Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees, 51230-51308 [2019-20353]

Download as PDF 51230 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations 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 Wage and Hour Division, Department of Labor. ACTION: Final rule. AGENCY: The Department of Labor is updating and revising the regulations issued under the Fair Labor Standards Act implementing the exemptions from minimum wage and overtime pay requirements for executive, administrative, professional, outside sales, and computer employees. DATES: This final rule is effective on January 1, 2020. FOR FURTHER INFORMATION CONTACT: Amy DeBisschop, Director, Division of Regulations, Legislation, and Interpretation, Wage and Hour Division, U.S. Department of Labor, Room S– 3502, 200 Constitution Avenue NW, Washington, DC 20210; telephone: (202) 693–0406 (this is not a toll-free number). Copies of this final rule may be obtained in alternative formats (Large Print, Braille, Audio Tape or Disc), upon request, by calling (202) 693–0675 (this is not a toll-free number). TTY/TDD callers may dial toll-free 1–877–889– 5627 to obtain information or request materials in alternative formats. Questions of interpretation and/or enforcement of the agency’s regulations may be directed to the nearest WHD district office. Locate the nearest office by calling WHD’s toll-free help line at (866) 4US–WAGE ((866) 487–9243) between 8 a.m. and 5 p.m. in your local time zone, or log onto WHD’s website for a nationwide listing of WHD district and area offices at http://www.dol.gov/ whd/america2.htm. SUPPLEMENTARY INFORMATION: SUMMARY: jbell on DSK3GLQ082PROD with RULES2 Table of Contents I. Executive Summary II. Background A. The FLSA B. Regulatory History C. Overview of Existing Regulatory Requirements D. The Department’s Proposal E. Final Rule Effective Date III. Need for Rulemaking IV. Final Regulatory Revisions A. Standard Salary Level B. Special Salary Tests VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 C. Inclusion of Nondiscretionary Bonuses, Incentive Payments, and Commissions in the Salary Level Requirement D. Highly Compensated Employees E. Future Updates to the Earnings Thresholds V. Paperwork Reduction Act VI. Analysis Conducted in Accordance With Executive Order 12866, Regulatory Planning and Review, and Executive Order 13563, Improving Regulation and Regulatory Review A. Introduction B. Methodology To Determine the Number of Potentially Affected EAP Workers C. Determining the Revised Salary and Compensation Levels D. Effects of Revised Salary and Compensation Levels VII. Final Regulatory Flexibility Analysis (FRFA) A. Objectives of, and Need for, the Final Rule B. The Agency’s Response to Public Comments C. Comment by the Chief Counsel for Advocacy of the Small Business Administration D. Description of the Number of Small Entities to Which the Final Rule Will Apply E. Projected Reporting, Recordkeeping, and Other Compliance Requirements of the Final Rule F. Steps the Agency Has Taken To Minimize the Significant Economic Impact on Small Entities G. Identification, to the Extent Practicable, of all Relevant Federal Rules That May Duplicate, Overlap, or Conflict With the Final Rule VIII. Unfunded Mandates Reform Act Analysis A. Authorizing Legislation B. Assessment of Costs and Benefits C. Response to Comments D. Least Burdensome Option or Explanation Required IX. Executive Order 13132, Federalism X. Executive Order 13175, Indian Tribal Governments Amendments to Regulatory Text I. Executive Summary The Fair Labor Standards Act (FLSA or Act) requires covered employers to pay employees a minimum wage and, for employees who work more than 40 hours in a week, overtime premium pay of at least 1.5 times the regular rate of pay. Section 13(a)(1) of the FLSA, commonly referred to as the ‘‘white collar’’ or ‘‘EAP’’ exemption, exempts from these minimum wage and overtime pay requirements ‘‘any employee employed in a bona fide executive, administrative, or professional capacity.’’ The statute delegates to the Secretary of Labor (Secretary) the authority to define and delimit the terms of the exemption. Since 1940, the regulations implementing the exemption have generally required each of the following three tests to be met: (1) PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 The employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the ‘‘salary basis test’’); (2) the amount of salary paid must meet a minimum specified amount (the ‘‘salary level test’’); and (3) the employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (the ‘‘duties test’’). The Department of Labor (Department) has long used the salary level test as a tool to help define the white collar exemption on the basis that employees paid less than the salary level are unlikely to be bona fide executive, administrative, or professional employees, and, conversely, that nearly all bona fide executive, administrative, and professional employees are paid at least that much. The salary level test provides certainty for employers and employees, as well as efficiency for government enforcement agencies. The salary level test’s usefulness, however, diminishes as the wages of employees entitled to overtime increase and inflation reduces the real value of the salary threshold. The Department increased the standard salary level from $455 per week ($23,660 per year) to $913 per week ($47,476 per year) in a final rule published May 23, 2016 (‘‘2016 final rule’’). That rulemaking was challenged in court, and on November 22, 2016, the U.S. District Court for the Eastern District of Texas enjoined the Department from implementing and enforcing the rule. On August 31, 2017, the court granted summary judgment against the Department, invalidating the 2016 final rule because it ‘‘makes overtime status depend predominately on a minimum salary level, thereby supplanting an analysis of an employee’s job duties.’’ Nevada v. U.S. Dep’t of Labor, 275 F. Supp. 3d 795, 806 (E.D. Tex. 2017). An appeal of that decision to the U.S. Court of Appeals for the Fifth Circuit is being held in abeyance. Currently, the Department is enforcing the regulations in effect on November 30, 2016, including the $455 per week standard salary level, which is the level that was set in a final rule issued April 23, 2004 (‘‘2004 final rule’’). Taking into account the Nevada district court’s conclusion with respect to the salary level, public comments received in response to a July 26, 2017 Request for Information (RFI), and feedback received at public listening sessions, the Department has undertaken this rulemaking to revise the part 541 regulations so that they E:\FR\FM\27SER2.SGM 27SER2 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations effectively distinguish between the white collar employees whom Congress intended to be protected by the FLSA’s minimum wage and overtime provisions and bona fide executive, administrative, and professional employees whom Congress intended to exempt from those statutory requirements. The Department published a Notice of Proposed Rulemaking (NPRM) on March 22, 2019. The NPRM stated that the standard salary level needed to exceed $455 per week to more effectively serve its purpose, but that the 2016 final rule’s increase to $913 per week was inappropriate because it excluded from exemption 4.2 million employees whose duties would have otherwise qualified them for exemption, a result in significant tension with the text of section 13(a)(1). Noting the conclusions of the district court that invalidated the 2016 final rule, the Department explained that the 2016 final rule’s inappropriately high salary level ‘‘untethered the salary level test from its historical justification’’ of ‘‘[s]etting a dividing line between nonexempt and potentially exempt employees’’ by screening out only those employees who, based on their compensation level, are unlikely to be bona fide executive, administrative, or professional employees. To address the district court’s and the Department’s concern with the 2016 final rule and set a more appropriate salary level, the NPRM proposed to rescind the 2016 final rule and update the salary level by applying the same methodology as the 2004 final rule to current earnings data. In 2004, the Department set the standard salary level at $455 per week ($23,660 per year), which was approximately the 20th percentile of full-time salaried workers in the South and in the retail industry nationally.1 Accordingly, in the NPRM, the Department proposed to update the standard salary level to the 20th percentile of full-time salaried workers in the lowest-wage Census Region (the South) 2 and/or in the retail industry nationally using current data.3 This 1 69 FR 22171. South Census Region comprises the following: Alabama, Arkansas, Delaware, District of Columbia, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, Virginia, and West Virginia. 3 In 2004, the Department looked to the 20th percentile of full-time salaried workers in the South and in the retail industry nationally to validate the standard salary level set in the final rule. In this final rule, the Department set the standard salary level at the 20th percentile of the combined subpopulations of full-time salaried employees in the South and full-time salaried employees in the retail industry nationwide. Accordingly, the use of ‘‘and/or’’ when describing the salary level methodology resulted in a proposed standard salary level of $679 per week ($35,308 per year). Additionally, the Department proposed special salary levels for U.S. territories and an updated base rate for employees in the motion picture producing industry. The Department also proposed to allow employers to count nondiscretionary bonuses and incentive payments toward satisfying up to ten percent of the standard salary level or any of the special salary levels applicable to U.S. territories, so long as such bonuses are paid at least annually. Further, the Department proposed to update the highly compensated employee (HCE) total annual compensation level—a higher compensation level that is paired with a reduced duties requirement to provide an alternative basis for exemption under section 13(a)(1). The HCE level was set at $100,000 in the 2004 final rule and increased to $134,004 in the 2016 final rule, but the Department has continued to enforce the $100,000 level in light of the district court’s invalidation of the 2016 final rule. In the NPRM, the Department proposed to update the HCE level by setting it equal to the annualized value of the 90th percentile of weekly earnings of full-time salaried workers nationally, resulting in a level of $147,414 per year. The Department proposed to project both the standard salary level and HCE total annual compensation level to January 2020, the final rule’s anticipated effective date. Finally, the Department explained its commitment to update the standard salary level and HCE total compensation levels more frequently in the future using notice-and-comment rulemaking every four years. The Department proposed no changes to the standard duties tests. The 60-day comment period on the NPRM ended on May 21, 2019, and the Department received more than 116,000 comments. The vast majority of these comments, including tens of thousands of duplicate or similar submissions, were campaign comments using similar template language.4 After considering jbell on DSK3GLQ082PROD with RULES2 2 The VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 methodology in this final rule reflects that this data set includes full-time salaried workers who work: (1) In the South but not in the retail industry; (2) in the retail industry but not in the South; and (3) in the South in the retail industry. 4 Specifically, one organization submitted spreadsheets containing over 56,000 comments from individuals. Of the comments contained in this submission, more than 34,000 were duplicates of comments that were submitted separately by these individuals. Additionally, numerous individual comments associated with this campaign were submitted multiple times. Together, these comments make up the vast majority of the comments received. PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 51231 the comments, the Department has decided in this final rule to maintain the proposed methodology for updating the part 541 standard salary level, but not to inflate the salary level to January 2020. The Department is also finalizing the special salary levels for certain U.S. territories as proposed, and updating the base rate for employees in the motion picture producing industry. Additionally, the Department is finalizing its proposal to permit employers to count nondiscretionary bonuses, incentives, and commissions toward up to 10 percent of the standard salary level or the special salary levels applicable to the U.S. territories, so long as employers pay those amounts at least annually. The Department has also decided to set the HCE total annual compensation threshold equal to the 80th percentile of earnings of full-time salaried workers nationally, without inflating the threshold to January 2020. When applied to updated data, these methodologies result in a standard salary level of $684 per week ($35,568 per year) and an HCE total annual compensation level of $107,432. Finally, the Department intends to update these thresholds more regularly in the future. The Department estimates that in 2020, 1.2 million currently exempt employees who earn at least $455 per week but less than the standard salary level of $684 per week will, without some intervening action by their employers, gain overtime eligibility. The Department also estimates that an additional 2.2 million white collar workers who are currently nonexempt because they do not satisfy the EAP duties tests and currently earn at least $455 per week, but less than $684 per week, will have their overtime-eligible status strengthened in 2020 because these employees will now fail both the salary level and duties tests. Lastly, an estimated 101,800 employees who are currently exempt under the HCE test will be affected by the increase in the HCE total annual compensation level. The Department has not made any changes to the duties tests in this final rule. This rule is considered an Executive Order 13771 deregulatory action. When the Department uses a perpetual time horizon to allow for cost comparisons under Executive Order 13771, and using the 2016 rule as the baseline, the annualized cost savings of this rule is $534.8 million with 7 percent discounting. Because the Department is currently enforcing the 2004 salary level, much of the economic analysis uses the 2004 rule as the baseline for calculating costs and transfers. The economic analysis E:\FR\FM\27SER2.SGM 27SER2 51232 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations quantifies the direct costs resulting from the rule: (1) Regulatory familiarization costs; (2) adjustment costs; and (3) managerial costs. The Department estimates that annualized direct employer costs in the first 10 years following the rule’s effective date will be $173.3 million with 7 percent discounting, including $543.0 million in Year 1 and $99.1 million in Year 10. This rulemaking will also give employees higher earnings in the form of transfers of income from employers to employees. Annualized transfers are estimated to be $298.8 million over the first ten years, with 7 percent discounting, including $396.4 million in Year 1. jbell on DSK3GLQ082PROD with RULES2 II. Background A. The FLSA The FLSA generally requires covered employers to pay their employees at least the federal minimum wage (currently $7.25 an hour) for all hours worked, and overtime premium pay of at least 1.5 times the regular rate of pay for all hours worked over 40 in a workweek.5 However, there are a number of exemptions from the FLSA’s minimum wage and overtime requirements. Section 13(a)(1) of the FLSA, codified at 29 U.S.C. 213(a)(1), exempts from both minimum wage and overtime protection ‘‘any employee employed in a bona fide executive, administrative, or professional capacity . . . or in the capacity of outside salesman (as such terms are defined and delimited from time to time by regulations of the Secretary, subject to the provisions of [the Administrative Procedure Act] . . .).’’ The FLSA does not define the terms ‘‘executive,’’ ‘‘administrative,’’ ‘‘professional,’’ or ‘‘outside salesman.’’ Pursuant to Congress’s grant of rulemaking authority, since 1938 the Department has issued regulations at 29 CFR part 541 defining the scope of the section 13(a)(1) exemptions. Because Congress explicitly delegated to the Secretary the power to define and delimit the specific terms of the exemptions through notice and comment rulemaking, the regulations so issued have the binding effect of law. See Batterton v. Francis, 432 U.S. 416, 425 n.9 (1977). Employees who meet the requirements of part 541 are not subject to the FLSA’s minimum wage and overtime pay requirements. Some state laws have stricter exemption standards than federal law. The FLSA does not preempt any such stricter state standards. If a State establishes a higher 5 29 U.S.C. 201, et seq. VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 standard than the provisions of the FLSA, the higher standard applies in that State. See 29 U.S.C. 218(a); 29 CFR 541.4. B. Regulatory History The Department has consistently used its rulemaking authority to define and clarify the section 13(a)(1) exemptions. The implementing regulations have generally required each of three tests to be met for the exemptions to apply: (1) The salary basis test; (2) the salary level test; and (3) the duties test. The first version of part 541, establishing the criteria for exempt status under section 13(a)(1), was promulgated in October 1938.6 The Department revised its regulations in 1940,7 1949,8 1954, 1958,9 1961, 1963, 1967, 1970, 1973, and 1975.10 A final rule increasing the salary levels was published on January 13, 1981, but was stayed indefinitely on February 12, 1981.11 In 1985, the Department published an Advance Notice of Proposed Rulemaking that was never finalized.12 In 1992, the Department twice revised the part 541 regulations. First, the Department created a limited exception from the salary basis test for public employees.13 The Department then implemented the 1990 law exempting employees in certain computer-related occupations.14 From 1949 until 2004, the part 541 regulations contained two different tests 63 FR 2518 (Oct. 20, 1938). FR 4077 (Oct. 15, 1940). The 1940 regulations were informed by what has come to be known as the Stein Report. See ‘‘Executive, Administrative, Professional . . . Outside Salesman’’ Redefined, Wage and Hour Division, U.S. Department of Labor, Report and Recommendations of the Presiding Officer [Harold Stein] at Hearings Preliminary to Redefinition (Oct. 10, 1940) (‘‘Stein Report’’). 8 14 FR 7705 (Dec. 24, 1949); 14 FR 7730 (Dec. 28, 1949). The 1949 regulations were informed by what has come to be known as the Weiss Report. See Report and Recommendations on Proposed Revisions of Regulations, Part 541, by Harry Weiss, Presiding Officer, Wage and Hour and Public Contracts Divisions, U.S. Department of Labor (June 30, 1949) (‘‘Weiss Report’’). 9 23 FR 8962 (Nov. 18, 1958). The 1958 regulations were informed by what has come to be known at the Kantor Report. See Report and Recommendations on Proposed Revision of Regulations, Part 541, Under the Fair Labor Standards Act, by Harry S. Kantor, Assistant Administrator, Office of Regulations and Research, Wage and Hour and Public Contracts Divisions, U.S. Department of Labor (Mar. 3, 1958) (‘‘Kantor Report’’). 10 See 19 FR 4405 (July 17, 1954); 26 FR 8635 (Sept. 15, 1961); 28 FR 9505 (Aug. 30, 1963); 32 FR 7823 (May 30, 1967); 35 FR 883 (Jan. 22, 1970); 38 FR 11390 (May 7, 1973); 40 FR 7091 (Feb. 19, 1975). 11 46 FR 3010 (Jan. 13, 1981); 46 FR 11972 (Feb. 12, 1981). 12 50 FR 47696 (Nov. 19, 1985). 13 57 FR 37677 (Aug. 19, 1992). 14 57 FR 46742 (Oct. 9, 1992); see Sec. 2, Pub. L. 101–583, 104 Stat. 2871 (Nov. 15, 1990), codified at 29 U.S.C. 213 Note. 75 PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 for exemption—a ‘‘long’’ test that paired a more rigorous duties test with a lower salary level, and a ‘‘short’’ test that paired a more flexible duties test with a higher salary level. On April 23, 2004, the Department issued a final rule, which replaced the ‘‘long’’ and ‘‘short’’ test system for determining exemption status with a single ‘‘standard’’ salary level paired with a ‘‘standard’’ duties test.15 The Department set the standard salary level at $455 per week, and made other changes, some of which are discussed below. In the 2004 final rule, the Department also created the HCE test for exemption, which paired a reduced duties requirement with a higher compensation level ($100,000 per year). On May 23, 2016, the Department issued another final rule, which raised the standard salary level to the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, resulting in a salary level of $913 per week. Additionally, the Department set the HCE total annual compensation level equal to the 90th percentile of earnings of full-time salaried workers nationally ($134,004 annually). The Department also included in the final rule a mechanism to automatically update (every three years) the salary and compensation thresholds, and for the first time permitted nondiscretionary bonuses, incentives, and commissions paid at least quarterly to count toward up to 10 percent of the required salary level. On November 22, 2016, the United States District Court for the Eastern District of Texas issued a preliminary injunction, enjoining the Department from implementing and enforcing the 2016 final rule, pending further review.16 On August 31, 2017, the district court granted summary judgment against the Department.17 The court held that the 2016 final rule’s salary level exceeded the Department’s authority and that the entire final rule was therefore invalid. The court determined that a salary level that ‘‘supplant[s] an analysis of an employee’s job duties’’ conflicts with Congress’s command to exempt bona fide executive, administrative, and professional employees.18 As a result of these rulings, the Department has continued to enforce the salary level set in 2004. On July 26, 2017, the Department published an RFI asking for public input 15 69 FR 22122 (Apr. 23, 2004). Nevada v. U.S. Dep’t of Labor, 218 F. Supp. 3d 520 (E.D. Tex. 2016). 17 See 275 F. Supp. 3d 795. 18 Id. at 806. 16 See E:\FR\FM\27SER2.SGM 27SER2 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations on what changes the Department should propose in a new NPRM on the EAP exemption.19 The Department received over 200,000 comments on the RFI. Between September 7 and October 17, 2018, the Department held listening sessions in all five Wage and Hour regions throughout the country, and in Washington, DC, to supplement feedback received as part of the RFI.20 On October 30, 2017, the Government appealed the Nevada district court’s summary judgment decision to the United States Court of Appeals for the Fifth Circuit. On November 6, 2017, the Fifth Circuit granted the Government’s motion to hold that appeal in abeyance while the Department undertook further rulemaking to set a new salary level. On March 22, 2019, the Department issued its NPRM, proposing to update and revise the EAP regulations. C. Overview of Existing Regulatory Requirements The regulations in 29 CFR part 541 contain specific criteria that define each category of exemption provided by section 13(a)(1) for bona fide executive, administrative, professional, and outside sales employees, as well as teachers and academic administrative personnel. The regulations also define those computer employees who are exempt under section 13(a)(1) and section 13(a)(17). The employer bears the burden of establishing the applicability of any exemption from the FLSA’s pay requirements.21 Job titles, job descriptions, or the payment of a salary instead of an hourly rate are insufficient, standing alone, to confer exempt status on an employee. To qualify for the EAP exemption, employees must meet certain tests regarding their job duties 22 and generally must be paid on a salary basis at least the amount specified in the regulations.23 Some employees, such as business owners, doctors, lawyers, teachers, and outside sales employees, 19 82 FR 34616 (July 26, 2017). Session transcripts may be viewed at www.regulations.gov, docket ID WHD–2017–0002. 21 See, e.g., Idaho Sheet Metal Works, Inc. v. Wirtz, 383 U.S. 190, 209 (1966); Walling v. Gen. Indus. Co., 330 U.S. 545, 547–48 (1947). 22 See §§ 541.100 (executive employees); 541.200 (administrative employees); 541.300–.303 (teachers and professional employees); 541.400 (computer employees); 541.500 (outside sales employees). 23 Alternatively, administrative and professional employees may be paid on a ‘‘fee basis’’ for a single job regardless of the time required for its completion as long as the hourly rate for work performed (i.e., the fee payment divided by the number of hours worked) would total at least the weekly amount specified in the regulation if the employee worked 40 hours. See § 541.605. jbell on DSK3GLQ082PROD with RULES2 20 Listening VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 are not subject to salary tests.24 Others, such as academic administrative personnel and computer employees, are subject to special, contingent earnings thresholds.25 In 2004, the standard salary level for EAP employees was set at $455 per week (equivalent to $23,660 per year for a full-year worker), and the total annual compensation level for highly compensated employees was set at $100,000.26 Due to the district court’s decision invalidating the 2016 final rule, these are the salary levels the Department is currently enforcing.27 The 2004 final rule created the HCE test for exemption. Under the HCE test, employees who receive at least a specified total annual compensation (which must include at least the standard salary amount per week paid on a salary or fee basis) are exempt from the FLSA’s overtime requirements if they customarily and regularly perform at least one of the exempt duties or responsibilities of an executive, administrative, or professional employee identified in the standard tests for exemption.28 The HCE test applies only to employees whose primary duty includes performing office or non-manual work.29 Nonmanagement production line workers and employees who perform work involving repetitive operations with their hands, physical skill, and energy cannot be exempt under this section.30 D. The Department’s Proposal On March 22, 2019, the Department issued its proposal to update and revise the regulations issued under section 13(a)(1) of the FLSA.31 The Department proposed to update the standard salary level by applying to current data the same method as in the 2004 final rule— i.e., by looking at the 20th percentile of earnings of full-time salaried workers in the lowest-wage Census Region (then and now the South) and/or in the retail industry nationwide. The Department also proposed to update the HCE total 24 See §§ 541.101; 541.303(d); 541.304(d); 541.500(c); 541.600(e). Such employees are also not subject to a fee-basis test. 25 See § 541.600(c)–(d). 26 69 FR 22123. 27 The current text of the Code of Federal Regulations (CFR) reflects the updates made in the 2016 final rule. Therefore, unless otherwise indicated, citations to part 541 refer to the current CFR, and the amendments to the regulatory text reflect the current CFR’s inclusion of the 2016 updates. However, because the Department is currently enforcing the 2004 standard salary and total annual compensation levels, the final rule references the 2004 standard salary and total annual compensation levels. 28 § 541.601. 29 § 541.601(d). 30 Id. 31 84 FR 10900. PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 51233 annual compensation level using the same method used in the 2016 final rule, setting it equivalent to the 90th percentile earnings of full-time salaried workers nationally. The Department proposed to project both levels to January 2020, the anticipated effective date of a final rule. Additionally, the Department proposed a special salary level of $380 per week for American Samoa, a special salary level of $455 per week for Puerto Rico, the U.S. Virgin Islands, Guam, and the Commonwealth of the Northern Mariana Islands, and a special ‘‘base rate’’ threshold of $1,036 for employees in the motion picture producing industry. The Department also proposed to permit employers to use nondiscretionary bonuses and incentive payments to satisfy up to 10 percent of the standard or special salary levels as long as such payments are made at least annually. As to future updates, the Department reaffirmed its commitment to evaluating the part 541 earnings thresholds more frequently, and stated its intent to propose updates to these levels quadrennially. The Department did not propose any changes to the duties tests. The Department received more than 116,000 timely comments on the NPRM during the 60-day comment period that ended on May 21, 2019. The Department received comments from a broad array of constituencies, including small business owners, employer and industry associations, individual workers, worker advocacy groups, unions, non-profit organizations, law firms (representing both employers and employees), educational organizations and representatives, religious organizations, economists, Members of Congress, state and local governments, professional associations, and other interested members of the public. All timely received comments may be viewed on the http:// www.regulations.gov website, docket ID WHD–2019–0001. Some of the comments the Department received were general statements of support or opposition, and the Department also received many identical or nearly identical ‘‘campaign’’ comments sent in response to organized comment initiatives. Nearly all commenters favored some change to the currently enforced regulations, and commenters expressed a wide variety of views on the merits of particular aspects of the Department’s proposal. Some commenters, including tens of thousands who submitted similar comments as part of a comment E:\FR\FM\27SER2.SGM 27SER2 jbell on DSK3GLQ082PROD with RULES2 51234 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations campaign (‘‘Campaign Comments’’),32 requested that the Department reject the proposal and defend the 2016 final rule. The Department has carefully considered the timely submitted comments addressing the proposed changes. Significant issues raised in the comments are discussed below, along with the Department’s responses to those comments. Some commenters appear to have mistakenly filed comments intended for this rulemaking into the dockets for the Department’s rulemakings concerning the regular rate (docket ID WHD–2019–0002) or joint employer status (docket ID WHD–2019– 0003) under the FLSA. The Department did not consider these misfiled comments in this rulemaking. The Department received a number of comments that are beyond the scope of this rulemaking. These include, for example, a request that the Department reconsider the scope of the exemption at 29 U.S.C. 207(i) for certain employees of retail and service establishments, and a request for tax write-offs for businesses that pass an annual audit by the Department. In addition, some nonprofit organizations asked the Department to work with other federal agencies to create a mechanism that non-profits with government grants and contracts could use to adjust reimbursement rates to cover unanticipated increased costs, such as labor costs due to this rule. For example, in a joint comment, the National Council of Nonprofits and others recommended addressing this issue through changes to the relevant Federal Acquisition Regulations. The Department does not address such issues in this final rule. Some commenters raised miscellaneous issues that more directly relate to other parts of the Department’s regulations. For example, one commenter urged the Department to amend its regular rate regulations to allow the exclusion of any payments that do not count toward the salary level test; one commenter requested that private colleges and universities be permitted to use compensatory time off instead of cash payments for overtime hours; two commenters requested a safe harbor from joint-employment liability for franchisors who help their franchisees implement this rule; and one commenter asked the Department to permit hourly paid employees (beyond just computer employees) to qualify for the exemption. Some commenters requested that the Department make changes to the duties test, either as an 32 See supra note 4. VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 alternative to raising the salary level more significantly or regardless of what salary level applies. The Department did not propose any of these changes in the NPRM, and declines to make such changes in this final rule. A number of commenters asked the Department to provide guidance on how the FLSA applies to non-profit organizations. See, e.g., Colorado Nonprofit Association; Independent Sector; National Council of Nonprofits. The Department notes that the FLSA does not provide special rules for nonprofit organizations or their employees, nor does this final rule.33 E. Final Rule Effective Date In the NPRM, the Department referenced an anticipated effective date of January 2020 for purposes of projecting forward the proposed standard salary level and proposed HCE total annual compensation level. Many commenters, while not expressly referencing the effective date, conveyed their view that updates to these regulations are ‘‘long overdue.’’ See, e.g., Legal Aid at Work; Public Housing Authorities Directors Association; Washington State Budget and Policy Center. Similarly, a few commenters encouraged the Department to increase the standard salary threshold, or to promulgate a final rule, ‘‘as soon as possible.’’ See, e.g., International Foodservice Distributors Association; Sergeants Benevolent Association. Other commenters did specifically address the final rule’s effective date. Nearly all of these commenters conveyed the need for employers to have sufficient time to adjust to and implement the rule, but they disagreed on how much time the Department should provide. The National Association of Landscape Professionals favored a period of 90 to 120 days between the rule’s publication and its effective date, while several other commenters favored a minimum of 120 days, which was the applicable period of time in the 2004 final rule. See, e.g., Seyfarth Shaw LLP (Seyfarth Shaw); Society for Human Resource Management (SHRM). SHRM thought the effective date should be at least 120 days from the date of publication of the final rule, but acknowledged that the proposed regulations are far more familiar to employers than the changes made in 2004. Other commenters favored a longer period, ranging from 33 The Department has issued specific guidance on the application of the FLSA to non-profit entities. See Fact Sheet #14A: Non-Profit Organizations and the Fair Labor Standards Act (FLSA), available at: https://www.dol.gov/whd/regs/ compliance/whdfs14a.pdf. PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 six to eighteen months from publication. The U.S. Public Interest Research Group suggested a two-year delay for public interest advocacy groups. Several employer representatives who opposed the proposed HCE level stated that adjusting to the new level would be particularly burdensome. For example, the National Association of Manufacturers stated that the proposed increase would require employers to spend significant time determining whether employees who previously met the HCE test satisfy the standard duties test (and thus remain exempt), and requested that if the Department were to finalize that increase as proposed, it should set a future compliance date that provides sufficient time for employers to adjust to the new HCE level. Relatedly, multiple commenters requested that the Department ‘‘phase in’’ any new salary/compensation levels over a period of time. Suggested phasein periods varied widely. Independent Sector and the National Council of Young Men’s Christian Associations of the United States of America (YMCA) favored a two-year phase-in period. An individual employee commenter proposed a 3- to 5-year phase-in period for non-profit organizations. Some commenters who requested a phase-in period did not specify a particular timeframe. Many commenters who supported a phase-in cited the importance of providing sufficient time for employers to adapt to and implement the new levels. See, e.g., Lutheran Services in America; National Grocers Association (NGA). The Department has set an effective date of January 1, 2020, for the final rule. The Department agrees with the commenters who expressed the view that this update to the regulations is ‘‘long overdue,’’ and with those who encouraged the Department to increase the salary level as soon as possible. The time between this rule’s publication and effective date exceeds the 30-day minimum required under the Administrative Procedure Act (APA), 5 U.S.C. 553(d), and the 60 days mandated for a ‘‘major rule’’ under the Congressional Review Act, 5 U.S.C. 801(a)(3)(A). While the 2004 rule provided for 120 days between the rule’s publication and effective date,34 the Department agrees with commenters who acknowledged that this final rule will be far more familiar to employers than the substantial changes provided in the 2004 final rule.35 34 See 79 FR 22126. 2004 final rule included several significant changes, including: (1) A significant percentage increase in the salary threshold; (2) a significant 35 The E:\FR\FM\27SER2.SGM 27SER2 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations Additionally, while the 2016 rule provided 192 days from the rule’s publication until its effective date, the salary level increase in this rule is more modest, and affects fewer workers—two factors that favor a shorter period. Moreover, given that the Department is currently enforcing the 2004 standard salary level, which an overwhelming majority of commenters agreed needs to be updated, the Department concludes that a lengthier delayed effective date would be imprudent. Additionally, a January 1 date may be convenient for those employers who use the calendar year as their fiscal year, or who use budgets, software systems, or other practices on a calendar-year basis. The Department is also declining to delay the effective date, or create a phase-in, specifically for non-profits. As discussed in more detail in the standard salary level discussion below, consistent with past practice, the Department is declining to create special rules for the application of the part 541 exemptions to non-profits. While some employer representatives expressed concern that the proposed HCE level increase would pose unique challenges for employers compared to the change to the standard salary level, given the change in methodology for setting the HCE threshold in the final rule, discussed in further detail below, the Department does not believe a delayed effective date for this provision is necessary. The Department believes that the January 1, 2020 effective date will provide employers adequate time to make any changes that are necessary to comply with the final regulations, and for similar reasons concludes that a phase-in of the new thresholds is not warranted. The Department will also provide significant outreach and compliance assistance, and will issue a number of guidance documents in connection with the publication of this final rule. III. Need for Rulemaking jbell on DSK3GLQ082PROD with RULES2 The primary goal of this rulemaking is to update the standard salary level that helps define and delimit the EAP exemption. This will ensure that the level works effectively with the standard duties test to distinguish potentially exempt EAP employees from overtime-protected white collar reorganization of the part 541 regulations; (3) the elimination of the short and long test structure that had been in place for more than 50 years and the creation of a single standard test; and (4) the creation of a new test for highly compensated employees. In contrast, here the Department is not changing the standard duties test or reorganizing the regulations, and so this rule will be much less complicated for employers to implement. VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 workers. Due to the Nevada district court’s decision invalidating the 2016 final rule, the Department has been enforcing the standard salary level of $455 a week. The Department recognizes that this level should be updated to reflect current earnings. In the NPRM, the Department proposed using the methodology from the 2004 final rule to calculate the salary threshold using current data. The Department explained that this method would keep the standard salary level aligned with the intervening years’ growth in earnings. It further stated that the 2004 approach has withstood the test of time, would restore the salary level to its traditional purpose of serving as a dividing line between nonexempt and potentially exempt employees, would address concerns that led to the 2016 rule’s invalidation, and would ensure that the FLSA’s intended overtime protections are fully implemented. The Department is also updating the total annual compensation requirement for the HCE test for exemption to ensure that this threshold remains a meaningful and appropriate standard when paired with the more-lenient HCE duties test. In an effort to modernize the part 541 regulations to account for changing methods of workplace compensation, the Department also proposed allowing nondiscretionary bonuses and incentive payments (including commissions) to count toward up to 10 percent of the standard or special salary levels. Finally, in its proposal the Department explained the importance of updating the salary thresholds more frequently. Regular updates promote greater stability, avoid the disruptive salary level increases that can result from lengthy gaps between updates, and provide appropriate wage protection for those under the threshold. With these goals in mind, in the NPRM, the Department affirmed its intention to issue a proposal to update the earnings thresholds every four years, unless the Secretary determines that economic or other factors warrant forestalling such an update. IV. Final Regulatory Revisions The Department is formally rescinding the 2016 final rule and is replacing it with a new rule that updates the part 541 earnings thresholds. The Department is setting the standard salary level by applying the methodology from the 2004 final rule to current data, resulting in a new standard salary level of $684 per week. In addition, the Department is setting a special salary level of $455 per week for Puerto Rico, the U.S. Virgin Islands, PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 51235 Guam, and the Commonwealth of the Northern Mariana Islands; a special salary level of $380 per week for American Samoa; and an updated weekly ‘‘base rate’’ of $1,043 per week for the motion picture producing industry. Nondiscretionary bonuses and incentive payments (including commissions) paid on an annual or more frequent basis may be used to satisfy up to 10 percent of the standard salary level or the special salary levels applicable to the U.S. territories. The Department is also setting the HCE annual compensation amount at the 80th percentile of full-time salaried workers nationally, resulting in a new HCE level of $107,432. These revisions are discussed in further detail below. A. Standard Salary Level i. History of the Standard Salary Level Congress enacted the FLSA on June 25, 1938, and the first version of part 541, which the Department issued in October 1938, set a salary level of $30 per week for executive and administrative employees.36 The Department updated the salary levels in 1940, maintaining the salary level for executive employees, increasing the salary level for administrative employees, and establishing a salary level for professional employees. In setting those rates, the Department considered surveys of private industry by federal and state government agencies, experience gained under the National Industrial Recovery Act, and Federal Government salaries to identify a salary level that reflected a reasonable ‘‘dividing line’’ between employees performing exempt and nonexempt work.37 Taking into account salaries paid in numerous industries and the percentage of employees earning below these amounts, the Department set the salary level for each exemption slightly below the average salary dividing exempt and nonexempt employees. In 1949, the Department evaluated salary data from state and federal agencies, including the Bureau of Labor Statistics (BLS). The Department considered wages in small towns and low-wage industries, wages of federal employees, average weekly earnings for exempt employees, starting salaries for college graduates, and salary ranges for different occupations such as bookkeepers, accountants, chemists, and mining engineers.38 The Department also looked at data showing increases in exempt employee salaries since 1940, 36 3 FR 2518. Report at 9, 20–21, 30–31. 38 Weiss Report at 10, 14–17, 19–20. 37 Stein E:\FR\FM\27SER2.SGM 27SER2 51236 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations and supplemented it with nonexempt employee earnings data to approximate the ‘‘prevailing minimum salaries of exempt employees.’’ 39 Recognizing that the ‘‘increase in wage rates and salary levels’’ since 1940 had ‘‘gradually weakened the effectiveness of the present salary tests as a dividing line between exempt and nonexempt employees,’’ the Department considered the increase in weekly earnings from 1940 to 1949 for various industries, and then adopted new salary levels at a ‘‘figure slightly lower than might be indicated by the data’’ to protect small businesses.40 Also in 1949, the Department established a second, 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, while the short duties test did not include a specific limit on nonexempt work.41 In 1958, the Department set the long test salary levels using data collected by WHD on salaries paid to employees who met the applicable salary and duties tests, grouped by geographic region, broad industry groups, number of employees, and city size, and supplemented with BLS and Census data to reflect income increases for white collar and manufacturing employees during the period not covered by the Department’s investigations.42 The Department then set the long test salary levels for exempt employees ‘‘at about the levels at which no more than about 10 percent of those in the lowest-wage region, or in the smallest size establishment group, or in the smallest-sized city group, or in the lowest-wage industry of each of the categories would fail to meet the tests.’’ 43 Thus, the Department set the long test salary levels so that about 10 percent of workers performing EAP 39 Id. at 12. at 8, 14–20. The Department also justified its modest increases by noting evidence of slow wage growth for executive employees ‘‘in some areas and some industries.’’ Id. at 14. 41 The Department instituted a 20 percent cap on nonexempt work as part of the long duties test for executive and professional employees in 1940, and for administrative employees in 1949. By statute, beginning in 1961, retail employees could spend up to 40 percent of their hours worked performing nonexempt work and still be found to meet the duties tests for the EAP exemption. See 29 U.S.C. 213(a)(1). 42 Kantor Report at 6. 43 Id. at 6–7. jbell on DSK3GLQ082PROD with RULES2 40 Id. VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 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.44 The salary level for executive and administrative employees was increased to $100 per week, for example, when the 1961 survey data showed that 13 percent of establishments paid one or more exempt executives less than $100 per week, and 4 percent of establishments paid one or more exempt administrative employees less than $100 per week.45 The professional salary level was increased to $115 per week when the 1961 survey data showed that 12 percent of establishments surveyed paid one or more professional employees less than $115 per week.46 The Department noted that these salary levels approximated the same percentages used to update the salary level in 1958.47 The Department applied a similar methodology when adopting salary level increases in 1970. After examining data from WHD investigations, BLS wage data, and information provided in a report issued by the Department in 1969 that included salary data for executive, administrative, and professional employees, the Department increased the long test salary level for executive employees to $125 per week when the salary level data showed that 20 percent of executive employees from all regions and 12 percent of executive employees in the West earned less than $130 a week.48 The Department also increased the long test salary levels for administrative and professional employees to $125 and $140 per week, respectively. In 1975, rather than follow the prior approaches, the Department updated the 1970 salary levels based on increases in the Consumer Price Index, but adjusted downward ‘‘to eliminate any inflationary impact.’’ 49 This resulted in a long test salary level for the executive and administrative exemptions of $155 per week, and $170 per week for the professional exemption. The short test salary level increased to $250 per week 44 28 FR 7002 (July 9, 1963). 45 Id. at 7004. 46 Id. 47 See id. 48 35 FR 884–85. 49 40 FR 7091. PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 in 1975.50 The salary levels adopted were intended as interim levels ‘‘pending the completion and analysis of a study by [BLS] covering a six-month period in 1975.’’ 51 Although the Department intended to increase the salary levels based on that study of actual salaries paid to employees, the process was never completed, and the ‘‘interim’’ salary levels remained in effect for the next 29 years. In 2004, the Department replaced the separate long and short tests with a single ‘‘standard’’ salary level test of $455 per week, which was paired with a ‘‘standard’’ duties test for executive, administrative, and professional employees, respectively. The Department noted, in accord with numerous comments received during that rulemaking, that as a result of the outdated salary level, ‘‘the ‘long’ duties tests [had], as a practical matter, become effectively dormant’’ because relatively few salaried employees earned below the short test salary level.52 The Department estimated that 1.3 million workers earning between $155 and $455 per week would become nonexempt under the new standard salary level.53 In setting the new standard salary level in 2004, the Department used Current Population Survey (CPS) Merged Outgoing Rotation Group (MORG) data collected by BLS that encompassed most salaried employees, including nonexempt salaried employees. The Department selected a standard salary level of $455 per week, which at the time was roughly equivalent to earnings at the 20th percentile of two subpopulations: (1) Salaried employees in the South and (2) salaried employees in the retail industry nationwide. Although prior salary levels had been based on salaries of approximately the lowest 10 percent of exempt salaried employees in low-wage regions and industries, the Department explained that the change in methodology was warranted in part to account for the elimination of the short and long tests, and because the data sample included nonexempt salaried employees, as opposed to only exempt salaried employees.54 As in the past, the Department used lower-salary data sets to accommodate businesses for which salaries were generally lower due to geographic- or industry-specific reasons. 50 Id. at 7092. Each time the short test was increased between 1949 and 1975, it was set significantly higher than the long test salary levels. 51 Id. at 7091. 52 69 FR 22126. 53 Id. at 22123. 54 Id. at 22167. E:\FR\FM\27SER2.SGM 27SER2 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations The Department published a final rule updating the salary level twelve years later, in 2016.55 The Department set the standard salary level at an amount that would exclude from exemption the bottom 40 percent of full-time salaried workers (exempt and nonexempt) in the lowest-wage Census Region (the South).56 The Department estimated that increasing the standard salary level from $455 per week to $913 per week would make 4.2 million workers earning between those levels newly nonexempt, absent other changes by their employers.57 The Department made no changes to the standard duties test. As previously discussed, on August 31, 2017, the U.S. District Court for Eastern District of Texas declared the 2016 final rule invalid, and the Department’s appeal of that decision is being held in abeyance. Until the Department issues a new final rule, it is enforcing the part 541 regulations in effect on November 30, 2016, including the $455 per week standard salary level. ii. Purpose of the Salary Level Requirement jbell on DSK3GLQ082PROD with RULES2 The FLSA states that its minimum wage and overtime requirements ‘‘shall not apply with respect to . . . any employee employed in a bona fide executive, administrative, or professional capacity . . . (as such terms are defined and delimited from time to time by regulations of the Secretary . . .).’’ 58 The Department has long used a salary level test as part of its method for defining and delimiting that exemption. In 1949, the Department summarized the role of the salary level tests over the preceding decade, explaining: In this long experience, the salary tests, even though too low in the later years to serve their purpose fully, have amply proved their effectiveness in preventing the misclassification by employers of obviously nonexempt employees, thus tending to reduce litigation. They have simplified enforcement by providing a ready method of screening out the obviously nonexempt employees, making an analysis of duties in such cases unnecessary. The salary requirements also have furnished a practical guide to the inspector as well as to employers and employees in borderline cases. In an overwhelming majority of cases, it has been found by careful inspection that personnel who did not meet the salary requirements would also not qualify under other sections of the regulations as the Divisions and the courts have interpreted them.59 55 81 FR 32391 (May 23, 2016). at 32408. 57 Id. at 32393. 58 29 U.S.C. 213(a)–(a)(1). 59 Weiss Report at 8. 56 Id. VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 The Department again referenced these principles in the Kantor Report, reiterating, for example, that the salary level tests ‘‘provide[’’] a ready method of screening out the obviously nonexempt employees[,]’’ and that employees ‘‘who do not meet the salary test are generally also found not to meet the other requirements of the regulations.’’ 60 The 2003–2004 rulemaking also referenced these principles.61 Likewise, this final rule updates the standard salary level in light of increased employee earnings, so that it maintains its usefulness in ‘‘screening out the obviously nonexempt employees.’’ For over 75 years the Department has used a salary level test as a criterion for identifying bona fide executive, administrative, and professional employees. Some statements in the Department’s regulatory history have at times, however, suggested a greater role for the salary level test. These include, for instance, a statement from the 1940 Stein Report that salary is ‘‘ ‘the best single test of the employer’s good faith in characterizing the employment as of a professional nature.’ ’’ 62 The Stein Report also stated that ‘‘if an employer states that a particular employee is of sufficient importance . . . to be classified as an ’executive’ employee and thereby exempt from the protection of the [A]ct, the best single test of the employer’s good faith in attributing importance to the employee’s services is the amount he pays for them.’’ 63 As explained in the NPRM, the Nevada district court’s invalidation of the 2016 final rule has prompted the Department to clarify these and similar statements in light of the salary level test’s purposes and regulatory history. The concept of a ‘‘dividing line’’ should not be misconstrued to suggest that the 60 Kantor Report at 2–3; see also U.S. Dep’t of Labor, 28th Annual Report of the Secretary of Labor for the Fiscal Year Ended June 30, 1940 (1940), at 236 (‘‘[T]he power to define is the power to exclude.’’). 61 See 69 FR 22165; 68 FR 15560, 15570 (Mar. 31, 2003). 62 81 FR 32413 (quoting Stein Report at 42); see also 69 FR 22165 (quoting Stein Report at 42). 63 Stein Report at 19; see also id. at 5 (‘‘[T] he good faith specifically required by the [A]ct is best shown by the salary paid.’’); id. at 19 (salary provides ‘‘a valuable and easily applied index to the ’bona fide’ character of the employment for which exemption is claimed’’); cf. Weiss Report at 9 (‘‘[S]alary is the best single indicator of the degree of importance involved in a particular employee’s job.’’); Kantor Report at 2 (‘‘[Salary] is an index of the status that sets off the bona fide executive from the working squad-leader, and distinguishes the clerk or subprofessional from one who is performing administrative or professional work.’’). The Department ‘‘is not bound by the [Stein, Weiss, and Kantor] reports,’’ though they have been carefully considered. 69 FR 22124. PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 51237 Department views the salary level test as an effort to divide all exempt employees from all nonexempt employees. A salary level is helpful to determine who is not an exempt executive, administrative or professional employee—the employees who fall beneath it. But the salary level has significantly less probative value for the employees above it. They may be exempt or nonexempt. Above the threshold, the Department evaluates an employee’s status as exempt or nonexempt based on an assessment of the duties that employee performs. An approach that emphasizes salary alone, irrespective of employee duties, would stand in significant tension with the Act. Section 13(a)(1) directs the Department to define and delimit employees based on the ‘‘capacity’’ in which they are employed. Salary is a helpful indicator of the capacity in which an employee is employed, especially among lower-paid employees. But it is not ‘‘capacity’’ in and of itself. The district court’s summary judgment decision endorsed the Department’s historical approach to setting the salary level and held the 2016 final rule unlawful because it departed from it. The district court approvingly cited the Weiss Report and explained that setting ‘‘the minimum salary level as a floor to ’screen[ ] out the obviously nonexempt employees’ ’’ is ‘‘consistent with Congress’s intent.’’ 64 Further endorsing the Department’s earlier rulemakings, the district court stated that prior to the 2016 final rule, ‘‘the Department ha[d] used a permissible minimum salary level as a test for identifying categories of employees Congress intended to exempt.’’ 65 The court then explained that in contrast to these acceptable past practices, the 2016 standard salary level of $913 per week was unlawful because it would exclude from exemption ‘‘so many employees who perform exempt duties.’’ 66 In support, the court cited the Department’s estimate that, without some intervening action by their employers, the new salary level would result in 4.2 million workers who meet the duties test becoming nonexempt.67 The court also emphasized the magnitude of the salary level increase, stating that the 2016 final rule ‘‘more than double[d] the previous minimum salary level’’ and that ‘‘[b]y raising the salary level in this manner, the Department effectively eliminate[d] a 64 275 F. Supp. 3d at 806 (quoting Weiss Report at 7–8); see also id. at 807 at n.6 (supporting salary level that operates ‘‘as more of a floor’’) (internal quotation marks and citation omitted). 65 Id. at 806 (emphasis in original). 66 Id. at 807. 67 Id. at 806. E:\FR\FM\27SER2.SGM 27SER2 51238 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 consideration of whether an employee performs ‘bona fide executive, administrative, or professional capacity’ duties.’’ 68 The district court declared the final rule invalid because the Department had unlawfully excluded from exemption ‘‘entire categories of previously exempt employees who perform ‘bona fide executive, administrative, or professional capacity’ duties.’’ 69 By excluding from exemption, without regard to their duties, 4.2 million workers who would have otherwise been exempt because they passed the salary basis and duties tests established under the 2004 final rule, the 2016 final rule was in tension with the Act and with the Department’s longstanding policy of setting a salary level that does not ‘‘disqualify[ ] any substantial number of’’ bona fide executive, administrative, and professional employees from exemption.70 A salary level set that high does not further the purpose of the Act, and is inconsistent with the salary level test’s useful, but limited, role in defining the EAP exemption. The Department has therefore reexamined the 2016 final rule in light of the district court’s decision and the salary level’s historical purpose. The district court’s decision underscores that except at the relatively low levels of compensation where EAP employees are unlikely to be found, the salary level is not a substitute for an analysis of an employee’s duties. It is, at most, an indicator of those duties. For most white collar, salaried employees, the exemption should turn on an analysis of their actual functions, not their salaries, as Congress instructed. The salary level test’s primary and modest purpose is to identify potentially exempt employees by screening out obviously nonexempt employees. In light of these considerations, as noted in the NPRM, the Department has concluded that, while an increase in the standard salary level from $455 per week is warranted, the increase to $913 per week in the 2016 final rule was inappropriate. The Department has therefore engaged in this rulemaking to realign the salary level with its appropriate limited purpose, to address the concerns about the 2016 final rule identified by the district court, and to 68 Id. at 807 (quoting 29 U.S.C. 213(a)(1)). 69 Id. at 806 (quoting 29 U.S.C. 213(a)(1)). 70 Kantor Report at 5. In contrast, had the Department simply applied the 2004 methodology to set the standard salary level, the 2016 final rule would have resulted in approximately 683,000 workers who satisfied the duties test becoming nonexempt. See 81 FR 32504 (Table 32). VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 update the salary level in light of increased employee earnings. iii. Standard Salary Level Proposal In its NPRM, the Department proposed to rescind formally the 2016 final rule and to update the salary level by setting the salary level equal to the 20th percentile of earnings of full-time salaried workers in the lowest-wage region (the South) and/or in the retail industry nationally. The Department applied this method to pooled CPS MORG data for 2015 to 2017, adjusted to 2017, producing a level of $641 per week. To reflect employees’ anticipated compensation at the time the rule would become effective, the Department then inflated this level to January 2020 using the compound annual growth rate in earnings since the 2004 rule. This methodology resulted in a proposed salary level of $679 per week ($35,308 per year). The Department estimated that at this level, 1.1 million employees who earn at least $455 per week but less than $679 per week would, without some intervening action by their employers, gain overtime eligibility. The Department also stated that applying the 2004 final rule’s methodology to set the salary level would ensure that overtime-eligible workers continue to receive the protections Congress intended, while avoiding the concerns that led to the invalidation of the 2016 rule. 84 FR 10903. The Department explained that adhering to the 2004 final rule’s methodology was reasonable and appropriate, noting that it has enforced the 2004 final rule’s salary level for nearly 15 years—the second-longest period (after the salary levels set in 1975) for any part 541 salary test. Id. at 10909. The Department stated that applying this well-established method would also promote familiarity and stability in the workplace, without causing significant hardship or disruption to the economy. Id. The Department also noted that the 2004 final rule has never been challenged, and so applying the 2004 salary level methodology would minimize the uncertainty and potential legal vulnerabilities that could accompany a novel and untested approach. Id. iv. Standard Salary Level Final Rule In the final rule, the Department adopts its proposed methodology for setting the standard salary level, with one minor modification. The Department will set the salary level equal to the 20th percentile of earnings of full-time salaried workers in the lowest-wage region (the South) and/or in the retail industry nationally. To PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 calculate the salary level, the Department used updated CPS earnings data that BLS has compiled since the Department drafted its proposal. Specifically, the Department applied the adopted methodology to pooled CPS MORG data for July 2016 to June 2019, adjusted to reflect 2018/2019. As discussed below, rather than projecting the salary level to January 2020, as proposed in the NPRM, the Department has instead used the most recent data available at the time the Department drafted this final rule. This results in a salary level of $684 per week. The Department believes that this method will set an appropriate dividing line between nonexempt and potentially exempt employees by screening out from exemption employees who, based on their compensation, are unlikely to be bona fide executive, administrative, or professional employees. In addition, the use of earnings data from the South and the retail industry will ensure that the salary level is suitable for employees in low-wage regions and industries. This approach will also maintain the prominence of the duties test by ensuring that the salary level alone does not disqualify from exemption a substantial number of employees who meet the duties test. This is consistent with the duties test’s historical function, and will alleviate a major concern— overemphasis on the salary level test— that led to the 2016 rule’s invalidation. Once this rule is effective, white collar employees who are subject to the salary level test and earn less than $684 per week will not qualify for the EAP exemption, and therefore will be entitled to overtime pay. Employees earning this amount or more on a salary or fee basis will be exempt if they meet the standard duties test. As a result of this updated salary level, 1.2 million currently exempt employees who earn at least $455 but less than the updated standard salary level of $684 per week will, without some intervening action by their employers, gain overtime eligibility. In addition, 2.2 million white collar workers earning within this salary range who are currently nonexempt because they do not meet the standard duties test will have their overtimeeligible status strengthened because their exemption status will be clear based on their salary alone. v. Discussion of Comments 1. Threshold Issues As was the case in the responses to the July 26, 2017 RFI and in feedback received at the public listening sessions, commenters to the NPRM overwhelmingly agreed that the salary E:\FR\FM\27SER2.SGM 27SER2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations level should be increased from the currently enforced level of $455 per week, which was set in 2004. Only a few commenters asserted that the salary level should not be updated; these commenters generally expressed concern that it would be difficult for employers to absorb any increase to the salary level. See Home Care Association of America; South Butler Community Library. Fisher & Phillips LLP and the National Federation of Independent Business (NFIB), however, questioned whether the Department has authority to set a salary level at all. The vast majority of commenters also agreed that the Department should continue to set the salary level on a nationwide basis rather than having different salary levels that vary by region, industry, or some other factor. See, e.g., Associated General Contractors of America (AGC); National Council of Nonprofits; National Employment Law Project (NELP); National Propane Gas Association; Partnership to Protect Workplace Opportunity (PPWO). A few commenters suggested that the Department set multiple salary levels, such as by region or state or for urban and rural areas. See Council for Christian Colleges and Universities; Idaho Division of Human Resources; Lutheran Services in America. A few other commenters advocated for industry-specific salary levels, see National Newspaper Association, or exemptions from the salary level test for specific industries, see Family Focused Treatment Association, or for ‘‘seasonal’’ employers, see Corps Network. Special Olympics sought a special salary level for non-profits, while the National Council of Nonprofits opposed such a carve-out. The Department maintains that the FLSA’s delegation of authority to the Secretary to ‘‘define[ ] and delimit[ ]’’ the terms of the section 13(a)(1) exemption includes the authority to set a salary level. While the language of section 13(a)(1) precludes the Department from adopting a salary-only test because salary ‘‘is not ’capacity’ in and of itself,’’ 84 FR 10907; see also 81 FR 32429; 69 FR 22173, the Department’s broad authority to ‘‘define and delimit’’ the terms of the EAP exemption permits it to use a salary level test as one criterion for identifying bona fide executive, administrative, and professional employees. The Department has used such a test for over 75 years, and its authority to establish a salary level is well-established. See, e.g., Wirtz v. Miss. Publishers Corp., 364 F.2d 603, 608 (5th Cir. 1966); Fanelli v. U.S. Gypsum Co., 141 F.2d 216, 218 (2d Cir. 1944); Walling v. Yeakley, 140 F.2d VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 830, 832–33 (10th Cir. 1944). As noted in the NPRM, ‘‘[a] salary level is helpful to determine who is not an executive, administrative or professional employee’’ because it ‘‘is a helpful indicator of the capacity in which an employee is employed, especially among lower-paid employees.’’ 84 FR 10907. The Department agrees with the vast majority of commenters who supported increasing the salary level. The currently enforced level of $455 was set a decade and a half ago in 2004. Like all previous salary levels, its effectiveness as a dividing line between nonexempt and potentially exempt employees has diminished over time, and the level should therefore be updated to align with growth in earnings in the intervening years. While the Department is sensitive to the views of commenters who contended that any increase would be challenging for businesses, historical experience has shown that incremental, reasonable salary level increases such as the one in this final rule are feasible and do not have significant adverse economic consequences. Additionally, as discussed below, the salary level set in this final rule takes these commenters’ concerns into account by using wages in the South and the retail industry. As in the past, the Department chooses to set a nationwide salary level and declines to establish multiple salary levels based on region, industry, employer size, or any other factor. Having multiple salary levels would make the regulations more complicated; for example, regional variations would introduce unnecessary complexity, particularly for employers and employees who operate or work across state lines. As the Department has explained when previously rejecting regional salary thresholds, adopting multiple different salary levels would, at minimum, create significant administrative difficulties ‘‘because of the large number of different salary levels this would require.’’ 69 FR 22171; 81 FR 32411. Likewise, the Department declines to set any additional industryspecific salary levels. The Department has rarely created such levels.71 Instead, as the Department has previously noted, the 2004 methodology ‘‘addresses the 71 A special level for the motion picture producing industry has been in place for over six decades due to the ‘‘peculiar employment conditions existing in the industry.’’ 18 FR 2881. Academic administrative employees meet the compensation requirement if they are paid on a salary basis ‘‘at a rate at least equal to the entrance salary for teachers in the educational establishment by which the employee is employed.’’ 29 CFR 541.600(c). The Department has otherwise refrained from setting industry-specific salary levels. PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 51239 concerns’’ of commenters advocating for multiple salary levels ‘‘by looking toward the lower end of the salary levels and considering salaries in the South and in the retail industry.’’ 69 FR 22171. This approach avoids the new compliance burdens that multiple salary levels would entail, while ensuring that the salary level is low enough that it exempts bona fide EAP employees in those regions and industries.72 2. The New Salary Level Commenters diverged regarding the appropriate level at which to set the new salary level. As a general matter, with some exceptions, employer representatives supported the Department’s proposal, while employee representatives opposed it and favored a level at least as high as the one set in the 2016 final rule. The vast majority of employer representatives supported the Department’s proposal to use the 2004 methodology to update the salary level. See, e.g., HR Policy Association; National Association of Home Builders (NAHB); Small Business Legislative Council; PPWO; Wage and Hour Defense Institute. Employer representatives who supported the proposed level generally agreed with the Department’s assessment that the 2004 methodology was faithful to the salary level’s purpose of screening out only those employees who are obviously nonexempt, while avoiding a de facto salary-only test that would impermissibly replace the role of the duties test. See, e.g., Bloomin’ Brands; Job Creators Network; National Retail Federation (NRF); PPWO; Seyfarth Shaw. Commenters who supported the proposal also stated that unlike the 2016 final rule, the proposal was suitable and manageable for low-wage regions and 72 Some commenters asked the Department to permit employers to prorate the salary level for part-time employees. See, e.g., College and University Professional Association for Human Resources (CUPA–HR); Council for Christian Colleges and Universities; Idaho Division of Human Resources. The Department has never prorated the salary level for part-time positions, and it specifically considered and rejected similar requests in its 2004 and 2016 final rules. See 81 FR 23422; 69 FR 22171. As the Department has previously explained, employees hired to work part time, by most definitions, do not work in excess of 40 hours in a workweek, and overtime pay is not at issue for these employees. An employer may pay a nonexempt employee a salary to work part time without violating the FLSA, so long as the salary equals at least the minimum wage when divided by the actual number of hours (40 or fewer) the employee worked. See FLSA2008–1NA (Feb. 14, 2008). To the extent that commenters are concerned about the exemption status of seasonal employees, the Department notes that ‘‘[e]xempt employees need not be paid for any workweek in which they perform no work.’’ 29 CFR 541.602(a)(1). E:\FR\FM\27SER2.SGM 27SER2 jbell on DSK3GLQ082PROD with RULES2 51240 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations industries, and for small businesses. See, e.g., American Hotel and Lodging Association (AHLA); American Society of Travel Advisors (ASTA); CUPA–HR; LeadingAge; Society of Independent Gasoline Marketers of America (SIGMA); YMCA. Many also conveyed that the proposed level would not produce the same negative effects—e.g., increased employer burdens and diminished workplace flexibility—as the 2016 final rule. See, e.g., National Association of Landscape Professionals; Seyfarth Shaw. Some also noted that the 2004 rule has withstood the test of time for the past 15 years and has never been challenged in court. See, e.g., Job Creators Network; SIGMA. Additionally, many of these commenters agreed with the Department that the proposed rule was responsive to the district court’s concerns that led to the invalidation of the 2016 final rule. See, e.g., Ogletree, Deakins, Nash, Smoak & Stewart, P.C.; SHRM. Many employer representatives maintained that the proposed rule’s salary level resulted in a more appropriate number of employees who would become newly nonexempt—1.1 million in the first year—compared to the 2016 final rule, which would have resulted in 4.2 million such workers in the first year. They noted that the smaller number of newly nonexempt employees would make it easier for employers to absorb the costs of compliance, see U.S. Small Business Administration Office of Advocacy (SBA Advocacy), would lessen the legal risk associated with the rule, see National Restaurant Association (NRA); Wage and Hour Defense Institute, and would ensure that the salary level maintains its historic screening function, see AGC; Chamber of Commerce of the United States of America (Chamber); NRF. A few commenters, while generally supportive of the Department’s approach in the NRPM, advocated for a salary level lower than the one proposed. These stakeholders maintained that to ensure that the salary level could accommodate low-wage regions and industries, the Department should exclude higher-wage states from the earnings data used to set the salary level. For example, some commenters urged the Department to include only the East South Central and West South Central Census Divisions, which include the lower-wage states of Kentucky, Tennessee, Alabama, Mississippi, Louisiana, Arkansas, Oklahoma, and Texas, see Chamber; Food Marketing Institute (FMI); International Franchise Association (IFA); NRA, while AHLA recommended VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 excluding Maryland, Virginia, and the District of Columbia from the data set. Others suggested generally that the Department use a narrower geographic area than the entire South, using the East South Central Census Division (Alabama, Kentucky, Mississippi, and Tennessee) as an example. See Kentucky Retail Federation; SBA Advocacy. Employee representatives, conversely, generally stated that the salary level should be raised significantly above the level proposed in the NPRM or that the duties test should be significantly strengthened. See, e.g., National Women’s Law Center (NWLC); Public Justice Center; UnidosUS. Many commenters supported the level in the 2016 final rule or something similar to it. See, e.g., American Association of Retired Persons (AARP); American Federation of State, County, and Municipal Employees (AFSCME); Campaign Comments; International Union, United Automobile, Aerospace & Agricultural Implement Workers of America (UAW). A few advocated that the salary level be set even higher, at $1,176 per week ($61,152 per year), using median earnings data. See National Employment Lawyers Association (NELA); Nichols Kaster, PLLP (Nichols Kaster); Rudy, Exelrod, Zieff & Lowe, LLP (Rudy Exelrod); Texas Employment Lawyers Association (TELA). Many employee representatives maintained that the salary level proposed in the NPRM is inconsistent with the purpose of the FLSA and the EAP exemption. In general, these commenters contended that the proposed salary level was too low to adequately distinguish between bona fide EAP employees and those who were intended to be eligible for overtime, and that the rule would result in the exemption of lower-wage workers with limited bargaining power, whom the statute was designed to protect. See, e.g., NELP; NELA; Texas RioGrande Legal Aid; Washington State Budget and Policy Center. Several commenters stated that the proposal would inappropriately exempt employees who perform significant amounts of nonexempt work. See, e.g., National Council of Jewish Women; Women Employed. The American Federation of Labor and Congress of Industrial Organizations (AFL–CIO) disagreed that the salary level test’s primary purpose is to screen out obviously nonexempt employees, contending that statements to that effect in the Weiss and Stein reports were ‘‘not proposals for setting the long duties salary threshold’’ but ‘‘defending the salary tests against PO 00000 Frm 00012 Fmt 4701 Sfmt 4700 criticism,’’ and that the salary levels described in those reports as having ‘‘screening’’ functions were accompanied by the more rigorous long duties test. Commenters also noted that according to the Department’s own estimates, 84 FR 10951, the proposed rule would result in 2.8 million fewer workers newly entitled to overtime pay in the first year than the 2016 final rule. See Joint Comment from 77 Members of Congress; National Partnership for Women and Families; Nichols Kaster. Many of these commenters also cited estimates by EPI, which projected that the proposed rule, compared to the 2016 final rule, would result in $1.2 billion fewer dollars in earnings transfers to employees and would affect 8.2 million fewer workers, including 3.1 million workers who would have gained the right to overtime pay and 5.1 million workers who are already overtimeeligible but would have had their overtime protections strengthened by the 2016 final rule’s higher salary level because of a reduced risk of misclassification. These commenters stated that the narrowed scope of the proposed rule would be detrimental to these employees, who include millions of women, people of color, and parents of children under 18. See EPI; National Partnership for Women and Families. Some maintained, for example, that a higher salary level that would affect more workers would provide such workers with more income, improve upward mobility, and/or provide workers with more time to spend with their families. See AARP; Campaign Comments. Several commenters highlighted the lower number of affected employees (compared to the 2016 final rule) in their particular states. See, e.g., Maryland Center on Economic Policy; Washington State Budget and Policy Center. Some commenters also asserted that the proposed salary level would result in a higher risk of misclassification relative to the 2016 final rule, as well as more litigation, because more employees’ exempt status would turn on the duties test rather than the salary level test. See NELA; Winebrake & Santillo LLC. A group of 14 state attorneys general and the Attorney General for the District of Columbia (State AGs) stated that these misclassification consequences would extend to state wage-and-hour laws that contain EAP exemptions that track the federal standard. Commenters who opposed the proposed rule also criticized the Department’s reliance on the reasoning of the Nevada district court’s decision. E:\FR\FM\27SER2.SGM 27SER2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations See AFL–CIO; EPI; NELP; NWLC; State AGs. These commenters took issue with the district court’s conclusion that the 2016 final rule’s salary level was too high because it classified as nonexempt over 4 million previously exempt workers based on their salaries alone, and as a result impermissibly displaced the role of the duties test. AFL–CIO and EPI asserted that the raw number of newly nonexempt workers under a new salary test should not determine the test’s appropriateness since that number depends on several factors, such as the amount of time since the previous update and whether the methodology used in the last update was sound. Relatedly, the AFL–CIO stated that it is unclear why the 2016 final rule’s salary level, which would have resulted in 4.2 million newly nonexempt employees, was impermissibly high, but the proposed rule’s salary level, which would result in 1.1 million (the Department’s estimate) to 1.4 million (EPI’s estimate) newly nonexempt employees, is not. The AFL–CIO also asserted that the Department preemptively responded to the district court’s views in the 2016 final rule, while it and other employee representatives contended that the rationale that the Department put forth in support of the 2016 final rule was more persuasive than the district court decision that invalidated it. See AFL– CIO; EPI; NELP; NWLC. Many employee commenters asserted that if the Department did not substantially raise the salary level above the proposed level, it should establish a more rigorous duties test such as the former long test, which set specific limits on the performance of nonexempt work. See, e.g., AARP; House and Senate Democratic Caucuses of the Michigan Legislature; National Council of Jewish Women; Women Employed. Some commenters recommended instituting a more rigorous duties test regardless of the salary level the Department adopts. See AFL–CIO; State of Wisconsin Department of Workforce Development. Finally, several employee representatives also asserted that by adopting the 2004 methodology in the NPRM, the Department perpetuated a methodological error that the 2016 final rule characterized as a ‘‘mismatch.’’ See AFL–CIO; Economic Policy Institute (EPI); NELP; NWLC; 81 FR 34400. According to this view, while the Department had historically used two tests for exemption—a long test that paired a more rigorous duties test with a lower salary level, and a short test that paired a less rigorous duties test with a higher salary level—in 2004, the VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 Department instead paired a less rigorous duties test with a lower salary level, resulting in historically nonexempt workers being instead classified as exempt. These commenters stated that the 2004 methodology failed to adjust for changes from the long/short test structure, and that a significantly higher salary level is necessary to account for the absence of the long duties test, which restricted the amount of nonexempt work lower-wage white collar employees could perform while still being classified as exempt. Some of these commenters contended that, as a result, the 2004 methodology results in a salary level that exempts certain historically nonexempt employees because employees who traditionally passed the long salary test and failed the long duties test became exempt under the 2004 final rule’s standard salary level and duties tests. See, e.g., NELA; Nichols Kaster; Senator Patty Murray. Some commented that the Department unreasonably relied on the functional dormancy of the long test to justify its adoption of the standard test in 2004, given that the Department did not update the short and long test thresholds between 1975 and 2004. One commenter, EPI, noted that the Department did not include the methodology for the Kantor long test, which used the lowest 10 percent of exempt salaried employees in low-wage regions and industries, as an alternative in the NPRM or elsewhere in the proposal. Conversely, employer representatives disagreed with the ‘‘mismatch’’ rationale. They stated, for example, that the standard duties test is not identical to the short duties test, and that in 2004, the Department accounted for its change in the structure and data set used for the EAP exemption by adjusting the percentile used for determining the salary level. See Chamber; NRA. More generally, nearly all employer representatives opposed any changes to the standard duties test. See, e.g., Bowling Proprietors Association of America; NGA; PPWO. The Department appreciates the thoughtful comments it received regarding the salary level. After considering these comments, the Department has decided to retain the approach from the proposed rule with one small change. As proposed, the Department is using CPS earnings data to set the salary level equal to the 20th percentile of full-time salaried workers in the lowest-wage Census Region (the South) and/or the retail industry nationwide. To set the salary level, the Department applied this methodology to pooled CPS MORG data for July 2016 to PO 00000 Frm 00013 Fmt 4701 Sfmt 4700 51241 June 2019, adjusted to reflect 2018/ 2019. This results in a final rule salary level of $684 per week ($35,568 for a full-year worker). For the reasons discussed below, the Department is not inflating the salary level forward to January 2020 as was proposed in the NPRM, but instead has used the most recent available actual wage data. As an initial matter, the Department believes that the proposed salary level is consistent with, and faithful to, the FLSA’s purpose. As noted in the NPRM, the FLSA explicitly directs that bona fide executive, administrative, and professional employees ‘‘shall not’’ be subject to the statute’s minimum wage and overtime requirements. 29 U.S.C. 213(a)(1); 84 FR 10903. As such, when defining the contours of the EAP exemption, while the Department must, of course, ensure that employees who are subject to the Act’s coverage receive its benefits, it must also ensure that employees whom Congress has directed ‘‘shall’’ be exempt from coverage are, in fact, exempt. The 2016 final rule was in tension with this purpose, as it would have newly disqualified 4.2 million workers from exemption simply because of their salaries, regardless of their duties. The Department believes that this final rule strikes the appropriate balance by using the salary level, in line with its historical purpose, to screen out obviously nonexempt employees. As explained above, the Department articulated this purpose in the Weiss Report in 1949, when it explained that the salary level tests ‘‘prevent[ed] the misclassification by employers of obviously nonexempt employees, thus tending to reduce litigation’’ and ‘‘simplified enforcement by providing a ready method of screening out the obviously nonexempt employees’’ who, ‘‘[i]n an overwhelming majority of cases . . . would also not qualify under other sections of the regulations as the Divisions and the courts have interpreted them.’’ Weiss Report at 8. Likewise, in the Kantor Report, the Department stated the salary level tests ‘‘provide[ ] a ready method of screening out the obviously nonexempt employees,’’ and that employees ‘‘who do not meet the salary test are generally also found not to meet the other requirements of the regulations.’’ Kantor Report at 2–3. The Department referenced the screening function again in the 2004 final rule. See 69 FR 22165. This principle has been at the heart of the Department’s interpretation of the EAP exemption for over 75 years. The Department disagrees with the proposition advanced by some employee representatives that this E:\FR\FM\27SER2.SGM 27SER2 51242 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 articulation of the salary level’s modest purpose misreads the Weiss and Kantor reports, or that it applies only when paired with the long duties test. Both reports explicitly characterize the minimum salary level as ‘‘simplif[ying] enforcement by providing a ready method of screening out the obviously exempt employees.’’ Kantor Report at 3; Weiss Report at 8. And both confirm that under an appropriate salary level test, employees earning below the salary level generally would not meet the requirements of the duties test.73 While these reports were written while a more rigorous duties test was in effect, they nonetheless affirm that a minimum salary level’s purpose is to serve as a ‘‘screening’’ mechanism. Conversely, as explained in the NPRM, the 2016 final rule went beyond this purpose, and instead suggested that the salary level had a much greater role to play in determining exempt status. For example, in the 2016 final rule the Department took the position that, in light of the single standard duties test that is less rigorous than the long duties test, ‘‘the salary threshold must play a greater role in protecting overtimeeligible employees,’’ and that ‘‘it [was] necessary to set the salary level higher . . . because the salary level must perform more of the screening function previously performed by the long duties test.’’ 81 FR 32412, 32465–66.74 As a result, the $913 per week salary level newly excluded 4.2 million salaried workers from exemption regardless of the duties they performed. The district court concluded that this would exclude from exemption ‘‘so many employees who perform exempt 73 See Kantor Report at 3 (‘‘Employees who do not meet the salary test are generally also found not to meet the other requirements of the regulations.’’); Weiss Report at 8 (‘‘In an overwhelming majority of cases, it has been found by careful inspection that personnel who did not meet the salary requirements would also not qualify under other sections of the regulations as the Divisions and the courts have interpreted them.’’). 74 As noted in the NRPM, 84 FR 10908 n.76, the Department explained in the 2016 final rule that at the time of its analysis, 12.2 million salaried white collar workers earned more than $455 per week but were overtime eligible because they failed the duties test, while 838,000 salaried white collar workers were overtime eligible because even though they passed the standard duties test they earned below $455 per week. The Department then estimated that a $913-per-week salary level would result in 6.5 million salaried white collar workers who failed only the duties test, and increase to 5.0 million the number of salaried white collar workers who passed the duties test but would be overtime eligible because they failed the salary level test. See 81 FR 32464–65; see also id. at 32413. As the Department noted, however, it ‘‘has never compared the number of employees who are nonexempt based exclusively on the salary or duties test, respectively, to determine the effectiveness of the salary level.’’ 84 FR 10908. VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 duties,’’ and in fact excluded ‘‘entire categories of previously exempt employees who perform ‘bona fide executive, administrative, or professional capacity’ duties[.]’’ 275 F. Supp. 3d at 806–7. Accordingly, it invalidated the rule. In sum, as explained in the NPRM, the Department believes that the 2016 final rule ‘‘untethered the salary level test from its historical justification[,]’’ 84 FR 10901, and that this resulted in its invalidation by the district court. For this reason, the Department declines to return to the 2016 methodology or to set an even higher salary level. In contrast, as noted in the NPRM, the methodology in the 2004 final rule, which the Department is applying in this rule, ‘‘has withstood the test of time, is familiar to employees and employers, and can be used without causing significant hardship or disruption to employers or the economy, while ensuring overtime-eligible workers continue to receive the protections intended by Congress.’’ Id. at 10903. The Department also believes that the number of workers affected by the salary level set in this final rule confirms that the level is appropriate. The Department estimates that the final rule will result in 1.2 million workers who will be newly overtime-eligible in the first year as a result of the increased salary level. The number of affected workers is very similar to the 1.3 million workers affected by the 2004 rule’s salary level increase. Id. at 10911 (citing 69 FR 22213, 22253). This similarity to the 2004 rule, which has never been challenged in court, is consistent with the Department’s view that the salary level set in this final rule is reasonable and legally sound. Moreover, as the Department explained in the NPRM, because the 2016 final rule set the salary level ‘‘at the low end of the historical salary range of short test salary levels,’’ 81 FR 32414, it failed to account for the absence of a long test that historically exempted white collar workers with lower salaries but whose duties confirmed they were bona fide EAP employees. Thus, the impact of the 2016 final rule would have been the inverse of the ‘‘mismatch’’ the Department sought to correct. It would have resulted in employees who, due to the nature of their duties, have historically been classified as exempt suddenly becoming nonexempt simply because of their salaries. As a result, the 2016 final rule was in tension with the salary level’s limited role in defining the EAP exemption, as it conflicted with the Department’s longtime practice of setting a salary PO 00000 Frm 00014 Fmt 4701 Sfmt 4700 level that did not ‘‘disqualify[ ] any substantial number of’’ bona fide executive, administrative, and professional employees from exemption, Kantor Report at 5, leading directly to the district court’s invalidation of the rule. While the Department has long recognized that it is inevitable that some employees will be incorrectly excluded from exemption since the salary level is ‘‘a dividing line [that] cannot be drawn with great precision but can at best be only approximate[,]’’ Weiss Report at 11, the Department may not disregard Congress’s express directive to exempt bona fide EAP employees. Conversely, the 1.2 million lower-income workers who will become nonexempt as a result of this rule’s increase to the standard salary level will not include a substantial number of workers whose duties have historically qualified them as bona fide EAP employees. Thus, while employee representatives criticized the narrower scope of this rule compared to the 2016 final rule, the fact that this final rule affects considerably fewer employees than the 2016 final rule confirms, rather than undermines, its appropriateness. Given that the 2016 final rule was invalidated due to its overbreadth, that rule is not a reasonable benchmark for concluding that the number of affected employees under this rule is too low. As noted above, employee commenters also objected to the Department’s reliance on the Nevada district court’s decision invalidating the 2016 final rule. The Department believes that its reliance on the reasoning of the district court is wellfounded. Such reliance is reasonable and prudent as it reduces the vulnerability of new rules to legal challenges or injunctions, and maximizes the likelihood that a new rule can be implemented immediately. Notably, it has been over three years since the 2016 rule was published, and nearly three years since its stated effective date. Because of the rule’s invalidation, however, the currently enforced salary level remains at $455 per week, which the Department and nearly all commenters agree must be updated. Adoption of a salary level that reduces, to the extent possible, the likelihood that the rule will be enjoined is the best way to ensure that workers can reap the rule’s benefits as soon as possible rather than waiting for the outcome of potentially lengthy litigation. The Department believes that the salary level in this final rule accomplishes that objective, particularly given the district court’s implicit endorsement of the 2004 methodology. See 275 F. Supp. 3d at E:\FR\FM\27SER2.SGM 27SER2 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 807 n.6 (noting the court’s earlier observation that an updated 2004 salary level likely would have not prompted the litigation that invalidated the 2016 final rule because it ‘‘would still be operating . . . as more of a floor’’) (internal quotation marks and citation omitted). Additionally, the Department is mindful of the concerns the district court cited. As articulated in the NPRM and above, the 2016 final rule was, at minimum, in tension with the FLSA because it resulted in 4.2 million employees, including employees who were historically exempt under the long test, becoming nonexempt based on their salaries alone, even though the Act directs that the EAP exemption be based on ‘‘capacity.’’ This threatened to make ‘‘salary rather than an employee’s duties determinative’’ of an employee’s status under the EAP exemption.75 While the 2016 final rule naturally contains language disagreeing with these propositions, for the reasons explained above, the Department has reexamined the 2016 final rule in light of the district court’s decision and the public comments it has received in response to the RFI and the NPRM, and ultimately finds that the concerns voiced by the district court and by many public commenters warrant adopting a lower salary level. The Department disagrees with the employee commenters who asserted that the 2004 methodology created a ‘‘mismatch’’ that must be corrected by a salary level comparable to the one from the 2016 final rule or a restoration of the long duties test. See, e.g., EPI (‘‘The methodology for setting the standard salary threshold in the 2004 rule was fundamentally flawed.’’); NELP. The 2004 final rule explained that it was difficult to coherently apply the long duties test’s requirement that an EAP employee perform no more than 20 percent nonexempt work.76 Consequently, the Department switched from the long and short duties tests to a single duties test that, like the previous short duties test, did not include a quantitative limit on the percentage of time performing nonexempt work. And the Department set a standard salary level that was similar to that of the long test. The commenters relying on the ‘‘mismatch’’ theory appear to assert that 75 275 F. Supp. 3d at 807. FR 22127 (‘‘When employers, employees, as well as Wage and Hour Division investigators applied the ‘long’ test exemption criteria in the past, distinguishing which specific activities were inherently a part of an employee’s exempt work proved to be a subjective and difficult evaluative task that prompted contentious disputes.’’). 76 69 VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 the 2004 final rule should have paired the single duties test with a higher salary threshold such as the short test because the Department was obligated to preserve the previous structure of pairing a more rigorous duties test with a lower salary level test, or a less rigorous duties test with a higher salary level. See, e.g., AFL–CIO, EPI. But the previous structure had been created by the Department as one among many permissible policy choices. It was not required by the statutory text. Indeed, the statutory text does not require the Department to determine any salary level. As such, the Department was under no legal obligation to preserve the previous salary/duties structure in the 2004 final rule. Moreover, the Department believes it would have been inappropriate to adopt the higher short test salary level after removing the long duties test in the 2004 final rule. See 84 FR 10908. The long duties test ensured that white collar employees would not become nonexempt simply because their salaries fell below the short test’s higher threshold, if their duties clearly indicated bona fide EAP status. If the 2004 final rule had adopted the short test’s higher salary threshold after eliminating the long duties test, such employees would have been reclassified as nonexempt solely because of their salary level. This approach would have departed from the historical role of using the salary level to screen out only obviously nonexempt employees, and would have risked violating the statutory requirement to base EAP status on the ‘‘capacity’’ in which the employee is employed. 29 U.S.C. 213(a)(1). Therefore, the Department believes that its’ decision in 2004 not to pair the higher short test salary level with the standard duties test was a necessary measure to maintain policy consistency and follow statutory requirements. Indeed, the 2016 final rule’s attempt to correct the ‘‘mismatch’’ by setting the salary level ‘‘at the low end of the historical range of short test salary levels,’’ 81 FR 32409, created the precise legal risks that the 2004 final rule attempted to avoid. While the Department previously relied on the mismatch theory in defending the 2016 final rule in litigation, the district court, in declaring the 2016 final rule invalid for the reasons set forth above, implicitly rejected application of the mismatch theory in reaching its conclusion. As explained above, the district court found that the salary level set by the 2016 final rule improperly substituted employee salaries for an PO 00000 Frm 00015 Fmt 4701 Sfmt 4700 51243 analysis of employees’ duties.77 275 F. Supp. 3d at 806. In contrast, the 2004 methodology has never even been challenged in court—let alone invalidated—during the 15 years it has been enforced by the Department. Additionally, as noted in the NPRM, the mismatch rationale failed to account for the substantial number of years during which the long duties test was effectively dormant. 84 FR 10908–09; see also 69 FR 22126 (explaining that ‘‘the ‘long’ duties test [had], as a practical matter, become effectively dormant’’ due to outdated salary levels, and quoting commenters who described the long duties test as ‘‘inoperative,’’ ‘‘rarely, if ever, used,’’ ‘‘largely . . . dormant,’’ and ‘‘lack[ing] current relevance’’). The long test salary levels set in 1975 were equaled or surpassed by the minimum wage in 1991.78 Thus, since at least 1991, the short duties test and salary level determined whether workers qualified for the EAP exemption. Employers and employees alike have effectively operated for 28 years under a single-test system. Thus, although, as noted above, some employee commenters asserted that the 2004 methodology exempts certain historically nonexempt employees (i.e., those who had passed the long salary test and failed the long duties test), any of these employees who were nonexempt in the years leading up to 2004 were nonexempt because their salaries fell below the short test’s salary threshold. It therefore appears that these commenters are requesting that the Department set the salary threshold at the historical short test level. The Department attempted to do this in the 2016 final rule, but as explained above, this approach created legal risks, as evidenced by the district court’s conclusion. The Department continues to believe that the post-1991 landscape is ‘‘highly relevant’’ to its approach here, 84 FR 10909, and disagrees with the employee representatives contending otherwise. The one-test system effectively in place for the nearly three decades has created significant reliance interests and 77 Some commenters contend that the district court’s decision was flawed because it did not address the ‘‘mismatch’’ theory in its opinion, even though it was the central theory behind the 2016 final rule. See AFL–CIO; NELP. However, as noted above, the district court implicitly rejected the mismatch theory. 78 In 1975, the Department set a long test salary level of $155 per week for executive and administrative employees, and of $170 per week for professional employees. See 40 FR 7092. On April 1, 1991, the federal minimum wage increased to $4.25 per hour, which equals $170 for a 40-hour workweek. See Sec. 2, Public Law 101–157, 103 Stat. 938 (Nov. 17, 1989). E:\FR\FM\27SER2.SGM 27SER2 jbell on DSK3GLQ082PROD with RULES2 51244 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations understandings in the workplace under which employees and employers alike recognize certain positions as exempt. As the Nevada district court recognized, a salary level that deviates substantially from recent practice would result in ‘‘entire categories of previously exempt employees who perform ‘bona fide executive, administrative, or professional capacity’ duties’’ becoming nonexempt. 275 F. Supp. 3d at 806 (quoting 29 U.S.C. 213(a)(1)). Numerous employers indicated that they anticipated significant adverse effects from the 2016 final rule as a result of this widespread reclassification, including not only increased compliance costs but decreased employee flexibility, reduced morale, and increased employee turnover. See Independent Electrical Contractors; National Association of Truck Stop Operators; National Multifamily Housing Council and the National Apartment Association; PPWO; SBA Advocacy; Seyfarth Shaw. Regarding EPI’s request that the Department ‘‘include the value of the Kantor long test in the final rule,’’ as explained below and as described in more detail in the economic analysis, the Department has considered the Kantor long test methodology as an alternative. But as the 2004 final rule explained, the Kantor method, which uses the lowest 10 percent of exempt salaried employees in low-wage regions and industries, requires ‘‘uncertain assumptions regarding which employees are actually exempt[.]’’ 69 FR 22167. It is also more complex to model and thus is less accessible and transparent. And it presents a circularity problem: The Kantor method would determine the population of exempt salaried employees, while being determined by the make-up of that population. The 2004 methodology of setting the minimum salary level based on the lowest 20 percent of all salaried employees in the South and retail industry avoids these problems. See id. Additionally, as discussed in the economic analysis below, upon consideration of the Kantor method, the Department found that it would result in a salary threshold that differs from the level set in this final rule by $40 per week. EPI similarly estimated that the Kantor method would result in a salary threshold that deviates from the level proposed in the NPRM by $33 per week. The Department does not believe this fairly small difference justifies reverting back to the Kantor method, particularly because the 2004 methodology is familiar to employers and employees, does not require uncertain and circular VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 assumptions, and has never been challenged in court. The Department also disagrees with commenters who stated that a significantly higher salary level is justified in order to reduce further the risk of employee misclassification. The Department recognizes that, in addition to conferring minimum wage and overtime protections on newly nonexempt employees, an updated salary level clarifies and strengthens the nonexempt status of employees who fail the duties test and earn between the previous salary level and the new one (i.e., those who are and will remain nonexempt), and thereby reduces the risk that those employees will be misclassified as exempt. Indeed, this final rule clarifies and strengthens the nonexempt status of 2.2 million salaried white collar workers and 1.9 million salaried blue collar workers earning between $455 and $684 per week. See infra §§ VI.A.iii, VI.D.iii.3. But the laudable goal of reducing misclassification cannot overtake the statutory text, which grounds an analysis of exemption status in the ‘‘capacity’’ in which someone is employed—i.e., that employee’s duties. Accordingly, the salary level test’s limited purpose is to screen out only those employees who are not performing bona fide EAP duties. See Weiss Report at 8 (noting that the salary levels ‘‘have amply proved their effectiveness in preventing the misclassification by employers of obviously nonexempt employees’’) (emphasis added). As explained at length above, if the salary level is too high, as was the case in the 2016 final rule, it results in a substantial number of historically exempt bona fide EAP employees being classified as nonexempt without any examination of their duties. Such action is inconsistent with the section 13(a)(1) exemption. The Department believes that potential misclassification of nonexempt employees as exempt is most appropriately addressed through compliance assistance and, if necessary, enforcement by the Department or private parties, rather than through an artificial increase to the salary level.79 The Department also declines to adopt a lower salary level than the one proposed in the NPRM, as some 79 Regarding the view of the state attorneys general that the new salary level does not do enough to prevent misclassification under their states’ wage-and-hour laws that track FLSA exemptions, nothing in this rule prevents any state from enacting a higher salary level, or a more restrictive duties test, than the FLSA if it believes it is necessary to prevent misclassification under state law. PO 00000 Frm 00016 Fmt 4701 Sfmt 4700 employer representatives suggested. As explained above, by setting the salary level at the low end—the 20th percentile—of the earnings of full-time salaried employees in the South and/or retail industry, the Department, consistent with its historical practice, has tailored the salary level to the needs of the lowest-wage regions and industries. While some employer representatives stated that the Department could use an even narrower subset of data by eliminating from consideration higher-wage states, the Department believes that using the entire South—the lowest-wage Census Region—in addition to the retail industry nationwide strikes the appropriate balance by setting a salary level that is based on low-wage areas but can still serve as a meaningful dividing line in higher-wage areas as well.80 In sum, after considering the comments received, the Department has decided to update the salary level by applying the 2004 methodology to current data. As noted in the NPRM, using this methodology ‘‘promotes familiarity and stability for the workplace, ensures workers the important wage protections contained in the Act, . . . minimizes the uncertainty and potential legal vulnerabilities that could accompany a novel and untested approach,’’ ‘‘avoids new regulatory burdens,’’ and sets a salary level that ‘‘accounts for nationwide differences in employee earnings and . . . work[s] appropriately with the standard duties test.’’ 84 FR 10909. The Department declines to make any changes to the duties test, such as adopting a duties test similar to the long duties test, which some employee representatives advocated as an alternative or complement to a higher salary level. As explained above, the standard duties test has been in effect for 15 years, and the short duties test, to which it is similar, was functionally the predominant test in use for the preceding 13 years. This approach has never been challenged. As a result, both employees and employers are accustomed to these tests. Moreover, a large body of jurisprudence interprets these duties tests, and so changing these tests could increase regulatory uncertainty and result in costly litigation. The Department also remains 80 The Chamber stated that the 2004 rule and the Department’s application of that rule (in the NPRM) used different groups of states, and that the 2004 rule used only a subset of states in the South Census Region. The Chamber’s characterization of the data set used in the 2004 rule is incorrect, as both this rule and the 2004 final rule used the entire South Census Region in setting the salary level. E:\FR\FM\27SER2.SGM 27SER2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations mindful of employer concerns that reinstating the long test’s cap on nonexempt work could introduce new compliance burdens. See, e.g., National Association of Truck Stop Operators; NRF; see also 81 FR 32446; 69 FR 22127. Finally, the Department did not propose any changes to the duties test in the NPRM and does not believe that it would be appropriate to institute such a significant change to the part 541 exemptions in this final rule. Accordingly, the Department declines to return to the more complicated long duties test. The Department believes that the standard duties test, which focuses on whether an employee’s ‘‘primary duty’’ consists of EAP tasks, can appropriately distinguish bona fide EAP employees from nonexempt workers. The Department considered a number of alternatives to the salary level in this final rule.81 First, the Department considered not changing the salary level from the currently enforced level of $455 per week. The Department rejected this option because, as discussed above, the Department concluded that the $455 salary level set fifteen years ago no longer reflects current earnings and must be updated to serve as a meaningful dividing line between nonexempt and potentially exempt employees. The Department also considered maintaining the average minimum wage protection in place since 2004 by using the weighted average of hours at minimum wage and overtime pay represented by the minimum salary level (i.e., the $455 weekly threshold represented 72.2 hours at minimum wage and overtime pay at the minimum wage in 2004; currently, that salary level represents 55.2 hours at minimum wage and overtime pay; the weighted average is 59.5 hours, which yields a salary of $502 per week). The Department rejected this option because it would not adequately address wage growth since 2004. In light of comments from some employer representatives, the Department also considered using the 2004 methodology but eliminating the District of Columbia, Maryland, and Virginia from the data set used to determine the salary level due to their higher levels of employee earnings. However, as discussed above, the Department believes that using the entire South and the retail industry nationwide results in an appropriate nationwide salary level that is based on low-wage regions but can still serve as 81 The salary levels that would result from each of the alternatives are set forth in section VI.C. VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 a meaningful dividing line in higherwage regions. Using the entire South is also consistent with the methodology used in the 2004 final rule. In response to a comment from EPI, the Department also considered adopting the methodology that was used to derive the long test salary level prior to 2004 (the Kantor long test method), which used the lowest 10 percent of exempt salaried employees in low-wage regions and industries. However, as explained in greater detail above, the Department declined to do so because while the Kantor methodology produces a salary level that differs from the level set in this final rule by less than 6 percent, it depends on uncertain and circular assumptions, and is more complex to model and thus less accessible and transparent. Finally, the Department considered using the methodology from the 2016 final rule to set the salary level, as suggested by many employee representatives. However, as explained at length above, the Department believes that methodology was inappropriate because it resulted in too many employees being newly classified as nonexempt based on their salaries alone, thus supplanting the role of the duties test. Moreover, the district court invalidated the 2016 final rule. Therefore, the Department has chosen to use the 2004 methodology, which, as noted above, screens out obviously nonexempt workers, works well with the standard duties test, and has never been challenged during the fifteen years in which it has been enforced by the Department. 3. Proposed Inflation to January 2020 The Department proposed to inflate the salary level to reflect anticipated wage growth to January 2020, the final rule’s estimated effective date. Most commenters did not address this aspect of the proposal, but some employer representatives opposed it. A few stated that the proposed approach was inconsistent with the Department’s past practice of setting the salary level using the most recent available data on actual salaries paid to employees, rather than inflationary metrics. See, e.g., Center for Workplace Compliance; Chamber; FMI. In the final rule, instead of projecting the salary level to January 2020, the Department has set the salary level using the most recent data available at the time the Department has drafted the final rule. The Department is using pooled CPS MORG data from July 2016 to June 2019, adjusted to reflect 2018/ 2019. As some commenters noted, using recent actual wage data is consistent with the approach the Department has PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 51245 taken in prior rulemakings. See 81 FR 32403 (noting regulatory history reveals that in most prior rulemakings ‘‘the Department examined a broad set of data on actual wages paid to salaried employees’’ to set the salary level), id. at 32051 (‘‘In keeping with our practice, the Department relies on the most upto-date data available to derive the final salary level[.]’’). It is also consistent with the Department’s historical practice (with only one exception, in 1975) of declining to use inflation to adjust the salary level for the part 541 exemption. See 69 FR 12167 (noting the Department’s ‘‘long-standing tradition of avoiding the use of inflation indicators for automatic adjustments to these salary requirements’’). Additionally, the gap between the latest month covered by the data set—June 2019—and the rule’s effective date—January 2020—is only six months. This is a shorter gap than was the case in the 2016 rule, which had an effective date of December 1, 2016 and relied on salary data from the fourth quarter of 2015, and a significantly shorter gap than the 2004 rule, which had an effective date of August 23, 2004 and relied on 2002 CPS data. 81 FR 32391, 32405; 69 FR 22122, 22168. Using a data set that includes such recent earnings data enables the Department to avoid the uncertainty and speculation that would accompany projecting earnings data. 4. Rescission of the 2016 Final Rule Many employer representatives who commented on the issue supported the NPRM’s independent proposal to rescind the 2016 final rule. See, e.g., ASTA; Center for Workplace Compliance; NAHB; NFIB; Wage and Hour Defense Institute; Worldwide Cleaning Industry Association. These employers generally maintained that the 2016 final rule, unlike the proposed rule, was inconsistent with how the Department has previously set the salary level, and some highlighted that the 2016 final rule excluded many workers performing EAP duties. As noted above, employer representatives also asserted that the 2016 final rule salary level would have a number of adverse effects, including reductions in staffing levels, hours, and employee benefits; less flexibility in scheduling; and decreased employee morale. In contrast, other commenters, including the tens of thousands who submitted comments as part of a campaign, maintained that the 2016 final rule was appropriate and would have benefited more employees than the salary level proposed in the NPRM, and urged the Department to defend the 2016 final rule in the E:\FR\FM\27SER2.SGM 27SER2 51246 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations currently stayed litigation. See, e.g., AFL–CIO; Campaign Comments; Senator Patty Murray; The Leadership Conference on Civil and Human Rights. The Department is finalizing the formal rescission of the 2016 final rule as proposed. Thus, in addition to replacing the 2016 final rule functionally by revising the part 541 regulatory text in the Code of Federal Regulations, this final rule also formally rescinds the 2016 final rule. This rescission operates independently of the new content in this final rule, as the Department intends it to be severable from the substantive rule for revising part 541. Thus, even if the substantive provisions of this final rule revising part 541 are invalidated, enjoined, or otherwise not put into effect, the Department intends the 2004 final rule to remain operative, not the enjoined 2016 final rule that it is rescinding. Particularly given the recent history of litigation in this area, the rescission of the 2016 final rule is necessary to provide certainty and clarity to employees and employers about what salary level will be effective if this final rule were to be invalidated, enjoined, or otherwise not put into effect. As explained at length above, the Department believes that the salary level set in the 2016 final rule was inappropriate. Moreover, given the district court’s invalidation of the 2016 final rule, the 2004 final rule, which has never been challenged in court, is the logical framework to take the place of this rule if this rule were to be struck down. B. Special Salary Tests jbell on DSK3GLQ082PROD with RULES2 i. Puerto Rico, Virgin Islands, Guam, and the Commonwealth of the Northern Mariana Islands 82 The Department has applied the standard salary level to Puerto Rico since 2004.83 In 2016, Congress passed the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA).84 Section 404 of PROMESA states that ‘‘any final regulations issued related to’’ the Department’s 2015 overtime rule NPRM—i.e., the 2016 final rule—‘‘shall have no force or effect’’ in Puerto Rico until the Comptroller General of the Unites States completes and transmits a report to Congress assessing the impact of applying the final regulations to 82 The special salary tests do not apply to employees of the Federal government employed in Puerto Rico, the U.S. Virgin Islands, Guam, the Commonwealth of the Northern Mariana Islands, or American Samoa. 83 See 69 FR 22172. 84 See Public Law 114–187, 130 Stat. 549 (June 30, 2016). VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 Puerto Rico, and the Secretary of Labor, ‘‘taking into account the assessment and report of the Comptroller General, provides a written determination to Congress that applying such rule to Puerto Rico would not have a negative impact on the economy of Puerto Rico.’’ 85 It is the Department’s belief that PROMESA does not apply to this final rule as it is a new rulemaking, and thus not ‘‘related to’’ the 2015 overtime rule NPRM within the meaning of PROMESA. Section 404, however, reflected Congress’s apprehension with increasing the salary level in Puerto Rico, and given the current economic climate there, the Department proposed to set a special salary level in Puerto Rico of $455 per week—the level that currently applies under PROMESA. The Department also currently applies the standard salary level to the Virgin Islands, Guam, and the Commonwealth of the Northern Mariana Islands (CNMI).86 The Department understands that U.S. territories face their own economic challenges and that an increase in the salary level affects them differently than the States. In recognition of these challenges, and to promote special salary level consistency across U.S. territories, the Department proposed setting a special salary level of $455 per week for the Virgin Islands, Guam, and the CNMI. Few commenters addressed this issue, but those who did all supported the Department’s proposal. The Saipan Chamber of Commerce, for example, stated that ‘‘U.S. territories face economic challenges not experienced by businesses and employers on the U.S. mainland,’’ and the World Floor Covering Association (WFCA) similarly cited the ‘‘unique economies’’ in these territories. The Hotel Association of the Northern Mariana Islands referenced several CNMI-specific concerns, including that ‘‘[w]ages across all industries in the CNMI, including the hospitality industry, have been historically lower than their stateside counterparts.’’ The CNMI chapter of SHRM expressed similar concerns. After reviewing the comments received, the Department is finalizing this aspect of the NPRM as proposed. As such, in this final rule the Department will set a special salary level of $455 per 85 See 48 U.S.C. 2193(a)–(b). The Comptroller General’s report was published on June 29, 2018 and is available at: https://www.gao.gov/products/ GAO-18-483. 86 In Guam and the CNMI, the Department has applied the salary level test(s) applicable to the States. In the Virgin Islands, the Department applied a special salary level test prior to 2004, but applied the standard salary level beginning in 2004. PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 week for Puerto Rico, the Virgin Islands, Guam, and the CNMI. ii. American Samoa As discussed in the NPRM, the Department has historically applied a special salary level test to employees in American Samoa because minimum wage rates there have remained lower than the federal minimum wage.87 The Fair Minimum Wage Act of 2007, as amended, provides that industryspecific minimum wage rates in American Samoa will increase every three years until each equals the federal minimum wage.88 The disparity with the federal minimum wage is expected to remain for the foreseeable future. The special salary level test for employees in American Samoa has historically equaled approximately 84 percent of the standard salary level.89 The Department proposed to maintain this percentage and considered whether to set the special salary level in American Samoa equal to 84 percent of the proposed standard salary level ($679 per week)—resulting in a special salary level of $570 per week—or to set it equal to approximately 84 percent of the proposed special salary level applicable to the other U.S. territories ($455 per week)—resulting in a special salary level of $380 per week. The Department proposed a special salary level of $380 per week in American Samoa. It explained that this approach would not only maintain the special salary level that the Department is currently enforcing in American Samoa, but would also ensure that American Samoa, which has a lower minimum wage than the other U.S. territories, would not have a higher special salary level.90 The Department received no comments on this proposal and will adopt the methodology set forth in the NPRM. Accordingly, in this final rule the Department will set a special salary level of $380 per week for employees in American Samoa. iii. Motion Picture Producing Industry The Department has permitted employers to classify as exempt employees in the motion picture producing industry who are paid a specified base rate per week (or a proportionate amount based on the number of days worked), so long as they meet the duties tests for the EAP exemption.91 This exception from the 87 See 69 FR 22172. Sec. 1, Public Law 114–61, 129 Stat. 545 (Oct. 7, 2015). 89 See, e.g., 69 FR 22172. 90 See 84 FR 10912. 91 See § 541.709. 88 See E:\FR\FM\27SER2.SGM 27SER2 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations ‘‘salary basis’’ requirement was created in 1953 to address the ‘‘peculiar employment conditions existing in the [motion picture producing] industry,’’ and applies, for example, when a motion picture producing industry employee works less than a full workweek and is paid a daily base rate that would yield the weekly base rate if 6 days were worked.92 Consistent with its practice since the 2004 final rule, the Department proposed to increase the required base rate proportionally to the proposed increase in the standard salary level test, resulting in a proposed base rate of $1,036 per week. The Department did not receive any comments on the proposed base rate for motion picture employees. The final rule adopts the methodology set forth in our proposal, which using the new standard salary level ($684 per week) results in a base rate of $1,043 per week (or a proportionate amount based on the number of days worked).93 C. Inclusion of Nondiscretionary Bonuses, Incentive Payments, and Commissions in the Salary Level Requirement In the 2016 final rule, the Department for the first time allowed employers to count nondiscretionary bonuses and incentive payments toward the standard or special salary levels.94 Under that rule, such bonuses must be paid quarterly or more frequently and may satisfy up to 10 percent of the standard or special salary level. In the NPRM, the Department again proposed to permit nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard or special salary level tests for the EAP exemption. However, unlike the 2016 final rule’s requirement that such payments must be paid on a quarterly or more frequent basis, the Department proposed to allow the crediting of payments made on an annual or more frequent basis. Additionally, the Department proposed to permit employers to make a final ‘‘catch-up’’ payment within one pay period after the end of each 52-week period to bring an employee’s compensation up to the required level. See 84 FR 10912–13. 92 18 FR 2881 (May 19, 1953). Department calculated this figure by dividing the weekly salary level ($684) by $455, and then multiplying this result (rounded to the nearest hundredth) by the base rate set in the 2004 final rule ($695 per week). This produced a new base rate of $1,043 (per week), when rounded to the nearest whole dollar. 94 Although a federal district court subsequently invalidated the 2016 final rule, the court’s summary judgment decision did not address the bonuses provision. 275 F. Supp. 3d 795. jbell on DSK3GLQ082PROD with RULES2 93 The VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 Most commenters representing employers supported allowing nondiscretionary bonuses and incentive payments to count towards the standard salary level requirement. Employer representatives supporting the bonuses proposal (or an expanded version of it) asserted that nondiscretionary bonuses and incentive payments constitute a large and important part of the total compensation package for many exempt employees. Several commenters, including the Chamber, FMI, IFA, and NRA, noted that, in light of commenter feedback, the Department has previously acknowledged this point in the NPRM and in the 2016 final rule. See 81 FR 32423–24; 84 FR 10912. The Chamber additionally cited a survey from 2018 showing that 80 percent of non-profit and government employers surveyed use some type of ‘‘short-term incentive plan.’’ The National Association of Truck Stop Operators and PPWO asserted that the majority of employees who receive bonuses and incentive payments otherwise qualify for exempt status, while SIGMA and WFCA asserted that bonuses and incentive payments tied to an employer’s success ‘‘foster a sense of ownership’’ among the managerial employees who receive them. Many employer representatives specifically approved of the Department’s proposal to allow the crediting of nondiscretionary bonuses and incentive payments paid on an annual basis (rather than quarterly, as provided by the 2016 final rule), agreeing that annual bonuses are a common form of compensation for many EAP employees. See PPWO; SIGMA. Although several employer representatives supported the proposal without reservation, a larger number objected to the proposal’s restriction that nondiscretionary bonuses and incentive payments could only satisfy up to 10 percent of the standard salary level. Some of these commenters urged the Department to allow bonuses to satisfy more than 10 percent of the standard salary level, but declined to specify an exact amount. See Center for Workplace Compliance; National Association of Federally-Insured Credit Unions; NGA. Others specifically proposed a higher percentage limit, including: WFCA (suggesting 20 percent); Small Business Legislative Council and TechServe Alliance (25 percent); ASTA (30 percent); National Independent Automobile Dealers Association (30 or 40 percent); and HR Policy Association and the Kentucky Retail Federation (50 percent). Finally, many employer representatives urged PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 51247 the Department not to impose any limit. See, e.g., American Network of Community Options and Resources; American Staffing Association; IFA; Mortgage Bankers Association; NRF; PPWO; Seyfarth Shaw. Some commenters critical of the proposed 10 percent limit asserted that it is not reflective of the compensation practices in their industry, where bonuses and incentive payments often exceed 10 percent of an employee’s fixed salary. See, e.g., ASTA; NGA; WFCA. Others contended that to ‘‘harmonize’’ the respective regulations, any non-hourly payments that count toward an employee’s ‘‘regular rate of pay’’ when calculating overtime pay, see 29 CFR 778.211(c), should count towards the salary threshold as well. See, e.g., AGC; HR Policy Association; PPWO; Worldwide Cleaning Industry Association.95 The Chamber, IFA, and the National Lumber and Building Material Dealers Association criticized the NPRM’s rationale that the 10 percent limit was necessary to help maintain parity between sectors that use such pay methods and those that traditionally have not done so,96 while ASTA and TechServe Alliance asserted that the 10 percent limit would have a negative impact on employers in industries that rely on incentive pay. Although few organizations representing employees commented on the bonuses proposal, those who did were unanimous in voicing their opposition. NELA, Nichols Kaster, Rudy Exelrod, and Smith Summerset & Associates LLC (Smith Summerset) asserted that allowing annual bonuses and incentive payments to satisfy any portion of the salary level test would undermine the premise that only workers with a minimum level of dependable and predictable pay should be exempt from the FLSA’s overtime protections. Relatedly, the AFL–CIO expressed concern that the proposal would ‘‘provide a means for employers to manipulate employees’ salaries to 95 For the same reason, some commenters specifically requested the Department allow employers to credit the value of board and lodging towards the standard salary level. See AHLA (‘‘If an employer must include a non-hourly payment in the regular rate, that payment should likewise count towards the salary threshold.’’); see also CUPA–HR; PPWO; Seyfarth Shaw. AHLA and CUPA–HR asserted that board and lodging benefits are especially common for exempt employees in hospitality and higher education, respectively. 96 The Chamber stated that such a consideration is ‘‘beyond the Department’s proper purview.’’ The Chamber and IFA additionally stated that government and non-profit employers do not typically compete with for-profit employers over the same employee, and that the proposal would not alter any existing competitive imbalance in any event. E:\FR\FM\27SER2.SGM 27SER2 51248 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 avoid paying overtime[.]’’ See also NELA. Given these concerns, some employee representatives asserted that the proposal would be particularly inappropriately paired with a salary level substantially lower than the figure adopted in the 2016 final rule. See, e.g., NELA; Smith Summerset. Several commenters disputed that nondiscretionary bonuses and incentive payments are indicative of exempt status. For example, NELA and TELA emphasized that such payments do not convey ownership interests in the business, and asserted that their members ‘‘have represented many categories of employees who receive various nondiscretionary bonuses, including middle management and lower level employees[.]’’ By contrast, Smith Summerset asserted that nondiscretionary bonuses and incentive payments ‘‘are not an important pay component for the relatively lowly paid employees who would be affected by the [proposal],’’ who the firm described as ‘‘most in need of the certainty and regularity of a salary’’ (emphasis in original). Finally, employee representatives worried that the proposal would undermine the clarity and effectiveness of the salary level test. For example, AFL–CIO stated that ‘‘[i]ncluding bonuses in the calculation could create confusion as to whether employees meet the salary threshold test and are overtime eligible.’’ See also Nichols Kaster. Several commenters, including NELA, Rudy Exelrod, and TELA, asserted that the proposal would increase monitoring and compliance costs. Smith Summerset asserted that employers would have to keep new payroll and timekeeping records for their exempt staff, including for some individuals no longer employed by the company who might be awaiting a deferred compensation payment. Several employee representatives predicted that the proposal would result in increased litigation, particularly over the distinction between discretionary and nondiscretionary bonuses.97 Smith Summerset emphasized that the back wage claims in such disputes would be substantial, and could pose ‘‘a surprising and unexpected liability to those unsophisticated employers who might stumble into the violation simply by reason of administrative oversight.’’ 97 NELA and other commenters asserted that ‘‘[d]etermining whether bonuses are discretionary or nondiscretionary already generates considerable litigation in the context of whether certain kinds of bonuses must be included in the regular rate for purposes of calculating the overtime rate.’’ See also Nichols Kaster; Rudy Exelrod; TELA. VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 After carefully considering commenter feedback, the Department has decided to adopt the proposal without modification—i.e., allowing employers to satisfy up to 10 percent of the standard or special salary levels 98 with nondiscretionary bonuses and incentive payments (including commissions), provided that such payments are paid no less frequently than on an annual basis.99 This provision appropriately modernizes the regulations to account for EAP compensation practices in a growing number of workplaces, while at the same time preserving the important role of the salary basis and salary level tests in identifying EAP employees, simplifying compliance, and preventing abuse. Feedback from employer representatives responding to the NPRM has reinforced the Department’s view in the previous rulemaking that the provision of nondiscretionary bonus and incentive payments has become sufficiently correlated with EAP status. At the same time, the Department acknowledges that nonexempt employees may receive nondiscretionary bonuses and incentive payments, and that the part 541 regulations have historically looked only to payments made on a salary or fee basis to satisfy the minimum salary level. The Department believes that allowing employers to credit nondiscretionary bonuses towards up to 10 percent of the standard or special salary levels strikes an appropriate balance between accommodating legitimate pay practices for a growing number of bona fide EAP employees, while not undermining the salary basis requirement. The Department has decided against raising or eliminating the proposal’s 10 percent limitation. The Department continues to believe in the basic logic of the salary requirement. Capping the crediting of nondiscretionary bonuses and incentive payments at 10 percent of the standard salary level ensures that the salary level test remains predominantly a test of salaried earnings, requiring that EAP employees subject to the salary criteria must earn at least 90 percent of the standard salary 98 Specifically, this rule permits employers to use nondiscretionary bonuses and incentive payments to satisfy up to 10 percent of the standard salary level or any of the special salary levels applicable to U.S. territories. As discussed in greater detail below, however, HCEs must receive at least the standard salary amount each pay period on a salary or fee basis without regard to the payment of nondiscretionary bonuses and incentive payments. 99 The employer may use any 52-week period, such as a calendar year, a fiscal year, or an anniversary of the hire year. PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 level on a salaried basis. Additionally, while several employer commenters asserted that nondiscretionary bonuses and incentive pay often comprise more than 10 percent of the total compensation paid to EAP employees, few specifically asserted that any significant number of EAP employees earn salaries of less than 90 percent of the proposed salary threshold (i.e., $614.70 per week, or $31,964.40 per year). Thus, the Department disagrees that the cumulative effect of raising the standard salary level while limiting the amount that can be satisfied through nondiscretionary bonuses and incentive pay will result in a significant reduction in such payments. The regulations do not limit the amount of bonuses EAP employees may earn; it only limits the amount that can count toward the standard salary level. For similar reasons, the Department has decided against expanding the proposal to allow additional kinds of payments to count towards the standard salary level, such as discretionary bonuses, employer benefit contributions, or the value of board, lodging, and facilities. The Department has never allowed such payments to count towards any of the earning thresholds required for the EAP exemption, including under the HCE test created in 2004. See 541.601(b)(1). The Department did not propose to allow such payments to count towards the salary level test, and declines commenter suggestions to do so in this final rule. NELA, Smith Summerset, and other commenters questioned how the proposed rule would treat employees affected by the proposal whose employment ends before the end of a 52-week period. Here, consistent with the treatment of employees under the existing HCE test, see § 541.601(b)(3), the Department has amended the proposed regulatory text at § 541.602(a)(3) to clarify that employers may pay employees a prorated amount for a designated 52-week period where an employee does not work for the entire period, because the employee either is newly hired after the period’s start or ends employment before the period’s end. Determining an employer’s payment obligation to such employees to maintain their exempt status depends on the number of workweeks that the employee works within the 52-week period. Where employment ends before the end of the 52-week period, employers must ensure that the employee receives enough in pay to satisfy the standard salary level by the end of the next pay period E:\FR\FM\27SER2.SGM 27SER2 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 following the employee’s end of employment. The final rule permits employers to meet the salary level requirement by making a catch-up payment within one pay period of the end of the 52-week period.100 In plain terms, each pay period an employer must pay the EAP employee on a salary basis at least 90 percent of the standard salary level and, if at the end of the 52-week period the sum of the salary paid plus the nondiscretionary bonuses and incentive payments (including commissions) paid does not equal the standard salary level for the 52-week period, the employer has one pay period to make up for the shortfall (up to 10 percent of the required salary level). Any such catchup payment will count only toward the previous 52-week period’s salary amount and not toward the salary amount in the 52-week period in which it was paid. The Department is sensitive to concerns raised by employee representatives and some employer commenters that the bonuses provision may increase compliance costs and litigation. These effects, however, are mitigated by the fact that crediting nondiscretionary bonuses and incentive pay towards the standard salary level is purely optional. Employers, who would predominantly bear the cost of compliance and litigation expenses, are presumably best positioned to evaluate whether the potential costs of such crediting would outweigh the potential benefits. While the AFL–CIO contends that the bonuses proposal could theoretically ‘‘lead to anomalous results, where employees working side by side performing the same job would be exempt and nonexempt, simply because inclusion of the bonus would raise one employee over the salary threshold[,]’’ this has always been true of the salary level test, given that employees performing identical job duties may receive different salaries. The Department emphasizes that this rulemaking does not change the requirement in § 541.601(b)(1) that highly compensated employees must receive at least the standard salary amount each pay period on a salary or fee basis without regard to the payment of nondiscretionary bonuses and 100 FMI, IFA, and other employer representatives requested giving employers more than one pay period to make any necessary catch-up payments, pointing out that the HCE test permits employers to make catch-up payments within one month after the end of the 52-week period used for that test. See 29 CFR 541.601(b)(2). The Department declines this request because this new provision specifically affects the standard salary level requirement, not additional income received on top of that threshold by highly compensated employees. VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 incentive payments. While nondiscretionary bonuses and incentive payments (including commissions) may be counted toward the HCE total annual compensation requirement, the HCE test does not allow employers to credit these types of payments toward the standard salary requirement. The Department continues to believe that permitting employers to use nondiscretionary bonuses and incentive payments to satisfy the standard salary portion of the HCE test is not appropriate because employers are already permitted to fulfill more than three quarters of the HCE total annual compensation requirement with commissions, nondiscretionary bonuses, and other forms of nondiscretionary deferred compensation (paid at least annually). Thus, when conducting the HCE analysis, employers must remain mindful that HCEs must receive the full standard salary amount each pay period on a salary or fee basis. Finally, nothing adopted in this final rule alters the Department’s longstanding position that employers may pay their exempt EAP employees additional compensation of any form beyond the minimum amount needed to satisfy the salary basis and salary level tests. See § 541.604(a). Similarly, the Department emphasizes that nonexempt employees may continue to receive bonuses and incentive payments. Where nondiscretionary bonuses or incentive payments are made to nonexempt employees, the payments must be included in the regular rate when calculating overtime pay. The Department’s regulations at §§ 778.208– .210 explain how to include nondiscretionary bonuses in the regular rate calculation. D. Highly Compensated Employees As noted in the NPRM, the Department’s 2004 final rule created a new test under the EAP exemption, known as the highly compensated employee (HCE) test, based on the rationale that it is unnecessary to apply the standard duties test in its entirety to employees who earn at least a certain amount annually—an amount substantially higher than the annual equivalent of the weekly standard salary level—because such employees ‘‘have almost invariably been found to meet all the other requirements of the regulations for exemption.’’ 101 The HCE test combines a high compensation requirement with a less-stringent duties test. To meet the HCE test, an employee must earn at least the amount specified 101 69 PO 00000 FR 22174 (quoting Weiss Report at 22). Frm 00021 Fmt 4701 Sfmt 4700 51249 in the regulation in total annual compensation and must customarily and regularly perform any one or more of the exempt duties or responsibilities of an executive, administrative, or professional employee.102 This test applies ‘‘only to employees whose primary duty includes performing office or non-manual work.’’ 103 Such an employee must receive at least the standard salary level each pay period on a salary or fee basis, while the remainder of the employee’s total annual compensation may include commissions, nondiscretionary bonuses, and other nondiscretionary compensation.104 An employee is permitted to make a final ‘‘catch-up’’ payment ‘‘during the last pay period or within one month after the end of the 52-week period’’ to bring an employee’s compensation up to the required level.105 If an employee works for less than a full year, either because the employee is newly hired after the beginning of the 52-week period or ends the employment before the end of this period, the employee may still qualify for exemption under the HCE test if the employee receives a pro rata portion of the required annual compensation, based upon the number of weeks of employment.106 The Department stated in the NPRM that it continues to believe that the HCE test is a useful alternative to the standard salary level and duties tests for highly compensated employees.107 At the time this level was initially set in 2004 at $100,000, the Department concluded that ‘‘white collar’’ employees who earn above this threshold would nearly always satisfy any duties test.108 The Department proposed updating the HCE threshold to ensure that it remains a meaningful and appropriate standard when paired with the more-lenient HCE duties test. Specifically, the Department proposed setting the HCE threshold at the 90th percentile of all full-time salaried workers nationally using 2017 CPS data, then inflated to January 2020, resulting 102 § 541.601(a). 103 § 541.601(d). 104 § 541.601(b)(1). However, total annual compensation does not include board, lodging, and other facilities, or payments for medical insurance, life insurance, retirement plans, or other fringe benefits. Id. 105 § 541.601(b)(2). 106 § 541.601(b)(3). 107 84 FR 10913. 108 Id. The Department concluded that ‘‘in the rare instances when these employees do not meet all other requirements of the regulations, a determination that such employees are exempt would not defeat the objectives of section 13(a)(1) of the Act.’’ 69 FR 22174 (quoting Weiss Report at 22–23). E:\FR\FM\27SER2.SGM 27SER2 51250 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 in a proposed HCE threshold of $147,414, of which $679 would have to be paid weekly on a salary or fee basis.109 The Department received fewer comments addressing the HCE proposal than on many other issues in the NPRM, and those who addressed the HCE proposal often did not provide detailed feedback. Nearly all the commenters on the HCE proposal were employer representatives, most of whom opposed the Department’s proposal to increase the HCE compensation level to a level equal to the 90th percentile of all fulltime salaried workers ($147,414). These commenters instead supported keeping the HCE level at $100,000, see, e.g., HR Policy Association; National Association of Manufacturers; NRF, or increasing the HCE level but by a lower amount (resulting in a threshold between $100,000 and $147,414), see, e.g., Chamber; National Lumber and Building Material Dealers Association; WFCA. For example, some commenters suggested lowering the percentile from 90 percent to 80 percent of full-time salaried employees nationwide. See, e.g., Center for Workplace Compliance; WorldatWork. A few employer representatives noted that they did not object to the proposed HCE salary level. See ASTA; Credit Human Federal Credit Union. By and large, employee representatives did not specifically address the HCE proposal.110 Commenters who favored keeping the HCE threshold at $100,000 or increasing it by a lower amount expressed concern that the proposed level was so high as to put the HCE test for the EAP exemption out of reach for employers in lower-wage regions and industries. For example, the Chamber stated that such employers would not be able to access the HCE test ‘‘on equal terms,’’ because ‘‘[w]hether an employee qualifies for exemption under the highly compensated test would depend more on where the employee works than how much the employer values the employee’s duties.’’ Some of these commenters suggested that the 109 84 FR 10913–14. Consistent with the 2016 final rule, the Department’s proposal did not permit employers to use nondiscretionary bonuses to satisfy the weekly standard salary level requirement for HCE workers. Id. at 10914 n.129. As previously stated, the Department believes that permitting employers to use nondiscretionary bonuses and incentive payments to satisfy the standard salary portion of the HCE test is not appropriate because employers are already permitted to fulfill the majority of the HCE total annual compensation requirement with commissions, nondiscretionary bonuses, and other forms of nondiscretionary deferred compensation (paid at least annually). 110 At least one individual commenter supported the proposed increase in the HCE compensation level. VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 Department should calculate the HCE threshold using data from a lower-wage region of the country, such as the South Census Region or a subset thereof, which would result in a lower threshold than using a national data set. See, e.g., Chamber; NRA. Others suggested that the Department should continue to use national data, but should lower the threshold by pegging the HCE threshold at the 80th percentile of full-time salaried workers, rather than the 90th percentile proposed in the NPRM. See Center for Workforce Opportunity; WorldatWork. WorldatWork asserted that this approach would ‘‘result in a far more workable standard, given the fluctuation in weekly earnings in different parts of the country and in different industries’’ and would still ‘‘identify[ ] those individuals who should be eligible for a more relaxed duties test.’’ Other commenters objected to the Department’s proposed HCE threshold on the ground that it would require employers to reassess the exempt status of many employees using the standard duties test, rather than the simpler HCE test. The HR Policy Association and PPWO explained that ‘‘[a] significant amount of administrative effort will be needed to determine that an employee who had been classified as exempt through application of the HCE test remains exempt under application of the standard duties test.’’ The National Association of Manufacturers explained that this process ‘‘is certain to be lengthy’’ as ‘‘employers will need to survey managers, conduct follow-up interviews, hold new budget discussions, and plan and implement changes to each individual employee’s duties or status.’’ The Department has considered the comments regarding the HCE test for exemption and decided to lower the percentile at which to set the HCE threshold from that proposed in the NPRM. The Department agrees with commenters that increasing the HCE threshold so dramatically would result in significant administrative burdens and compliance costs, including costs associated with reassessing the exempt status of many highly paid white collar workers under the standard duties test. Yet while employers would incur these burdens and costs, the vast majority of currently exempt HCE employees would remain exempt (under the standard test).111 In short, the Department would 111 In the economic analysis below in section VI.B.v, the Department estimated that, under the baseline scenario in which the HCE threshold remains at $100,000, approximately 9.3 million workers will pass both the standard and HCE tests and 343,000 will pass only the HCE test. Stated PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 be imposing significant administrative costs on employers for a limited effect. Additionally, the Department agrees with commenters that the proposed level was so high that it would have excluded employees who should be exempt under the provision, particularly those in lower-wage regions and industries. However, the Department disagrees with commenters who oppose any increase in the HCE threshold beyond the currently enforced level. The number of full-time salaried workers who earn above $100,000 per year has increased significantly.112 The Department believes that some increase to the HCE threshold is necessary to ensure that the HCE threshold continues to provide a meaningful and appropriate complement to the more lenient HCE duties test. Accordingly, the Department is setting the HCE total annual compensation level at the 80th percentile of full-time salaried workers nationally using pooled 2018/2019 CPS data.113 This results in a level of $107,432, of which $684 must be paid weekly on a salary or fee basis.114 The Department believes this threshold is sufficiently high to ensure that it provides a meaningful and appropriate complement to the more lenient HCE duties test, and that nearly all of the highly-paid white collar workers earning above this threshold ‘‘would satisfy any duties test.’’ Additionally, to be consistent with the methodology for setting the standard salary level, the Department now uses three-year pooled data to estimate the HCE compensation level. The Department further believes that this straightforward approach will lower administrative costs, as compared to the initial proposal, while still ensuring that nearly all of the highly paid white collar workers earning above this threshold ‘‘would satisfy any duties test.’’ 115 E. Future Updates to the Earnings Thresholds As the Department noted in the NPRM, even a well-calibrated salary differently, of those workers who will earn at least $100,000, approximately 96.4 percent would pass the standard duties test. 112 84 FR 10913 n.123. 113 In the NPRM, the Department used 2017 CPS data to set the HCE compensation level. See id. at 10913. To be consistent with the methodology for setting the standard salary level, in the final rule the Department is setting the HCE compensation level using pooled CPS data for July 2016 to June 2019, adjusted to reflect 2018/2019. 114 The Department notes that no regional adjustment has been made to the HCE threshold in this final rule, just as this was not part of the determination of the HCE threshold in either the 2004 or 2016 final rules. 115 84 FR 10914 (internal citation omitted). E:\FR\FM\27SER2.SGM 27SER2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations level that is fixed becomes obsolete as wages for nonexempt workers increase over time. Long lapses between rulemakings have resulted in EAP salary levels based on outdated salary data. Such levels are ill-equipped to help employers assess which employees are unlikely to meet the duties tests for the part 541 exemptions. As the Department noted in 2004, outdated regulations ‘‘allow unscrupulous employers to avoid their overtime obligations and can serve as a trap for the unwary but wellintentioned employer;’’ they can also lead increasing numbers of nonexempt employees to ‘‘resort to lengthy court battles to receive their overtime pay.’’ 69 FR 22212. Throughout the years, various stakeholders have submitted comments asking the Department to establish a mechanism to update the thresholds automatically. The Department has twice declined such requests, once in 1970, when it concluded that ‘‘such a proposal [would] require further study,’’ 35 FR 884, and once in 2004, 69 FR 22171–72. However, in the 2016 final rule, the Department for the first time adopted a mechanism to automatically update the earnings thresholds every three years, applying the same methodology used to initially set each threshold in that rulemaking. 81 FR 32430. The district court’s summary judgment decision invalidating the 2016 final rule stated that because the standard salary level established by the 2016 final rule was unlawful, the mechanism to automatically update that standard salary level was ‘‘similarly . . . unlawful.’’ 116 In the NPRM, the Department expressed its intent to evaluate the part 541 earnings thresholds more frequently through rulemaking. 84 FR 10914–15. Specifically, the Department stated in the NPRM that it intended to propose updates to the standard salary level and HCE total compensation threshold on a quadrennial basis (i.e., once every four years) through notice-and-comment rulemaking, and that each proposal would use the same methodology as the most recently published final rule. The Secretary, however, could forestall proposed updates if economic or other factors so indicated. The Department also described how it could revise the part 541 regulations if it were to codify this intention in a final rule. Id. at 10915 n.140. Some commenters supported the Department’s proposal to propose updates to the earnings thresholds every four years unless unwarranted due to economic or other factors. See National 116 275 F. Supp. 3d at 808. VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 Association of Convenience Stores; National Association of Landscape Professionals; NGA; National Multifamily Housing Council and the National Apartment Association; SBA Advocacy. These commenters generally agreed that the Department’s proposal would help the salary level keep pace with earnings growth, thus preventing dramatic increases after long gaps between updates. See, e.g., Credit Union National Association; Joint Comment from Golf Industry Representatives. Many of these commenters specifically expressed support for the Department’s proposal to use notice-and-comment rulemaking to set future salary thresholds; such as NAHB, which commented that ‘‘[b]y continuing its current practice of engaging the regulated community . . . DOL will receive timely and important information as it moves forward with proposed updates in the future.’’ Commenters who supported the Department’s proposal generally characterized this reliance on noticeand-comment rulemaking as preferable to the 2016 final rule’s automatic updating provision, see, e.g., Job Creators Network; Joint Comment of 5 Senators, with some asserting that automatic updating, without notice-andcomment rulemaking, would be unlawful, see, e.g., Joint Comment by International Public Management Association for Human Resources and others; SIGMA. Other commenters did not support the Department’s commitment to evaluate the thresholds regularly. Many commenters felt that there was no need to adhere to a fixed schedule, with some asserting that doing so could deprive the Department of flexibility to adapt to unanticipated circumstances. These commenters advocated for the Department to continue its practice of updating the salary whenever it deems such updates appropriate. See, e.g., AGC; Argentum and American Seniors Housing Association; HR Policy Association; Independent Bakers Association. A few commenters questioned the Department’s authority to bind itself to conducting regular evaluations of the salary level. See AHLA; PPWO. Others felt that the proposed updating framework could expose the Department to legal risk because parties might challenge a decision by the Department not to engage in the anticipated rulemaking. See Associated Builders and Contractors; FMI. Some commenters who opposed the updating proposal asserted that it was unnecessary since the Department can engage in PO 00000 Frm 00023 Fmt 4701 Sfmt 4700 51251 rulemaking at any time. See Associated Builders and Contractors, FMI, NRA. Other commenters, including employee representatives, took the opposite tack, requesting that the Department automatically update the salary thresholds. See, e.g., Center for Popular Democracy; Demos; Oxfam America. Some of these commenters asserted that past experience, including the long gaps between the most recent updates, has demonstrated that in the absence of regular updates, the salary level becomes obsolete, and that an announced intent to propose updates does not sufficiently ensure that the levels will, in fact, be updated. See, e.g., AARP; Joint Comment from 77 Members of Congress; Nichols Kaster. Many commenters who favored automatic updating specifically supported the updating provision that was included in the 2016 final rule. See AARP; NELA; NELP; NWLC; State AGs; The Leadership Conference on Civil and Human Rights. Some maintained that the lack of automatic updating would result in decreased earnings for workers, citing EPI’s estimates that the gap in projected earnings transfers to workers between the 2016 final rule and the proposal would increase from $1.2 billion to $1.6 billion due to the lack of automatic updates. See, e.g., EPI; NELP; UAW. NELP further stated that ‘‘[i]ndexing would ensure predictability for workers and employers alike and eliminate the need for time-consuming federal regulations.’’ A number of commenters generally supported regular updates to the earnings thresholds, but suggested a frequency other than every four years. For instance, ASTA suggested that a sixyear gap ‘‘would strike a better balance in recognizing [its] and [its] member employers’ legitimate concerns . . . than the four-year interval included in the NPRM.’’ The Pennsylvania Credit Union Association wrote in support of updating the thresholds no less frequently than every three years, while Representative Daniel Lipinski ‘‘urge[d] the Department to review the [standard salary] threshold more frequently than once every four years.’’ AFSCME supported annual updates. In this final rule, the Department reaffirms its intent to update the standard salary level and HCE total annual compensation threshold more regularly in the future using notice-andcomment rulemaking. The Department agrees with those commenters who stated that long periods without updates serve neither employee nor employer interests, since they diminish the usefulness of the salary level test and cause future increases to be larger and E:\FR\FM\27SER2.SGM 27SER2 jbell on DSK3GLQ082PROD with RULES2 51252 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations more challenging for businesses to absorb. Regular updates, on the other hand, ensure that the salary level test is based on the best available data (and thus remains a meaningful, bright-line test), produce more predictable and incremental changes in the salary level, and therefore provide certainty to employers and promote government efficiency. After reviewing the comments received on this issue, however, the Department declines to finalize its proposal to propose updates to the part 541 regulations quadrennially. The Department agrees with commenters who stated that this commitment could deprive the Department of flexibility to adapt to unanticipated circumstances, and believes that prevailing economic conditions, rather than fixed timelines, should drive future updates. While some commenters supported the Department’s updating proposal, the reasons often underlying that support— e.g., the benefits of notice-and-comment rulemaking and of salary levels that keep pace with earnings growth—are not necessarily tied to updates occurring on a predetermined schedule, and would be met by the Department updating the salary thresholds more regularly. In addition, that many commenters who supported regular updates nonetheless disagreed on the optimal updating frequency reaffirms the Department’s approach, as does the fact that few, if any, commenters supported the Department codifying its intent to propose updates quadrennially. The Department’s intention to update the part 541 regulations more regularly using notice-and-comment rulemaking will also ensure ample opportunity for public input, and provide the Department with the flexibility to update the earnings thresholds in a manner that is tailored to wages and economic conditions at the time of the update. Because the Department believes that it is important to preserve the Department’s flexibility to adapt to different types of circumstances, the Department declines the suggestions by employee representatives to adopt an automatic updating mechanism as in the 2016 final rule. Lastly, while the Department understands commenter concerns regarding the lengthy time periods between recent rulemakings, in this final rule the Department is reaffirming its commitment to better implement Congress’s instruction to define and delimit the EAP exemptions ‘‘from time to time’’ 117 through regulations. Regular updates ensure that 117 29 U.S.C. 213(a)(1). VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 the salary level test continues to screen from exemption obviously nonexempt employees who are unlikely to be performing the duties of bona fide executive, administrative, or professional employees. V. Paperwork Reduction Act The Paperwork Reduction Act of 1995 (PRA), 44 U.S.C. 3501 et seq., and its attendant regulations, 5 CFR part 1320, require that the Department consider the impact of paperwork and other information collection burdens imposed on the public. Under the PRA an agency may not collect or sponsor the collection of information, nor may it impose an information collection requirement, unless it displays a currently valid Office of Management and Budget (OMB) control number. See 5 CFR 1320.8(b)(3)(vi). OMB has assigned control number 1235–0018 to the Fair Labor Standards Act (FLSA) information collections. OMB has assigned control number 1235–0021 to Employment Information Form collections, which the Department uses to obtain information from complainants regarding FLSA violations. In accordance with the PRA, the Department solicited comments on the FLSA information collections and the Employment Information Form collections in the NPRM published March 22, 2019, see 84 FR 10900, as the NPRM was expected to impact these collections. 44 U.S.C. 3506(c)(2). The Department also submitted a contemporaneous request for OMB review of the proposed revisions to the FLSA information collections, in accordance with 44 U.S.C. 3507(d). On May 20, 2019, OMB issued a notice for each collection (1235–0018 and 1235– 0021) that continued the previous approval of the FLSA information collections and the Employment Information Form collections under the existing terms of clearance. OMB asked the Department to resubmit the information collection request upon promulgation of the final rule and after considering public comments on the proposed rule. Circumstances Necessitating Collection: The FLSA, 29 U.S.C. 201 et seq., sets the federal minimum wage, overtime pay, recordkeeping, and youth employment standards of most general application. Section 11(c) of the FLSA requires all employers covered by the FLSA to make, keep, and preserve records of employees and of wages, hours, and other conditions and practices of employment. An FLSA covered employer must maintain the records for such period of time and PO 00000 Frm 00024 Fmt 4701 Sfmt 4700 make such reports as prescribed by regulations issued by the Secretary of Labor. The Department has promulgated regulations at part 516 to establish the basic FLSA recordkeeping requirements, which are approved under OMB control number 1235–0018. FLSA section 11(a) provides that the Secretary of Labor may investigate and gather data regarding the wages, hours, or other conditions and practices of employment in any industry subject to the FLSA, and may enter and inspect such places and such records (and make such transcriptions thereof), question such employees, and investigate such facts, conditions, practices, or matters deemed necessary or appropriate to determine whether any person has violated any provision of the FLSA. 29 U.S.C. 211(a). The information collection approved under OMB control number 1235–0021 provides a method for the Wage and Hour Division of the U.S. Department of Labor to obtain information from complainants regarding alleged violations of the labor standards the agency administers and enforces. This final rule revises the existing information collections previously approved under OMB control number 1235–0018 (Records to be Kept by Employers—Fair Labor Standards Act) and OMB control number 1235–0021 (Employment Information Form). This final rule does not impose new information collection requirements; rather, burdens under existing requirements are expected to increase as more employees receive minimum wage and overtime protections due to the proposed increase in the salary level requirement. More specifically, the changes adopted in this final rule may cause an increase in burden on the regulated community because employers will have additional employees to whom certain longestablished recordkeeping requirements apply (e.g., maintaining daily records of hours worked by employees who are not exempt from both the minimum wage and overtime provisions). Additionally, the changes adopted in this final rule may cause an initial increase in burden if more employees file complaints with WHD to collect back wages under the overtime pay requirements. Public Comments: The Department sought public comments regarding the burdens imposed by information collections contained in the proposed rule. The Department received few comments relevant to the PRA. A few commenters stated that employers would need to maintain records of hours worked for more employees as a result of an increase to the salary level. E:\FR\FM\27SER2.SGM 27SER2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations See, International Bancshares Corporation; Washington Nonprofits. A few individual commenters expressed concerns surrounding costs associated with additional recordkeeping. A CEO of a professional placement firm indicated that tracking of hours would produce increased human resources paperwork and technology costs. Smith Summerset commented that those employers who take advantage of the allowance for up to ten percent of nondiscretionary bonuses and incentive payments to meet the standard salary level will have to maintain records documenting the applicable annual periods and detailing earnings and all payments (including catch-up payments) for each affected worker, including records such employers were not previously required to maintain. In response to these comments, the Department notes that most employers currently have both exempt and nonexempt workers and therefore have systems already in place for employers to track hours. The Department also notes that commenters did not offer alternatives for estimates or make suggestions regarding the methodology for calculating the PRA burdens. The actual recordkeeping requirements are not changing in the final rule. However, the pool of workers for whom employers will be required to make and maintain records has increased under the final rule, and as a result the burden hours have increased. Included in this PRA section are the regulatory familiarization costs for this final rule. We note, however, that this is a duplication of the regulatory familiarization costs contained in the economic impact analysis, see section VI. An agency may not conduct an information collection unless it has a currently valid OMB approval, and the Department has submitted the identified information collection contained in the proposed rule to OMB for review under the PRA under the Control Numbers 1235–0018 and 1235–0021. See 44 U.S.C. 3507(d); 5 CFR 1320.11. The Department has resubmitted the revised FLSA information collections to OMB for approval, and intends to publish a notice announcing OMB’s decision regarding this information collection request. A copy of the information collection request can be obtained at http://www.Reginfo.gov or by contacting the Wage and Hour Division as shown in the FOR FURTHER INFORMATION CONTACT section of this preamble. Total annual burden estimates, which reflect both the existing and new responses for the recordkeeping and complaint process information collections, are summarized as follows: VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 Type of Review: Revisions to currently approved information collections. Agency: Wage and Hour Division, Department of Labor. Title: Records to be Kept by Employers—Fair Labor Standards Act. OMB Control Number: 1235–0018. Affected Public: Private sector businesses or other for-profits, farms, not-for-profit institutions, state, local and tribal governments, and individuals or households. Estimated Number of Respondents: 5,621,961 (2,616,667 by this rulemaking). Estimated Number of Responses: 46,959,856 (2,616,667 added by this rulemaking). Estimated Burden Hours: 3,625,986 hours (2,616,667 added by this rulemaking). Estimated Time per Response: Various (unaffected by this rulemaking). Frequency: Various (unaffected by this rulemaking). Other Burden Cost: 0. Title: Employment Information Form. OMB Control Number: 1235–0021. Affected Public: Businesses or other for-profit, farms, not-for-profit institutions, state, local and tribal governments, and individuals or households. Total Respondents: 36,278 (651 added by this rulemaking). Estimated Number of Responses: 36,278 (651 added by this rulemaking). Estimated Burden Hours: 12,155 (217 hours added by this rulemaking). Estimated Time per Response: 20 minutes (unaffected by this rulemaking). Frequency: Once. Other Burden Cost: 0. VI. Analysis Conducted in Accordance With Executive Order 12866, Regulatory Planning and Review, and Executive Order 13563, Improving Regulation and Regulatory Review Executive Orders 12866 and 13563 direct agencies to assess the costs and benefits of a regulation and to adopt a regulation only upon a reasoned determination that the regulation’s net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity) justify its costs. Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, reducing costs, harmonizing rules, and promoting flexibility. Under Executive Order 12866, the Office of Management and Budget (OMB) determines whether a regulatory action is a ‘‘significant regulatory action,’’ which includes an economically significant action that has an annual effect of $100 million or more PO 00000 Frm 00025 Fmt 4701 Sfmt 4700 51253 on the economy. Significant regulatory actions are subject to review by OMB. As described below, this final rule is economically significant. When the Department uses a perpetual time horizon to allow for cost comparisons under Executive Order 13771,118 the annualized cost savings of the final rule is $534.8 million with 7 percent discounting. This final rule is accordingly expected to be an Executive Order 13771 deregulatory action. A. Introduction i. Background The FLSA requires covered employers to: (1) Pay employees who are covered and not exempt from the Act’s requirements not less than the federal minimum wage for all hours worked and overtime premium pay at a rate of not less than one and one-half times the employee’s regular rate of pay for all hours worked over 40 in a workweek, and (2) make, keep, and preserve records of their employees and of the wages, hours, and other conditions and practices of employment. The FLSA provides a number of exemptions from the Act’s minimum wage and overtime pay provisions, including one for bona fide executive, administrative, and professional (EAP) employees. The exemption applies to employees employed in a bona fide executive, administrative, or professional capacity and to outside sales employees, as those terms are ‘‘defined and delimited’’ by the Department.119 The Department’s regulations implementing these ‘‘white collar’’ exemptions are codified at 29 CFR part 541. In 2004, the Department determined that two earnings level tests should be used to help employers distinguish nonexempt employees from exempt employees: The standard salary test, which it set at $455 a week, and the highly compensated employee (HCE) total-compensation test, which it set at $100,000 per year (see section II.C for further discussion). In 2016, the Department published a final rule setting the standard salary level at $913 per week and the HCE annual compensation level at $134,004. As previously discussed, the U.S. District Court for Eastern District of Texas declared the 2016 final rule invalid. ii. Need for Rulemaking The Department has updated the salary level test many times since its implementation in 1938. Table 1 presents the weekly salary levels 118 82 119 29 E:\FR\FM\27SER2.SGM FR 9339 (Feb. 3, 2017). U.S.C. 213(a)(1). 27SER2 51254 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations associated with the EAP exemptions since 1938, organized by exemption and long/short/standard duties tests.120 In the 37 years between 1938 and 1975, the Department increased salary test levels approximately every five to nine years. In subsequent years, the Department revised the levels less frequently, and it is currently enforcing the levels set in 2004.121 TABLE 1—HISTORICAL SALARY LEVELS FOR THE EAP EXEMPTIONS Long test Date enacted 1938 1940 1949 1958 1963 1970 1975 Executive ......................................................................................................... ......................................................................................................... ......................................................................................................... ......................................................................................................... ......................................................................................................... ......................................................................................................... ......................................................................................................... Professional Short test (all) .......................... $50 75 95 115 140 170 .......................... .......................... $100 125 150 200 250 Administrative $30 30 55 80 100 125 155 $30 50 75 95 100 125 155 Standard test jbell on DSK3GLQ082PROD with RULES2 2004 ......................................................................................................... $455 To restore the value of the standard salary level as a line of demarcation between those workers for whom Congress clearly intended to provide minimum wage and overtime protections and other workers who may be bona fide EAPs, and to maintain the salary level’s continued validity, the Department is updating the standard salary level by applying the 2004 methodology to current Current Population Survey (CPS) data.122 Using pooled CPS Merged Outgoing Rotation Group (MORG) 123 data to represent the July 2018 through June 2019 period (hereafter referred to as 2019), the salary level of $684 ($35,568 annually) set in this final rule corresponds to the 20th percentile of earnings for full-time salaried workers in the South Census Region and/or in the retail industry.124 125 Similarly, the Department used the pooled 2018/19 CPS MORG data to set the updated HCE total annual compensation requirement at $107,432, which is the earnings for the 80th percentile of all full-time salaried workers nationally. The Department estimated the number of affected workers and quantified costs and transfer payments associated with this final rule, using the currently-enforced 2004 salary level as the baseline. To produce these estimates, the Department used pooled CPS MORG data. See section VI.B.ii. Most critically, the Department estimates that 1.2 million workers who would otherwise be exempt under the currently-enforced standard salary level of $455 per week will either become eligible for overtime or have their salary increased to at least $684 per week, and that 4.1 million employees paid between $455 and $684 per week who fail the standard duties test (i.e., that are and will remain nonexempt) will have their overtime eligibility made clearer because their salary will fall below the specified threshold (Table 2).126 Additionally, an estimated 101,800 workers will be affected by the increase in the HCE compensation test from $100,000 per year to $107,432 per year using the pooled 2018/19 CPS MORG data. By Year 10, the Department estimates that 723,000 workers will be affected by the change in the standard salary level test and 154,000 workers will be affected by the change in the HCE total annual compensation test, compared to a baseline assuming the currently-enforced earnings thresholds (i.e., $455 per week and $100,000 per year) remain unchanged.127 This analysis quantifies three direct costs to employers: (1) Regulatory familiarization costs; (2) adjustment costs; and (3) managerial costs (see section VI.D.iii for further discussion on costs). The costs presented here are the combined costs for both the change in the standard salary level test and the HCE total annual compensation level (these will be disaggregated in section VI.D.iii). Total annualized direct employer costs over the first 10 years 120 From 1949 until 2004 the regulations contained two different tests for exemption—a long test for employees paid a lower salary that included a more rigorous examination of employees’ duties, and a short test for employees paid at a higher salary level that included a more flexible duties test. The standard duties test is used in conjunction with the standard salary level test, as set in 2004 and applied to date, to determine eligibility for the EAP exemptions. It replaced the short and long tests in effect from 1949 to 2004. 121 In 2016, the Department issued a final rule revising the EAP salary levels; however, on August 31, 2017, the U.S. District Court for Eastern District of Texas held that the 2016 final rule’s standard salary level exceeded the Department’s authority and was therefore invalid. See Nevada v. U.S. Dep’t of Labor, 275 F. Supp. 3d 795 (E.D. Tex. 2017). Until the Department issues a new final rule, it is enforcing the part 541 regulations in effect on November 30, 2016, including the $455 per week standard salary level set in the 2004 final rule. 122 The Department also notes that the terms employee and worker are used interchangeably throughout this analysis. 123 The Merged Outgoing Rotation Group is a supplement to the CPS and is conducted on approximately one-fourth of the CPS sample monthly to obtain information on weekly hours worked and earnings. 124 Excluding workers who are not subject to the FLSA, not subject to the salary level test, or in agriculture or transportation. 125 As previously explained, in the 2004 final rule, the Department looked to the 20th percentile of full-time salaried workers in the South and in the retail industry nationally to validate the standard salary level set in the final rule. In this final rule, the Department set the standard salary level at the 20th percentile of the combined subpopulations of full-time salaried employees in the South and fulltime salaried employees in the retail industry nationwide. Accordingly, the use of ‘‘and/or’’ when describing the salary level methodology in this final rule reflects that this data set includes full-time salaried workers who work: (1) In the South but not in the retail industry; (2) in the retail industry but not in the South; and (3) in the south in the retail industry. 126 Here and elsewhere in this analysis, numbers are reported at varying levels of aggregation, and are generally rounded to a single decimal point. However, calculations are performed using exact numbers. Therefore, some numbers may not match the reported totals or the calculations shown due to rounding of components. 127 In later years, earnings growth will cause some workers to no longer be affected because their earnings will exceed the new salary threshold. Additionally, some workers will become newly affected because their earnings will exceed $455 per week, and in the absence of this final rule would have lost their overtime protections. To estimate the total number of affected workers over time, the Department accounts for both of these effects. VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 iii. Summary of Affected Workers, Costs, Benefits, and Transfers PO 00000 Frm 00026 Fmt 4701 Sfmt 4700 E:\FR\FM\27SER2.SGM 27SER2 51255 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations were estimated to be $173.3 million, assuming a 7 percent discount rate (Table 2).128 In addition to the costs described above, this rule will also transfer income from employers to employees in the form of wages. The Department estimated annualized transfers will be $298.8 million. The majority of these transfers will be attributable to the FLSA’s overtime provision; a smaller share will be attributable to the FLSA’s minimum wage requirement. Transfers also include salary increases for some affected EAP workers 129 to preserve their exempt status. Employers may incur additional costs, such as hiring new workers. These other potential costs are discussed in section VI.D.iii. Potential benefits of this rule could not be quantified due to data limitations, requiring the Department to discuss such benefits qualitatively. See § VI.D.v. TABLE 2—SUMMARY OF REGULATORY COSTS AND TRANSFERS, STANDARD AND HCE SALARY LEVELS [Millions in 2019$] Future years a Impact Annualized value Year 1 Year 2 Year 10 3% real discount rate 7% real discount rate ........................ ........................ ........................ ........................ $164.0 295.0 $173.3 298.8 Affected Workers (1,000s) Standard ............................................................................... HCE ...................................................................................... 1,156 101.8 1,069 114 723 154 Total .............................................................................. 1,257 1,183 877 Costs and Transfers (Millions in 2019$) b Direct employer costs .......................................................... Transfersthnsp;c ................................................................... $543.0 396.4 $134.3 307.7 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 B. Methodology To Determine the Number of Potentially Affected EAP Workers income from some workers to others. The estimates of EAP exempt workers were based on data drawn from the CPS MORG, which is sponsored jointly by the U.S. Census Bureau and BLS. The CPS is a large, nationally representative sample of the labor force. Households are surveyed for four months, excluded from the survey for eight months, surveyed for an additional four months, then permanently dropped from the sample. During the last month of each rotation in the sample (month 4 and month 16), employed respondents complete a supplementary questionnaire in addition to the regular survey.132 This supplement contains the detailed information on earnings necessary to estimate a worker’s exemption status. Responses are based on the reference week, which is always the week that includes the 12th day of the month. Although the CPS MORG is a large scale survey, administered to approximately 15,000 households monthly representing the entire nation, it is still possible to have relatively few observations when looking at subsets of employees, such as exempt workers in a specific occupation employed in a specific industry, or workers in a specific geographic location. To increase the sample size, the Department pooled together three years of CPS MORG data (July 2016 through June 2019) to represent the single year from July 2018 through June 2019. Earnings for each observation from the last six months of 2016, 2017, and the first six months of 2018 were inflated to 2018/19 dollars using the Consumer Price Index for All Urban Consumers (CPI–U). For ease of presentation and because inflation is low enough for this to be trivial, these will be referred to as 2019 dollars throughout this analysis. The weight of each observation was adjusted so that the total number of potentially affected EAP workers in the pooled sample remained the same as the number for the July 2018 through June 2019 CPS MORG. Thus, the pooled CPS MORG sample uses roughly three times as many observations to represent the same total number of workers in 2018/19. The additional observations allow the Department to better characterize certain attributes of the potentially affected labor force. This pooled dataset 128 Hereafter, unless otherwise specified, annualized values will be presented using the 7 percent real discount rate. 129 The term affected EAP workers refers to the population of potentially affected EAP workers who either pass the standard duties test and earn at least $455 but less than the new salary level of $684, or pass only the HCE duties test and earn at least $100,000 but less than the new HCE compensation level of $107,432. This was estimated to be 1.3 million workers. 130 In 2015, RAND released results from a survey conducted to estimate EAP exempt workers. However, this survey does not have the variables or sample size necessary for the Department to base the RIA on this analysis. Rohwedder, S. and Wenger, J.B. (2015). The Fair Labor Standards Act: Worker Misclassification and the Hours and Earnings Effects of Expanded Coverage. RAND Labor and Population. 131 See 69 FR 22196–209; 81 FR 32453–60. Where the proposal follows the methodology used to determine affected workers in both the 2004 and 2016 final rules citations to both rules are not always included. 132 This is the outgoing rotation group (ORG); however, this analysis uses the data merged over twelve months and thus will be referred to as MORG. i. Overview This section explains the methodology used to estimate the number of workers who are subject to the part 541 regulations and the number of potentially affected EAP workers. In this final rule, as in the 2004 final rule, the Department estimated the number of EAP exempt workers because there is no data source that identifies workers as EAP exempt. Employers are not required to report EAP exempt workers to any central agency or as part of any employee or establishment survey.130 The methodology described here is largely based on the approach the Department used in the 2004 and 2016 final rules.131 ii. Data jbell on DSK3GLQ082PROD with RULES2 $99.1 247.4 VerDate Sep<11>2014 20:10 Sep 26, 2019 Jkt 247001 PO 00000 Frm 00027 Fmt 4701 Sfmt 4700 E:\FR\FM\27SER2.SGM 27SER2 51256 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations is used to estimate all impacts of the final rulemaking.133 Some assumptions were necessary to use these data as the basis for the analysis. For example, the Department eliminated workers who reported that their weekly hours vary and provided no additional information on hours worked. This was done because the Department cannot estimate effects for these workers since it is unknown whether they work overtime and therefore unknown whether there would be any need to pay for overtime if their status changed from exempt to nonexempt. The Department reweighted the rest of the sample to account for this change (i.e., to keep the same total employment estimates).134 This adjustment assumes that the distribution of hours worked by workers whose hours do not vary is representative of hours worked by workers whose hours do vary. The Department believes that without more information this is an appropriate assumption.135 jbell on DSK3GLQ082PROD with RULES2 133 A few commenters commented on the Department’s use of CPS data to calculate the salary level. EPI and NELP asked the Department to set the salary thresholds using a data series that BLS publishes on a regular basis, while the Chamber asked the Department to publish the data sets used to set the salary thresholds. The Department calculated the standard salary level and the HCE total annual compensation level using publiclyavailable CPS microdata (compiled by the U.S. Census Bureau). The Department has frequently set the salary level using its own enforcement data and/ or data that is not publicly available, and believes that using publicly available CPS data to calculate the salary level in this final rule is appropriate. 134 The Department also reweighted for workers reporting zero earnings. In addition, the Department eliminated, without reweighting, workers who both reported usually working zero hours and working zero hours in the past week. 135 This is justifiable because demographic and employment characteristics are similar across these two populations (e.g., age, gender, education, VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 iii. Number of Workers Covered by the Department’s Part 541 Regulations To estimate the number of workers covered by the FLSA and subject to the Department’s part 541 regulations, the Department excluded workers who are not subject to its regulations or whom the FLSA does not cover. This may happen, for instance, if a worker is not an employee under the FLSA. Excluded workers include military personnel, unpaid volunteers, self-employed individuals, clergy and other religious workers, and federal employees (with a few exceptions described below). Many of these workers are excluded from the CPS MORG, including members of the military on active duty and unpaid volunteers. Self-employed and unpaid workers are included in the CPS MORG, but have no earnings data reported and thus are excluded from the analysis. The analysis excluded religious workers identified by their occupation codes: ‘clergy’ (Census occupational code 2040), ‘directors, religious activities and education’ (2050), and ‘religious workers, all other’ (2060). Most employees of the federal government are covered by the FLSA but not the Department’s part 541 regulations because the Office of Personnel Management (OPM) regulates their entitlement to minimum wage and overtime pay.136 Exceptions exist for distribution across industries, share paid nonhourly). The share of all workers who stated that their hours vary (but provided no additional information) is 5.0 percent. To the extent these excluded workers are exempt, if they tend to work more overtime than other workers, then transfer payments and costs may be underestimated. Conversely, if they work fewer overtime hours, then transfer payments and costs may be overestimated. 136 See 29 U.S.C. 204(f). Federal workers are identified in the CPS MORG with the class of worker variable PEIO1COW. PO 00000 Frm 00028 Fmt 4701 Sfmt 4700 U.S. Postal Service employees, Tennessee Valley Authority employees, and Library of Congress employees.137 The analysis identified and included these covered federal workers using occupation and/or industry codes.138 The FLSA also does not cover employees of firms that have annual revenue of less than $500,000 and who are not engaged in interstate commerce. The Department does not exclude them from the analysis, however, because there is no data set that would adequately inform an estimate of the size of this worker population, although the Department believes it is a small percentage of workers. The 2004 final rule analysis similarly did not adjust for these workers. The Department estimated that in Year 1 there will be 164.5 million wage and salary workers in the United States (Figure 1). Of these, 139.4 million will be covered by the FLSA and subject to the Department’s regulations (84.7 percent). The remaining 25.1 million workers will be excluded from FLSA coverage for the reasons described above. Figure 1 illustrates how the Department analyzed the U.S. civilian workforce through successive stages to estimate the number of potentially affected EAP workers. 137 See id. 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 138 Postal E:\FR\FM\27SER2.SGM 27SER2 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations After limiting the analysis to workers covered by the FLSA and subject to the Department’s part 541 regulations, several other groups of workers were identified and excluded from further analysis since this final rule is unlikely to affect them. These include blue collar workers, workers paid on an hourly basis, and workers who are exempt under certain other (non-EAP) exemptions. The Department excluded a total of 91.9 million workers from the analysis for one or more of these reasons, which often overlapped (e.g., many blue collar workers are also paid hourly). The Department estimated that in 2018/19 there were 50.0 million blue collar workers. These workers were identified in the CPS MORG data following the methodology from the U.S. Government Accountability Office’s (GAO) 1999 white collar exemptions report 139 and the Department’s 2004 regulatory impact analysis. See 69 FR 22240–44. Supervisors in traditionally blue collar 139 GAO/HEHS. (1999). Fair Labor Standards Act: White Collar Exemptions in the Modern Work Place. GAO/HEHS–99–164, 40–41, https:// www.gao.gov/assets/230/228036.pdf. VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 industries were classified as white collar workers because their duties are generally managerial or administrative, and therefore they were not excluded as blue collar workers. Using the CPS variable indicating a respondent’s hourly wage status, the Department determined that 81.9 million workers were paid on an hourly basis in 2018/ 19.140 Also excluded from further analysis were workers who were exempt under certain other (non-EAP) exemptions. Although some of these workers may also be exempt under the EAP exemptions, they would independently remain exempt from the minimum wage and/or overtime pay provisions based on the non-EAP exemptions. The Department excluded an estimated 5.0 million workers, including some agricultural and transportation workers, from further analysis because they would be subject to another (non-EAP) overtime exemption. See Appendix A: Methodology for Estimating Exemption Status, contained in the rulemaking docket, for details on how this population was identified. 140 CPS PO 00000 MORG variable PEERNHRY. Frm 00029 Fmt 4701 Sfmt 4700 Agricultural and transportation workers are two of the largest groups of workers excluded from the population of potentially affected EAP workers in the current analysis, and with some exceptions, they were similarly excluded in 2004. The 2004 final rule excluded all workers in agricultural industries from the analysis,141 while the current analysis, similar to the 2016 analysis, only excludes agricultural workers from specified 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 1.1 million agricultural workers and 2.1 million transportation workers from the analysis. In addition, the Department excluded another 1.9 million workers who fall within one or more other FLSA minimum wage and overtime 141 69 E:\FR\FM\27SER2.SGM FR 22197. 27SER2 ER27SE19.000</GPH> jbell on DSK3GLQ082PROD with RULES2 iv. Number of Workers in the Analysis 51257 51258 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations exemptions. The criteria for determining exempt status for agricultural and transportation workers are detailed in Appendix A. However, of these 1.9 million workers, all but 20,000 are either blue collar or hourly, and thus the effect of excluding these workers is negligible. jbell on DSK3GLQ082PROD with RULES2 v. Number of Potentially Affected EAP Workers After excluding workers not subject to the Department’s FLSA regulations and workers who are unlikely to be affected by this final rule (i.e., blue collar workers, workers paid hourly, workers who are subject to another (non-EAP) overtime exemption), the Department estimated there will be 47.6 million salaried white collar workers for whom employers might claim either the standard EAP exemption or the HCE exemption. To be exempt under the standard EAP test, the employee must: • Be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the salary basis test); 142 • earn at least a designated salary amount (the 2004 final rule set the salary level at $455 per week (the standard salary level test)); and • primarily perform exempt work, as defined by the regulations (the standard duties test). The 2004 final rule’s HCE test allows certain highly-paid employees to qualify for exemption as long as they customarily and regularly perform one or more exempt job duties. The HCE annual compensation level set in the 2004 final rule was $100,000, including at least $455 per week paid on a salary or fee basis. The CPS annual earnings variable is topcoded at $150,000 (i.e., workers earning above $2,884.61 ($150,000/52 weeks) per week are reported as earning $2,884.61 per week). The Department imputed earnings for topcoded workers in the CPS data to adequately estimate the cost savings of 142 Some computer employees may be exempt even if they are not paid on a salary basis. Hourly computer employees who earn at least $27.63 per hour and perform certain duties are exempt under section 13(a)(17) of the FLSA. These workers are considered part of the EAP exemptions but were excluded from the analysis because they are paid hourly and will not be affected by this final rule (these workers were similarly excluded in the 2004 analysis). Salaried computer workers are exempt if they meet the salary and duties tests applicable to the EAP exemptions, and are included in the analysis since they will be impacted by this final rule. Additionally, administrative and professional employees may be paid on a fee basis, as opposed to a salary basis. § 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 18:58 Sep 26, 2019 Jkt 247001 this rule in comparison to the 2016 final rule under E.O. 13771.143 144 Salary Basis The Department included only nonhourly workers in the analysis based on CPS data.145 For this rulemaking, the Department considered data representing compensation paid to nonhourly workers to be an appropriate proxy for compensation paid to salaried workers. The Department notes that it made the same assumption regarding nonhourly workers in the 2004 final rule.146 The CPS population of ‘‘nonhourly’’ workers includes workers who are paid on a piece-rate, a day-rate, or largely on bonuses or commissions. Data in the CPS are not available to distinguish between salaried workers and these other nonhourly workers. However, the Panel Study of Income Dynamics (PSID) provides additional information on how nonhourly workers are paid. In the PSID, respondents are asked how they are paid on their main job and are also asked for more detail if their response is other than salaried or hourly. Possible responses include piecework, commission, self-employed/farmer/ profits, and by the job/day/mile. The Department analyzed the PSID data and found that relatively few nonhourly workers were paid by methods other than salaried. The Department is not aware of any statistically robust source that more closely reflects salary as defined in its regulations. Salary Level Weekly earnings are available in the CPS MORG data, which allowed the Department to estimate how many nonhourly workers pass the salary level tests.147 However, the CPS earnings variable does not perfectly reflect the Department’s definition of earnings. First, the CPS includes all nondiscretionary bonuses and commissions, which may be used to satisfy up to 10 percent of the new standard salary level under this final 143 We used the standard Pareto distribution approach to impute earnings above the topcoded value as described in Armour, P. and Burkhauser, R (2013). Using the Pareto Distribution to Improve Estimates of Topcoded Earnings. Center for Economic Studies (CES). 144 As a result of the 2016 final rule’s automatic updating provision, the HCE compensation level in Year 7 following the 2016 final rule would exceed $150,000. Imputing earnings improves the impact estimates and consequently the estimates of cost savings of this final rule. 145 The CPS variable PEERNHRY identifies workers as either hourly or nonhourly. 146 See 69 FR 22197. 147 The CPS MORG variable PRERNWA, which measures weekly earnings, is used to identify weekly salary. PO 00000 Frm 00030 Fmt 4701 Sfmt 4700 rule. This discrepancy between the earnings variable used and the FLSA definition of salary may cause a slight overestimation of the number of workers estimated to meet the standard salary level test. Second, CPS earnings data includes overtime pay, commissions, and tips. The Department notes that employers may factor into an employee’s salary a premium for expected overtime hours worked. To the extent they do so, that premium would be reflected in the data. Similarly, the Department believes tips will be an uncommon form of payment for these workers since tips are uncommon for white collar workers. The Department also believes that commissions make up a relatively small share of earnings among nonhourly employees.148 Duties The CPS MORG data do not capture information about job duties; therefore, the Department used occupational titles, combined with probability estimates of passing the duties test by occupational title, to estimate the number of workers passing the duties test. This methodology is very similar to the methodology used in the 2004 rulemaking, and the Department believes it is the best available methodology. In 2004, to determine whether a worker met the duties test, the Department used an analysis performed by WHD in 1998 in response to a request from the GAO. Because WHD enforces the FLSA’s overtime requirements and regularly assesses workers’ exempt status, WHD was uniquely qualified to provide the analysis. The analysis was used in both the GAO’s 1999 white collar exemptions report 149 and the Department’s 2004 regulatory impact analysis.150 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 148 In the PSID, relatively few nonhourly workers were paid by commission. Additionally, according to the BLS ECI, about 5 percent of the private workforce is incentive-paid workers (incentive pay is defined as payment that relates earnings to actual individual or group production). See William J. Wiatrowski, Bureau of Labor Statistics, The Effect of Incentive Pay on Rates of Change in Wages and Salaries (November 24, 2009), http://www.bls.gov/ opub/mlr/cwc/the-effect-of-incentive-pay-on-ratesof-change-in-wages-and-salaries.pdf, at 1. 149 Fair Labor Standards Act: White Collar Exemptions in the Modern Work Place, supra note 139, at 40–41. 150 See 69 FR 22198. E:\FR\FM\27SER2.SGM 27SER2 51259 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations determined that 251 occupational codes likely included EAP exempt workers and assigned one of four probability codes reflecting the estimated likelihood, expressed as ranges, that a worker in a specific occupation would perform duties required to meet the EAP duties tests. The Department supplemented this analysis in the 2004 final rule regulatory impact analysis when the HCE exemption was introduced. The Department modified the four probability codes for highly paid workers based upon its analysis of the provisions of the highly compensated test relative to the standard duties test (Table 3). To illustrate, WHD assigned exempt probability code 4 to the occupation ‘‘first-line supervisors/managers of construction trades and extraction workers’’ (Census code 6200), which indicates that a worker in this occupation has a 0 to 10 percent likelihood of meeting the standard EAP duties test. However, if that worker earned at least $100,000 annually, he or she was assigned a 15 percent probability of passing the more lenient HCE duties test.151 The occupations identified in GAO’s 1999 report and used by the Department in the 2004 final rule map to an earlier occupational classification scheme (the 1990 Census occupational codes). For this final rule, the Department used occupational crosswalks to map the previous occupational codes to the 2002 Census occupational codes and then to the 2010 Census occupational codes, which are used in the CPS MORG 2016 through 2019 data.152 If a new occupation comprises more than one previous occupation, then the new occupation’s probability code is the weighted average of the previous occupations’ probability codes, rounded to the closest probability code. TABLE 3—PROBABILITY WORKER IN CATEGORY PASSES THE DUTIES TEST The standard EAP test Probability code jbell on DSK3GLQ082PROD with RULES2 0 1 2 3 4 Lower bound % ....................................................................................................................... ....................................................................................................................... ....................................................................................................................... ....................................................................................................................... ....................................................................................................................... The HCE test Upper bound % 0 90 50 10 0 0 100 90 50 10 Lower bound % 0 100 94 58.4 15 Upper bound % 0 100 96 60 15 These codes provide information on the likelihood that an employee in a category met the duties test but they do not identify the workers in the CPS MORG who actually passed the test. Therefore, the Department designated workers as exempt or nonexempt based on the probabilities. For example, for every ten public relations managers, between five and nine were estimated to pass the standard duties test (based on probability category 2). However, it is unknown which of these ten workers are exempt; therefore, the Department must determine the status for these workers. Exemption status could be randomly assigned with equal probability, but this would ignore the earnings of the worker as a factor in determining the probability of exemption. The probability of qualifying for the exemption increases with earnings because higher paid workers are more likely to perform the required duties, an assumption to which both the Department in the 2004 final rule and the GAO in its 1999 Report adhered.153 The Department estimated the probability of exemption for each worker as a function of both earnings and the occupation’s exempt probability category using a gamma distribution.154 Based on these revised probabilities, each worker was assigned exempt or nonexempt status based on a random draw from a binomial distribution using the worker’s revised probability as the probability of success. Thus, if this method is applied to ten workers who each have a 60 percent probability of being exempt, six workers would be expected to be designated as exempt.155 However, which particular workers are designated as exempt may vary with each set of ten random draws. For details, see Appendix A (in the rulemaking docket). The Department acknowledges that the probability codes used to determine the share of workers in an occupation who are EAP exempt are 21 years old. However, the Department believes the probability codes continue to estimate exemption status accurately given the fact that the standard duties test is not substantively different from the former short duties tests reflected in the codes. For the 2016 rulemaking, the Department looked at O*NET 156 to determine the extent to which the 1998 probability codes reflected current occupational duties. The Department’s review of O*NET verified the continued appropriateness of the 1998 probability codes.157 151 The HCE duties test is used in conjunction with the HCE total annual compensation requirement, as set in 2004 and applied to date, to determine eligibility for the HCE exemption. It is much less stringent than the standard and short duties tests to reflect that very highly paid employees are much more likely to be properly classified as exempt. 152 References to occupational codes in this analysis refer to the 2002 Census occupational codes. Crosswalks and methodology available at: https://www.census.gov/topics/employment/ industry-occupation/guidance/code-lists.html. 153 For the standard exemption, the relationship between earnings and exemption status is not linear and is better represented with a gamma distribution. For the HCE exemption, the relationship between earnings and exemption can be well represented with a linear function because the relationship is linear at high salary levels (as determined by the Department in the 2004 final rule). Therefore, the gamma model and the linear model would produce similar results. See 69 FR 22204–08, 22215–16. 154 The gamma distribution was chosen because, during the 2004 revision, this non-linear distribution best fit the data compared to the other non-linear distributions considered (i.e., normal and lognormal). A gamma distribution is a general type of statistical distribution that is based on two parameters that control the scale (alpha) and shape (in this context, called the rate parameter, beta). 155 A binominal distribution is frequently used for a dichotomous variable where there are two possible outcomes; for example, whether one owns a home (outcome of 1) or does not own a home (outcome of 0). Taking a random draw from a binomial distribution results in either a zero or a one based on a probability of ‘‘success’’ (outcome of 1). This methodology assigns exempt status to the appropriate share of workers without biasing the results with manual assignment. 156 The O*NET database contains hundreds of standardized and occupation-specific descriptions. See http://www.onetcenter.org. 157 81 FR 32459. VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 PO 00000 Frm 00031 Fmt 4701 Sfmt 4700 Potentially Affected Exempt EAP Workers The Department estimated that of the 47.6 million salaried white collar workers considered in the analysis, 33.4 million qualified for the EAP exemption under the currently-enforced regulations. Some of these workers were E:\FR\FM\27SER2.SGM 27SER2 51260 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations excluded from further analysis because the final rule will not affect them. This excluded group contains workers in named occupations who are not required to pass the salary requirements (although they must still pass a duties test) and therefore whose exemption status does not depend on their earnings. These occupations include physicians (identified with Census occupation codes 3010, 3040, 3060, 3120), lawyers (2100), teachers (occupations 2200–2550 and industries 7860 or 7870), academic administrative personnel (school counselors (occupation 2000 and industries 7860 or 7870) and educational administrators (occupation 0230 and industries 7860 or 7870)), and outside sales workers (a subset of occupation 4950). Out of the 33.4 million workers who were EAP exempt, 7.8 million, or 23.4 percent, were expected to be in named occupations. Thus, changes in the standard salary level and HCE compensation tests will not affect these workers. The 25.6 million EAP exempt workers remaining in the analysis are referred to in this final rule as ‘‘potentially affected.’’ Based on analysis of the occupational codes and CPS earnings data (described above), the Department has concluded that in Year 1, in the baseline scenario in which the rule does not take effect, of the 25.6 million potentially affected EAP workers, approximately 16.0 million will pass only the standard EAP test, 9.3 million will pass both the standard and the HCE tests, and approximately 343,000 will pass only the HCE test. C. Determining the Revised Salary and Compensation Levels For the reasons discussed in section IV.A, the Department has decided to update the 2004 standard salary level by reapplying the 2004 methodology. Using pooled 2018/19 CPS MORG data, the 20th percentile of earnings for full-time salaried workers in the South Census region and/or in the retail industry nationally roughly corresponds to a standard salary level of $684. For the HCE compensation level, the Department used the 80th percentile of all full-time salaried workers nationwide, calculated using the 2018/ 19 CPS MORG. This results in an HCE annual compensation level of $107,432. i. The Policy Methodologies Chosen This final rule uses the same methodology used in 2004 for the standard salary level, setting it at the 20th percentile of full-time salaried workers in the South and/or in the retail industry nationally. After considering public comments pertaining to the HCE total annual compensation requirement, as discussed in section IV.D, the Department has set this threshold so as to be equivalent to the earnings of the 80th percentile of all full-time salaried workers nationally, as opposed to the 90th percentile as proposed in the NPRM. Additionally, to be consistent with the methodology for setting the standard salary level, the Department now uses three-year pooled data to estimate the HCE compensation level. Lastly, the Department has chosen not to project the earnings levels to January 2020 as proposed in the NPRM. ii. Alternative Methods for Setting the Standard Salary Level For this final rule, the Department also considered several alternatives for setting the standard salary level. Table 4 presents alternative standard salary levels calculated using pooled 2018/19 CPS data for each alternative approach considered. • Alternative 1: No change (i.e., keep the salary level at the currently-enforced level of $455 per week). • Alternative 2: Maintain the average minimum wage protection in place since 2004 by using the weighted average of hours at minimum wage and overtime pay represented by the minimum salary level. • Alternative 3: Use the 2004 method but exclude the relatively high-wage areas from the South Census Region (Washington, DC, Maryland, and Virginia). • Alternative 4: Use the Kantor method to determine the long test salary level, and set the salary level at that level. The Kantor method calculates a long test salary level by selecting the 10th percentile of earnings of likely exempt workers. • Alternative 5: Use the 2016 method (i.e., the 40th percentile of earnings of nonhourly full-time workers in the South Census Region). Section VI.D details the transfers, costs, and benefits of the new salary level and the above alternatives. TABLE 4—STANDARD SALARY LEVEL AND ALTERNATIVES IN 2018/19 Salary level (weekly/annually) Alternative Alt. #1: No change ............................................................................................................. Alt. #2: Maintain average minimum wage protection since 2004 b ................................... Alt. #3: 2004 Method, South (excluding Washington D.C., MD & VA) or Retail c ............ Final rule: 2004 method c ................................................................................................... Alt. #4: Kantor long test d ................................................................................................... Alt. #5: 2016 Method e ....................................................................................................... $455/$23,660 502/26,082 673/34,996 684/35,568 724/37,648 976/50,752 Total increase a $ % $0 47 218 229 269 521 0.0 10.3 47.9 50.3 59.1 114.5 a Change between salary level or alternative and the salary level set in 2004 ($455 per week). the $455 weekly threshold was established in 2004, the federal minimum wage was $5.15, so the salary threshold equated to minimum wage and overtime pay at time and one-half for hours over 40 for an employee working no more than 72.2 hours. That amount fell with increases in the minimum wage and is now 55.2 hours. The weighted average across the 15 years since the overtime threshold was last changed is 59.5 hours, and a threshold that would provide 59.5 hours of $7.25 minimum wage and overtime pay would be $502. c Full-time salaried workers with various industry/region exclusions (excludes workers not subject to the FLSA, not subject to the salary level test, and in some workers in agriculture or transportation). Pooled CPS data for 7/2016–6/2019 adjusted to reflect 2018/2019. d 10th percentile of likely exempt workers. Pooled CPS data for 7/2016–6/2019 adjusted to reflect 2018/2019. e 40th percentile earnings of nonhourly full-time workers in the South Census region, provided by BLS. The salary level reflects the first automatic update that would have taken place under the 2016 final rule. jbell on DSK3GLQ082PROD with RULES2 b When iii. Alternative Methods for Setting the HCE Total Annual Compensation Level As described above, the Department is updating the HCE compensation level VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 using earnings for the 80th percentile of all full-time salaried workers nationally, $107,432 per year. The Department also PO 00000 Frm 00032 Fmt 4701 Sfmt 4700 evaluated the following alternative HCE compensation levels: • HCE alternative 1: No change (i.e., leave the HCE compensation level at the E:\FR\FM\27SER2.SGM 27SER2 51261 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations currently-enforced level of $100,000 per year). • HCE alternative 2: Use the methodology proposed in the NPRM (i.e., use the 90th percentile earnings of full-time salaried workers nationally).158 Table 5 presents possible 2018/19 HCE levels as calculated using each alternative approach considered. Section VI.D details the transfers, costs, and benefits of the new HCE compensation level and the two alternatives. TABLE 5—HCE COMPENSATION LEVELS AND ALTERNATIVES IN 2018/19 Salary level (weekly/annually) Alternative HCE alt. #1: No change .................................................................................................... Final rule: 80th percentile of full-time salaried workers b .................................................. HCE alt. #2: 90th percentile of full-time salaried workers b ............................................... $1,923/$100,000 2,066/107,432 2,807/145,964 Total increase a $ % $0 7,432 45,964 0.0 7.4 46.0 a Change b Pooled between updated/alternative compensation level and the compensation level set in 2004 ($100,000 annually). CPS data for 7/2016–6/2019 adjusted to reflect 2018/2019. The Department believes that HCE alternative 1 is inappropriate because some increase to the HCE threshold is necessary to ensure that the HCE threshold continues to appropriately complement the more lenient HCE duties test. However, as explained in section IV.D, the Department does not believe the significantly higher threshold equal to the 90th percentile of full-time salaried workers nationally is necessary. Further, setting the HCE threshold at such a high level will result in significant administrative burdens, including the costs associated with the need to reassess, under the standard duties test, the exempt status of highly paid white collar workers, many of whom would remain exempt under that test. Accordingly, the Department rejected the second alternative because it believes that the HCE threshold set in this final rule is sufficiently high to ensure that those who meet that threshold will almost invariably pass the standard duties test. D. Effects of Revised Salary and Compensation Levels i. Overview and Summary of Quantified Effects The economic effects of increasing the EAP salary and compensation levels will depend on how employers respond. Employer response is expected to vary by the characteristics of the affected EAP workers. Transfers from employers to employees and between employees, and direct employer costs, depend on how employers respond to the final rule. The Department has derived the standard salary level using the 2004 methodology, and has set the HCE compensation level at the 80th percentile of all full-time salaried workers nationwide. In both cases we used pooled 2018/19 CPS data to calculate the levels. Given that at the time this analysis was performed data was available through June 2019, the Department believes that using current data to estimate the economic effects of the rule taking effect in January 2020 is appropriate. Table 6 presents the estimated number of affected workers, costs, and transfers associated with increasing the salary and compensation levels. The Department estimated that the direct employer costs of this final rule will total $543.0 million in the first year, with 10-year annualized direct costs of $164.0 million per year using a 3 percent real discount rate and $173.3 million per year using a 7 percent real rate. In addition to these direct costs, this final rule will transfer income from employers to employees. Estimated Year 1 transfers will equal $396.4 million, with annualized transfers estimated at $295.0 million and $298.8 million per year using the 3-percent and 7-percent real discount rates, respectively. Potential employer costs due to reduced profits and additional hiring were not quantified but are discussed in section VI.D.iii.5. TABLE 6—SUMMARY OF AFFECTED WORKERS AND REGULATORY COSTS AND TRANSFERS, STANDARD AND HCE EARNINGS THRESHOLDS Future years b Impact a Annualized value Year 1 Year 2 Year 10 3% Real discount rate 7% Real discount rate Affected Workers (1000s) Standard ............................................................................... HCE ...................................................................................... 1,156 102 1,069 114 723 154 ........................ ........................ ........................ ........................ Total .............................................................................. 1,257 1,183 877 ........................ ........................ $0.0 4.6 94.5 $38.7 10.5 114.8 $45.3 11.7 116.3 jbell on DSK3GLQ082PROD with RULES2 Direct Employer Costs (Millions in 2019$) Regulatory familiarization ..................................................... Adjustment c ......................................................................... Managerial ........................................................................... 158 Because in the final rule the Department is using pooled CPS MORG data to set the HCE compensation level, it used the same data set to VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 $340.4 68.2 134.4 $0.0 2.0 132.3 calculate this alternative compensation level. Thus, this method differs slightly from that proposed in PO 00000 Frm 00033 Fmt 4701 Sfmt 4700 the NPRM, which was calculated using the most recent year of data provided by BLS. E:\FR\FM\27SER2.SGM 27SER2 51262 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations TABLE 6—SUMMARY OF AFFECTED WORKERS AND REGULATORY COSTS AND TRANSFERS, STANDARD AND HCE EARNINGS THRESHOLDS—Continued Future years b Impact a Annualized value Year 1 Year 2 Total direct costs d ........................................................ 543.0 Year 10 134.3 3% Real discount rate 7% Real discount rate 99.1 164.0 173.3 Transfers from Employers to Workers (Millions in 2019) e Due to minimum wage ......................................................... Due to overtime pay ............................................................ 75.4 321.0 42.8 264.9 26.1 221.3 36.9 258.1 38.1 260.6 Total transfers d ............................................................. 396.4 307.7 247.4 295.0 298.8 a Additional The Department estimated there are 25.6 million potentially affected EAP workers—that is, EAP workers who either (1) passed the salary basis test, the standard salary level test, and the standard duties test, or (2) passed the salary basis test, the standard salary level test, the HCE total compensation level test, and the HCE duties test (but not the standard duties test). This number excluded workers in named occupations, who are not subject to the salary tests, or those who qualify for another (non-EAP) exemption. Using the method described above, the Department estimated that the increase in the standard salary level from $455 per week to $684 per week will affect 1.2 million exempt workers in Year 1, while the increase in the HCE annual compensation level from $100,000 to $107,432 will impact 101,800 workers (Figure 2).159 160 In total, the Department expects that 1.3 million workers will be affected in Year 1 by the final rule earnings threshold increases, composing about 4.9 percent of the pool of potentially affected EAP workers. Table 7 presents the number of affected EAP workers, the mean number of overtime hours they work per week, and their average weekly earnings. The 1.2 million workers affected by the increase in the standard salary level work on average 1.6 usual hours of overtime per week and earn on average $581 per week.161 However, the majority of these workers (about 86 percent) work zero usual hours of overtime. The 14 percent of affected workers who regularly work overtime average 11.7 hours of overtime per week. The 101,800 EAP workers affected by the change in the HCE compensation level average 4.2 hours of overtime per week and earn an average of $1,989 per week ($103,450 per year). About 65 percent of these workers work zero usual hours of overtime while the 35 percent who work usual hours of overtime average 11.9 hours of overtime per week. Although most affected EAP workers who typically do not work overtime are unlikely to experience significant 159 This group includes workers who may currently be nonexempt under more protective state EAP laws and regulations, such as some workers in Alaska, California, and New York. 160 The 2016 final rule applied joint probabilities to estimate the number of affected HCE workers (i.e., the number of HCE workers who pass the HCE duties test but fail the standard duties test). In order to provide a more accurate estimate, this final rule applies conditional probabilities to determine the number of affected HCE workers. 161 CPS defines ‘‘usual hours’’ as hours worked 50 percent or more of the time. ii. Affected EAP Workers jbell on DSK3GLQ082PROD with RULES2 1. Overview VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 PO 00000 Frm 00034 Fmt 4701 Sfmt 4700 E:\FR\FM\27SER2.SGM 27SER2 ER27SE19.001</GPH> costs and benefits of the rule that could not be quantified or monetized are discussed in the text. b These costs/transfers represent a range over the nine-year span. c Adjustment costs occur in all years when there are newly affected workers. d Components may not add to total due to rounding. e This is the net transfer from employers to workers. There may also be transfers between workers. Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations because of the revised standard salary level.162 Employers might respond by paying overtime premiums; reducing or eliminating overtime hours; reducing employees’ regular wage rates (provided that the reduced rates still exceed the minimum wage); increasing employees’ 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 51263 salaries to the updated salary level to preserve their exempt status (although this will be less common for affected workers earning below the minimum wage); or using some combination of these responses. TABLE 7—NUMBER OF AFFECTED EAP WORKERS, MEAN OVERTIME HOURS, AND MEAN WEEKLY EARNINGS, YEAR 1 Affected EAP workers a Type of affected EAP worker Mean usual weekly earnings Mean overtime hours Number (1,000s) % of Total Standard Salary Level All affected EAP workers .... Earn less than the minimum wage b. Regularly work overtime ..... CPS occasionally work overtime c. 1,156 ................................. 22 ...................................... 100% ................................ 1.9 ..................................... 1.6 ..................................... 21.4 ................................... $581 524 158 .................................... 42 ...................................... 13.7 ................................... 3.7 ..................................... 11.7 ................................... 8.3 ..................................... 582 581 HCE Compensation Level All affected EAP workers .... Earn less than the minimum wage b. Regularly work overtime ..... CPS occasionally work overtime c. 102 .................................... ........................................... 100 .................................... ........................................... 4.2 ..................................... ........................................... 1,989 36 ...................................... 4 ........................................ 35.1 ................................... 3.5 ..................................... 11.9 ................................... 9.7 ..................................... 1,968 1,995 jbell on DSK3GLQ082PROD with RULES2 Note: Pooled CPS data for 7/2016–6/2019 adjusted to reflect 2018/2019. a Estimated number of workers exempt under the EAP exemptions who will be entitled to overtime protection under the updated salary levels (if their weekly earnings do not increase to the new salary levels). b The applicable minimum wage is the higher of the federal minimum wage and the state minimum wage. HCE workers will not be affected by the minimum wage provision. These workers all regularly work overtime and are also included in that row. c Workers who do not usually work overtime but did in the CPS reference week. Mean overtime hours are actual overtime hours in the reference week. Other workers may occasionally work overtime in other weeks. These workers are identified later. The Department considered two types of overtime workers in this analysis: Regular overtime workers and occasional overtime workers.163 Regular overtime workers typically worked more than 40 hours per week. Occasional overtime workers typically worked 40 hours or less per week, but they worked more than 40 hours in the week they were surveyed. The Department considered these two populations separately in the analysis because labor market responses to overtime pay requirements may differ for these two types of workers. In a representative week, the increases in the standard salary level and the HCE compensation level affected an estimated 45,900 occasional overtime workers (3.7 percent of all affected EAP workers). They averaged 8.4 hours of overtime in the weeks they worked overtime. This group represents the number of workers with occasional overtime hours in the week the CPS MORG survey was conducted. Because the survey week is a representative week, the Department believes the prevalence of occasional overtime in the survey week, and the characteristics of these workers, is representative of other weeks (even though a different group of workers would be identified as occasional overtime workers in a different week). 162 A small proportion (1.9 percent) of affected EAP workers earn implicit hourly wages that are less than the applicable minimum wage (the higher of the state or federal minimum wage). The implicit hourly wage is calculated as an affected EAP employee’s total weekly earnings divided by total weekly hours worked. For example, workers earning the currently-enforced $455 per week standard salary level would earn less than the federal minimum wage if they work 63 or more hours in a week ($455/63 hours = $7.22 per hour). VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 2. Characteristics of Affected EAP Workers In this section, the Department examined the characteristics of affected EAP workers. Table 8 presents the distribution of affected EAP workers by industry and occupation, using Census industry and occupation codes. The industry with the most affected EAP workers is education and health services (288,000), while the industry with the highest percentage of affected EAP workers is leisure and hospitality (about 10 percent). The occupation category PO 00000 Frm 00035 Fmt 4701 Sfmt 4700 with the most affected EAP workers is management, business, and financial (506,000), while the occupation category with the highest percentage of affected EAP workers is services (about 15 percent). Finally, 6.1 percent of potentially affected workers in private nonprofits are affected compared with 4.6 percent in private for-profit firms. However, as discussed in section VI.B.iii, the estimates of workers subject to the FLSA include workers employed by enterprises that do not meet the enterprise coverage requirements because there is no data set that would adequately inform an estimate of the size of this worker population. Although failing to exclude workers who work for non-covered enterprises would only affect a small percentage of workers generally, it may have a larger effect (and result in a larger overestimate) for workers in nonprofits because when determining enterprise coverage only 163 Regular overtime workers were identified in the CPS MORG with variable PEHRUSL1. Occasional overtime workers were identified with variables PEHRUSL1 and PEHRACT1. E:\FR\FM\27SER2.SGM 27SER2 51264 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations revenue derived from business operations, not charitable activities, is included. TABLE 8—ESTIMATED NUMBER OF EXEMPT WORKERS WITH THE CURRENT AND UPDATED SALARY LEVELS, BY INDUSTRY AND OCCUPATION, YEAR 1 Workers subject to FLSA (millions) Industry/occupation/nonprofit Total ..................................................................................... Potentially affected EAP workers (millions) a 139.43 Not-affected (millions) b Affected (millions) c Affected as share of potentially affected (%) 25.59 24.33 1.26 4.9 0.04 0.19 1.02 3.61 2.60 0.92 1.01 3.81 5.75 4.15 0.92 0.64 0.93 0.04 0.18 0.97 3.52 2.44 0.88 0.97 3.64 5.53 3.86 0.83 0.59 0.88 0.00 0.00 0.05 0.09 0.17 0.04 0.04 0.17 0.21 0.288 0.09 0.05 0.05 5.4 2.6 5.0 2.5 6.4 4.1 4.2 4.3 3.7 6.9 9.8 8.3 5.5 12.76 9.02 0.22 2.44 0.95 0.00 0.02 0.04 0.11 0.03 12.25 8.61 0.18 2.26 0.84 0.00 0.02 0.04 0.10 0.03 0.51 0.41 0.03 0.18 0.11 0.00 0.00 0.00 0.00 0.00 4.0 4.6 14.6 7.6 11.7 0.0 3.2 3.9 3.9 9.1 1.91 20.52 1.90 0.12 1.00 0.13 6.1 4.6 6.5 By Industry d Agriculture, forestry, fishing, & hunting ................................ Mining ................................................................................... Construction ......................................................................... Manufacturing ...................................................................... Wholesale & retail trade ...................................................... Transportation & utilities ...................................................... Information ........................................................................... Financial activities ................................................................ Professional & business services ........................................ Education & health services ................................................ Leisure & hospitality ............................................................. Other services ...................................................................... Public administration ............................................................ 1.33 0.73 8.49 15.56 19.08 7.65 2.73 9.66 15.80 34.24 13.13 5.62 5.40 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 ........................................ 21.12 32.96 24.16 13.78 17.64 1.01 6.75 4.59 8.48 8.93 By Nonprofit and Government Status Nonprofit, private .................................................................. For profit, private .................................................................. Government (state, local, and federal) ................................ 9.65 111.04 18.73 2.04 21.52 2.03 Note: Pooled CPS data for 7/2016–6/2019 adjusted to reflect 2018/2019. a Exempt workers who are white collar, salaried, not eligible for another (non-EAP) overtime exemption, and not in a named occupation. b Workers who continue to be exempt after the increases in the salary levels (assuming affected workers’ weekly earnings do not increase to the new salary level). c Estimated number of workers exempt under the EAP exemptions who will be entitled to overtime protection under the updated salary levels (if their weekly earnings do not increase to the new salary levels). d Census industry and occupation categories. jbell on DSK3GLQ082PROD with RULES2 Table 9 presents the distribution of affected EAP workers based on Census Regions and Divisions, and metropolitan statistical area (MSA) status. The region with the most affected workers will be the South (544,000), but the South’s percentage of potentially affected workers who are affected is still small (6.1 percent). Although 90 percent of affected EAP workers will reside in MSAs (1.13 of 1.26 million), so do a corresponding 88 percent of all workers subject to the FLSA.164 Employers in low-wage industries, regions, and in non-metropolitan areas may be more affected because they typically pay lower wages and salaries. However, the Department believes the salary level adopted in this final rule is appropriate for these lower-wage sectors because the methodology used in 2004, and applied for this rulemaking, used earnings data in the low-wage retail industry and the low-wage South Region. Effects by region and industry are considered in section VI.D.vi. 164 Identified with CPS MORG variable GTMETSTA. VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 PO 00000 Frm 00036 Fmt 4701 Sfmt 4700 E:\FR\FM\27SER2.SGM 27SER2 51265 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations TABLE 9—ESTIMATED NUMBER OF POTENTIALLY AFFECTED EAP WORKERS WITH THE CURRENT AND UPDATED SALARY LEVELS, BY REGION, DIVISION, AND MSA STATUS, YEAR 1 Workers subject to FLSA (millions) Region/division/metropolitan status Total .............................................................................. Potentially affected EAP workers (millions) a 139.43 Not-affected (millions) b Affected (millions) c Affected as share of potentially affected (%) 25.59 24.33 1.26 4.9 5.30 1.56 3.74 5.23 3.56 1.67 8.93 5.01 1.09 2.83 6.12 1.74 4.38 5.07 1.50 3.57 5.01 3.40 1.60 8.39 4.72 1.01 2.67 5.87 1.66 4.21 0.23 0.06 0.17 0.23 0.16 0.07 0.54 0.30 0.08 0.16 0.25 0.08 0.17 4.4 3.7 4.6 4.4 4.4 4.4 6.1 5.9 7.7 5.7 4.1 4.7 3.9 23.98 1.51 0.10 22.84 1.39 0.10 1.13 0.12 0.01 4.7 7.7 6.0 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 ........................................................................... 25.38 7.03 18.35 30.59 20.77 9.82 50.90 26.77 7.59 16.55 32.56 10.30 22.26 By Metropolitan Status Metropolitan ......................................................................... Non-metropolitan .................................................................. Not identified ........................................................................ 122.63 15.85 0.95 Note: Pooled CPS data for 7/2016–6/2019 adjusted to reflect 2018/2019. a Exempt workers who are white collar, salaried, not eligible for another (non-EAP) overtime exemption, and not in a named occupation. b Workers who continue to be exempt after the increases in the salary levels (assuming affected workers’ weekly earnings do not increase to the new salary level). c Estimated number of workers exempt under the EAP exemptions who will be entitled to overtime protection under the updated salary levels (if their weekly earnings do not increase to the new salary levels). 3. NPRM Comments on Affected Worker Calculation EPI and a few other commenters asserted that the Department’s use of pooled 2015–2017 data to calculate the number of affected workers ‘‘leads to an underestimate because it doesn’t account for employment growth and other changes in the three years between 2017 and 2020.’’ The Department is using pooled CPS MORG data for July 2016 through June 2019, adjusted to reflect 2018/2019, in this final rule. The Department is not modeling employment growth between 2018/19 and the final rule’s effective date because of uncertainty in the appropriate growth rates to project earnings and employment, and because of the relatively short period of time separating June 2019—the most recent CPS MORG data available at the time this impact analysis was developed— and January 1, 2020—the effective date of the final rule. However, as a sensitivity analysis undertaken in response to these comments, the Department used the BLS National Employment Matrix (NEM) for 2016 to 2026 to calculate growth rates for each occupation-industry category. Using these rates to adjust the number of affected employees in 2018/19 for one and a half years of employment growth increased the estimated number of affected workers by less than 1.8 percent. iii. Costs 1. Summary The Department quantified three direct costs to employers in this analysis: (1) Regulatory familiarization costs; (2) adjustment costs; and (3) managerial costs. The Department estimated that in Year 1 (2020), regulatory familiarization costs will be $340.4 million, adjustment costs will be $68.2 million, and managerial costs will be $134.4 million (Table 10). Total direct employer costs in Year 1 will be $543.0 million. TABLE 10—SUMMARY OF YEAR 1 DIRECT EMPLOYER COSTS jbell on DSK3GLQ082PROD with RULES2 [Millions] Direct employer costs Standard salary level HCE compensation level Regulatory familiarization a .......................................................................................................... Adjustment ................................................................................................................................... Managerial ................................................................................................................................... ........................ $62.7 121.5 ........................ $5.5 12.9 $340.4 68.2 134.4 Total direct costs .................................................................................................................. 184.1 18.4 543.0 a Regulatory VerDate Sep<11>2014 familiarization costs are assessed jointly for the change in the standard salary level and the HCE compensation level. 18:58 Sep 26, 2019 Jkt 247001 PO 00000 Frm 00037 Fmt 4701 Sfmt 4700 E:\FR\FM\27SER2.SGM 27SER2 Total 51266 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 Adjustment costs and managerial costs are recurring, so we also projected them for years 2 through 10 in section VI.D.viii. The Department discusses costs that are not quantified in section VI.D.iii.5. 2. Regulatory Familiarization Costs This rule will impose direct costs on firms by requiring them to review the regulation. To estimate these ‘‘regulatory familiarization costs,’’ three pieces of information must be estimated: (1) The number of affected establishments; (2) a wage level for the employees reviewing the rule; and (3) the amount of time employees spend reviewing the rule. It is unclear whether regulatory familiarization costs are a function of the number of establishments or the number of firms. To avoid underestimating these costs, the Department assumed that regulatory familiarization occurs at a decentralized level and used the number of establishments in its cost estimate; this results in a higher estimate than would result from using the number of firms. The most recent data on private sector establishments at the time this final rule was drafted are from the 2016 Statistics of U.S. Businesses (SUSB), which reports 7.76 million establishments with paid employees.165 Additionally, there were an estimated 90,126 state and local governments in 2017, the most recent data available.166 The Department thus estimated 7.85 million establishments altogether (for ease, the Department uses the term ‘‘establishments’’ to refer to the total of establishments and government entities) might incur regulatory familiarization costs. The Department believes that all establishments will incur some regulatory familiarization costs, even if they do not employ exempt workers, because all establishments will need to confirm whether this rule includes any provisions that may affect their employees. Firms with more affected EAP workers will likely spend more time reviewing the regulation than firms with fewer or no affected EAP workers (since a careful reading of the regulation will probably follow the initial decision that the firm is affected). However, the Department did not know the distribution of affected EAP workers across firms, so it used an average cost per establishment. The Department believes one hour per establishment is appropriate because the 165 Statistics of U.S. Businesses 2016, https:// www.census.gov/programs-surveys/susb.html. 166 2017 Census of Governments. Table 1, https:// www.census.gov/data/tables/2017/econ/gus/2017governments.html. VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 EAP exemptions have existed in one form or another since 1938. The most significant change in this rulemaking is setting a new standard salary level for exempt workers, and the changed regulatory text is only a few pages. The Department thus believes that one hour is an appropriate average estimate for the time each establishment will spend reviewing the changes made by this rulemaking. Time spent to implement the necessary changes was included in adjustment costs. The Department’s analysis assumed that mid-level human resource workers with a median wage of $26.56 per hour will review the final rule.167 The Department also assumed that benefits are paid at a rate of 46 percent of the base wage 168 and overhead costs are paid at a rate of 17 percent of the base wage,169 resulting in an hourly rate of $43.38. The Department thus estimates regulatory familiarization costs in Year 1 will be $340.4 million ($43.38 per hour × 1 hour × 7.85 million establishments).170 Some commenters asserted these cost estimates are too low. For example, SBA Office of Advocacy (SBA Advocacy) wrote: ‘‘we spoke to a small retail business in Alabama, who retained the services of an attorney for 10–15 hours to review the 2016 final rule.’’ International Bancshares Corporation described the necessary hours for regulatory familiarization and adjustment costs as ‘‘countless.’’ An individual commenter stated that the Department’s estimated costs are too 167 The median wage in the pooled 2018/19 CPS data for workers with the Census 2010 occupations ‘‘human resources workers’’ (0630); ‘‘compensation, benefits, and job analysis specialists’’ (0640); and ‘‘training and development specialists’’ (0650). The Department determined these occupations include most of the workers who would conduct these tasks. See Bureau of Labor Statistics, U.S. Department of Labor, Occupational Outlook Handbook. 168 The benefits-earnings ratio is derived from BLS’s Employer Costs for Employee Compensation data using variables CMU1020000000000D and CMU1030000000000D. This fringe benefit rate includes some fixed costs such as health insurance. 169 The Department believes that the overhead costs associated with this rule are small because existing systems maintained by employers to track currently hourly employees can be used for newly overtime-eligible workers. However, acknowledging that there might be additional overhead costs, we have included an overhead rate of 17 percent. Because the 2016 final rule did not include overhead costs in its cost and transfer estimates, estimated costs and transfers associated with the 2016 final rule have been recalculated for comparison purposes in section VI.D.ix. 170 As previously noted, the Department used the number of establishments rather than the number of firms, which results in a higher estimate of the regulatory familiarization cost. Using the number of firms, 6.0 million, would result in a reduced regulatory familiarization cost estimate of $262.2 million in Year 1. PO 00000 Frm 00038 Fmt 4701 Sfmt 4700 low but did not provide any information on what costs should be. The Department continues to believe that an average of one hour per establishment is appropriate. The EAP exemptions have been in existence in one form or another since 1938, and a final rule was published as recently as 2016. Furthermore, employers who use the exemptions must apply them every time they hire an employee whom they seek to classify as exempt. Thus, employers should be familiar with the exemptions. The most significant change promulgated in this rulemaking is setting new earnings thresholds for exempt workers. The Department believes that, on average, one hour is sufficient to time to read and understand, for example, the changes to these thresholds, and we note that the regulatory text changes comprise only a few pages. Additionally, the estimated one hour for regulatory familiarization represents an average for all establishments in the U.S., even those without any affected or exempt workers, which are unlikely to spend much time reviewing the rule. Some businesses, of course, will spend more than one hour, and some will spend less, but for the reasons stated above, the Department believes that an average of one hour is an appropriate estimate. 3. Adjustment Costs This rule will also impose direct costs on firms by requiring them to evaluate the exemption status of employees, update and adapt overtime policies, notify employees of policy changes, and adjust their payroll systems.171 The Department believes the size of these ‘‘adjustment costs’’ will depend on the number of affected EAP workers and will occur in any year when exemption status is changed for any workers. To estimate adjustment costs, three pieces of information must be estimated: (1) A wage level for the employees making the adjustments; (2) the amount of time spent making the adjustments; and (3) the estimated number of newly affected EAP workers. The Department again estimated that the average wage with benefits and overhead costs for a midlevel human resource worker will be $43.38 per hour (as explained above). The Department estimated that it will take establishments an average of 75 171 While some companies may need to reconfigure information technology systems to include both exempt and overtime-protected workers, the Department notes that most organizations affected by the rule already employ overtime-eligible workers and have in place payroll systems and personnel practices (e.g., requiring advance authorization for overtime hours) such that additional costs associated with the rule should be relatively small in the short run. E:\FR\FM\27SER2.SGM 27SER2 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 minutes per affected worker to make the necessary adjustments. Little applicable data were identified from which to estimate the amount of time required to make these adjustments.172 Therefore, in the NPRM the Department used the estimate of 1.25 hours from the 2016 final rule after reviewing public comments on the 2015 NPRM, and it is again using this estimate in this final rule. The estimated number of affected EAP workers in Year 1 is 1.3 million (as discussed in section VI.D.ii). Therefore, total estimated Year 1 adjustment costs will be $68.2 million ($43.38 × 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. However, when the rule takes effect, firms will no longer be required to apply the potentially time-consuming duties test to employees earning less than the new standard salary level. This will be a clear cost savings to employers for the approximately 4.1 million salaried employees (2.2 million in white collar occupations and 1.9 million in blue collar occupations) who do not pass the duties test and earn at least $455 per week but less than the updated salary level. The Department did not estimate the potential size of this cost savings. A few commenters expressed concern that the time estimate is too low. For example, as noted above, International Bancshares Corporation described the necessary hours for regulatory familiarization and adjustment costs as ‘‘countless.’’ SBA Advocacy wrote: ‘‘Small businesses have told Advocacy that it may take them many hours and several weeks to understand and implement this rule for their small businesses.’’ Two commenters, the National Association of Manufacturers and the HR Policy Association, expressed particular concern with adjustment costs stemming from the proposed increase in the HCE compensation level, noting that for each worker earning between $100,000 and the new HCE compensation level, the employee’s job duties will need to be reassessed to determine whether the worker remains exempt under the 172 Costs from the 2004 final rule were considered, but because that revision included changes to the duties test, the cost estimates are not directly applicable; in addition, the 2004 final rule did not separately account for managerial costs. The 2015 NPRM separately accounted for managerial costs. Some commenters responded with higher time estimates, but these estimates were not substantiated with data. VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 standard salary level exemption. The National Association of Manufacturers elaborated that ‘‘across the manufacturing sector, the change in HCE threshold [proposed in the NPRM] may be even more difficult and consequential than updating the standard salary threshold.’’ The Department is retaining its estimate of adjustment costs as 75 minutes per affected worker in the final rule. The Department notes that the vast majority of commenters, including employer representatives, did not contest this estimate. Additionally, this estimate is drawn from the 2016 final rule, and represents a 25 percent increase, in response to concerns from employer representatives, over the Department’s original estimate of one hour per worker in the 2015 NPRM.173 Moreover, SBA Advocacy’s numbers are not necessarily inconsistent with the Department’s estimates. For example, if a small business has 15 affected employees, then the Department estimated it will (on average) take 19.75 hours to make the appropriate adjustments, an amount of time that some small businesses might consider ‘‘many hours’’ and that could take place over ‘‘several weeks.’’ The Department also believes that the 75-minute-per-worker average time estimate appropriately takes into account adjustment time for HCEaffected workers (those passing only the HCE duties test and not the standard duties test). This estimate assumes that the average is concentrated in the subset of employees requiring more analysis to make a decision. For example, employers are likely to incur relatively low adjustment costs for some workers, such as those who work no overtime (described below as Type 1 workers). This leaves more time for employers to spend on adjustment costs for other workers, such as affected HCE employees who become newly subject to the more rigorous standard duties test. The Department further notes that in this final rule, the number of affected HCE employees has declined from the NPRM as a result of the Department’s decision to decrease the HCE threshold from the proposed amount of $147,414 to $107,432. This adjustment also addresses concerns about the burdens that would have been associated, under the NPRM, with applying the standard duties test to a large number of formerly HCE exempt employees, many of whom would have remained exempt under the standard duties test. Thus, although some employers may spend more time adjusting for HCE-affected workers than 173 81 PO 00000 for other workers, HCE workers will now comprise a smaller portion of the of the total number of affected workers, further affirming the Department belief that its estimate of 75 minutes per worker on average is appropriate. 4. Managerial Costs If employers reclassify employees as overtime-eligible due to the changes in the salary levels, then firms may incur ongoing managerial costs because the employer may spend more time developing work schedules and closely monitoring an employee’s hours to minimize or avoid overtime. For example, the manager of a reclassified worker may have to assess whether the marginal benefit of scheduling the worker for more than 40 hours exceeds the marginal cost of paying the overtime premium. Additionally, the manager may have to spend more time monitoring the employee’s work and productivity since the marginal cost of employing the worker per hour has increased. Unlike regulatory familiarization and adjustment costs, which occur primarily in Year 1, managerial costs are incurred more uniformly every year. The Department applied managerial costs to workers who (1) are reclassified as nonexempt, overtime-protected and (2) either regularly work overtime or occasionally work overtime, but on a predictable basis—an estimated 304,500 workers (see Table 13 and accompanying explanation). The Department estimated these costs assuming that management spends an additional ten minutes per week scheduling and monitoring each affected worker expected to be reclassified as nonexempt, 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 will be 50,751 hours ((10 minutes/60 minutes) × 304,500 workers). The median hourly wage in 2018/19 for a manager was $31.18 and benefits were estimated to be paid at a rate of 46 percent of the base wage.174 Together 174 Calculated as the median wage in the pooled 2018/19 CPS MORG data for workers in management occupations (excluding chief FR at 32475. Frm 00039 Fmt 4701 51267 Continued Sfmt 4700 E:\FR\FM\27SER2.SGM 27SER2 jbell on DSK3GLQ082PROD with RULES2 51268 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations with the 17 percent overhead costs used for this analysis, this totals $50.92 per hour. Thus, the estimated Year 1 managerial costs total $134.4 million (50,751 hours/week × 52 weeks × $50.92/hour). Although the exact magnitude will vary with the number of affected EAP workers each year, the Department anticipates that employers will incur managerial costs annually. There was little precedent or data to aid in evaluating managerial costs. With the exception of the 2016 rulemaking, prior part 541 rulemakings did not estimate managerial costs. The Department likewise found no estimates of managerial costs after reviewing the literature. Thus, in the NPRM, the Department used the same methodology as the 2016 final rule, which the Department adopted after considering comments on the 2015 NPRM. However, for this final rule, the Department has increased the time estimate from 5 minutes to 10 minutes. A few commenters generally expressed concern about the managerial costs for businesses. For example, one commenter noted: ‘‘There is no easy way to track hours for salaried folks easily, in most businesses. As a result, companies will be forced to begin this practice, adding more costs in administrative ways.’’ Another individual wrote that the proposed rule ‘‘would create a challenge by placing a burden on the employers to exaustively [sic] track these newly nonexempt employees’ hours to ensure compliance with overtime pay and other requirements. This tracking of hours would also produce increased human resources paperwork and technology costs to our company.’’ The Kentucky Retail Federation wrote: ‘‘Reclassifying managers to hourly workers will require hours spent scheduling work hours to avoid overtime costs.’’ SBA Advocacy, asserting that the Department underestimated compliance costs, wrote: ‘‘Employers reclassifying managers to hourly staff may spend many hours a week scheduling and keeping track of employee work to avoid these extra overtime costs.’’ The Department acknowledges that firms may incur costs monitoring and managing the hours of formerly exempt staff. In addition, the Department acknowledges that to the extent workers who lose their exempt status as a result of the change in the standard salary level telecommute, but hourly and other nonexempt salaried workers do not executives). The adjustment ratio is derived from BLS’ Employer Costs for Employee Compensation data using variables CMU1020000000000D and CMU1030000000000D. VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 telecommute, it may be necessary to develop ways of tracking such work by newly nonexempt workers. However, the Department does not expect that such firms will spend ‘‘many hours a week’’ on such tasks, and believes an estimate of 10 minutes per worker per week is appropriate. First, the Department notes that EAP exempt employees account for less than 20 percent of the U.S. labor force; as such, the Department expects that the vast majority of employers of EAP exempt workers also employ nonexempt workers. Such employers already have in place recordkeeping systems and standard operating procedures for ensuring employees work overtime under only employer-prescribed circumstances. Thus, such systems generally do not need to be invented for managing formerly-exempt EAP employees. Second, the Department also notes that under the FLSA recordkeeping regulations in part 516, employers determine how to make and keep an accurate record of hours worked by employees; for example, employers may tell their workers to write their own time records and any timekeeping plan is acceptable as long as it is complete and accurate. Additionally, if the nonexempt employee works a fixed schedule, e.g., 9:00 a.m.–5:30 p.m. Monday–Friday, the employer may keep a record showing the exact schedule of daily and weekly hours and merely indicate exceptions to that schedule. See Fact Sheet #21: Recordkeeping Requirements under the Fair Labor Standards Act (https://www.dol.gov/ whd/regs/compliance/whdfs21.pdf). However, as previously noted, in response to concerns raised by commenters the Department has doubled the amount of time attributed to managerial costs. 5. Other Potential Costs In addition to the costs discussed above, the final rule may impose additional costs that have not been quantified. These costs are discussed qualitatively below, but we note that in some cases (e.g., schedule flexibility, salaried status) these costs may directly affect workers’ wages because workers face a tradeoff in the labor market between cash wages and the nonpecuniary aspects of jobs.175 Reduced Scheduling Flexibility Exempt workers may enjoy more scheduling flexibility because their 175 See, e.g., Ashenfelter, O. & Layard, R. (1986). Handbook of Labor Economics. Volume 1 641–92. https://www.sciencedirect.com/science/article/abs/ pii/S1573446386010155. PO 00000 Frm 00040 Fmt 4701 Sfmt 4700 hours are less likely to be monitored than nonexempt workers. If so, the final rule could impose costs on newly nonexempt, overtime-eligible workers by, for example, limiting their ability to adjust their schedules to meet personal and family obligations. But the rule does not require employers to reduce scheduling flexibility. Employers can continue to offer flexible schedules and require workers to monitor their own hours and to follow the employers’ timekeeping rules. Additionally, some exempt workers already monitor their hours for billing purposes. For these reasons, and because there is little data or literature on these costs, the Department did not quantify potential costs regarding scheduling flexibility. Preference for Salaried Status Some of the workers who become nonexempt as a result of the final rule and whose pay is changed by their employer from salaried to hourly status may have preferred to remain salaried. Research has shown that salaried workers are more likely than hourly workers to receive benefits such as paid vacation time and health insurance,176 and are more satisfied with their benefits.177 Additionally, when employer demand for labor decreases, hourly workers tend to see their hours cut before salaried workers, making earnings for hourly workers less predictable.178 However, this literature generally does not control for differences between salaried and hourly workers such as education, job title, or earnings; therefore, this correlation is not necessarily attributable to hourly status. If workers are reclassified as hourly, and hourly workers have fewer benefits than salaried workers, reclassification could reduce workers’ benefits. But the Department notes that this rule does not require such reclassification. These newly nonexempt workers may continue to be paid a salary, as long as that salary is equivalent to a base wage at least equal to the minimum wage rate for every hour worked, and the employee receives a 50 percent 176 Lambert, S.J. (2007). Making a Difference for Hourly Employees. In A. Booth, & A.C. Crouter, Work-Life Policies that Make a Real Difference for Individuals, Families, and Communities. Washington, DC: Urban Institute Press. 177 Balkin, D.B., & Griffeth, R.W. (1993). The Determinants of Employee Benefits Satisfaction. Journal of Business and Psychology, 7(3), 323–339. 178 Lambert, S.J., & Henly, J.R. (2009). Scheduling in Hourly Jobs: Promising Practices for the TwentyFirst 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. E:\FR\FM\27SER2.SGM 27SER2 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations premium on that base wage for any overtime hours each week.179 Similarly, employers may continue to provide these workers with the same level of benefits as previously, whether paid on an hourly or salary basis. Quality of Public Services To the extent that employers respond to this rule by restricting employee work hours, this rulemaking could negatively affect the quality of public services provided by local governments and nonprofits. However, the Department believes the effect of the rule on public services will be small. The Department acknowledges that some employees who work overtime providing public services may see a reduction in hours as an effect of the rulemaking. But if the services are in demand, the Department believes additional workers may be hired, as funding availability allows, to make up some of these hours, and productivity increases may offset some reduction in services. In addition, the Department expects many employers will adjust base wages downward to some degree so that even after paying the overtime premium, overall pay and hours of work for many employees will be relatively minimally impacted. Additionally, as noted above, many nonprofits are noncovered enterprises because when determining enterprise coverage only revenue derived from business operations, not charitable activities, is included. jbell on DSK3GLQ082PROD with RULES2 Increased Prices Business firms may pass along increased labor costs to consumers through higher prices. The Department anticipates that some firms may offset part of the additional labor costs through charging higher prices for the firms’ goods and services. However, because costs and transfers are, on average, small relative to payroll and revenues, the Department does not expect the final rule to have a significant effect on prices. The Department estimated that, on average, costs and transfers make up less than 0.02 percent of payroll and less than 0.003 percent of revenues, although for specific industries and firms this percentage may be larger. Therefore, any potential change in prices would be modest. Further, any significant price increases would not represent a separate category of effects from those estimated in this economic analysis; rather, such price increases (where they occur) would be the channel through which consumers, rather than employers or 179 §§ 778.113–.114. VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 employees, bear rule-induced costs (including transfers). International Bancshares Corporation commented that the increased salary level could lead to increased prices, if ‘‘anticipated wage gains do not result in productivity increases.’’ As noted above, however, costs and transfers make up less than 0.02 percent of payroll; furthermore, payroll comprises only a fraction of the costs of producing goods and services in the U.S. economy. Therefore, the Department concludes the final rule will add little upward pressure to prices. To the extent that EAP-exempt employees are concentrated in some industries more than others, and thus specific industries might experience more pressure on wages, the Department notes that even in the industry where costs and transfers compose the highest percentage of payroll (agriculture, forestry, fishing, and hunting), that percentage is only 0.038 percent. Reduced Profits The increase in workers’ earnings resulting from the revised salary level is a transfer of income from firms to workers, not a cost. The Department acknowledges that the increased employer costs and transfer payments as a result of this final rule may reduce the profits of business firms, although (1) some firms may offset some of these costs and transfers by making payroll adjustments, and (2) some firms may mitigate their reduced profits due to these costs and transfers through increased prices. To the extent that the final rule reduces profits at some business firms after all these adjustments are made, these firms would have marginally lower after-tax returns on new investments in equipment, structures, and intellectual property and could therefore make fewer such investments going forward. All else equal, less business investment slows economic growth and reduces employment. However, the Department expects that any anti-growth effects of the final rule would be minimal. Hiring Costs To the extent that firms respond to an update to the salary level test by reducing overtime hours, they may do so by spreading hours to other workers, including current workers employed for less than 40 hours per week by that employer, current workers who retain their exempt status, and newly hired workers. If new workers are hired to absorb these transferred hours, then the associated hiring costs are a cost of this final rule. PO 00000 Frm 00041 Fmt 4701 Sfmt 4700 51269 Other Costs Raised by Commenters Some commenters asserted that the proposed rule would entail additional costs not detailed above. A few believe that the rule will result in increased employee turnover. SBA Advocacy wrote: ‘‘Small businesses that reclassified their salaried staff to hourly staff as a result of the 2016 final rule reported that their employee turnover increased by up to 50 percent,’’ forcing them to incur costs to hire and train new workers. According to SBA Advocacy, small businesses attributed this turnover to previously-exempt managers feeling ‘‘demoralized’’ by having to ‘‘clock in’’ due to their changed status, and suggested that this rule may have similar effects. Similarly, International Bancshares Corporation predicted that the proposed rule would result in layoffs, asserting that costs associated with ‘‘reviewing the final regulations and building a software system to implement and monitor their compliance with the regulations’’ would make it ‘‘extremely difficult for community and regional banks to . . . [avoid] laying off employees or curtailing their operations.’’ The Department believes these concerns are overstated. First, this final rule’s increases to the earnings thresholds are much more modest than the 2016 final rule’s, and the associated impacts are correspondingly more moderate. Thus, the Department believes that any adverse effects, such as increased turnover, will be minimal. Therefore, the Department has not quantified the potential costs associated with increased turnover. Likewise, the Department does not believe that this final rule will cause a significant number of layoffs. As explained above, the vast majority of firms employ both exempt and nonexempt workers and therefore have systems in place for managing nonexempt employees, and affected employees comprise less than 4 percent of EAP exempt employees. As such, the Department does not believe that the increased earnings thresholds in this final rule will cause layoffs to any significant extent, and has not quantified such costs. iv. Transfers 1. Overview Transfer payments occur when income is redistributed from one party to another. The Department has quantified two transfers from employers to employees that will result from the final rule: (1) Transfers to ensure compliance with the FLSA minimum wage provision; and (2) transfers to ensure compliance with the FLSA E:\FR\FM\27SER2.SGM 27SER2 51270 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations workers eligible for the HCE exemption earn well above the minimum wage. The Department estimates that transfers due to the overtime pay provision will be $321.0 million: $220.7 million from the increased standard salary level and overtime pay provision. Transfers in Year 1 due to the minimum wage provision were estimated to be $75.4 million. The increase in the HCE compensation level does not affect minimum wage transfers because $100.3 million from the increased HCE compensation level. Total Year 1 transfers are estimated at $396.4 million (Table 11). TABLE 11—SUMMARY OF YEAR 1 REGULATORY TRANSFERS [Millions] Standard salary level Transfer from employers to workers HCE compensation level Total Due to minimum wage ................................................................................................................. Due to overtime pay .................................................................................................................... $75.4 220.7 $0.0 100.3 $75.4 321.0 Total transfers ....................................................................................................................... 296.1 100.3 396.4 Because the overtime premium depends on the base wage, the estimates of minimum wage transfers and overtime transfers are linked. This can be considered a two-step approach. The Department first identified affected EAP workers with an implicit regular hourly wage lower than the minimum wage, and then calculated the wage increase necessary to reach the minimum wage. 2. Transfers Due to the Minimum Wage Provision For purposes of this analysis, the hourly rate of pay was calculated as usual weekly earnings divided by usual weekly hours worked. To earn less than the federal or most state minimum wages, this set of workers must work many hours per week. For example, a worker paid $455 per week must work 62.8 hours to earn less than the federal minimum wage of $7.25 per hour ($455/ $7.25 = 62.8).180 The applicable minimum wage is the higher of the federal minimum wage and the state minimum wage as of July 1, 2018. Most affected EAP workers already receive at least the minimum wage; only an estimated 1.8 percent of them (22,200 in total) earn an implicit hourly rate of pay less than the minimum wage. The Department estimated transfers due to payment of the minimum wage by calculating the change in earnings if wages rose to the minimum wage for workers who become nonexempt.181 In response to an increase in the regular rate of pay to the minimum wage, employers may reduce the workers’ hours. Since the quantity of labor hours demanded is inversely related to wages, a higher mandated wage will result in fewer hours of labor demanded. For the first year, the Department estimated the potential disemployment effects (i.e., the estimated reduction in hours) of the transfer attributed to the minimum wage by multiplying the percent change in the regular rate of pay by a labor demand elasticity of ¥0.2 (years 2–10 use a long run elasticity of ¥0.4) 182 183 At the new standard salary level, the Department estimated that 22,200 affected EAP workers will, on average, see an hourly wage increase of $1.39, work 2.4 fewer hours per week, and receive an increase in weekly earnings of $65.29 as a result of coverage by the minimum wage provisions (Table 12). The total change in weekly earnings due to the payment of the minimum wage was estimated to be $1.4 million per week ($65.29 × 22,200) or $75.4 million in Year 1. TABLE 12—MINIMUM WAGE ONLY: MEAN HOURLY WAGES, USUAL OVERTIME HOURS, AND WEEKLY EARNINGS FOR AFFECTED EAP WORKERS, YEAR 1 Hourly wage a Before Final Rule ............................................................................................. After Final Rule ................................................................................................ Change ............................................................................................................ Usual weekly hours $8.75 10.14 1.39 61.4 59.0 ¥2.4 Usual weekly earnings $524.37 589.66 65.29 Total weekly transfer (1,000s) ........................ ........................ 1,450 jbell on DSK3GLQ082PROD with RULES2 Note: Pooled data for 7/2016–6/2018 adjusted to reflect 2018/2019. a The applicable minimum wage is the higher of the federal minimum wage and the state minimum wage. 180 Workers in states with minimum wages higher than the federal minimum wage could earn less than the state minimum wage working fewer hours. 181 Because these workers’ hourly wages will be set at the minimum wage after this final rule, their employers will not be able to adjust their wages downward to offset part of the cost of paying the overtime pay premium (which will be discussed in the following section). Therefore, these workers will VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 generally receive larger transfers attributed to the overtime pay provision than other workers. 182 Labor demand elasticity is the percentage change in labor hours demanded in response to a one percent change in wages. 183 This elasticity estimate represents a short run demand elasticity for general labor, and is based on the Department’s analysis of Lichter, A., Peichl, A. & Siegloch, A. (2014). The Own-Wage Elasticity of PO 00000 Frm 00042 Fmt 4701 Sfmt 4700 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. E:\FR\FM\27SER2.SGM 27SER2 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations 3. Transfers Due to the Overtime Pay Provision jbell on DSK3GLQ082PROD with RULES2 Introduction The final rule will transfer income to affected workers who work in excess of 40 hours per week. Requiring an overtime premium increases the marginal cost of labor, which employers will likely try to offset by adjusting wages and/or hours of affected workers. The size of the transfer will depend largely on how employers respond to the updated salary levels. Employers may respond by: (1) Paying overtime premiums to affected workers; (2) reducing overtime hours of affected workers and potentially transferring some of these hours to other workers; (3) reducing the regular rate of pay for affected workers working overtime (provided that the reduced rates still exceed the minimum wage); (4) increasing affected workers’ salaries to the updated salary or compensation level to preserve their exempt status; or (5) using some combination of these responses. How employers will respond depends on many factors, including the relative costs of each of these alternatives; in turn, the relative costs of each of these alternatives are a function of workers’ earnings and hours worked. Literature on Employer Adjustments Two conceptual models are useful for thinking about how employers may respond to reclassifying certain employees as overtime-eligible: (1) The ‘‘fixed-wage’’ or ‘‘labor demand’’ model, and (2) the ‘‘fixed-job’’ or ‘‘employment contract’’ model.184 These models make different assumptions about the demand for overtime hours and the structure of the employment agreement, which result in different implications for predicting employer responses. The fixed-wage model assumes that the standard hourly wage is independent of the statutory overtime premium. Under the fixed-wage model, a reclassification of workers from overtime exempt to overtime nonexempt would cause a reduction in overtime hours for affected workers, an increase in the prevalence of a 40-hour workweek among affected workers, and an increase in the earnings of affected workers who continue to work overtime. In contrast, the fixed-job model assumes that the standard hourly wage is affected by the statutory overtime premium. Thus, employers can 184 See Trejo, S.J. (1991). The Effects of Overtime Pay Regulation on Worker Compensation. American Economic Review, 81(4), 719–740, and Barkume, A. (2010). The Structure of Labor Costs with Overtime Work in U.S. Jobs. Industrial and Labor Relations Review, 64(1), 128–142. VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 neutralize any reclassification of workers from overtime exempt to overtime nonexempt by reducing the standard hourly wage of affected workers so that their weekly earnings and hours worked are unchanged, except when minimum wage laws prevent employers from lowering the standard hourly wage below the minimum wage. Under the fixed-job model, a reclassification of workers from overtime exempt to overtime nonexempt would have different effects on minimum-wage workers and 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 who continue to work overtime for a given employer. Unlike the fixed-wage model, however, above-minimum-wage workers would experience no change. The Department conducted a literature review to evaluate studies of how labor markets adjust to a change in the requirement to pay overtime. In general, these studies are supportive of the fixed-job model of labor market adjustment, in that wages adjust to offset the requirement to pay an overtime premium as predicted by the fixed-job model, but do not adjust enough to completely offset the overtime premium as predicted by the model. The Department believes the two most important papers in this literature are the studies by Trejo (1991) and Barkume (2010). Analyzing the economic effects of the overtime pay provisions of the FLSA, Trejo (1991) found ‘‘the data analyzed here suggest the wage adjustments occur to mitigate the purely demand-driven effects predicted by the fixed-wage model, but these adjustments are not large enough to neutralize the overtime pay regulations completely.’’ Trejo noted, ‘‘In accordance with the fixed job model, the overtime law appears to have a greater impact on minimum-wage workers.’’ He also stated, ‘‘[T]he finding that overtime pay coverage status systematically influences the hours-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 PO 00000 Frm 00043 Fmt 4701 Sfmt 4700 51271 supportive of the fixed-wage model whose adjustment is incomplete largely due to the minimum-wage requirement.185 A second paper by Trejo (2003) took a different approach to testing the consistency of the fixed-wage adjustment models with overtime coverage and data on hours worked. In this paper, he examined time-series data on employee hours by industry. After controlling for underlying trends in hours worked over 20 years, he found changes in overtime coverage had no impact on the prevalence of overtime hours worked. This result supports the fixed-job model. Unlike the 1991 paper, however, he did not examine impacts of overtime coverage on employees’ weekly or hourly earnings, so this finding in support of the fixed-job model only analyzes one implication of the model.186 Barkume (2010) built on the analytic method used in Trejo (1991).187 However, Barkume observed that Trejo did not account for ‘‘quasi-fixed’’ employment costs (e.g., benefits) that do not vary with hours worked, and therefore affect employers’ decisions on overtime hours worked. After incorporating these quasi-fixed costs in the model, Barkume found results consistent with those of Trejo (1991): ‘‘though wage rates in otherwise similar jobs declined with greater overtime hours, they were not enough to prevent the FLSA overtime provisions from increasing labor costs.’’ Barkume also determined that the 1991 model did not account for evidence that in the absence of regulation some employers may voluntarily pay workers some overtime premium to entice them to work longer hours, to compensate workers for unexpected changes in their schedules, or as a result of collective bargaining.188 Barkume found that how much wages and hours worked adjusted in response to the overtime pay requirement 185 Trejo, S. J. (1991). The Effects of Overtime Pay Regulation on Worker Compensation. American Economic Review, 81(4), 719–740. 186 Trejo, S. J. (2003). Does the Statutory Overtime Premium Discourage Long Workweeks? Industrial and Labor Relations Review, 56(3), 375–392. 187 Barkume, A. (2010). The Structure of Labor Costs with Overtime Work in U.S. Jobs. Industrial and Labor Relations Review, 64(1), 128–142. 188 Barzel, Y. (1973). The Determination of Daily Hours and Wages. The Quarterly Journal of Economics, 87(2), 220–238, demonstrated that modest fluctuations in labor demand could justify substantial overtime premiums in the employment contract model. Hart, R. A. and Yue, M. (2000). Why Do Firms Pay an Overtime Premium? IZA Discussion Paper No. 163, showed that establishing an overtime premium in an employment contract can reduce inefficiencies. E:\FR\FM\27SER2.SGM 27SER2 51272 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 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 Britain. Unlike the United States, Britain does not have national labor laws regulating overtime compensation. Bell and Hart found that after accounting for overtime, average hourly earnings are generally uniform in a given industry because firms paying below-market level straight-time wages tend to pay abovemarket 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, marketdetermined, hourly wage rate.189 Their research is also consistent with studies showing that employers may pay overtime premiums either in the absence of a regulatory mandate (e.g., Britain), or when the mandate exists but the requirements are not met (e.g., United States).190 Finally, Kuroda and Yamamoto (2009) examined ‘‘name only managers’’ in Japanese labor markets and found essentially 100 percent adjustment of implicit hourly wages to offset the overtime pay requirement.191 192 This study suggests that these affected workers are all employed under the pure fixed-job model, so the implicit wage adjusted so that workers received no additional pay, and had essentially no change to hours worked. If applied to this rulemaking, transfers from employers to employees would occur only in cases in which the implicit hourly rate is less than the minimum wage. The Department estimates transfers would be about $193.4 million in Year 1 with 100 percent adjustment to the fixed-job model (compared with the Department’s estimate of $396.4 million using the substantial, but 189 Bell, D. N. F. and Hart, R. A. (2003). Wages, Hours, and Overtime Premia: Evidence from the British Labor Market, Industrial and Labor Relations Review, 56(3), 470–480. 190 Hart, R. A. and Yue, M. (2000). Why Do Firms Pay an Overtime Premium? IZA Discussion Paper No. 163. 191 Kuroda, S. and Yamamoto, I. (2009). How Are Hours Worked and Wages Affected by Labor Regulations?: The White-Collar Exemption and ‘Name-Only Managers’ in Japan. University of Tokyo Institute of Social Science. Discussion Paper Series No. F–147. 192 The implicit hourly wage is calculated by dividing reported weekly earnings by reported hours worked. VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 incomplete fixed-job model, described in further detail below). However, there are some challenges in generalizing Kuroda and Yamamoto’s results to U.S. labor markets. First, ‘‘name-only-managers would not be exempt in the U.S. because they do not meet the duties test for exemption. ‘‘Name-only-managers’’ are essentially identical to their peers, have no managerial responsibilities, and are distinguished only by their job title. This is not directly analogous to the case of EAP exempt employees, who do have managerial responsibilities, and must pass the duties test while other similar (but nonexempt) employees do not. Second, Kuroda also found that the pure fixed-job model results may not hold under all conditions. For example, in a following paper he found that during a recession, the labor market for ‘‘name-only-managers’’ behaved more like the fixed-wage model than the fixed-job model.193 Third, some commenters on the NPRM provided survey results supporting that, among other responses, employers planned to respond to this rule (or responded or planned to respond to the 2016 final rule) by increasing salaries of some exempt employees to maintain their exempt status (see section VI.D.iv.5). This is inconsistent with Kuroda and Yamamoto’s findings. 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 nonexempt and the fixed-wage model as the best approximation of the likely effects of a reclassification of minimum-wage workers from overtime exempt to overtime nonexempt. In addition, the studies suggest that although observed wage adjustment patterns are consistent with the fixed-job model, this evidence also suggests that the actual wage adjustment might, especially in the short run, be less than 100 percent as predicted by the fixed-job model. Thus, the hybrid model used in this analysis may be described as a substantial, but incomplete fixed-job model. To determine the magnitude of the adjustment, the Department accounted for the following findings. Earlier research had demonstrated that in the absence of regulation some employers may voluntarily pay workers some overtime premium to entice them to work longer hours, to compensate 193 Kuroda, S. and Yamamoto, I. (2012). Impact of Overtime Regulations on Wages and Work Hours, Journal of the Japanese and International Economies, 26(2), 249–262. PO 00000 Frm 00044 Fmt 4701 Sfmt 4700 workers for unexpected changes in their schedules, or as a result of collective bargaining.194 Barkume (2010) found that the measured adjustment of wages and hours to overtime premium requirements depended on what overtime premium might be paid in absence of any requirement to do so. Thus, when Barkume assumed that workers would receive an average voluntary overtime pay premium of 28 percent in the absence of an overtime pay regulation, which is the average overtime premium that Bell and Hart (2003) found British employers paid in the absence of any overtime regulations, the straight-time hourly wage adjusted downward by 80 percent of the amount that would occur with the fixed-job model.195 When Barkume assumed workers would receive no voluntary overtime pay premium in the absence of an overtime pay regulation, the results were more consistent with Trejo’s (1991) findings that the adjustment was a smaller percentage. The Department modeled an adjustment process between these two findings. Although it seemed reasonable that some premium was paid for overtime in the absence of regulation, Barkume’s assumption of a 28 percent initial overtime premium is likely too high for the salaried workers potentially affected by a change in the salary and compensation level requirements for the EAP exemptions because this assumption is based on a study of workers in Britain. British workers were likely paid a larger voluntary overtime premium than American workers because Britain did not have a required overtime pay regulation and so collective bargaining played a larger role in implementing overtime pay.196 If the Department were to use only Barkume’s assumptions and results to model employer adjustment to the overtime wage premium requirement for affected workers, estimated Year 1 transfers would total $247.9 million; further estimates derived from Barkume’s findings will be presented later in the analysis. However, in the sections that 194 Barzel, Y. (1973). The Determination of Daily Hours and Wages. The Quarterly Journal of Economics, 87(2), 220–238, demonstrated that modest fluctuations in labor demand could justify substantial overtime premiums in the employment contract model. Hart, R. A. and Yue, M. (2000). Why Do Firms Pay an Overtime Premium? IZA Discussion Paper No. 163, showed that establishing an overtime premium in an employment contract can reduce inefficiencies. 195 Barkume, A. (2010). The Structure of Labor Costs with Overtime Work in U.S. Jobs. Industrial and Labor Relations Review, 64(1), 128–142. 196 Bell, D. N. F. and Hart, R. A. (2003). Wages, Hours, and Overtime Premia: Evidence from the British Labor Market, Industrial and Labor Relations Review, 56(3), 470–480. E:\FR\FM\27SER2.SGM 27SER2 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations immediately follow, the Department uses both papers to model transfers. jbell on DSK3GLQ082PROD with RULES2 Identifying Types of Affected Workers The Department identified four types of workers whose work characteristics affect how it modeled employers’ responses to the changes in both the standard and HCE salary levels: • Type 1: Workers who do not work overtime. • Type 2: Workers who do not regularly work overtime but occasionally work overtime. • Type 3: Workers who regularly work overtime and become overtime eligible (nonexempt). • Type 4: Workers who regularly work overtime and remain exempt, because it is less expensive for the employer to pay the updated salary level than to pay overtime and incur additional managerial costs. The Department began by identifying the number of workers in each type. After modeling employer adjustments, it estimated transfer payments. Type 3 and 4 workers were identified as those who regularly work overtime (CPS variable PEHRUSL1 greater than 40). Distinguishing Type 3 workers from Type 4 workers involved a four-step process. First, the Department identified all workers who regularly work overtime. Then the Department estimated each worker’s weekly earnings if they became nonexempt, to which it added weekly managerial costs for each affected worker of $8.49 ($50.92 per hour × (10 minutes/60 minutes)).197 Last, the Department identified as Type 4 those workers whose expected nonexempt earnings plus weekly managerial costs exceeds the updated standard salary level, and, conversely, as Type 3 those whose expected nonexempt earnings plus weekly managerial costs are less than the new standard salary.198 The Department assumed that firms will include incremental managerial costs in their determination of whether to treat an affected employee as a Type 3 or Type 4 worker because those costs are only incurred if the employee is a Type 3 worker. 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 197 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 130. 198 When VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 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 incomplete fixed-job model) predicts that employers will adjust wages of regular overtime workers but not to the full extent indicated by fixed-job model, and thus some employees may receive a small increase in weekly earnings due to overtime pay coverage. When modeling employer responses with respect to the adjustment to the regular rate of pay, the Department used the incomplete fixed-job model. In this portion of the analysis, the Department presents an estimate of the effect on the implicit hourly rate of pay for regular overtime workers should be determined using the average of two estimates of the incomplete fixed-job model adjustments: Trejo’s (1991) estimate that the overtime-induced wage change is 40 percent of the adjustment toward the amount predicted by the fixed-job model, assuming an initial zero overtime pay premium, and Barkume’s (2010) estimate that the wage change is 80 percent of the predicted adjustment assuming an initial 28 percent overtime pay premium.199 This is approximately equivalent to assuming that salaried overtime workers implicitly receive the equivalent of a 14 percent overtime premium in the absence of regulation (the midpoint between 0 and 28 percent). 199 Both studies considered a population that included hourly workers. Evidence is not available on how the adjustment towards the employment contract model differs between salaried and hourly workers. The employment contract model may be more likely to hold for salaried workers than for hourly workers since salaried workers directly observe their weekly total earnings, not their implicit equivalent hourly wage. Thus, applying the partial adjustment to the employment contract model as estimated by these studies may overestimate the transfers from employers to salaried workers. We do not attempt to quantify the magnitude of this potential overestimate. PO 00000 Frm 00045 Fmt 4701 Sfmt 4700 51273 Modeling changes in wages, hours, and earnings for Type 1 and Type 4 workers was relatively straightforward. Type 1 affected EAP workers will become overtime-eligible, but because they do not work overtime, they will see no change in their weekly earnings. Type 4 workers will remain exempt because their earnings will be raised to at least the updated EAP level (either the standard salary level or HCE compensation level). These workers’ earnings will increase by the difference between their current earnings and the amount necessary to satisfy the new salary or compensation level. It is possible employers will increase these workers’ hours in response to paying them a higher salary, but the Department did not have enough information to model this potential change.200 Modeling changes in wages, hours, and earnings for Type 2 and Type 3 workers was more complex. The Department distinguished those who regularly work overtime (Type 3 workers) from those who occasionally work overtime (Type 2 workers) because employer adjustment to the final rule may differ accordingly. Employers are more likely to adjust hours worked and wages for regular overtime workers because their hours are predictable. However, in response to a transient, perhaps unpredicted, shift in market demand for the good or service such employers provide, employers are more likely to pay for occasional overtime rather than adjust hours worked and pay. The Department treated Type 2 affected workers in two ways due to the uncertainty of the nature of these occasional overtime hours. The Department assumed that 50 percent of these occasional overtime workers worked expected overtime hours and the other 50 percent worked unexpected overtime. Workers were randomly assigned to these two groups. Workers with expected occasional overtime hours were treated like Type 3 affected workers (incomplete fixed-job model adjustments). Workers with unexpected occasional overtime hours were assumed to receive a 50 percent pay premium for the overtime hours worked and receive no change in base wage or hours (full overtime premium 200 Cherry, Monica, ‘‘Are Salaried Workers Compensated for Overtime Hours?’’ Journal of Labor Research 25(3): 485–494, September 2004, found that exempt full-time salaried employees earn more when they work more hours, but her results do not lend themselves to the quantification of the effect on hours of an increase in earnings. E:\FR\FM\27SER2.SGM 27SER2 51274 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations model).201 When modeling Type 2 workers’ hour and wage adjustments, the Department treated those identified as Type 2 using the CPS data as representative of all Type 2 workers. The Department estimated employer adjustments and transfers assuming that the patterns observed in the CPS reference week are representative of an average week in the year. Thus, the Department assumes total transfers for the year are equal to 52 times the transfers estimated for the single representative week for which the Department has CPS data. However, these transfers are spread over a larger group including those who occasionally work overtime but did not do so in the CPS reference week.202 use the term ‘‘full overtime premium’’ to describe the adjustment process as modeled. The full overtime premium model is a special case of the general fixed-wage model in that the Department assumes the demand for labor under these circumstances is completely inelastic. That is, employers make no changes to employees’ hours in response to these temporary, unanticipated changes in demand. 202 If a different week was chosen as the survey week, then likely some of these workers would not have worked overtime. However, because the data jbell on DSK3GLQ082PROD with RULES2 201 We VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 Since employers must now pay more for the same number of labor hours, for Type 2 and Type 3 EAP workers, the quantity of labor hours demanded by employers will decrease. It is the net effect of these two changes that will determine the final weekly earnings for affected EAP workers. The reduction in hours is calculated using the elasticity of labor demand with respect to wages. The Department used a short-term demand elasticity of -0.20 to estimate the percentage decrease in hours worked in Year 1 and a long-term elasticity of -0.4 to estimate the percentage decrease in hours worked in Years 2–10.203 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.204 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. 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. 203 This elasticity estimate is based on the Department’s analysis of Lichter, A., Peichl, A. & Siegloch, A. (2014). The Own-Wage Elasticity of Labor Demand: A Meta-Regression Analysis. IZA DP No. 7958. Some researchers have estimated larger impacts on the number of overtime hours worked (Hamermesh, D. and S. Trejo. (2000)). The Demand for Hours of Labor: Direct Evidence from California. The Review of Economics and Statistics, 82(1), 38–47 concludes the price elasticity of demand for overtime hours is at least -0.5. The Department decided to use a general measure of elasticity applied to the average change in wages since the increase in the overtime wage is somewhat offset by a decrease in the non-overtime wage as indicated in the fixed-job model. 204 In this equation, the only unknown is adjusted total hours worked. Since adjusted total hours worked is in the denominator of the left side of the equation and is also in the numerator of the right side of the equation, solving for adjusted total hours worked requires solving a quadratic equation. PO 00000 Frm 00046 Fmt 4701 Sfmt 4700 E:\FR\FM\27SER2.SGM 27SER2 51275 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations Figure 3: Flow Chart of Final Rule's Effect on Earnings and Hours Worked ~ .............................................................. Affected workers [a] , I I I I I I I l No change in weekly earnings - Gain MW/OT protection I Decreased weekly earnings [f] I I Weekly earnings increase on average [e] Weekly earnings increase on average I I Hours decrease on average Hours decrease Type2 I Remain exempt I Weekly earnings increase on average [e] Type 1 J Weekly earnings increase to new salary level [d] I Gain MW/OT protection I No change in hours Hourly wages adjust downward to offset some OT compensation [c] I I ___ /~ Work occasional OT[b] Gain MW/OT protection .... I I Regularly work OT ~ I ______ .:,. ______ , Hourly wages increase to MW ........................................• Do not usually work OT Do not work occasional OT I I I I I "'-w---r ______ ; , / ... Regular hourly wages< MW I Regular hourly wages<': MW ______ :,. ______ Hours decrease on average No change in hours [g] Type 3 Type4 VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 PO 00000 Frm 00047 Fmt 4701 Sfmt 4725 E:\FR\FM\27SER2.SGM 27SER2 ER27SE19.002</GPH> jbell on DSK3GLQ082PROD with RULES2 [a] Affected EAP workers are those who are exempt under the current EAP exemptions and will gain minimum wage and overtime protection or receive a raise to the increased salary or compensation level. [b] There are two methods the Department uses to identify occasional overtime workers. The first includes workers who report they usually work 40 hours or less per week (identified with variable PEHRUSLl in CPS MORG) but in the reference week worked more than 40 hours (variable PEHRACTl in CPS MORG). The second includes reclassifying some additional workers who usually work 40 hours or less per week, and in the reference week worked 40 hours 51276 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations Estimated Number of and Effects on Affected EAP Workers The Department estimated the final rule will affect 1.3 million workers (Table 13), of which 762,200 were Type 1 workers (60.6 percent of all affected EAP workers), 300,900 were estimated to be Type 2 workers (23.9 percent of all affected EAP workers), 154,000 were Type 3 workers (12.3 percent of all affected EAP workers), and 40,100 were estimated to be Type 4 workers (3.2 percent of all affected workers). All Type 3 workers and half of Type 2 employees (304,500) are assumed to work predictable overtime. TABLE 13—AFFECTED EAP WORKERS BY TYPE (1,000S), YEAR 1 Regular overtime No overtime (T1) Total Occasional overtime (T2) Newly nonexempt (T3) Remain exempt (T4) Standard salary level ........................................................... HCE compensation level ..................................................... 1,155.6 101.8 700.3 62.0 296.8 4.1 126.8 27.2 31.7 8.5 Total .............................................................................. 1,257.3 762.2 300.9 154.0 40.1 The final rule will affect some affected workers’ hourly wages, hours, and weekly earnings. Predicted changes in implicit wage rates are outlined in Table 14, changes in hours in Table 15, and changes in weekly earnings in Table 16. How these will change depends on the type of worker, but on average the Department projects that weekly earnings will be unchanged or increase while hours worked will be unchanged or decrease. Type 1 workers will have no change in wages, hours, or earnings.205 Employers were assumed to be unable to adjust the hours or regular rate of pay for the occasional overtime workers whose overtime is irregularly scheduled and unpredictable. The Department used the incomplete fixed-job model to estimate changes in the regular rate of pay for Type 3 workers and the 50 percent of Type 2 workers who regularly work occasional overtime. As a group, Type 2 workers will see a decrease in their average regular hourly wage; however, because these workers will now receive a 50 percent premium on their regular hourly wage for each hour worked in excess of 40 hours per week, average weekly earnings for Type 2 workers will increase.206 Similarly, Type 3 workers will also receive decreases in their regular hourly wage as predicted by the incomplete fixed-job model but an increase in weekly earnings because these workers will now be eligible for the overtime premium. Type 4 workers’ implicit hourly rates of pay will increase to meet the updated standard salary level or HCE annual compensation level. 205 It is possible that these workers may experience an increase in hours and weekly earnings because of transfers of hours from other newly nonexempt workers who do usually work overtime. Due to the high level of uncertainty in employers’ responses regarding the transfer of hours, the Department did not have credible evidence to support an estimation of the number of hours transferred to other workers. 206 Type 2 workers do not see increases in regular earnings to the new salary level (as Type 4 workers do) even if their new earnings in this week exceed that new level. This is because the estimated new earnings only reflect their earnings in that week when overtime is worked; their earnings in typical weeks that they do not work overtime do not exceed the salary level. VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 PO 00000 Frm 00048 Fmt 4701 Sfmt 4700 E:\FR\FM\27SER2.SGM 27SER2 ER27SE19.003</GPH> jbell on DSK3GLQ082PROD with RULES2 Note: Pooled CPS data for 7/2016–6/2019 adjusted to reflect 2018/2019. * Type 1: Workers without regular OT and without occasional OT and become overtime eligible. * Type 2: Workers without regular OT but with occasional OT. These workers become overtime eligible. * Type 3: Workers with regular OT who become overtime eligible. * Type 4: Workers with regular OT who remain exempt (i.e., earnings increase to the updated salary level). 51277 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations TABLE 14—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 Final Rule ................................................................. After Final Rule .................................................................... Change ($) ........................................................................... Change (%) .......................................................................... $15.85 $15.81 ¥$0.04 ¥0.3% $16.71 $16.71 $0.00 0.0% $16.15 $16.09 ¥$0.06 ¥0.4% $11.39 $10.97 ¥$0.42 ¥3.7% $11.91 $12.51 $0.60 5.1% $51.63 $51.63 $0.00 0.0% $49.81 $47.53 ¥$2.29 ¥4.6% $38.80 $36.55 ¥$2.26 ¥5.8% $37.46 $38.27 $0.81 2.2% HCE Compensation Level Before Final Rule ................................................................. After Final Rule .................................................................... Change ($) ........................................................................... Change (%) .......................................................................... $46.94 $46.32 ¥$0.63 ¥1.3% Note: Pooled CPS data for 7/2016–6/2019 adjusted to reflect 2018/2019. * Type 1: Workers without regular OT and without occasional OT and become overtime-eligible. * Type 2: Workers without regular OT but with occasional OT. These workers become overtime eligible. * Type 3: Workers with regular OT who become overtime eligible. * Type 4: Workers with regular OT who remain exempt (i.e., earnings increase to the updated salary level). Hours for Type 1 workers will not change. Similarly, hours will not change for the half of Type 2 workers who work irregular overtime. Half of Type 2 and all Type 3 workers will see a small decrease in their hours of overtime worked. This reduction in hours is relatively small and is due to the effect on labor demand from the increase in the average hourly wage as predicted by the incomplete fixed-job model (Table 15). Type 4 workers’ hours may increase, but due to lack of data, the Department assumed hours would not change. TABLE 15—AVERAGE WEEKLY HOURS FOR AFFECTED EAP WORKERS BY TYPE, YEAR 1 No overtime worked (T1) Total Regular OT Occasional OT (T2) Newly nonexempt (T3) Remain exempt (T4) Standard Salary Level a Before Final Rule ................................................................. After Final Rule .................................................................... Change (hours) .................................................................... Change (%) .......................................................................... 39.9 39.8 ¥0.1 ¥0.2% HCE Compensation Level Before Final Rule ................................................................. After Final Rule .................................................................... Change (hours) .................................................................... Change (%) .......................................................................... 37.5 37.5 0.0 0.0% 39.2 39.1 0.0 ¥0.1% 50.4 49.8 ¥0.6 ¥1.2% 56.6 56.6 0.0 0.0% 39.4 39.4 0.0 0.0% 48.4 48.2 ¥0.3 ¥0.5% 51.0 50.7 ¥0.3 ¥0.7% 54.9 54.9 0.0 0.0% a 44.2 44.1 ¥0.1 ¥0.2% jbell on DSK3GLQ082PROD with RULES2 Note: Pooled CPS data for 7/2016–6/2019 adjusted to reflect 2018/2019. a Usual hours for Types 1, 3, and 4 but actual hours for Type 2 workers identified in the CPS MORG. * Type 1: Workers without regular OT and without occasional OT and become overtime eligible. * Type 2: Workers without regular OT but with occasional OT. These workers become overtime eligible. * Type 3: Workers with regular OT who become overtime eligible. * Type 4: Workers with regular OT who remain exempt (i.e., earnings increase to the updated salary level). Because most Type 1 workers will not experience a change in their regular rate of pay or hours, they will have no change in earnings due to the final rule (Table 16).207 Although Type 2 and Type 3 workers will, on average, experience a decrease in both their regular rate of pay and hours worked, their weekly earnings will increase as a result of the overtime premium. Weekly earnings after the standard salary level increased were estimated using the new 207 The small increase in average weekly earnings for Type 1 workers is due to increasing the weekly earnings in the District of Columbia to the minimum wage ($13.25 per hour). VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 PO 00000 Frm 00049 Fmt 4701 Sfmt 4700 wage (i.e., the incomplete fixed-job model wage) and the reduced number of overtime hours worked. Type 4 workers’ salaries will increase to the new standard salary level or the HCE compensation level. E:\FR\FM\27SER2.SGM 27SER2 51278 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations TABLE 16—AVERAGE WEEKLY EARNINGS FOR AFFECTED EAP WORKERS BY TYPE, YEAR 1 Regular overtime No overtime (T1) Total Occasional overtime (T2) Newly nonexempt (T3) Remain exempt (T4) Standard Salary Level a Before Final Rule ................................................................. After Final Rule .................................................................... Change ($) ........................................................................... Change (%) .......................................................................... $581.42 $586.34 $4.93 0.8% $575.71 $575.72 $0.01 0.0% $594.52 $599.48 $4.96 0.8% $566.67 $589.91 $23.24 4.1% $643.94 $684.00 $40.06 6.2% $2,415.63 $2,467.78 $52.15 2.2% $1,950.93 $2,000.16 $49.24 2.5% $2,021.82 $2,066.00 $44.18 2.2% HCE Compensation Level a Before Final Rule ................................................................. After Final Rule .................................................................... Change ($) ........................................................................... Change (%) .......................................................................... $1,989.41 $2,008.37 $18.96 1.0% $1,973.57 $1,973.57 $0.00 0.0% Note: Pooled CPS data for 7/2016–6/2019 adjusted to reflect 2018/2019. a The mean of the hourly wage multiplied by the mean of the hours does not necessarily equal the mean of the weekly earnings because the product of two averages is not necessarily equal to the average of the product. * Type 1: Workers without regular OT and without occasional OT and become overtime eligible. * Type 2: Workers without regular OT but with occasional OT. These workers become overtime eligible. * Type 3: Workers with regular OT who become overtime eligible. * Type 4: Workers with regular OT who remain exempt (i.e., earnings increase to the updated salary level). standard salary level.208 They compared hourly and salaried workers in the CPS using quantile treatment effects. This methodology estimates the effect of a worker becoming nonexempt by comparing similar workers who are hourly and salaried. They found no statistically significant change in hours or wages on average. However, their point estimates, averaged across all affected workers, show small increases in earnings and decreases in hours, similar to our analysis. For example, using a salary level of $750, they estimated weekly earnings may increase between $2 and $22 and weekly hours may decrease by approximately 0.4 hours. The Department estimated weekly earnings for workers affected by TABLE 17—TOTAL CHANGE IN WEEKLY the standard salary level will increase AND ANNUAL EARNINGS FOR AF- by $4.93 and hours will decrease by 0.1 FECTED EAP WORKERS BY PROVI- hours. At the new standard salary level, the average weekly earnings of affected workers will increase $4.93 (0.8 percent), from $581.42 to $586.34. Multiplying the average change of $4.93 by the 1.2 million EAP workers affected by the change in the standard salary level and 52 weeks equals an increase in earnings of $296.1 million in the first year (Table 17). For workers affected by the change in the HCE compensation level, average weekly earnings will increase by $18.96. When multiplied by 101,800 affected workers and 52 weeks, the national increase will be $100.3 million in the first year. Thus, total Year 1 transfer payments attributable to this final rule will total $396.4 million. SION, YEAR 1 jbell on DSK3GLQ082PROD with RULES2 Provision Total ...................................... Standard salary level: Total ............................... Minimum wage only ...... Overtime pay only a ...... HCE compensation level: Total ............................... Minimum wage only ...... Overtime pay only a ...... Annual change in earnings (1,000s) $396,424 4. Potential Transfers Not Quantified There may be additional transfers attributable to this final rule; however, the magnitude of these other transfers could not be quantified and therefore are discussed only qualitatively. Reduced Earnings for Some Workers Holding regular rate of pay and work hours constant, payment of an overtime premium will increase weekly earnings 100,345 for workers who work overtime. ........................ However, as discussed previously, 100,345 employers may try to mitigate cost increases by reducing the number of a Estimated by subtracting the minimum overtime hours worked, either by wage transfer from the total transfer. transferring these hours to other workers Rohwedder and Wenger (2015) analyzed the effects of increasing the 208 Rohwedder and Wenger, supra note 130. VerDate Sep<11>2014 18:58 Sep 26, 2019 296,078 75,376 220,702 Jkt 247001 PO 00000 Frm 00050 Fmt 4701 Sfmt 4700 or monitoring hours more closely. Depending on how hours are adjusted, a specific worker may earn less pay after this final rule. Additional Work for Some Workers Affected workers who remain exempt will see an increase in pay but may also see an increase in workload. The Department estimated the net changes in hours, but due to the data limitations as noted in section VI.D.iv.3, did not estimate changes in hours for affected workers whose salary is increased to the new threshold so they remain overtime exempt. Reduction in Bonuses and Benefits for Some Workers Employers may offset increased labor costs by reducing bonuses or benefits instead of reducing base wages or hours worked. Due to data limitations, the Department has not modeled this effect separately. The Department observes that any reductions in bonuses or benefits would be likely accompanied by smaller reductions in base wages or hours worked. Several commenters stated that in order to pay for the higher payroll costs, they would decrease employee benefits. These comments were mostly general statements, often included in a list of changes the employer intends to make in response to the increased salary threshold. Others stated that employees would lose benefits due to being reclassified as hourly workers. However, as the Department previously noted, this regulation does not require that workers who become nonexempt must be E:\FR\FM\27SER2.SGM 27SER2 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 reclassified as hourly nor does it require that hourly workers receive fewer benefits than salaried workers. Additionally, some commenters stated that these employees would have reductions in their ability to earn commissions, bonuses, or other types of incentive payments, but these commenters generally did not discuss the net impact on these employees’ earnings. These comments did not provide information that would allow the Department to estimate the purported impact of the final rule on employee benefits. 5. NPRM Comments on Transfer Calculations In response to the NPRM, the Department’s RFI, and at listening sessions, some commenters provided information concerning their proposed wage and hour adjustments in anticipation of an increase to the standard salary level and HCE total compensation level. In comments on the NPRM, Capital Associated Industries submitted the results from a survey of their members, which conveyed that employers plan to respond in different ways such as increasing salaries of exempt employees so that they remain exempt, or decreasing the hours or hourly rates of newly nonexempt employees. A survey of members of the International Public Management Association for Human Resources found ‘‘an almost even split between those who would increase salaries of exempt employees to the new threshold and those who would shift currently exempt employees to nonexempt status’’ in response to the proposed standard salary level. In responses to the Department’s RFI, commenters representing employer interests indicated that employers would respond to a new salary level by making a variety of adjustments to wages, hours worked, or both. Some commenters’ feedback supports adoption of an incomplete fixed-job model. For example, Littler Mendelson and the U.S. Chamber of Commerce reported that, among surveyed employers with exempt employees who would become nonexempt under the 2016 final rule, 28.7 percent reported that they planned to ‘‘allow [newly nonexempt employees] to work the same number of hours and earn overtime compensation without restriction,’’ compared to just 18.6 percent who planned to reduce effective hourly rates ‘‘so that their total pay remained the same.’’ The Chamber’s survey did not ask whether employers planned to adopt a combination of those two responses (i.e., paying overtime VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 premiums while partially reducing effective hourly rates). In this final rule, the Department estimated that some workers will see their earnings increase to the new earnings levels and remain exempt. There is some evidence that employers will respond in this manner. For example, in response to the RFI, the Chamber reported that, of surveyed employers who had implemented or made plans to implement changes to comply with the 2016 final rule, 76.4 percent reported that they had increased or planned to increase the salaries of some exempt employees to retain their exempt status. Similarly, the American Hotel and Lodging Association reported that 43 percent of their members raised the salaries of at least one worker to a figure above the 2016 final rule’s salary threshold. It is possible that employers will increase the salaries paid to some ‘‘occasional’’ overtime workers to maintain the exemption for those workers, but the Department has no way of identifying these workers. Regarding the proposed transfer calculations, SBA Advocacy took issue with the Department’s estimates that affected small business establishments would have, on average, $422 to $3,187 in additional payroll costs in the first year of the proposed rule. Rather, SBA Advocacy stated that ‘‘[s]mall businesses have told Advocacy that their [additional] payroll costs will be in the thousands of dollars.’’ This comment, however, does not explain what methodological approach the Department should use to estimate transfers; what error(s), if any, the Department’s method contains; or how much, if at all, the Department’s approach underestimated such transfers. Therefore, the Department has not made any changes to the methodology in response to this comment. The National Association of Manufacturers (NAM), in its comment opposing the proposed rule’s HCE total annual compensation threshold of $147,414, stated that such a threshold would impact many manufacturers who currently employ numerous exempt HCE employees. It contended that ‘‘[i]n the representative case of one large manufacturer, approximately 1,200 individuals—nearly 11% of the company’s workforce—are exempt employees earning between $100,000 and $147,414 annually. For this manufacturer, the difference between ‘exempt’ and ‘almost exempt’ is estimated to be between $8 million and $20 million in potential overtime exposure per year.’’ Using the upper end of NAM’s transfer cost range, this equates to $16,667 per affected worker. PO 00000 Frm 00051 Fmt 4701 Sfmt 4700 51279 This single anecdote, however, does not provide a sufficient basis for the Department to change the methodology used to calculate transfers. Moreover, NAM’s concerns are mitigated by the Department’s decision to set the HCE total annual compensation level to $107,432 instead of to $147,414. The Department further notes that its estimates of transfers are informed by its projection that employers will respond to the final rule in a number of ways. If, for example, an employer simply pays each affected employee the overtime premium for each hour worked in excess of 40 hours per week, without making any adjustments to wages, hours or duties, such an approach would maximize transfers from employers to employees. However, as discussed above, the Department believes that employers will respond to the final rule by adjusting wages, hours, and duties to minimize the cost of the rule. The Department’s approach is supported by both the literature the Department reviewed examining employers’ response to overtime premium pay requirements, as well as survey data and anecdotal evidence provided in response to the NPRM and RFI regarding employers’ responses to the 2016 final rule and planned responses to this rulemaking. Accordingly, the actual amount of transfers will fall well short of the transfers that would result if employers simply paid each affected employee overtime premiums without adjusting wages, hours, or duties. v. Benefits and Cost Savings Potential Benefits and Effects Not Discussed Elsewhere The Department has determined that the final rule will provide some benefits; however, these benefits could not be quantified due to data limitations, requiring the Department to discuss such benefits only qualitatively. 1. Reduce Employee Misclassification The revised salary level reduces the likelihood of workers being misclassified as exempt from overtime pay, providing an additional measure of the effectiveness of the salary level as a bright-line test delineating exempt and nonexempt workers. The Department’s analysis of misclassification drew on CPS data and looked at workers who are white collar, salaried, subject to the FLSA and covered by part 541 regulations, earn a weekly salary of at least $455 but less than $684, and fail the duties test. Because only workers who work overtime may receive overtime pay, when determining the share of workers who are misclassified E:\FR\FM\27SER2.SGM 27SER2 51280 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 the sample was limited to those who usually work overtime. Workers were considered misclassified if they did not receive overtime pay.209 The Department estimated that 9.3 percent of workers in this analysis who usually worked overtime did not receive overtime compensation and are therefore misclassified as exempt. Applying this estimate to the sample of white collar salaried workers who fail the duties test and earn at least $455 but less than $684, the Department estimated that there are approximately 206,900 white collar salaried workers who are overtime-eligible but whose employers do not recognize them as such.210 These employees’ entitlement to overtime pay will now be abundantly evident. RAND has conducted a survey to identify the number of workers who may be misclassified as EAP exempt. The survey, a special module to the American Life Panel, asks respondents: (1) Their hours worked, (2) whether they are paid on an hourly or salary basis, (3) their typical earnings, (4) whether they perform certain job responsibilities that are treated as proxies for whether they would justify exempt status, and (5) whether they receive any overtime pay. Using these data, Susann Rohwedder and Jeffrey B. Wenger 211 found that ‘‘11.5 percent of salaried workers were classified as exempt by their employer although they did not meet the criteria for being so.’’ Using RAND’s estimate of the rate of misclassification (11.5 percent), the Department estimated that approximately 255,400 salaried workers earning between $455 and $684 per week who fail the standard duties test are currently misclassified as exempt.212 By raising the salary level the final rule will increase the likelihood that these workers will be correctly classified as nonexempt. 209 Overtime pay status was based on worker responses to the CPS MORG question concerning whether they receive overtime pay, tips, or commissions at their job (‘‘PEERNUOT’’ variable). 210 The Department applies the misclassification estimate derived here to both the group of workers who usually work more than 40 hours and to those who do not. 211 Rohwedder and Wenger, supra note 130. 212 The number of misclassified workers estimated based on the RAND research cannot be directly compared to the Department’s estimates because of differences in data, methodology, and assumptions. Although it is impossible to reconcile the two different approaches without further information, by calculating misclassified workers as a percent of all salaried workers in its sample, RAND uses a larger denominator than the Department. If calculated on a more directly comparable basis, the Department expects the RAND estimate of the misclassification rate would still be higher than the Department’s estimate. VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 2. Reduced Litigation One result of enforcing the 2004 standard salary level for 15 years is that the established ‘‘dividing line’’ between EAP workers who are exempt and not exempt has gradually eroded and no longer holds the same relative position in the distribution of nominal wages and salaries. Therefore, as nominal wages and salaries for workers have increased over time, while the standard salary level has remained constant, more workers earn above the ‘‘dividing line’’ and have moved from nonexempt to potentially exempt. The Department’s enforcement of the 2004 salary levels has burdened employers with performing duties tests to determine overtime exemption status of white collar workers for a larger proportion of workers than in 2004 and has created uncertainty regarding the correct classification of workers as nonexempt or exempt. This may have contributed to an increase in FLSA lawsuits since 2004,213 much of which has involved cases regarding whether workers who satisfy the salary level test also meet the duties test for exemption. Updating the standard salary level should restore the relative position of the standard salary level in the overall distribution of nominal wages and salaries as set forth in the 2004 rule. Increasing the standard salary level from $455 per week to the level set in this final rule of $684 per week will increase the number of white collar workers for whom the standard salary level test is determinative of their nonexempt status, and employers will no longer have to perform a duties analysis for these employees. This final rule’s update to the standard salary level will reduce the burden on employers and may reduce legal challenges and the overall cost of litigation faced by employers in FLSA overtime lawsuits, specifically litigation that turns on whether workers earning above the current salary and earnings thresholds but below the levels set in this final rule pass the duties test. The size of the potential social benefit from fewer legal challenges and the corresponding decline in overall litigation costs is difficult to quantify, but a reduction in litigation costs would benefit employers and workers. To provide a general estimate of the size of the potential benefits from 213 See Lydia DePillis, Why wage and hour litigation is skyrocketing, Washington Post (Nov. 25, 2015), https://www.washingtonpost.com/news/ wonk/wp/2015/11/25/people-are-suing-more-thanever-over-wages-and-hours; Uptick in FLSA Litigation Expected to Continue in 2016, BNA Daily Labor Report (Nov. 25, 2015), https:// bnanews.bna.com/daily-labor-report/uptick-in-flsalitigation-expected-to-continue-in-2016. PO 00000 Frm 00052 Fmt 4701 Sfmt 4700 reducing litigation, the Department used data from the federal courts’ Public Access to Court Electronic Records (PACER) system and the CPS to estimate the number and percentage of FLSA cases that concern EAP exemptions and are likely to be affected by the final rule. For this step of the analysis, to avoid using data that could reflect changed behavior in anticipation of the 2016 final rule, the Department used the data gathered during the 2016 rulemaking. As explained in that rule, to determine the potential number of cases that will likely be affected by the final rule, the Department obtained a list of all FLSA cases closed in 2014 from PACER (8,256 cases).214 From this list, the Department selected a random sample of 500 cases. The Department identified the cases within this sample that were associated with the EAP exemptions. The Department found that 12.0 percent of these FLSA cases (60 of 500) were related to the EAP exemptions. Next, the Department determined what share of these cases could potentially be avoided by an increase in the standard salary and HCE compensation levels. The Department estimated the share of EAP cases that may be avoided due to the final rule by using data on the salaried earnings distribution from the 2018/19 CPS MORG to determine the share of EAP cases in which workers earn at least $455 but less than $684 per week or at least $100,000 but less than $107,432 annually. From CPS, the Department selected white collar, nonhourly workers as the appropriate reference group for defining the earnings distribution rather than exempt workers because if a worker is litigating his or her exempt status, then we do not know if that worker is exempt or not. Based on this analysis, the Department determined that 13.5 percent of white collar nonhourly workers had earnings within these ranges. Applying these findings to the 12 percent of cases associated with the EAP exemption yields an estimated 1.6 percent of FLSA cases, or about 133 cases, that may be avoidable. The assumption underlying this method is that workers who claim they are misclassified as EAP exempt have a similar earnings distribution as all white collar nonhourly workers. After determining the potential number of EAP cases that the final rule may avoid, the Department examined a selection of 56 FLSA cases concluded between 2012 and 2015 that contained litigation cost information to estimate the average costs of litigation to assign 214 See E:\FR\FM\27SER2.SGM 81 FR 32501. 27SER2 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 to the potentially avoided EAP cases.215 To calculate average litigation costs associated with these cases, the Department looked at records of court filings in the Westlaw Case Evaluator tool and on PACER to ascertain how much plaintiffs in these cases were paid for attorney fees, administrative fees, and/or other costs, apart from any monetary damages attributable to the alleged FLSA violations. (The FLSA provides for successful plaintiffs to be awarded reasonable attorney’s fees and costs, so this data is available in some FLSA cases.) After determining the plaintiff’s total litigation costs for each case, the Department then doubled the figures to account for litigation costs that the defendant employers incurred.216 According to this analysis, the average litigation cost for FLSA cases concluded between 2012 and 2015 was $654,182.217 Applying this figure to the approximately 133 EAP cases that could be prevented as a consequence of this rulemaking, the Department estimated that avoided litigation costs resulting from the rule may total approximately $87.0 million per year. The Department believes these totals may underestimate total litigation costs because some FLSA overtime cases are heard in state court and thus were not captured by PACER; some FLSA overtime matters are resolved before litigation or by alternative dispute resolution; and some attorneys representing FLSA overtime plaintiffs may take a contingency fee atop their statutorily awarded fees and costs. The Department did not receive any comments on the methodology it used to estimate potential reduced litigation costs. 215 The 56 cases used for this analysis were retrieved from Westlaw’s Case Evaluator database using a keyword search for case summaries between 2012 and 2015 mentioning the terms ‘‘FLSA’’ and ‘‘fees.’’ Although the initial search yielded 64 responsive cases, the Department excluded one duplicate case, one case resolving litigation costs through a confidential settlement agreement, and six cases where the defendant employer(s) ultimately prevailed. Because the FLSA only entitles prevailing plaintiffs to litigation cost awards, information about litigation costs was only available for the remaining 56 FLSA cases that ended in settlement agreements or court verdicts favoring the plaintiff employees. 216 This is likely a conservative approach to estimate the total litigation costs for each FLSA lawsuit, as defendant employers tend to incur greater litigation costs than plaintiff employees because of, among other things, typically higher discovery costs. 217 The median cost was $111,835 per lawsuit. VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 51281 3. NPRM Comments on Benefits vi. Sensitivity Analysis Some commenters contended that the proposed salary level would not yield the benefits that a higher salary level would. They asserted that raising the salary level higher than the proposed level would result in less misclassification and less litigation. The law firm Winebrake & Santillo, LLC estimated that ‘‘if the executive exemption carried a $50,000/year salary threshold, over 75% of the [lawsuits the firm litigated involving alleged misclassification under the executive exemption] would never have been filed.’’ NELA provided an example of a misclassification case involving managers at a fast food chain earning $32,000-$40,000 whom a jury found had been misclassified, and stated that such litigation would have been unnecessary under a higher salary level such as the one in the 2016 final rule. EPI, a group of 14 State attorneys general and the Attorney General for the District of Columbia, and other commenters similarly stated that a higher salary level was necessary to further reduce the risk of employee misclassification and the costs of litigation. While a higher salary level would likely result in fewer workers being misclassified as exempt, and potentially less litigation as a result, as explained above, the aim of reducing misclassification cannot be prioritized over the statutory text, which grounds an analysis of exemption status in the ‘‘capacity’’ in which someone is employed—i.e., that employee’s duties. The salary level test’s limited purpose is therefore to screen out only those employees who are clearly nonexempt because they are not performing bona fide EAP duties. Likewise, many commenters expressed concern that the proposed salary level is too low and thus does not do enough to address income inequality. Other commenters asserted that a higher salary level would create jobs and/or stimulate the economy. As explained in greater detail above, however, the Department declined to set a higher salary level because it believes that the salary level set in this final rule appropriately screens out obviously nonexempt workers and distinguishes between nonexempt and potentially exempt employees, without threatening to supplant the role of the duties test. Accordingly, the Department declines to change the salary level methodology in response to these comments. 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. PO 00000 Frm 00053 Fmt 4701 Sfmt 4700 1. Bounds on Transfer Payments Because the Department cannot predict employers’ precise reactions to the final rule, the Department calculated bounds on the size of the estimated transfers from employers to workers. These bounds on transfers do not generate bounded estimates for costs. For a reasonable upper bound on transfer payments, the Department assumed that all occasional overtime workers and half of regular overtime workers will receive the full overtime premium (i.e., such workers will work the same number of hours but be paid 1.5 times their implicit initial hourly wage for all overtime hours) (Table 18). The full overtime premium model is a special case of the fixed-wage model where there is no change in hours. For the other half of regular overtime workers, the Department assumed in the upper-bound method that they will have their implicit hourly wage adjusted as predicted by the incomplete fixed-job model (wage rates fall and hours are reduced but total earnings continue to increase, as in the preferred method). In the preferred model, the Department assumed that only 50 percent of occasional overtime workers and no regular overtime workers will receive the full overtime premium. The plausible lower-transfer bound also depends on whether employees work regular overtime or occasional overtime. For those who regularly work overtime hours and half of those who work occasional overtime, the Department assumes the employees’ wages will fully adjust as predicted by the fixed-job model.218 For the other half of employees with occasional overtime hours, the lower bound assumes they will be paid one and onehalf times their implicit hourly wage for overtime hours worked (full overtime premium). 218 The straight-time wage adjusts to a level that keeps weekly earnings constant when overtime hours are paid at 1.5 times the straight-time wage. In cases where adjusting the straight-time wage results in a wage less than the minimum wage, the straight-time wage is set to the minimum wage. E:\FR\FM\27SER2.SGM 27SER2 51282 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations TABLE 18—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. alternative employer response assumptions because fewer workers’ hours are adjusted by employers and thus managerial costs, which depend in part on the number of workers whose hours change, will be smaller.219 The cost and transfer payment estimates associated with the bounds are presented in Table 19. Regulatory familiarization costs and adjustment costs do not vary across the scenarios. Managerial costs are lower under these Depending on how employers adjust the implicit regular hourly wage, estimated transfers may range from $233.7 million to $644.8 million, with the preferred estimate equal to $396.4 million. TABLE 19—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 $413.5 340.4 68.2 9.8 233.7 $476.6 340.4 68.2 134.4 396.4 Upper transfer estimate $422.9 340.4 68.2 27.7 644.8 Note 1: Pooled CPS data for 7/2016–6/2019 adjusted to reflect 2018/2019. 2. Effects by Regions and Industries This section presents estimates of the effects of this final rule by region and by industry. The Department compared the number of affected workers, costs, and transfers across the four Census Regions. The region with the largest number of affected workers will be the South (544,000). As a share of potentially affected workers in the region, the South has somewhat more affected workers relative to other regions (6.1 percent are affected compared with 4.1 to 4.4 percent in other regions). However, as a share of all workers in the region, the South will not be particularly affected relative to other regions (1.1 percent are affected compared with 0.7 to 0.9 percent in other regions). TABLE 20—POTENTIALLY AFFECTED AND AFFECTED WORKERS, BY REGION, YEAR 1 Affected workers Workers subject to FLSA (millions) jbell on DSK3GLQ082PROD with RULES2 Region All ............................................................. Northeast .................................................. Midwest .................................................... South ........................................................ West ......................................................... 139.4 25.4 30.6 50.9 32.6 Potentially affected workers (millions) a Number (millions) b 25.6 5.3 5.2 8.9 6.1 Percent of total affected workers 1.257 0.231 0.229 0.544 0.253 100 18.4 18.2 43.2 20.2 Affected workers as a percent of potentially affected workers 4.9 4.4 4.4 6.1 4.1 Affected workers as a percent of all workers 0.9 0.9 0.7 1.1 0.8 Note: Pooled CPS data for 7/2016–6/2019 adjusted to reflect 2018/2019. a EAP exempt workers who are white collar, salaried, not eligible for another (non-EAP) overtime exemption, and not in a named occupation. 219 In the lower transfer estimate, managerial costs are for employees whose hours change VerDate Sep<11>2014 20:10 Sep 26, 2019 Jkt 247001 because their hourly rate increased to the minimum wage. PO 00000 Frm 00054 Fmt 4701 Sfmt 4700 E:\FR\FM\27SER2.SGM 27SER2 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations 51283 b Currently EAP exempt workers who will be entitled to overtime protection under the updated earnings levels or whose weekly earnings will increase to the new earnings levels to remain exempt. Total transfers in the first year were estimated to be $396.4 million (Table 21). As expected, the transfers in the South will be the largest portion because the largest number of affected workers will be in the South; however, transfers per affected worker will be the lowest in the South. Annual transfers per worker will be $255 in the South, and $317 to $436 in other regions. TABLE 21—TRANSFERS BY REGION, YEAR 1 Total change in earnings (millions) Region All ................................................................................................................................................. Northeast ..................................................................................................................................... Midwest ........................................................................................................................................ South ............................................................................................................................................ West ............................................................................................................................................. $396.4 73.3 73.8 138.8 110.6 Percent of total 100 18.5 18.6 35.0 27.9 Per affected worker $315.29 317.35 321.60 255.39 436.18 Note: Pooled CPS data for 7/2016–6/2019 adjusted to reflect 2018/2019. Direct employer costs are composed of regulatory familiarization costs, adjustment costs, and managerial costs. The Department estimates that total direct employer costs will be the highest in the South ($208.3 million) and lowest in the Northeast ($100.4 million) (Table 22). Direct employer costs in each region, as a percentage of the total direct costs, will range from 18.5 percent in the Northeast to 38.4 percent in the South. These proportions are almost the same as the proportions of the total workforce in each region: 18.2 percent in the Northeast and 36.5 percent in the South. TABLE 22—DIRECT EMPLOYER COSTS BY REGION, YEAR 1 Regulatory familiarization Region Adjustment Managerial Total direct costs Costs (Millions) All ............................................................................................................. $340.4 $68.2 $134.4 $543.0 Northeast ................................................................................................. Midwest .................................................................................................... South ........................................................................................................ West ......................................................................................................... 65.7 74.8 119.6 80.3 12.5 12.4 29.5 13.7 22.2 27.7 59.2 25.3 100.4 114.9 208.3 119.4 100.0 18.4 18.2 43.2 20.2 100.0 16.5 20.6 44.0 18.9 100.0 18.5 21.2 38.4 22.0 Percent of Total Costs by Region All ............................................................................................................. Northeast ................................................................................................. Midwest .................................................................................................... South ........................................................................................................ West ......................................................................................................... 100.0 19.3 22.0 35.1 23.6 Note: Pooled CPS data for 7/2016–6/2019 adjusted to reflect 2018/2019. Another way to compare the relative effects of this final rule by region is to consider the transfers and costs as a proportion of payroll and revenues (Table 23). Nationally, employer costs and transfers will be approximately 0.012 percent of payroll. By region, direct employer costs and transfers as a percent of payroll will be approximately the same (between 0.010 and 0.013 percent of payroll). Employer costs and transfers as a percent of revenue will be 0.002 percent nationally and in each region. TABLE 23—ANNUAL TRANSFERS AND COSTS AS PERCENT OF PAYROLL AND OF REVENUE BY REGION, YEAR 1 Costs and transfers Payroll (billions) jbell on DSK3GLQ082PROD with RULES2 Region All ..................................................................................................................... Northeast ......................................................................................................... Midwest ............................................................................................................ South ................................................................................................................ VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 PO 00000 Frm 00055 Fmt 4701 Sfmt 4700 $7,867 1,733 1,673 2,618 Revenue (billions) $45,023 9,048 10,251 16,109 E:\FR\FM\27SER2.SGM 27SER2 As percent of payroll 0.012 0.010 0.011 0.013 As percent of revenue 0.002 0.002 0.002 0.002 51284 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations TABLE 23—ANNUAL TRANSFERS AND COSTS AS PERCENT OF PAYROLL AND OF REVENUE BY REGION, YEAR 1— Continued Costs and transfers Payroll (billions) Region West ................................................................................................................. Revenue (billions) 1,843 As percent of payroll 9,616 0.012 As percent of revenue 0.002 Notes: Pooled CPS data for 7/2016–6/2019 adjusted to reflect 2018/2019. Payroll, revenue, costs, and transfers all exclude the federal government. Sources: Private sector payroll and revenue data from 2012 SUSB. State and local payroll and revenue data from State and Local Government Finances Summary: FY2016. Inflated to 2018$ using GDP deflator. In order to gauge the effect of the final rule on industries, the Department compared estimates of combined direct costs and transfers as a percent of payroll, profit, and revenue for the 13 major industry groups (Table 24).220 This provides a common method of assessing the relative effects of the rule on different industries, and the magnitude of adjustments the rule may require on the part of enterprises in each industry. The relative costs and transfers expressed as a percentage of payroll are particularly useful measures of the relative size of adjustment faced by organizations in an industry because they benchmark against the cost category directly associated with the labor force. Measured in these terms, costs and transfers as a percent of payroll will be highest in agriculture, forestry, fishing, and hunting; leisure and hospitality; and other services. However, the magnitude of the relative shares will be small, representing less than 0.04 percent of payroll costs in all industries. The Department also estimated transfers and costs as a percent of profits.221 Benchmarking against profits is potentially helpful in the sense that it provides a measure of the final rule’s effect against returns on investment. However, this metric must be interpreted carefully as it does not account for differences across industries in risk-adjusted rates of return, which are not readily available for this analysis. The ratio of costs and transfers to profits also does not reflect differences in the firm-level adjustment to changes in profits reflecting crossindustry variation in market structure.222 Nonetheless, the magnitude of costs and transfers as a percentage of profits will be small, with total costs and transfers as a percent of profits will vary among industries, ranging from a low of 0.01 percent (financial activities and manufacturing) to a high of 0.18 percent (other services). However, because the share is not more than 0.2 percent, even for the industry with the largest impact, we believe this final rule will not disproportionately affect any industries. Finally, the Department’s estimates of transfers and costs as a percent of revenue by industry also indicated very small effects (Table 24) of less than 0.01 percent of revenues in any industry. The industry with the largest costs and transfers as a percent of revenue will be leisure and hospitality. However, the difference between this industry and the industry with the lowest costs and transfers as a percent of revenue (public administration) is only 0.008 percentage points. Table 24 illustrates that the differences in costs relative to revenues will be quite small across industry groupings. TABLE 24—ANNUAL TRANSFERS, TOTAL COSTS, AND TRANSFERS AND COSTS AS PERCENT OF PAYROLL, REVENUE, AND PROFIT BY INDUSTRY, YEAR 1 Costs and transfers Transfers (millions) Industry jbell on DSK3GLQ082PROD with RULES2 All ......................................................................................... Agriculture, forestry, fishing, & hunting ................................ Mining ................................................................................... Construction ......................................................................... Manufacturing ...................................................................... Wholesale & retail trade ...................................................... Transportation & utilities ...................................................... Information ........................................................................... Financial activities ................................................................ Professional & business services ........................................ Education & health services ................................................ Leisure & hospitality ............................................................. Other services ...................................................................... 220 Note that the totals in this table do not match the totals in other sections due to the exclusion of transfers to federal workers and costs to federal entities. Federal costs and transfers are excluded to be consistent with payroll and revenue which exclude the federal government. 221 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 information on total receipts, net income, and VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 Direct costs (millions) $396.3 1.5 2.0 20.1 36.0 64.5 9.7 22.8 38.6 73.5 57.3 47.6 12.5 $528.6 1.4 2.1 37.4 27.5 97.2 16.4 13.5 60.4 90.9 81.4 49.7 40.2 deficits. The Department calculated the ratio of net income (column (7)) less any deficit (column (8)) to total receipts (column (3)) for all firms by major industry categories. Costs and transfers as a percent of revenues were divided by the profit to receipts ratios to calculate the costs and transfers as a percent of profit. 222 In particular, a basic model of competitive product markets would predict that highly competitive industries with lower rates of return would adjust to increases in the marginal cost of PO 00000 Frm 00056 Fmt 4701 Sfmt 4700 As percent of payroll 0.012 0.038 0.005 0.017 0.008 0.017 0.008 0.011 0.013 0.010 0.012 0.029 0.028 As percent of revenue 0.002 0.007 0.001 0.003 0.001 0.001 0.002 0.002 0.002 0.005 0.005 0.008 0.007 As percent of profit a 0.03 0.16 0.02 0.10 0.01 0.04 0.06 0.03 0.01 0.06 0.09 0.16 0.18 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\27SER2.SGM 27SER2 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations 51285 TABLE 24—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 Public administration ............................................................ Direct costs (millions) 10.2 As percent of payroll 10.6 0.002 As percent of revenue As percent of profit a (b) 0.001 Notes: Pooled CPS data for 7/2016–6/2019 adjusted to reflect 2018/2019. Payroll, revenue, costs, and transfers all exclude the federal government. Sources: Private sector payroll and revenue data from 2012 Economic Census. State and local payroll and revenue data from State and Local Government Finances Summary: FY2016 are used for the Public Administration industry. Profit to revenue ratios calculated from 2012 Internal Revenue Service Corporation Income Tax Returns. Inflated to 2018$ using GDP deflator. a Profit data based on corporations only. b Profit is not applicable for public administration. Although labor market conditions vary by Census Region and industry, the effects from updating the standard salary level and the HCE compensation level will not unduly affect any of the regions or industries. The proportion of total costs and transfers in each region will be fairly consistent with the proportion of total workers in each region. Additionally, although the shares will be larger for some firms and smaller for others, the average estimated costs and transfers from this final rule are very small relative to current payroll or current revenue—less than a tenth of a percent of payroll and less than onehundredth of a percent of revenue in each region and in each industry. vii. Regulatory Alternatives As mentioned earlier, the Department considered a range of alternatives before selecting its methods for updating the standard salary level and the HCE compensation level (see § VI.C). As seen in Table 25, the Department has calculated the salary levels, the number of affected workers, and the associated costs and transfers for the alternative methods that the Department considered. TABLE 25—UPDATED STANDARD SALARY AND HCE COMPENSATION LEVELS AND ALTERNATIVES, AFFECTED EAP WORKERS, COSTS, AND TRANSFERS, YEAR 1 Affected EAP workers (1,000s) Salary level a Alternative Year 1 effects (millions) Adj. & managerial costs b Transfers Standard Salary Level (Weekly) Alt. #1: No change ........................................................................................... Alt. #2: Maintain average minimum wage protection since 2004 b ................. Alt. #3: 2004 Method, South (excluding Washington D.C., MD & VA) or Retail c ............................................................................................................... Final rule: 2004 method c ................................................................................. Alt. #4: Kantor long test d ................................................................................. Alt. #5: 2016 method e ..................................................................................... $455 502 0 218 ........................ 27.1 ........................ 29.6 673 684 724 976 1,043 1,156 1,552 4,345 169.4 184.1 247.4 732.9 276.7 296.1 406.1 1,325.8 0 102 246 ........................ 18.4 53.3 ........................ 100.3 301.7 HCE Compensation Level (Annually) HCE alt. #1: No change .................................................................................. Final rule: 80th percentile of full-time salaried workers ................................... HCE alt. #2: 90th percentile of full-time salaried workers ............................... 100,000 107,432 145,964 Note: Impacts estimated using pooled CPS data for 7/2016–6/2019 adjusted to reflect 2018/2019. a Regulatory familiarization costs are excluded because they do not vary significantly based on the selected values of the salary levels. b When the $455 weekly threshold was established in 2004, the federal minimum wage was $5.15, so the salary threshold equated to minimum wage and overtime pay at time-and-one-half for hours over 40 for an employee working no more than 72.2 hours. That amount fell with increases in the minimum wage and is now 55.2 hours. The weighted average across the 15 years since the overtime threshold was last changed is 59.5 hours, and a threshold that would provide 59.5 hours of $7.25 minimum wage and overtime pay would be $502. c Full-time salaried workers with various industry/region exclusions (excludes workers not subject to the FLSA, not subject to the salary level test, and in some workers in agriculture or transportation). Pooled CPS data for 7/2016–6/2019 adjusted to reflect 2018/2019. d 10th percentile of likely exempt workers. Pooled CPS data for 7/2016–6/2019 adjusted to reflect 2018/2019. e 40th percentile earnings of nonhourly full-time workers in the South Census region, provided by BLS. The salary level reflects the first automatic update that would have taken place under the 2016 final rule. jbell on DSK3GLQ082PROD with RULES2 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 VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 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 PO 00000 Frm 00057 Fmt 4701 Sfmt 4700 2007 to 2017.223 This is the annual 223 To increase the number of observations, three years of data were pooled for each of the endpoint years. Specifically, data from 2006, 2007, and 2008 (converted to 2007 dollars) were used to calculate the 2007 median wage and data from 2016, 2017, and 2018 (converted to 2017 dollars) were used to calculate the 2017 median wage. E:\FR\FM\27SER2.SGM 27SER2 51286 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations growth rate that when compounded (applied to the first year’s wage, then to the resulting second year’s wage, etc.) yields the last historical year’s wage. In occupation-industry categories where the CPS MORG data had an insufficient number of observations to reliably calculate median wages, the Department used the growth rate in median wages calculated from BLS’ Occupational Employment Statistics (OES).224 Any remaining occupation-industry combinations without estimated median growth rates were assigned the median of the growth rates in median wages from the CPS MORG data for all industries and occupations. For projecting costs, we similarly projected wage rates for the human resource and managerial workers whose time is spent on these tasks. Second, the Department compared workers’ counter-factual earnings (i.e., absent this final rule) to the earnings levels. If the counter-factual earnings are below the relevant level (i.e., standard or HCE) then the worker is considered affected. In other words, in each year affected EAP workers were identified as those who would be exempt in Year 1 absent any change to the current regulations but have projected earnings in the future year that are less than the relevant salary level. Third, sampling weights were adjusted to reflect employment growth. The employment growth rate is the compound annual growth rate based on the ten-year employment projection from BLS’ National Employment Matrix (NEM) for 2016 to 2026 within an occupation-industry category. Adjusted hours for workers affected in Year 1 were re-estimated in Year 2 using a long-run elasticity of labor demand of -0.4.225 For workers newly affected in Year 2 through Year 10, employers’ wage and hour adjustments are estimated in that year, as described in section VI.D.iv, except the long-run elasticity of labor demand of -0.4 is used. Employer adjustments are made in the first year the worker is affected and then applied to all future years in which the worker continues to be affected (unless the worker switches to a Type 4 worker). Workers’ earnings in predicted years are earnings post employer adjustments, with overtime pay, and with ongoing wage growth based on historical growth rates (as described above). 2. Estimated Projections The Department estimated that the final rule will affect 1.3 million EAP workers in Year 1 and 0.9 million workers in Year 10 (Table 26). The projected number of affected workers includes workers who were not EAP exempt in the base year but would have become exempt in the absence of this final rule in Years 2 through 10. For example, a worker who passes the standard duties test may earn less than $455 in Year 1 but between $455 and the new salary level in subsequent years; such a worker will be counted as an affected worker. The Department quantified three types of direct employer costs in the ten-year projections: (1) Regulatory familiarization costs; (2) adjustment costs; and (3) managerial costs. Regulatory familiarization costs only occur in Year 1. Although start-up firms must still become familiar with the FLSA following Year 1, the difference between the time necessary for familiarization with the current part 541 regulations and the regulations as modified by the final rule is essentially zero. Therefore, projected regulatory familiarization costs for new entrants over the next nine years are zero. Adjustment costs will occur in any year in which workers are newly affected. After Year 1, these costs will be relatively small since the majority of workers will be affected in Year 1. Management costs will recur each year for all affected EAP workers whose hours are adjusted. However, managerial costs generally decrease over time as the number of affected EAP workers decreases. The Department estimated that Year 1 managerial costs will be $134.4 million; by Year 10 these costs decline to $94.5 million. The Department projected two types of transfers from employers to employees associated with workers affected by the regulation. Transfers due to the minimum wage provision will be $75.4 million in Year 1 and will fall to $26.1 million in Year 10 as increased earnings over time move workers’ implicit rate of pay above the minimum wage.226 Transfers due to overtime pay also decrease because wage growth raises workers’ earnings above the earnings thresholds over time thus decreasing the number of affected workers. Thus, transfers due to the overtime pay provision are estimated to decrease from $321.0 million in Year 1 to $221.3 million in Year 10. Projected costs and transfers were deflated to 2019 dollars using the Congressional Budget Office’s projections for the CPI–U.227 TABLE 26—PROJECTED COSTS AND TRANSFERS, STANDARD AND HCE SALARY LEVELS Affected EAP workers (millions) Year (year #) Costs Reg. fam. Adjustment a Transfers Managerial Due to MW Total Due to OT Total jbell on DSK3GLQ082PROD with RULES2 (Millions 2019$) Year: Year 1 ................................................ Year 2 ................................................ Year 3 ................................................ Year 4 ................................................ Year 5 ................................................ Year 6 ................................................ Year 7 ................................................ Year 8 ................................................ Year 9 ................................................ Year 10 .............................................. Annualized value: 1.3 1.2 1.1 1.1 1.1 1.0 1.0 0.9 0.9 0.9 224 To lessen small sample bias, this rate was only calculated using CPS MORG data when these data contained at least 30 observations in each period. 225 This elasticity estimate is based on the Department’s analysis of the following paper: Lichter, A., Peichl, A. & Siegloch, A. (2014). The Own-Wage Elasticity of Labor Demand: A MetaRegression Analysis. IZA DP No. 7958. 226 Increases in minimum wages were not projected. If state or federal minimum wages increase during the projected timeframe then VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 PO 00000 $340.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Frm 00058 Fmt 4701 $68.2 2.0 1.9 2.7 3.1 2.9 3.2 3.8 4.1 4.6 Sfmt 4700 $134.4 132.3 126.7 121.4 116.8 110.7 103.9 99.8 95.3 94.5 $543.0 134.3 128.5 124.1 119.9 113.6 107.1 103.6 99.4 99.1 $75.4 42.8 37.4 33.2 31.2 29.5 29.5 28.0 26.4 26.1 $321.0 264.9 266.5 248.7 269.0 257.3 236.9 241.8 235.0 221.3 $396.4 307.7 303.9 281.9 300.1 286.8 266.5 269.7 261.4 247.4 projected minimum wage transfers may be underestimated. 227 Congressional Budget Office. 2018. The Budget and Economic Outlook: 2018 To 2028. See https://www.cbo.gov/publication/53651. E:\FR\FM\27SER2.SGM 27SER2 51287 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations TABLE 26—PROJECTED COSTS AND TRANSFERS, STANDARD AND HCE SALARY LEVELS—Continued Affected EAP workers (millions) Year (year #) Costs Reg. fam. Adjustment a Transfers Managerial Due to MW Total Due to OT Total (Millions 2019$) 3% real discount rate ......................... 7% real discount rate ......................... a Adjustment ........................ ........................ 38.7 45.3 10.5 11.7 114.8 116.3 164.0 173.3 36.9 38.1 258.1 260.6 295.0 298.8 costs occur in all years when there are newly affected workers. Table 26 also summarizes annualized costs and transfers over the ten-year projection period, using 3 percent and 7 percent real discount rates. The Department estimated that total direct employer costs have an annualized value of $173.3 million per year over ten years when using a 7 percent real discount rate. The annualized value of total transfers was estimated to equal $298.8 million. ix. Alternative Regulatory Baseline, Including Calculation of Cost Savings Under Executive Order 13771 Other portions of this regulatory impact analysis contain estimates of the impacts of this final rule relative to the 2004 final rule, which is the rule that the Department is currently enforcing. However, OMB Circular A–4 states that multiple regulatory baselines may be analytically relevant. In this case, a second informative baseline is the 2016 final rule, which is currently in the Code of Federal Regulations (CFR).228 Moreover, for purposes of determining whether this rule is deregulatory under E.O. 13771, the economic impacts should be compared to what is currently published in the CFR. As such, most of this section presents an estimate of the cost savings of this final rule relative to the 2016 rule, and in addition to estimating annualized cost savings for the final rule using a 10-year time horizon, we also estimated annualized cost savings in perpetuity in accordance with E.O. 13771 accounting standards. This perpetual time horizon makes it especially important to avoid overemphasizing short-run compensation stickiness in the estimation approach; as such, the quantitative estimates will incorporate a relatively high compensation adjustment, the 80 percent derived from Barkume (2010), which assumes an initial overtime premium is paid, rather than the adjustment reflected in the estimates that are elsewhere identified as primary.229 Later in this section, the Department presents transfer and benefits estimates from the analysis accompanying the 2016 final rule— values that are also relevant to this second regulatory baseline. To ensure that the estimated costs of the 2016 final rule can be directly and appropriately compared with the costs estimated for this final rule, the Department started with the analytic model for this final rule and replaced this final rule’s salary and compensation thresholds with the thresholds that would be required by the 2016 final rule, including that rule’s provision to automatically update the salary level on a triennial basis. The Department assumed that initial regulatory familiarization costs would be identical under adoption of either this final rule or the 2016 final rule, because the same number of employers would be potentially affected in Year 1. In addition, implementation of the 2016 rule would have resulted in the first automatic update occurring in 2020, and therefore the Department used that value to represent Year 1 of the 2016 rule for 2020. Similarly, automatic updates in Years 7 and 10 from the 2016 final rule become the second and third automatic updates in the comparison. Finally, the Department projected earnings levels for year 13 of the 2016 rule to use as the final automatic update in the comparison. Therefore, the only differences in estimated costs presented here between the 2016 final rule and this final rule are attributable to the difference in earnings thresholds and the effects of the 2016 final rule’s automatic updating mechanism. TABLE 27—WEEKLY EARNINGS THRESHOLDS USED IN COMPARISON OF 2016 AND 2019 FINAL RULES 2016 Final rule Standard salary threshold Year 2020 b .............................................................................................................. 2023 ................................................................................................................. 2026 ................................................................................................................. 2029 ................................................................................................................. $984 1,049 1,118 1,192 a 2019 Final rule HCE compensation threshold $2,837 3,080 3,345 3,632 Standard salary threshold $684 684 684 684 HCE compensation threshold $2,066 2,066 2,066 2,066 jbell on DSK3GLQ082PROD with RULES2 a Earnings levels in 2020, 2023, and 2026 are the projected salary levels as reported in the 2016 final rule. The 2029 levels were calculated using the same growth rate as was used in the 2016 final rule to estimate the projected levels in 2023 and 2026; the growth rate of the 40th percentile in the South from FY2005 to FY2015. b Standard salary threshold reflects the 2016 final rule projection for 2020. If the earnings levels were recalculated using current data (2018Q3 through 2019Q2) they would be $976 and $2,888. However, this approach means that the estimated costs presented here for 228 29 CFR part 541. noted previously, even Barkume’s result was estimated for a population that included hourly workers. The fixed-job model is probably more 229 As VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 the 2016 final rule are not directly comparable to those published in the Federal Register (81 FR 32391). The differences between the previously likely to hold for salaried workers than for hourly workers because salaried workers directly observe their weekly total earnings, not their implicit equivalent hourly wage; therefore, applying the partial adjustment to the fixed-job model as estimated by these studies may overestimate the transfers between employers and salaried workers and other associated impacts. PO 00000 Frm 00059 Fmt 4701 Sfmt 4700 E:\FR\FM\27SER2.SGM 27SER2 jbell on DSK3GLQ082PROD with RULES2 51288 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations published 2016 cost estimates and those presented here are primarily due to: Earnings levels associated with 2020; an increase in the number of establishments that would incur regulatory familiarization costs to account for economic growth between 2012 (estimates for the 2016 final rule were based on 2012 SUSB data) and 2016 (estimates for this final rule are based on 2016 SUSB data); the use of more recent CPS MORG data (the 2016 final rule used pooled CPS data for 2013 through 2015 inflated to represent FY 2017); the use of the Barkume-derived 80 percent compensation adjustment estimate, rather than the estimate that averages Barkume’s findings with Trejo’s; an increase in the wage rates used to value staff time spent on regulatory familiarization, adjustment, and monitoring; an increase in the managerial time estimate from 5 to 10 minutes; incorporating a 17 percent overhead rate in those wage rates; and minor improvements to the model.230 The estimated total perpetual annualized costs of the 2016 rule are $676.9 million using a 7 percent discount rate. For purposes of this E.O. 13771 analysis, the estimated total perpetual annualized costs of this final rule are $142.0 million using a 7 percent discount rate. The Department then subtracted direct regulatory costs expected to have been incurred under the 2016 final rule from the direct costs estimated under this final rule. Direct employer costs of this final rule are estimated to be, on average, $534.8 million lower per year in perpetuity than the 2016 final rule (using a 7 percent discount rate). The cost savings from this final rule are primarily attributable to two factors. First, a lower standard salary level will result in fewer affected workers in any given year. If fewer workers are affected, then management must consider and make earnings adjustments for fewer employees, and must monitor hours worked for fewer employees. Second, this analysis does not incorporate automatic updating whereas the 2016 final rule incorporated a triennial automatic updating mechanism. Therefore, regulatory familiarization costs are now only incurred in Year 1 and adjustment costs are primarily incurred in Year 1. Additionally, managerial costs now gradually decrease over time rather than increasing every three years. 230 As previously discussed, one such improvement is the Department’s application of conditional probabilities to estimate the number of HCE workers. See supra note 160. VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 In the 2016 final rule, the Department estimated average annualized transfers of $1,189.1 million over a ten-year period using a discount rate of 7 percent. The Department also estimated that avoided litigation costs resulting from the rule could total approximately $31.2 million per year.231 The Department includes these values here for reference. EPI compared the estimated number of affected workers under the 2016 final rule to the estimate in the proposed rule, and commented that the Department’s estimate ‘‘that 2.8 million fewer workers will be impacted under its proposal than under the 2016 rule . . . is a vast underestimate.’’ The alleged underestimate of affected workers resulted in part from EPI comparing the estimated impacts of the 2016 final rule in 2020 (i.e., Year 4 of the 2016 rule) with the 2020 impacts of this rule (i.e., Year 1 of this final rule).232 Thus, EPI used the earnings levels associated with the first automatic update (which it calculated to be $51,053 for the standard salary level) for the 2016 rule. The Department has adjusted the calculation to use the 2016 final rule’s predicted salary levels for 2020 when calculating Year 1 impacts.233 EPI also contended that the Department underestimated the difference between the number of workers affected by the 2016 final rule and the number affected by the NPRM because the Department’s analysis ‘‘[left] out an entire group of workers who would be affected by the rule— those who will no longer get strengthened protections.’’ The majority of the difference between EPI’s estimate of the number of affected workers and the NPRM’s estimate is due to EPI including workers whose overtime protections were strengthened in the estimate of affected workers. However, in both this rule and the 2016 final rule, workers with strengthened overtime protections—those who fail the standard duties test and earn at least $455 but below the new standard salary level— are included in the description of affected workers but not in the official calculation of affected workers. This is because workers with strengthened 231 In this final rule, the Department has revised (from the 2016 rule) how it calculates avoided litigation costs so the number referenced here for the 2016 final rule is not directly comparable to the calculation of reduced litigation costs for this final rule. 232 See https://www.epi.org/files/pdf/165984.pdf, at 7. 233 The Department also notes there are a variety of reasons for the discrepancy between the Department’s and EPI’s calculations, including use of different data and methodological differences. PO 00000 Frm 00060 Fmt 4701 Sfmt 4700 protections are not directly impacted by changes in the regulations; they only directly benefit from the rulemaking if they are currently misclassified as exempt. Even so, the Department notes that this final rule will strengthen overtime protections for 4.1 million workers who currently fail the standard duties test and now will also earn below the standard salary level. VII. Final Regulatory Flexibility Analysis (FRFA) The Regulatory Flexibility Act of 1980 (RFA) as amended by the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA), hereafter jointly referred to as the RFA, requires that an agency prepare an initial regulatory flexibility analysis (IRFA) when proposing, and a final regulatory flexibility analysis (FRFA) when issuing, regulations that will have a significant economic impact on a substantial number of small entities. The agency is also required to respond to public comment on the NPRM.234 The Chief Counsel for Advocacy of the Small Business Administration submitted public comments on the NPRM which are addressed below. A. Objectives of, and Need for, the Final Rule The FLSA requires covered employers to: (1) Pay employees who are covered and not exempt from the Act’s requirements not less than the Federal minimum wage for all hours worked and overtime premium pay at a rate of not less than one and one-half times the employee’s regular rate of pay for all hours worked over 40 in a workweek, and (2) make, keep, and preserve records of the persons employed by the employer and of the wages, hours, and other conditions and practices of employment. The FLSA provides a number of exemptions from the Act’s minimum wage and overtime pay provisions, including one for bona fide executive, administrative, and professional (EAP) employees. The exemption applies to employees employed in a bona fide executive, administrative, or professional capacity and for outside sales employees, as those terms are ‘‘defined and delimited’’ by the Department. 29 U.S.C. 213(a)(1). The Department’s regulations implementing these ‘‘white collar’’ exemptions are codified at 29 CFR part 541. For an employer to exclude an employee from minimum wage and overtime protection pursuant to the EAP exemption, the employee generally must 234 See E:\FR\FM\27SER2.SGM 5 U.S.C. 604. 27SER2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations meet three criteria: (1) The employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the ‘‘salary basis test’’); (2) the amount of salary paid must meet a minimum specified amount (the ‘‘salary level test’’); and (3) the employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (the ‘‘duties test’’). The salary level requirement was created to identify the dividing line distinguishing workers who may be performing exempt duties from the nonexempt workers whom Congress intended to be protected by the FLSA’s minimum wage and overtime provisions. The Department has periodically updated the regulations governing these tests since the FLSA’s enactment in 1938. The Department is currently enforcing the 2004 final rule, which, among other revisions, created the standard duties test and paired it with a salary level test of $455 per week. The 2004 final rule also created a new ‘‘highly compensated’’ test for exemption. Under this test, employees who are paid total annual compensation of at least $100,000 (which must include at least $455 per week paid on a salary or fee basis) are exempt from the FLSA’s overtime requirements if they customarily and regularly perform at least one of the duties or responsibilities of an exempt EAP employee identified in the standard tests for exemption.235 The Department’s primary objective in this rulemaking is to ensure that the revised salary levels will continue to provide a useful and effective test for exemption. The premise behind the standard salary level is to be an appropriate dividing line between employees who are nonexempt and employees who may be performing exempt duties. The threshold essentially screens out obviously nonexempt employees whom Congress intended to be protected by the FLSA’s minimum wage and overtime provisions. If left unchanged, the effectiveness of the salary level test as a means to help determine exempt status diminishes as nonexempt employee wages increase over time. Employees who meet the requirements of part 541 are excluded from the Act’s minimum wage and overtime pay protections. As a result, employees may work any number of hours in the workweek and not be subject to the FLSA’s overtime pay requirements. Some state laws have 235 § 541.601. VerDate Sep<11>2014 stricter exemption standards than those described above. The FLSA does not preempt any such stricter state standards. If a state law establishes a higher standard than the provisions of the FLSA, the higher standard applies as a matter of state law in that specific state.236 To restore the function of the standard salary level and the HCE total compensation requirements as appropriate bright-line tests between overtime-protected employees and those who may be bona fide EAP employees, the Department is increasing the minimum salary level necessary for exemption from the FLSA’s minimum wage and overtime requirements as an EAP employee from $455 to $684 a week for the standard salary test, and from $100,000 to $107,432 per year for the HCE test. B. The Agency’s Response to Public Comments Small business commenters expressed concerns with the Department’s estimates of the proposed rule’s costs and other impacts. These concerns are acknowledged and addressed in sections VI.d.iii and VI.d.iv, which we incorporate herein. C. Comment by the Chief Counsel for Advocacy of the Small Business Administration SBA’s Office of Advocacy (SBA Advocacy) generally supported the Department’s proposal. SBA Advocacy’s comment was based largely on feedback received from small businesses, many of whom told SBA Advocacy that the higher threshold in the 2016 final rule ($47,476) would have been disruptive and costly to small businesses. In its roundtables on the 2019 rulemaking, in contrast, SBA Advocacy heard that most small businesses would only have a few affected employees, and could absorb the costs from this rulemaking. SBA Advocacy listed a few recommendations for the Department to consider. Several of these recommendations (and related issues raised by other commenters) are also addressed elsewhere in this final rule. SBA Advocacy recommended an adjustment to the calculation of the standard salary level. It indicated that some small businesses recommended that the Department ‘‘adopt a narrower Census definition for areas with the lowest wages in the south when calculating and adjusting the new minimum salary threshold.’’ SBA Advocacy, along with other commenters, specifically recommended 236 See 18:58 Sep 26, 2019 Jkt 247001 PO 00000 29 U.S.C. 218(a). Frm 00061 Fmt 4701 Sfmt 4700 51289 that the Department ‘‘focus on [a] more narrow geographic area like the EastSouth Central Census [Division] (which includes Alabama, Kentucky, Mississippi, and Tennessee) when adjusting the national wages; or provide more flexibility for these areas.’’ The Department evaluated an alternative that eliminates higher-wage areas (District of Columbia, Maryland, and Virginia) from the data set used to determine the salary level (see Sections VI.D.vii and IV.A.v.). As previously discussed, the Department ultimately decided not to adopt this alternative, because it believes that using the entire South Census Region and the retail industry nationwide results in an appropriate nationwide salary level that is based on a low-wage region but can still serve as a meaningful dividing line in higher-wage regions. Using the entire South is also consistent with the methodology used in the 2004 final rule. SBA Advocacy and a few other commenters also asserted that the Department underestimated small business compliance costs. SBA Advocacy stated that small businesses disagreed with the Department’s estimate that, on average, establishments (including small businesses) will have a one-hour burden for rule familiarization, a 1.25-hour burden per affected worker in adjustment costs, and a 5-minute burden per worker per week for scheduling and monitoring. SBA Advocacy stated that small businesses have told them ‘‘that it may take . . . many hours and several weeks to understand and implement this rule,’’ and that ‘‘[m]any small businesses spend a disproportionately higher amount of time and money on outside compliance staff.’’ As discussed in more detail above, however, the Department believes that its estimates of time for rule familiarization and adjustment costs are appropriate, particularly given that the final rule is limited in scope and that most small businesses are already likely familiar with their responsibilities under the part 541 regulations. Additionally, these estimates represent an average of all establishments, some of which will spend little time on these activities and some of whom will spend more time than the average. However, the Department acknowledges that the prior 5 minutes per newly nonexempt overtime worker may be low and has doubled this estimate to 10 minutes. Regarding the proposed transfer calculations, SBA Advocacy took issue with the Department’s estimates that affected small business establishments would have, on average, $422 to $3,187 E:\FR\FM\27SER2.SGM 27SER2 51290 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations in additional payroll costs in the first year (based on the proposed rule). Rather, SBA Advocacy stated that ‘‘[s]mall businesses have told Advocacy that their payroll costs will be in the thousands of dollars.’’ This comment, however, does not explain what methodological approach the Department should use to estimate transfers, or how much, if at all, the Department’s approach underestimated such transfers. Therefore, the Department concludes that this comment does not provide a sufficient basis for changing its transfer calculation methodology. D. Description of the Number of Small Entities to Which the Final Rule Will Apply i. Definition of Small Entity The RFA defines a ‘‘small entity’’ as a (1) small not-for-profit organization, (2) small governmental jurisdiction, or (3) small business. The Department used the entity size standards defined by SBA, in effect as of October 1, 2017, to classify entities as small.237 SBA establishes separate standards for individual 6-digit NAICS industry codes, and standard cutoffs are typically based on either the average number of employees, or the average annual receipts. For example, small businesses are generally defined as having fewer than 500, 1,000, or 1,250 employees in manufacturing industries and less than $7.5 million in average annual receipts for nonmanufacturing industries. However, some exceptions do exist, the most notable being that depository institutions (including credit unions, commercial banks, and non-commercial banks) are classified by total assets (small defined as less than $550 million in assets). Small governmental jurisdictions are another noteworthy exception. They are defined as the governments of cities, counties, towns, townships, villages, school districts, or special districts with populations of less than 50,000 people.238 Parameters that are used in the small business cost analysis are provided in Table 28. TABLE 28—OVERVIEW OF PARAMETERS USED FOR COSTS TO SMALL BUSINESSES Small business costs Cost Direct and Payroll Costs entity a Average total cost per affected .................................................... Range of total costs per affected entity a ................................................. Average percent of revenue per affected entity a .................................... Average percent of payroll per affected entity a ....................................... Average percent of small business profit ................................................. $3,656. $1,678–$31,118. 0.15%. 0.81%. 0.05%. 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. $43.38. 75 minutes per newly affected worker. $43.38. 10 minutes per affected worker. $50.92. Payroll Increases Average payroll increase per affected entity a ......................................... Range of payroll increases per affected entity a ...................................... $2,393. $0–$26,943. 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. The Department obtained data from several sources to determine the number of small entities and employment in these entities for each industry. However, the Statistics of U.S. Businesses (SUSB) was used for most industries. Industries for which the Department used alternative sources include credit unions,239 commercial banks and savings institutions,240 agriculture,241 and public administration.242 Unless otherwise noted, the Department used the latest available data in each case, so data years differ between sources. For each industry, the SUSB 2012 data tabulates total employment, establishment, and firm counts by both enterprise employment size (e.g., 0–4 employees, 5–9 employees) and receipt size (e.g., less than $100,000, $100,000– $499,999).243 The Department combined these categories with the SBA size standards to estimate the proportion of establishments and employees in each industry that are considered small or employed by a small entity, respectively. The general 237 See https://www.sba.gov/sites/default/files/ files/Size_Standards_Table_2017.pdf. 238 See http://www.sba.gov/advocacy/regulatoryflexibility-act for details. 239 National Credit Union Association. (2012). 2012 Year End Statistics for Federally Insured Credit Unions. Available at: https://www.cuna.org/ uploadedFiles/Global/About_Credit_Unions/ NationalProfile-M18-Bank.pdf. 240 Federal Depository Insurance Corporation. (2018). Statistics on Depository Institutions— Compare Banks. Available at: https:// www5.fdic.gov/SDI/index.asp. Data are from 3/31/ 18 for employment and from 6/30/2017 for share of firms and establishments that are ‘‘small.’’ 241 United States Department of Agriculture. (2019). 2017 Census of Agriculture: United States Summary and State Data: Volume 1, Geographic Area Series, Part 51. Available at: https:// www.nass.usda.gov/Publications/AgCensus/2017/ Full_Report/Volume_1,_Chapter_1_US/usv1.pdf. 242 Census of Governments. 2017. Available at: https://www.census.gov/data/tables/2017/econ/gus/ 2017-governments.html. 243 The SUSB defines employment as of March 12th. jbell on DSK3GLQ082PROD with RULES2 ii. Data Sources and Methods VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 PO 00000 Frm 00062 Fmt 4701 Sfmt 4700 E:\FR\FM\27SER2.SGM 27SER2 51291 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations methodological approach was to classify all establishments or employees in categories below the SBA cutoff as in ‘‘small entity’’ employment.244 If a cutoff fell in the middle of a defined category, a uniform distribution of employees across that bracket was assumed to determine what proportion should be classified as small. The Department assumed that the small entity share of credit card issuing and other depository credit intermediation institutions (which were not separately represented in FDIC asset data), is similar to that of commercial banking and savings institutions. The estimated share of employment in small entities was applied to the CPS data to estimate the number of affected workers in small entities. Similarly, the estimated share of establishments that are small was applied to the most recent SUSB data available (2016) to determine the number of small entities. The Department also estimated the number of small establishments by employer type (nonprofit, for-profit, government). The calculation of the number of establishments by employer type is similar to the calculation of the number of establishments by industry. However, instead of using SUSB data by industry, the Department used SUSB data by Legal Form of Organization for nonprofit and for-profit establishments, and data from the 2012 Census of Governments for small governments. The 2012 Census of Governments report includes a breakdown of state and local governments by the population of their underlying jurisdiction, allowing us to estimate the number of governments that are small. The estimated share of establishments that are small was applied to the 2016 SUSB data available and the estimated share of governments that are small was applied to the 2017 Census of Governments. iii. Number of Small Entities and Employees Table 29 presents the estimated number of establishments and small establishments in the U.S. (hereafter, the terms ‘‘establishment’’ and ‘‘entity’’ are used interchangeably and are considered equivalent for the purposes of this FRFA).245 Based on the methodology described above, the Department found that of the 7.8 million establishments relevant to this analysis, 81 percent (6.3 million) are small by SBA standards. These small establishments employ about 53.1 million workers, about 37 percent of workers employed by all establishments (excluding self-employed, unpaid workers, and members of the armed forces), and account for roughly 36 percent of total payroll ($2.9 trillion of $8.0 trillion).246 TABLE 29—NUMBER OF ESTABLISHMENTS AND EMPLOYEES BY SBA SIZE STANDARDS, BY INDUSTRY AND EMPLOYER TYPE Establishments (1,000s) Workers (1,000s) a Industry/employer type Total Total ................................................................................... Small 7,847.9 Annual payroll (billions) Small business employed Total Total Small 6,345.4 143,184.6 53,058.6 $7,976.2 $2,868.0 8.6 12.9 22.0 676.9 11.5 55.8 21.5 11.0 4.9 10.1 13.1 14.6 25.1 23.9 7.6 15.2 27.6 1.2 10.7 10.1 328.3 688.8 183.8 7.8 21.2 22.3 4.6 6.8 13.3 ( c) ( c) ( c) 8,525.6 ( c) 1,652.6 1,240.7 1,173.5 ( c) 2,616.6 ( c) ( c) 1,512.1 1,809.0 ( c) 575.8 871.7 ( c) 1,423.2 ( c) 3,440.5 15,694.5 6,355.2 1,391.6 ( c) ( c) 554.0 ( c) ( c) ( c) ( c) (c) 5,482.7 (c) 1,004.7 673.2 552.2 (c) 728.6 (c) (c) 888.6 829.3 ( c) 390.3 464.6 ( c) 553.8 ( c) 1,583.3 5,398.1 1,740.6 264.2 ( c) ( c) 129.4 ( c) ( c) (c) ( c) ( c) 478.8 ( c) 91.6 79.9 109.9 ( c) 183.3 ( c) ( c) 92.9 81.2 (c) 26.0 49.5 ( c) 121.0 ( c) 216.4 617.8 329.9 110.6 ( c) ( c) 39.2 ( c) ( c) ( c) (c) ( c) 309.5 ( c) 54.7 44.0 53.5 ( c) 47.0 ( c) ( c) 53.8 35.9 ( c) 17.5 25.3 ( c) 45.4 (c) 98.3 234.8 84.4 20.3 ( c) ( c) 8.6 ( c) (c) Industry b jbell on DSK3GLQ082PROD with RULES2 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 ................................................................. 244 The Department’s estimates of the numbers of affected small entities and affected workers who are employees of small entities are likely overestimates as the Department had no credible way to estimate which enterprises with annual revenues below $500,000 also did not engage in interstate commerce. 245 SUSB reports data by ‘‘enterprise’’ size designations (a business organization consisting of one or more domestic establishments that were specified under common ownership or control). VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 9.3 13.3 27.2 696.7 15.0 59.4 23.5 12.4 5.7 11.7 14.3 15.0 26.0 27.1 8.5 15.6 29.6 2.2 13.5 12.1 412.5 1,069.1 231.0 18.2 27.5 25.5 8.3 8.1 59.2 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 PO 00000 Frm 00063 Fmt 4701 Sfmt 4700 than firms for a more conservative estimate (potential overestimate) of the number of small businesses. 246 Since information is not available on employer size in the CPS MORG, respondents were randomly assigned as working in a small business based on the SUSB probability of employment in a small business by detailed Census industry. Annual payroll was estimated based on the CPS weekly earnings of workers by industry size. E:\FR\FM\27SER2.SGM 27SER2 51292 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations TABLE 29—NUMBER OF ESTABLISHMENTS AND EMPLOYEES BY SBA SIZE STANDARDS, BY INDUSTRY AND EMPLOYER TYPE—Continued Establishments (1,000s) Industry/employer type Total 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 ............................................................... Annual payroll (billions) Workers (1,000s) a Small Small business employed Total Total Small 9.0 3.6 129.8 141.7 286.4 26.7 819.1 34.1 328.8 18.4 90.6 1.7 575.8 149.0 126.3 55.8 500.7 199.8 201.6 298.3 (d) 72.8 ( c) ( c) 4,506.3 2,746.7 2,091.1 ( c) 10,196.2 ( c) 5,080.7 ( c) 14,196.6 ( c) 10,074.6 3,040.0 2,760.6 1,475.8 8,946.1 1,614.1 1,763.1 2,104.1 ( c) 7,527.9 ( c) ( c) 847.0 722.0 1,274.7 ( c) 4,770.7 ( c) 2,309.8 ( c) 3,089.0 ( c) 4,787.1 1,703.7 1,394.5 566.4 2,422.7 1,214.7 1,300.1 1,545.8 ( c) 685.8 ( c) (c) 374.8 197.0 126.5 (c) 897.3 ( c) 210.7 ( c) 793.8 ( c) 496.9 113.2 108.9 55.6 240.4 72.9 57.1 112.2 ( c) 499.4 ( c) ( c) 70.7 51.8 77.5 ( c) 414.2 ( c) 87.7 (c) 162.1 ( c) 236.3 60.5 54.4 21.1 65.4 53.9 41.6 80.9 ( c) 40.1 504.6 5,753.9 72.9 10,190.1 111,050.8 18,078.8 4,170.3 46,579.0 2,309.4 586.5 6,080.5 1,020.2 216.4 2,525.3 126.3 13.6 4.2 295.5 181.5 336.8 53.7 903.5 55.4 384.9 24.6 103.4 7.1 700.5 182.9 137.2 66.8 636.7 214.8 230.3 309.2 (d) 90.1 Employer Type Nonprofit, private ....................................................................... For profit, private ....................................................................... Government (state and local) ................................................... 584.0 7,173.8 90.1 Note: Establishment data are from the Survey of U.S. Businesses 2016; worker and payroll data from pooled CPS data for 7/2016–6/2019 adjusted to reflect 2018/ 2019. a Excludes the self-employed and unpaid workers. b Summation across industries may not add to the totals reported due to suppressed values and some establishments not reporting an industry. c Data not displayed because sample size of affected workers in small establishments is less than 10 due to reliability concerns. d SUSB does not provide information on private households. e Establishment number represents the total number of governments, including state and local. Data from Census of Governments, 2017. As discussed in section VI.B.iii, estimates of workers subject to the FLSA do not exclude workers employed by enterprises that do not meet the enterprise coverage requirements because there is no data set that would adequately inform an estimate of the size of this worker population. Although not excluding such workers only affects a small percentage of workers generally, it may have a larger effect (and result in a larger overestimate) for non-profits, because revenue from charitable activities is not included when determining enterprise coverage. iv. Number of Affected Small Entities and Employees To estimate the probability that an exempt EAP worker in the CPS data is jbell on DSK3GLQ082PROD with RULES2 247 The Department used CPS microdata to estimate the number of affected workers. This was VerDate Sep<11>2014 20:33 Sep 26, 2019 Jkt 247001 employed by a small establishment, the Department assumed this probability is done individually for each observation in the relevant sample by randomly assigning them a small business status based on the best available estimate of the probability of a worker to be employed in a small business in their respective industry (3-digit Census codes). While aggregation to the 262 3-digit Census codes is certainly possible, many of these industry codes contain too few observations to be reliable. 248 There is a strand of literature that indicates that small establishments tend to pay lower wages than larger establishments. This may imply that workers in small businesses are more likely to be affected than workers in large businesses; however, the literature does not make clear what the appropriate alternative rate for small businesses should be. 249 Workers are designated as employed in a small business based on their industry of employment. The share of workers considered small in nonprofit, for profit, and government entities is therefore the weighted average of the shares for the industries that compose these categories. PO 00000 Frm 00064 Fmt 4701 Sfmt 4700 equal to the proportion of all workers employed by small establishments in the corresponding industry. That is, if 50 percent of workers in an industry are employed in small entities, then on average small entities are expected to employ 1 out of every 2 exempt EAP workers in this industry.247 The Department applied these probabilities to the population of exempt EAP workers to find the number of workers (total exempt EAP workers and total affected by the rule) that small entities employ. No data are available to determine whether small businesses (or small businesses in specific industries) are more or less likely than non-small businesses to employ exempt EAP workers or affected EAP workers. Therefore, the best assumption available is to assign the same rates to all small and non-small businesses.248 249 E:\FR\FM\27SER2.SGM 27SER2 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations The Department estimated that small entities employ 480,900 of the 1.3 million affected workers (38.2 percent) (Table 30). This composes 0.9 percent of the 53.1 million workers that small entities employ. The sectors with the highest total number of affected workers employed by small establishments are: Professional and technical services (79,700); retail trade (47,500); and health care services, except hospitals (43,500). The sectors with the largest 51293 percent of small business workers who are affected include: broadcasting (except internet) (2.0 percent); arts, entertainment, and recreation (1.9 percent); and insurance (1.9 percent). TABLE 30—NUMBER OF AFFECTED WORKERS EMPLOYED BY SMALL ESTABLISHMENTS, BY INDUSTRY AND EMPLOYER TYPE Workers (1,000s) Industry Total Total ................................................................................................................. Affected workers (1,000s) a Small business employed Total Small business employed 143,184.6 53,058.6 1,257.3 480.9 (c) (c) (c) 8,525.6 (c) 1,652.6 1,240.7 1,173.5 (c) 2,616.6 (c) (c) 1,512.1 1,809.0 (c) 575.8 871.7 (c) 1,423.2 (c) 3,440.5 15,694.5 6,355.2 1,391.6 (c) (c) 554.0 (c) (c) (c) (c) 4,506.3 2,746.7 2,091.1 (c) 10,196.2 (c) 5,080.7 (c) 14,196.6 (c) 10,074.6 3,040.0 2,760.6 1,475.8 8,946.1 1,614.1 1,763.1 2,104.1 (c) 7,527.9 (c) (c) (c) 5,482.7 (c) 1,004.7 673.2 552.2 (c) 728.6 (c) (c) 888.6 829.3 (c) 390.3 464.6 (c) 553.8 (c) 1,583.3 5,398.1 1,740.6 264.2 (c) (c) 129.4 (c) (c) (c) (c) 847.0 722.0 1,274.7 (c) 4,770.7 (c) 2,309.8 (c) 3,089.0 (c) 4,787.1 1,703.7 1,394.5 566.4 2,422.7 1,214.7 1,300.1 1,545.8 (c) 685.8 (c) (c) (c) 51.6 (c) 7.8 7.1 8.4 (c) 15.0 (c) (c) 7.9 5.5 (c) 4.6 7.2 (c) 10.6 (c) 35.8 129.9 25.7 12.4 (c) (c) 8.2 (c) (c) (c) (c) 76.8 60.2 25.4 (c) 173.1 (c) 33.5 (c) 74.5 (c) 91.0 52.8 53.0 9.8 27.1 11.4 6.8 35.3 (c) 50.9 (c) (c) (c) 34.7 (c) 3.9 4.1 3.9 (c) 4.1 (c) (c) 4.4 3.1 (c) 2.6 4.5 (c) 3.7 (c) 17.7 47.5 5.5 3.8 (c) (c) 2.5 (c) (c) (c) (c) 15.2 13.7 17.3 (c) 79.7 (c) 13.5 (c) 12.3 (c) 43.5 28.3 26.7 4.0 8.1 8.2 5.8 25.3 (c) 5.2 10,190.1 4,170.3 125.0 58.4 jbell on DSK3GLQ082PROD with RULES2 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 ........................................................................ Membership associations & organizations ...................................................... Private households .......................................................................................... Public administration b ...................................................................................... Employer Type Nonprofit, private ............................................................................................. VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 PO 00000 Frm 00065 Fmt 4701 Sfmt 4700 E:\FR\FM\27SER2.SGM 27SER2 51294 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations TABLE 30—NUMBER OF AFFECTED WORKERS EMPLOYED BY SMALL ESTABLISHMENTS, BY INDUSTRY AND EMPLOYER TYPE—Continued Workers (1,000s) Small business employed Industry Total For profit, private ............................................................................................. Government (state and local) .......................................................................... Affected workers (1,000s) a 111,050.8 18,078.8 Small business employed Total 46,579.0 2,309.4 1,000.5 131.9 410.5 11.9 Note: Worker data are from pooled CPS data for 7/2016–6/2019 adjusted to reflect 2018/2019. a Estimation of affected workers employed by small establishments was done at the Census 4-digit occupational code and industry level. Therefore, at the more aggregated 51 industry level shown in this table, the ratio of small business employed to total employed does not equal the ratio of affected small business employed to total affected for each industry, nor does it equal the ratio for the national total because relative industry size, employment, and small business employment differs from industry to industry. b Establishment number represents the total number of state and local governments. Data from Census of Governments, 2017. c Data not displayed due to reliability concerns; sample size of affected workers in small establishments is less than 10. Because no information is available on how affected workers are distributed among small establishments that employ affected workers, the Department estimated a range for effects. At one end of this range, the Department assumed that each small establishment employs no more than one affected worker, meaning that at most 480,900 of the 6.3 million small establishments will employ an affected worker. Thus, these assumptions provide an upper bound estimate of the number of affected small establishments (although it provides a lower bound estimate of the effect per small establishment because costs are spread over a larger number of establishments). The impacts experienced by an establishment would increase as the share of its workers that are affected increases. Establishments that employ only affected workers are most likely to experience the most severe effects. Therefore, to estimate a lower-end estimate for the number of affected establishments (which generates an upper-end estimate for impacts per establishment) the Department assumed that all workers employed by an affected establishment are affected. For the purposes of estimating this lower-range number of affected small establishments, the Department used the average size of a small establishment as the typical size of an affected small establishment.250 The average number of employees in a small establishment is the number of workers that small establishments employ divided by the total number of small establishments in that industry (SUSB 2012). Thus, the number of affected small establishments in an industry, if all employees of an affected establishment are affected, equals the number of affected small establishment employees divided by the average number of employees per small establishment. Table 31 summarizes the estimated number of affected workers that small establishments employ and the expected range for the number of affected small establishments by industry. The Department estimated that the rule will affect 480,900 workers who are employed by somewhere between 63,400 and 480,900 small establishments; this composes from 1.0 percent to 7.6 percent of all small establishments. It also means that from 5.9 million to 6.3 million small establishments incur no more than minimal regulatory familiarization costs (i.e., 6.3 million minus 480,900 equals 5.9 million; 6.3 million minus 63,400 equals 6.3 million, using rounded values). The table also presents the average number of affected employees per establishment using the method in which all employees at the establishment are affected. For the other method, by definition, there is always one affected employee per establishment. Also displayed is the average payroll per small establishment by industry (based on both affected and non-affected small establishments), calculated by dividing total payroll of small businesses by the number of small businesses (Table 29) (applicable to both methods). TABLE 31—NUMBER OF SMALL AFFECTED ESTABLISHMENTS AND EMPLOYEES BY INDUSTRY AND EMPLOYER TYPE Affected workers in small entities (1,000s) Industry Total ..................................................................................... Number of small affected establishments (1,000s) a One affected employee per estab. b 480.9 Per establishment All employees at estab. affected c Affected employees a Average annual payroll ($1,000s) 480.9 63.4 7.6 $452.0 (d ) ( d) (d ) (d ) Industry (d) jbell on DSK3GLQ082PROD with RULES2 Agriculture ............................................................................ 250 This is not the true lower bound estimate of the number of affected establishments. Strictly speaking, a true lower bound estimate of the number of affected small establishments would be calculated by assuming all employees in the largest small establishments are affected. For example, if VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 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. PO 00000 Frm 00066 Fmt 4701 Sfmt 4700 However, because such an outcome appears implausible, the Department determined a more reasonable lower estimate would be based on average establishment size. E:\FR\FM\27SER2.SGM 27SER2 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations 51295 TABLE 31—NUMBER OF SMALL AFFECTED ESTABLISHMENTS AND EMPLOYEES BY INDUSTRY AND EMPLOYER TYPE— Continued Affected workers in small entities (1,000s) Industry 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 .......................................................... Number of small affected establishments (1,000s) a One affected employee per estab. b (d) (d) 34.7 (d) 3.9 4.1 3.9 (d) 4.1 (d) (d) 4.4 3.1 (d) 2.6 4.5 (d) 3.7 (d) 17.7 47.5 5.5 3.8 (d) (d) 2.5 (d) (d) (d) (d) 15.2 13.7 17.3 (d) 79.7 (d) 13.5 (d) 12.3 (d) 43.5 28.3 26.7 4.0 8.1 8.2 5.8 25.3 (d) 5.2 All employees at estab. affected c Per establishment Affected employees a Average annual payroll ($1,000s) ( d) ( d) 34.7 ( d) 3.9 4.1 3.9 ( d) 4.1 ( d) ( d) 4.4 3.1 (d ) 2.6 4.5 ( d) 3.7 ( d) 17.7 47.5 5.5 3.8 (d ) (d ) 2.5 ( d) (d ) ( d) ( d) 15.2 13.7 17.3 ( d) 79.7 ( d) 13.5 ( d) 12.3 ( d) 43.5 28.3 26.7 4.0 8.1 8.2 5.8 25.3 (d ) 5.2 ( d) ( d) 4.3 ( d) 0.2 0.1 0.1 (d ) 0.1 ( d) ( d) 0.1 0.1 ( d) 0.1 0.3 ( d) 0.1 ( d) 3.7 6.1 0.6 0.1 ( d) ( d) 0.1 ( d) ( d) (d ) ( d) 2.3 2.7 3.9 ( d) 13.7 (d ) 1.9 ( d) 0.4 ( d) 5.2 2.5 2.4 0.4 1.7 1.4 0.9 4.9 ( d) 0.6 (d ) (d ) 8.1 (d ) 18.0 31.4 50.1 (d ) 72.5 (d ) (d ) 35.5 34.7 (d ) 25.6 16.9 (d ) 51.8 (d ) 4.8 7.8 9.5 34.0 (d ) (d ) 28.0 (d ) (d ) (d ) (d ) 6.5 5.1 4.5 (d ) 5.8 (d ) 7.0 (d ) 34.1 (d ) 8.3 11.4 11.0 10.1 4.8 6.1 6.4 5.2 (d ) 9.4 ( d) ( d) 457.2 (d ) 980.4 2,048.1 4,856.7 (d ) 4,677.3 ( d) ( d) 2,146.1 1,504.7 (d ) 1,151.1 918.3 (d ) 4,246.9 (d ) 299.5 340.9 459.4 2,612.6 (d ) (d ) 1,851.5 ( d) (d ) (d ) ( d) 545.0 365.7 270.4 (d ) 505.6 (d ) 266.8 (d ) 1,790.4 (d ) 410.4 405.9 430.7 378.3 130.7 269.9 206.4 271.4 (d ) 550.3 58.4 410.5 11.9 7.1 50.7 0.4 8.3 8.1 31.7 428.8 438.9 1,734.0 Employer Type jbell on DSK3GLQ082PROD with RULES2 Nonprofit, private .................................................................. For profit, private .................................................................. Government (state and local) .............................................. 58.4 410.5 11.9 Note: Establishment data are from the Survey of U.S. Businesses 2016; worker and payroll data from pooled CPS data for 7/2016–6/2019 adjusted to reflect 2018/2019. a Estimation of both affected small establishment employees and affected small establishments was done at the most detailed industry level available. Therefore, the ratio of affected small establishment employees to total small establishment employees for each industry may not match the ratio of small affected establishments to total small establishments at the more aggregated industry level presented in the table, nor will it equal the ratio at the national level because relative industry size, employment, and small business employment differs from industry to industry. b This method may overestimate the number of affected establishments and therefore the ratio of affected workers to affected establishments may be greater than 1-to-1. However, we addressed this issue by also calculating effects based on the assumption that 100 percent of workers at an establishment are affected. VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 PO 00000 Frm 00067 Fmt 4701 Sfmt 4700 E:\FR\FM\27SER2.SGM 27SER2 51296 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations c For example, on average, a small establishment in the construction industry employs 8.1 workers (5.5 million employees divided by 676,900 small establishments). This method assumes if an establishment is affected then all 8.1 workers are affected. Therefore, in the construction industry this method estimates there are 4,300 small affected establishments (34,700 affected small workers divided by 8.1). d Data not displayed due to reliability concerns; sample size of affected workers in small establishments is less than 10. e Number of establishments is smaller than number of affected employees; thus, total number of establishments reported. f Establishment number represents the total number of state and local governments. v. Projected Impacts to Affected Small Entities For small entities, the Department projected various types of effects, including regulatory familiarization costs, adjustment costs, managerial costs, and payroll increases to employees. The Department estimated a range for the number of small affected establishments and the impacts they incur. However, few establishments are likely to incur the effects at the upper end of this range because it seems unlikely that the final rule would affect all employees at a small firm. While the upper and lower bounds are likely overand under-estimates, respectively, of effects per small establishment, the Department believes that this range of costs and payroll increases provides the most accurate characterization of the effects of the rule on small employers.251 Furthermore, the smaller estimate of the number of affected establishments (i.e., where all employees are assumed to be affected) will result in the largest costs and payroll increases per entity as a percent of establishment payroll and revenue, and the Department expects that many, if not most, entities will incur smaller costs, payroll increases, and effects relative to establishment size. The Department expects total direct employer costs will range from $80.1 million to $97.1 million for affected small establishments (Table 32) in the first year. Small establishments that do not employ affected workers will incur an additional $254.4 million to $272.5 million in regulatory familiarization costs. The three industries with the highest costs (professional and technical services; retail trade; and health care services, except hospitals) account for about 36 percent of the costs. The transportation equipment manufacturing industry is expected to incur the largest cost per establishment ($11,700 using the method where all employees are affected), although the costs are not expected to exceed 0.25 percent of payroll. The food services and drinking places industry is expected to experience the largest effect as a share of payroll (estimated direct costs compose 0.63 percent of average entity payroll). TABLE 32—YEAR 1 SMALL ESTABLISHMENT DIRECT COSTS, TOTAL AND PER ESTABLISHMENT, BY INDUSTRY AND EMPLOYER TYPE Cost to small entities in year 1 a One affected employee All employees affected Industry Cost per affected entity Total (millions) b Total .......................................................................................... $97.1 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 ................................................................................ ( c) Percent of annual payroll Total (millions) b Cost per affected entity Percent of annual payroll $202 0.04% $80.1 $1,263 0.28 ( c) ( c) (c) 204 ( c) 204 204 204 (c) 204 (c) (c) 204 204 ( c) 204 204 ( c) 204 ( c) 204 204 204 204 (c) (c) 204 ( c) ( c) ( c) ( c) 204 204 204 (c) ( c) ( c) 0.04 (c) 0.02 0.01 0.00 ( c) 0.00 ( c) ( c) 0.01 0.01 (c) 0.02 0.02 ( c) 0.00 ( c) 0.07 0.06 0.04 0.01 ( c) ( c) 0.01 ( c) ( c) (c) (c) 0.04 0.06 0.08 ( c) (c) ( c) 5.8 ( c) 0.6 0.7 0.6 ( c) 0.7 ( c) ( c) 0.7 0.5 ( c) 0.4 0.7 ( c) 0.6 ( c) 3.0 7.9 0.9 0.6 ( c) ( c) 0.4 ( c) ( c) ( c) ( c) 2.5 2.3 3.0 ( c) ( c) ( c) 1,348 ( c) 2,943 5,094 8,116 ( c) 11,720 ( c) ( c) 5,758 5,639 ( c) 4,175 2,759 (c) 8,382 (c) 820 1,306 1,569 5,527 ( c) ( c) 4,556 (c) (c) ( c) ( c) 1,095 864 760 ( c) ( c) (c) 0.29 ( c) 0.30 0.249 0.17 (c) 0.25 (c) (c) 0.27 0.37 ( c) 0.36 0.30 ( c) 0.20 ( c) 0.27 0.38 0.34 0.21 (c) (c) 0.25 ( c) ( c) ( c) ( c) 0.20 0.24 0.28 jbell on DSK3GLQ082PROD with RULES2 Industry 251 As noted previously, these are not the true lower and upper bounds. The values presented are VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 ( c) ( c) 7.1 ( c) 0.8 0.8 0.8 ( c) 0.8 ( c) (c) 0.9 0.6 ( c) 0.5 0.9 ( c) 0.8 ( c) 3.6 9.7 1.1 0.8 (c) (c) 0.5 ( c) ( c) ( c) ( c) 3.1 2.8 3.5 the highest and lowest estimates the Department believes are plausible. PO 00000 Frm 00068 Fmt 4701 Sfmt 4700 E:\FR\FM\27SER2.SGM 27SER2 51297 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations TABLE 32—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 All employees affected Industry Total (millions) b 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 ................................................................. ( c) 16.3 ( c) 2.8 (c) 2.5 ( c) 8.9 5.8 5.4 0.8 1.7 1.7 1.2 5.2 ( c) 1.1 Nonprofit, private ....................................................................... For profit, private ....................................................................... Government (state and local) ................................................... 11.6 86.6 2.4 Cost per affected entity Percent of annual payroll Total (millions) b Cost per affected entity Percent of annual payroll ( c) 204 (c) 204 (c) 204 ( c) 204 204 204 204 204 204 204 204 ( c) 204 ( c) 0.04 ( c) 0.08 ( c) 0.01 ( c) 0.05 0.05 0.05 0.05 0.16 0.08 0.10 0.08 ( c) 0.04 (c) 13.4 ( c) 2.3 ( c) 2.0 ( c) 7.2 4.7 4.4 0.7 1.4 1.4 1.0 4.3 (c) 0.9 ( c) 982 ( c) 1,175 ( c) 5,539 (c) 1,383 1,885 1,822 1,678 823 1,023 1,082 878 ( c) 1,561 ( c) 0.19 (c) 0.44 (c) 0.31 ( c) 0.34 0.46 0.42 0.44 0.63 0.38 0.52 0.32 ( c) 0.28 199 211 201 0.05 0.05 0.01 9.4 71.0 1.9 1,330 1,400 5,055 0.31 0.32 0.29 Employer Type jbell on DSK3GLQ082PROD with RULES2 Note: Pooled CPS data for 7/2016–6/2019 adjusted to reflect 2018/2019. a Direct costs include regulatory familiarization, adjustment, and managerial costs. b The range of costs per establishment depends on the number of affected establishments. The minimum assumes that each affected establishment has one affected worker (therefore, the number of affected establishments is equal to the number of affected workers). The maximum assumes the share of workers in small entities who are affected is also the share of small entity establishments that are affected. c Data not displayed due to reliability concerns; sample size of affected workers in small establishments is less than 10. It is possible that the costs of the final rule may be disproportionately large for small entities, especially because small entities often have limited or no human resources personnel on staff. However, the Department expects that small entities will rely upon compliance assistance materials provided by the Department or industry associations to become familiar with the final rule. Additionally, the Department notes that the final rule is quite limited in scope as it primarily makes changes to the salary component of the part 541 regulations. Finally, the Department believes that most entities have at least some nonexempt employees and, therefore, already have policies and systems in place for monitoring and recording their hours. The Department believes that applying those same policies and systems to the workers whose exemption status changes will not be an unreasonable burden on small businesses. Average weekly earnings for affected EAP workers in small establishments are expected to increase by about $6.07 per week per affected worker, using the incomplete fixed-job model 252 described in section VI.D.iv.3.253 This will lead to $151.8 million in additional annual wage payments to employees in small entities (less than 0.6 percent of aggregate affected establishment payroll; Table 33). The largest payroll increases per establishment are expected in the sectors of textile, apparel, and leather manufacturing (up to $27,000 per entity); transportation equipment manufacturing (up to $14,600 per entity); and food manufacturing (up to $14,500 per entity). However, average payroll increases per establishment exceed 2 percent of average annual payroll in only two sectors: Food services and drinking places (3.0 percent) and textile, apparel, and leather manufacturing (2.3 percent). 252 As explained in section VI.D.iv.3, the incomplete fixed-job model reflects the Department’s determination that an appropriate estimate of the impact on the implicit hourly rate of pay for regular overtime workers should be determined using the average of Barkume’s and Trejo’s two estimates of the incomplete fixed-job model adjustments: A wage change that is 40 percent of the adjustment toward the amount predicted by the fixed-job model, assuming an initial zero overtime pay premium, and a wage change that is 80 percent of the adjustment assuming an initial 28 percent overtime pay premium. 253 This is an average increase for all affected workers (both EAP and HCE), and reconciles to the weighted average of individual salary changes discussed in the Transfers section. VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 PO 00000 Frm 00069 Fmt 4701 Sfmt 4700 E:\FR\FM\27SER2.SGM 27SER2 51298 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations TABLE 33—YEAR 1 SMALL ESTABLISHMENT PAYROLL INCREASES, TOTAL AND PER ESTABLISHMENT, BY INDUSTRY AND EMPLOYER TYPE Increased payroll for small entities in year 1 a One affected employee Industry Total (millions) Total ..................................................................................... Per estab. $151.8 All employees affected Percent of annual payroll Per estab. Percent of annual payroll $316 0.07 $2,393 0.53 (b ) ( b) ( b) 265 ( b) 257 405 80 (b ) 200 ( b) ( b) 389 417 (b ) 1,051 233 ( b) 236 ( b) 263 360 321 0 (b ) (b ) 451 ( b) (b ) ( b) ( b) 239 169 489 ( b) 404 ( b) 265 ( b) 373 ( b) 134 148 567 0 818 466 110 160 (b ) 165 ( b) ( b) ( b) 0.06 (b ) 0.03 0.02 0.00 ( b) 0.00 ( b) ( b) 0.02 0.03 ( b) 0.09 0.03 ( b) 0.01 ( b) 0.09 0.11 0.07 ........................ ( b) ( b) 0.02 ( b) ( b) (b ) ( b) 0.04 0.05 0.18 ( b) 0.08 (b ) 0.10 ( b) 0.02 ( b) 0.03 0.04 0.13 ........................ 0.63 0.17 0.05 0.06 ( b) 0.03 (b ) (b ) (b ) 2,147 (b ) 4,622 12,710 4,004 (b ) 14,528 (b ) (b ) 13,794 14,476 (b ) 26,943 3,931 (b ) 12,236 (b ) 1,270 2,818 3,039 0 (b ) (b ) 12,620 (b ) (b ) (b ) (b ) 1,557 862 2,175 (b ) 2,351 (b ) 1,859 (b ) 12,716 (b ) 1,114 1,690 6,260 0 3,960 2,832 709 831 (b ) 1,553 (b ) (b ) ( b) 0.47 (b ) 0.47 0.62 0.08 (b ) 0.31 ( b) (b ) 0.64 0.96 (b ) 2.34 0.43 (b ) 0.29 (b ) 0.42 0.83 0.66 ........................ (b ) (b ) 0.68 ( b) (b ) (b ) ( b) 0.29 0.24 0.80 (b ) 0.47 (b ) 0.70 (b ) 0.71 (b ) 0.27 0.42 1.45 ........................ 3.03 1.05 0.34 0.31 (b ) 0.28 448 303 108 0.10 0.07 0.01 3,702 2,452 3,422 0.86 0.56 0.20 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 ............................................................ (b) (b) (b) 9.2 (b) 1.0 1.7 0.3 (b) 0.8 (b) (b) 1.7 1.3 (b) 2.7 1.1 (b) 0.9 (b) 4.7 17.1 1.8 ........................ (b) (b) 1.1 (b) (b) (b) (b) 3.6 2.3 8.5 (b) 32.2 (b) 3.6 (b) 4.6 (b) 5.8 4.2 15.1 ........................ 6.6 3.8 0.6 4.1 (b) 0.9 jbell on DSK3GLQ082PROD with RULES2 Employer Type Nonprofit, private .................................................................. For profit, private .................................................................. Government (state and local) .............................................. 26.2 124.4 1.3 Note: Pooled CPS data for 7/2016–6/2019 adjusted to reflect 2018/2019. a Aggregate change in total annual payroll experienced by small entities under the updated salary levels after labor market adjustments. This amount represents the total amount of (wage) transfers from employers to employees. b Data not displayed due to reliability concerns; sample size of affected workers in small establishments is less than 10. VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 PO 00000 Frm 00070 Fmt 4701 Sfmt 4700 E:\FR\FM\27SER2.SGM 27SER2 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations Table 34 presents estimated first year direct costs and payroll increases combined per establishment and the costs and payroll increases as a percent of average establishment payroll. The Department presents only the results for the upper bound scenario where all workers employed by the establishment are affected. Combined costs and payroll increases per establishment range from $1,700 in the accommodations industry to $31,100 in textile, apparel, and leather manufacturing. Combined costs and payroll increases compose more than 2 percent of average annual establishment payroll in two sectors: Food services and drinking places (3.7 percent) and textile, apparel, and leather manufacturing (2.7 percent). In all other sectors, they range from 0.2 percent to 1.9 percent of payroll. However, comparing costs and payroll increases to payrolls overstates the effects on establishments because payroll represents only a fraction of the financial resources available to an 51299 establishment. The Department approximated revenue per small affected establishment by calculating the ratio of small business revenues to payroll by industry from the 2012 SUSB data then multiplying that ratio by average small entity payroll.254 Using this approximation of annual revenues as a benchmark, only one sector has costs and payroll increases amounting to more than one percent of revenues, food services and drinking places (1.1 percent). TABLE 34—YEAR 1 SMALL ESTABLISHMENT DIRECT COSTS AND PAYROLL INCREASES, TOTAL AND PER ESTABLISHMENT, BY INDUSTRY AND EMPLOYER TYPE, USING ALL EMPLOYEES IN ESTABLISHMENT AFFECTED METHOD Costs and payroll increases for small affected establishments, all employees affected Industry Total (millions) Total ................................................................................................................. Per estab. a Percent of annual payroll Percent of estimated revenues b $231.9 $3,656 0.81 0.15 (c) (c) (c) 15.0 (c) 1.6 2.3 0.9 (c) 1.5 (c) (c) 2.4 1.8 (c) 3.2 1.8 (c) 1.5 (c) 7.7 25.0 2.7 0.6 (c) (c) 1.6 (c) (c) (c) (c) 6.2 4.6 11.4 (c) 45.6 (c) 5.8 (c) 6.6 (c) 13.1 8.8 (c) (c) (c) 3,495 (c) 7,565 17,804 12,119 (c) 26,248 (c) (c) 19,552 20,115 (c) 31,118 6,690 (c) 20,618 (c) 2,090 4,123 4,608 5,527 (c) (c) 17,176 (c) (c) (c) (c) 2,652 1,727 2,936 (c) 3,333 (c) 3,034 (c) 18,255 (c) 2,497 3,575 (c) (c) (c) 0.76 (c) 0.77 0.87 0.25 (c) 0.56 (c) (c) 0.91 1.34 (c) 2.70 0.73 (c) 0.49 (c) 0.70 1.21 1.00 0.21 (c) (c) 0.93 (c) (c) (c) (c) 0.49 0.47 1.09 (c) 0.66 (c) 1.14 (c) 1.02 (c) 0.61 0.88 (c) (c) (c) 0.17 (c) 0.15 0.18 0.05 (c) 0.08 (c) (c) 0.21 0.12 (c) 0.50 0.15 (c) 0.04 (c) 0.04 0.12 0.23 0.02 (c) (c) 0.33 (c) (c) (c) (c) 0.17 0.11 0.24 (c) 0.26 (c) 0.51 (c) 0.39 (c) 0.26 0.41 jbell on DSK3GLQ082PROD with RULES2 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 ............................................................................................. 254 The ratio of revenues to payroll for small businesses ranged from 2.15 (social assistance) to 43.40 (petroleum and coal products manufacturing), VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 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 PO 00000 Frm 00071 Fmt 4701 Sfmt 4700 2012 SUSB so revenue aligned with payrolls in 2018. E:\FR\FM\27SER2.SGM 27SER2 51300 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations TABLE 34—YEAR 1 SMALL ESTABLISHMENT DIRECT COSTS AND PAYROLL INCREASES, TOTAL AND PER ESTABLISHMENT, BY INDUSTRY AND EMPLOYER TYPE, USING ALL EMPLOYEES IN ESTABLISHMENT AFFECTED METHOD—Continued Costs and payroll increases for small affected establishments, all employees affected Industry Total (millions) 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 19.5 0.7 8.0 5.2 1.6 8.4 (c) 1.7 8,082 1,678 4,783 3,855 1,791 1,710 (c) 3,114 1.88 0.44 3.66 1.43 0.87 0.63 (c) 0.57 0.62 0.11 1.09 0.40 0.30 0.16 (c) 0.15 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 CPS data for 7/2016–6/2019 adjusted to reflect 2018/2019. a Total direct costs and transfers for small establishments in which all employees are affected. Impacts to small establishments in which one employee is affected will be a fraction of the impacts presented in this table. b Revenues estimated by calculating the ratio of estimated small business revenues to payroll from the 2012 SUSB, and multiplying by payroll per small entity. For the public administration sector, the ratio was calculated using revenues and payroll from the 2017 Census of Governments. c Data not displayed due to reliability concerns; sample size of affected workers in small establishments is less than 10. vi. Projected Effects to Affected Small Entities in Year 2 Through Year 10 To determine how small businesses will be affected in future years, the Department projected costs to small businesses for nine years after Year 1 of the rule. Projected employment and earnings were calculated using the same methodology described in section VI.B.iii. Affected employees in small firms follow a similar pattern to affected workers in all establishments: the number decreases gradually in projected years. There are 480,900 affected workers in small establishments in Year 1 and 337,700 in Year 10. Table 35 reports affected workers in selected years only. TABLE 35—PROJECTED NUMBER OF AFFECTED WORKERS IN SMALL ESTABLISHMENTS, BY INDUSTRY Affected workers in small establishments (1,000s) Industry jbell on DSK3GLQ082PROD with RULES2 Year 1 Year 10 Total .................................................................................................................................................................. 480.9 337.7 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) ................................................................................................................................. (a) ( a) (a ) (a ) 20.7 (a ) (a) 4.4 ( a) (a ) (a) (a ) (a ) 3.8 (a) ( a) ( a) (a) ( a) ( a) (a ) 12.7 26.9 3.8 (a) ( a) ( a) ( a) VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 PO 00000 Frm 00072 Fmt 4701 Sfmt 4700 E:\FR\FM\27SER2.SGM 27SER2 (a) (a) 34.7 (a) 3.9 4.1 3.9 (a) 4.1 (a) (a) 4.4 3.1 (a) 2.6 4.5 (a) 3.7 (a) 17.7 47.5 5.5 3.8 (a) (a) 2.5 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations 51301 TABLE 35—PROJECTED NUMBER OF AFFECTED WORKERS IN SMALL ESTABLISHMENTS, BY INDUSTRY—Continued Affected workers in small establishments (1,000s) Industry Year 1 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 ................................................................................................................................................ (a) (a) (a) (a) 15.2 13.7 17.3 (a) 79.7 (a) 13.5 (a) 12.3 (a) 43.5 28.3 26.7 4.0 8.1 8.2 5.8 25.3 (a) 5.2 Year 10 (a ) ( a) (a ) (a ) 12.1 13.0 12.1 (a ) 55.7 (a ) 9.3 (a ) 11.1 (a ) 35.3 25.7 17.6 ( a) 6.2 7.6 3.9 18.2 ( a) 2.7 Note: Worker data are from pooled CPS data for 7/2016–6/2019 adjusted to reflect 2018/2019. a Data not displayed because sample size of affected workers in small establishments is less than 10. Costs to small establishments vary by year but generally decrease from Year 1 mostly because regulatory familiarization costs are zero in all projected years, and adjustment costs are relatively small. By Year 10, additional costs and payroll for small businesses have decreased from $231.9 million in Year 1 to $118.5 million (Table 36). The Department notes that, due to relatively small sample sizes, the estimates by detailed industry are not precise. This can cause some numbers in the data to vary across years by a greater amount than they will in the future. TABLE 36—PROJECTED DIRECT COSTS AND PAYROLL INCREASES FOR AFFECTED SMALL ESTABLISHMENTS, BY INDUSTRY, USING ALL EMPLOYEES IN ESTABLISHMENT AFFECTED METHOD Costs and payroll increases for small affected establishments, all employees affected (millions 2019) Industry jbell on DSK3GLQ082PROD with RULES2 Year 1 Year 10 Total .................................................................................................................................................................. $231.9 $118.5 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 ....................................................................................................................................................... (a) (a) (a) 15.0 (a) 1.6 2.3 0.9 (a) 1.5 (a) (a) 2.4 1.8 (a) 3.2 1.8 (a) 1.5 (a) 7.7 ( a) (a ) (a ) 6.1 (a ) (a) 2.6 ( a) (a ) (a) (a ) (a ) 1.1 (a) ( a) ( a) (a) ( a) ( a) (a ) 7.0 VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 PO 00000 Frm 00073 Fmt 4701 Sfmt 4700 E:\FR\FM\27SER2.SGM 27SER2 51302 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations TABLE 36—PROJECTED DIRECT COSTS AND PAYROLL INCREASES FOR AFFECTED SMALL ESTABLISHMENTS, BY INDUSTRY, USING ALL EMPLOYEES IN ESTABLISHMENT AFFECTED METHOD—Continued Costs and payroll increases for small affected establishments, all employees affected (millions 2019) Industry Year 1 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 ................................................................................................................................................ 25.0 2.7 0.6 (a) (a) 1.6 (a) (a) (a) (a) 6.2 4.6 11.4 (a) 45.6 (a) 5.8 (a) 6.6 (a) 13.1 8.8 19.5 0.7 8.0 5.2 1.6 8.4 (a) 1.7 Year 10 14.7 0.5 (a) ( a) ( a) ( a) (a ) ( a) (a ) (a ) 2.1 2.6 4.7 (a ) 21.8 (a ) 2.3 (a ) 3.9 (a ) 6.4 4.9 6.0 ( a) 3.7 3.2 0.8 5.9 ( a) 0.3 jbell on DSK3GLQ082PROD with RULES2 Note: Pooled CPS data for 7/2016–6/2019 adjusted to reflect 2018/2019. a Data not displayed because sample size of affected workers in small establishments is less than 10. E. Projected Reporting, Recordkeeping, and Other Compliance Requirements of the Final Rule The FLSA sets minimum wage, overtime pay, and recordkeeping requirements for employment subject to its provisions. Unless exempt, covered employees must be paid at least the minimum wage and not less than one and one-half times their regular rates of pay for overtime hours worked. Every covered employer must keep certain records for each nonexempt worker. The regulations at part 516 require employers to maintain records for employees subject to the minimum wage and overtime pay provisions of the FLSA. The recordkeeping requirements are not new requirements; however, employers will need to keep some additional records for affected employees who become nonexempt. As indicated in this analysis, this final rule expands minimum wage and overtime pay coverage to 1.2 million affected EAP workers. This will result in an increase in employer burden and was estimated in the PRA portion (section V) of this VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 final rule. Note that the burdens reported for the PRA section of this rule include the entire information collection and not merely the additional burden estimated as a result of this final rule. F. Steps the Agency Has Taken To Minimize the Significant Economic Impact on Small Entities This section discusses the description of the steps the agency has taken to minimize the economic impact on small entities, consistent with the stated objectives of the FLSA. It includes a statement of the factual, policy, and legal reasons for the selected standard and HCE levels adopted in the final rule and why alternatives were rejected. In this final rule, the Department sets the standard salary level equal to the 20th percentile of earnings of full-time salaried workers in the lowest-wage Census Region (currently the South) and/or the retail industry. Based on 2018/19 data, this results in a salary level of 684 per week, or 35,568 annually for a full-year worker. The PO 00000 Frm 00074 Fmt 4701 Sfmt 4700 Department believes that a standard salary level set at the 20th percentile of earnings of full-time salaried workers in the lowest-wage Census Region and/or retail industry will accomplish the goal of setting a salary threshold that adequately distinguishes between employees who may meet the duties requirements of the EAP exemption and those who likely do not, without necessitating the reintroduction of a limit on nonexempt work as existed under the long duties test. The Department sets the HCE total annual compensation level equal to the 80th percentile of earnings of full-time salaried workers nationally (107,432 annually based on 2018/19 data).255 The Department believes that this level avoids unduly burdensome costs associated with evaluating, under the 255 The Department estimated this value using CPS data for earnings of full-time (defined as at least 35 hours per week) nonhourly paid employees. For the purpose of this rulemaking, the Department considers data representing compensation paid to nonhourly workers to be an appropriate proxy for compensation paid to salaried workers. E:\FR\FM\27SER2.SGM 27SER2 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations standard duties test, the exemption statuses of large numbers of highly-paid white collar employees, many of whom would have remained exempt even under that test, while providing a meaningful and appropriate complement to the more lenient HCE duties test. The Department further believes that nearly all of the highlypaid white collar workers earning above this threshold ‘‘would satisfy any duties test.’’ 256 The Department is also revising the regulations to permit employers to count nondiscretionary bonuses, incentives, and commissions toward up to 10 percent of the required salary level for the standard exemption, so long as employers pay those amounts on an annually or more frequent basis. jbell on DSK3GLQ082PROD with RULES2 i. Differing Compliance and Reporting Requirements for Small Entities This final rule provides no differing compliance requirements and reporting requirements for small entities. The Department has strived to minimize respondent recordkeeping burden by requiring no specific form or order of records under the FLSA and its corresponding regulations. Moreover, employers would normally maintain the records under usual or customary business practices. ii. Least Burdensome Option or Explanation Required The Department believes it has chosen the most effective option that updates and clarifies the rule and which results in the least burden. Among the options considered by the Department, the least restrictive option was taking no regulatory action. Taking no regulatory action does not address the Department’s concerns discussed above under Objectives of, and Need for, the Final Rule. Pursuant to section 603(c) of the RFA, the following alternatives are to be addressed: Differing compliance or reporting requirements that take into account the resources available to small entities. The FLSA creates a level playing field for businesses by setting a floor below which employers may not pay their employees. To establish differing compliance or reporting requirements for small businesses would undermine this important purpose of the FLSA and appears unnecessary given the small annualized cost of the rule. The Year 1 cost of the proposed rule for the average employer that qualifies as small was estimated to range from a minimum of 1,700 (accommodation industry) to a maximum of 31,100 (textile, apparel, and leather manufacturing), using the upper-bound estimates. The Department makes available a variety of resources to employers for understanding their obligations and achieving compliance. Therefore, the Department has not proposed differing compliance or reporting requirements for small businesses. The clarification, consolidation, or simplification of compliance and reporting requirements for small entities. This final rule imposes no new reporting requirements. The Department makes available a variety of resources to employers for understanding their obligations and achieving compliance. The use of performance rather than design standards. Under this final rule, employers may achieve compliance through a variety of means. Employers may elect to continue to claim the EAP exemption for affected employees by adjusting salary levels, hire additional workers or spread overtime hours to other employees, or compensate employees for overtime hours worked. The Department makes available a variety of resources to employers for understanding their obligations and achieving compliance. An exemption from coverage of the rule, or any part thereof, for such small entities. Creating an exemption from coverage of this rule for businesses with as many as 500 employees, those defined as small businesses under SBA’s size standards, is inconsistent with the FLSA, which applies to all employers that satisfy the enterprise coverage threshold or employ individually covered employees, regardless of employer size.257 G. Identification, to the Extent Practicable, of all Relevant Federal Rules That May Duplicate, Overlap, or Conflict With the Final Rule The Department is not aware of any federal rules that duplicate, overlap, or conflict with this final rule. VIII. Unfunded Mandates Reform Act Analysis The Unfunded Mandates Reform Act of 1995 (UMRA),258 requires agencies to prepare a written statement for rules for which a final rulemaking was published and that include any federal mandate that may result in increased expenditures by state, local, and tribal governments, in the aggregate, or by the private sector, of $165 million ($100 million in 1995 dollars adjusted for inflation to 2018) or more in at least one year. This statement must: (1) Identify 256 84 FR 10914 (internal citation omitted). VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 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 final rule is issued pursuant to section 13(a)(1) of the Fair Labor Standards Act (FLSA or Act), 29 U.S.C. 213(a)(1). The section exempts from the FLSA’s minimum wage and overtime pay requirements ‘‘any employee employed in a bona fide executive, administrative, or professional capacity (including any employee employed in the capacity of academic administrative personnel or teacher in elementary or secondary schools), or in the capacity of outside salesman (as such terms are defined and delimited from time to time by regulations of the Secretary, subject to the provisions of [the Administrative Procedure Act] . . .).’’ 259 The requirements of the exemption are contained in part 541 of the Department’s regulations. Section 3(e) of the FLSA 260 defines ‘‘employee’’ to include most individuals employed by a state, political subdivision of a state, or interstate governmental agency. Section 3(x) of the FLSA 261 also defines public agencies to include the government of a state or political subdivision thereof, or any interstate governmental agency. B. Assessment of Costs and Benefits For purposes of the UMRA, this rule includes a federal mandate that is expected to result in increased expenditures by the private sector of more than $165 million in at least one year, but the rule will not result in increased expenditures by state, local and tribal governments, in the aggregate, of $165 million or more in any one year. Costs to state and local governments: Based on the economic impact analysis of this final rule, the Department determined that the final rule will result in Year 1 costs for state and local governments totaling $52.1 million, of which $21.7 million are direct employer costs and $30.4 million are payroll increases (Table 37). In subsequent years, the Department estimated that state and local governments may experience payroll increases of as much as $49.0 million per year. 259 29 U.S.C. 213(a)(1). U.S.C. 203(e). 261 29 U.S.C. 203(x). 257 See 29 U.S.C. 203(s). 258 2 U.S.C. 1501 et seq. PO 00000 Frm 00075 Fmt 4701 260 29 Sfmt 4700 51303 E:\FR\FM\27SER2.SGM 27SER2 51304 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations Costs to the private sector: The Department determined that the final rule will result in Year 1 costs to the private sector of approximately $887.0 million, of which $521.0 million are direct employer costs and $366.0 million are payroll increases. In subsequent years, the Department estimated that the private sector may experience a payroll increase of as much as $284.2 million per year. TABLE 37—SUMMARY OF YEAR 1 AFFECTED EAP WORKERS, REGULATORY COSTS, AND TRANSFERS BY TYPE OF EMPLOYER Total Private Government a Affected EAP Workers (1,000s) Number ........................................................................................................................................ 1,257 1,125 128 Regulatory familiarization ............................................................................................................ Adjustment ................................................................................................................................... Managerial ................................................................................................................................... $340.4 68.2 134.4 $336.5 61.0 123.5 $3.9 7.0 10.9 Total direct costs .................................................................................................................. 543.0 521.0 21.7 $396.4 $366.0 $30.4 $939.4 $887.0 $52.1 Direct Employer Costs (Millions) Payroll Increases (Millions) From employers to workers ......................................................................................................... Direct Employer Costs & Transfers (Millions) From employers ........................................................................................................................... jbell on DSK3GLQ082PROD with RULES2 a Includes only state, local, and tribal governments. UMRA requires agencies to estimate the effect of a regulation on the national economy if, at its discretion, such estimates are reasonably feasible and the effect is relevant and material.262 However, OMB guidance on this requirement notes that such 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 $51.2 billion to $102.5 billion (using 2018 GDP). A regulation with a smaller aggregate effect is not likely to have a measurable effect in macro-economic terms unless it is highly focused on a particular geographic region or economic sector, which is not the case with this final rule. The Department’s RIA estimates that the total first-year costs (direct employer costs and payroll increases from employers to workers) of the final rule will be approximately $887.0 million for private employers and $52.1 million for state and local governments. Given OMB’s guidance, the Department has determined that a full macro-economic analysis is not likely to show any measurable effect on the economy. Therefore, these costs are compared to payroll costs and revenue to demonstrate the feasibility of adapting to these new rules. Total first-year private sector costs compose 0.013 percent of private sector 262 2 U.S.C. 1532(a)(4). VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 payrolls nationwide.263 Total private sector first-year costs compose 0.002 percent of national private sector revenues (revenues in 2018 are projected to be $40.9 trillion).264 The Department concludes that effects of this magnitude are affordable and will not result in significant disruptions to typical firms in any of the major industry categories. Total first-year state and local government costs compose less than 0.01 percent of state and local government payrolls.265 First-year state and local government costs compose 0.001 percent of state and local government revenues (projected 2018 revenues were estimated to be $3.7 trillion).266 Effects of this magnitude will not result in significant disruptions to typical state and local governments. The $52.1 million in state and local 263 Private sector payroll costs nationwide are projected to be $6.8 trillion in 2018. This projection is based on private sector payroll costs in 2012, which were $5.3 trillion using the 2012 Economic Census of the United States. This was inflated to 2018 dollars using the GDP deflator. 264 Private sector revenues in 2012 were $32.3 trillion using the 2012 Economic Census of the United States. This was inflated to 2018 dollars using the GDP deflator. 265 State and local payrolls in 2016 were reported as $927.9 billion. This was inflated to 2018 payroll costs of $1,016.5 billion using the CPI–U. State and Local Government Finances Summary: FY2016. Available at https://www.census.gov/govs/local/. 266 State and local revenues in 2016 were reported as $3.4 trillion. This was inflated to 2018 dollars using the CPI–U. State and Local Government Finances Summary: FY2016. Available at https:// www.census.gov/govs/local/. PO 00000 Frm 00076 Fmt 4701 Sfmt 4700 government costs constitutes an average of approximately $578 for each of the approximately 90,126 state and local entities. The Department considers effects of this magnitude to be quite small both in absolute terms and in relation to payrolls and revenue. C. Response to Comments i. Consultation Prior to Issuance of the NPRM On July 26, 2017, the Department published an RFI to gather information to aid in formulating a proposal to revise the part 541 regulations. Later, between September 7 and October 17, 2018, the Department held listening sessions in all five Wage and Hour regions throughout the country, and in Washington, DC, to supplement feedback received as part of the RFI. A wide variety of state and local government entities filed comments in response to the 2017 RFI and/or participated in the 2018 listening sessions, and the Department took their views into consideration in drafting the NPRM published earlier this year. Although several tribal governments submitted comments in response to the Department’s 2015 NPRM, see 81 FR 32547–48, no tribal governments participated in response to the 2017 RFI or 2018 listening sessions. E:\FR\FM\27SER2.SGM 27SER2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations ii. Comments Received in Response to the NPRM The Department received comments from a variety of commenters representing state and local governments, including from some elected officials.267 These comments presented a range of views on the proposed rule, particularly the proposed increase to the standard salary level threshold. Some commenters, like the Public Housing Authorities Directors Association (PHADA), supported the proposed rule, agreeing that an update to the standard salary level is ‘‘long overdue’’ and finding the proposed increase preferable to the higher threshold adopted in the 2016 final rule. See also Joint Comment of the International Public Management Association for Human Resources (IPMA–HR), the International City/ County Management Association (ICMA), and the Government Finance Officers Association (GFOA). Other commenters, like the Idaho Division of Human Resources (IDHR), the National Association of Counties (NACo), and the South Butler Community Library, expressed concern about the impact of any increase to the standard salary level, including from the proposed increase. While IDHR and NACo agreed that the proposed rule would be preferable to the 2016 final rule, each criticized the Department’s preference for a uniform standard salary level that, they stated, would disproportionately impact employers operating in lower-income states and counties. Others representing certain state governments, however, opposed the proposed rule on the grounds that they would prefer a significantly higher standard salary level, such as the one adopted under the 2016 final rule. See House and Senate Democratic Caucuses of the Michigan Legislature; Michigan Governor Gretchen Whitmer; Pennsylvania Department of Labor & Industry; State AGs; Washington Governor Jay Inslee; Wisconsin Department of Workforce Development. These comments echoed many of the same criticisms of the proposed salary level levied by employee advocates discussed earlier in section IV.A.v, but the State AGs made an additional point (relevant for UMRA purposes) that a low federal threshold burdens state governments with expensive law enforcement responsibilities to protect workers in their states from unlawful misclassification. The State AGs asserted that state governments are 267 As in response to the RFI, the Department did not receive any comments from tribal governments or affiliated stakeholders in response to the NPRM. VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 reluctant to set their own higher exemption thresholds for fear of ‘‘creating uneven standards for employment and [risking] competition with neighboring states.’’ As explained earlier in section IV.A, the Department agrees with the overwhelming majority of commenters that an increase to the $455 per week standard salary level currently being enforced is both necessary and overdue. While the adoption of any nationwide earning threshold has a disproportionate impact on employers operating in lower-income regions and industries, the Department believes that adopting multiple salary levels that vary by region would introduce confusion and compliance costs for employers (or employees) operating across different jurisdictions. By contrast, the Department concludes that reapplying the 2004 final rule’s methodology to set the standard salary level appropriately accommodates employers operating in low-wage regions.268 Some state and local government commenters opined on other aspects of the proposed rule. For example, NACo endorsed the Department’s proposal to permit nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary level test; this proposal has been finalized as proposed. The joint comment submitted by IPMA– HR, ICMA, and the GFOA objected to the NPRM’s proposed increase to the total annual compensation threshold for highly compensated employees, asserting that the proposed threshold of $147,414 per year ‘‘would render the highly compensated employee exemption almost meaningless, especially for smaller governmental organizations in certain parts of the country.’’ As explained in section IV.D, the Department has finalized a lower increase to the HCE threshold, to $107,432 per year, which addresses such concerns. State and local government commenters disagreed over how the Department should update the earnings thresholds going forward. Some commenters urged the Department to adopt a mechanism to automatically update the standard salary level and HCE total compensation levels, which they viewed as critical for ensuring that 268 IDHR and the joint comment submitted by IPMA–HR, ICMA, and the GFOA requested that the Department permit employers to prorate the salary level for part-time employees. As explained earlier, see supra n.72, the Department declines this request, emphasizing that the standard salary level is not an annual earnings threshold and that ‘‘[e]xempt employees need not be paid for any workweek in which they perform no work.’’ 29 CFR 541.602(a)(1). PO 00000 Frm 00077 Fmt 4701 Sfmt 4700 51305 the effectiveness of the earnings thresholds does not erode over time. See House and Senate Democratic Caucuses of the Michigan Legislature; Michigan Governor Gretchen Whitmer; State AGs; Washington Governor Jay Insee; Wisconsin Department of Workforce Development. By contrast, NACo, PHADA, and the joint comment submitted by IPMA–HR, ICMA, and the GFOA supported the Department’s proposed commitment to update the earnings thresholds using notice-andcomment rulemaking every four years. As explained in section IV.E, in this final rule the Department reaffirms its intent to update the standard salary level and HCE total annual compensation threshold more regularly in the future using notice-and-comment rulemaking. Finally, IDHR requested a delayed effective date of at least 18 months, asserting that ‘‘[p]ublic entities, like the State [of Idaho], require sufficient time in the [budgeting] and legislative processes to address appropriations or to make statutory changes to existing state law affected by a federal law amendment.’’ As explained in section II.E, the Department has set an effective date of January 1, 2020, for the final rule. The time between this rule’s publication and effective date exceeds the 30-day minimum required under the Administrative Procedure Act (APA), 5 U.S.C. 553(d), and the 60 days mandated for a ‘‘major rule’’ under the Congressional Review Act, 5 U.S.C. 801(a)(3)(A). Given that the Department is currently enforcing the 2004 standard salary level, which an overwhelming majority of commenters agreed needs to be updated, the Department concludes that a lengthier delayed effective date would be imprudent. D. Least Burdensome Option or Explanation Required This final rule has described the Department’s consideration of various options throughout the preamble and economic impact analysis (see section VI.C). The Department believes that it has chosen the least burdensome but still cost-effective methodology to update the salary level consistent with the Department’s statutory obligation. Although some alternative options considered would have set the standard salary level at a rate lower than the updated salary level, that outcome would not necessarily be the most 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 E:\FR\FM\27SER2.SGM 27SER2 51306 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations within the Act’s protection. A low salary level would also increase the burden on the employer to apply the duties test to more employees in determining whether an employee is exempt, which would inherently increase the likelihood of misclassification and, in turn, increase the risk that employees who should receive overtime and minimum wage protections under the FLSA are denied those protections. Selecting a standard salary level inevitably affects both the risk and cost of misclassification of overtime-eligible employees earning above the salary level, as well as the risk and cost of providing overtime protection to employees performing bona fide EAP duties who are paid below the salary level. An unduly low level risks increasing employer liability from unintentionally misclassifying workers as exempt; but an unduly high standard salary level increases labor costs to employers precluded from claiming the exemption for employees performing bona fide EAP duties. Thus, the ultimate cost of the regulation is increased if the standard salary level is set either too low or too high. The Department determined that setting the standard salary level equivalent to the earnings of the 20th percentile of full-time salaried workers in the South and/or in the retail industry balances the risks and costs of misclassification of exempt status. IX. Executive Order 13132, Federalism The Department has (1) reviewed this final rule in accordance with Executive Order 13132 regarding federalism and (2) determined that it does not have federalism implications. X. Executive Order 13175, Indian Tribal Governments This final rule would not have substantial direct effects on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian tribes. List of Subjects in 29 CFR Part 541 jbell on DSK3GLQ082PROD with RULES2 Labor, Minimum wages, Overtime pay, Salaries, Teachers, Wages. Signed at Washington, DC, this 16th day of September, 2019. Cheryl M. Stanton, Administrator, Wage and Hour Division. For the reasons set out in the preamble, the Department of Labor amends title 29 of the Code of Federal Regulations part 541 as follows: VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 PART 541—DEFINING AND DELIMITING THE EXEMPTIONS FOR EXECUTIVE, ADMINISTRATIVE, PROFESSIONAL, COMPUTER AND OUTSIDE SALES EMPLOYEES 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). 2. In § 541.100, revise paragraph (a)(1) 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 $684 per week (or $455 per week if employed in the Commonwealth of the Northern Mariana Islands, Guam, Puerto Rico, or the U.S. Virgin Islands by employers other than the Federal government, or $380 per week if employed in American Samoa by employers other than the Federal government), exclusive of board, lodging or other facilities; * * * * * ■ 3. In § 541.200, revise paragraph (a)(1) 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 $684 per week (or $455 per week if employed in the Commonwealth of the Northern Mariana Islands, Guam, Puerto Rico, or the U.S. Virgin Islands by employers other than the Federal government, or $380 per week if employed in American Samoa by employers other than the Federal government), exclusive of board, lodging or other facilities; * * * * * ■ 4. In § 541.204, revise paragraph (a)(1) to read as follows: § 541.204 Educational establishments. (a) * * * (1) Compensated on a salary or fee basis at a rate of not less than $684 per week (or $455 per week if employed in the Commonwealth of the Northern Mariana Islands, Guam, Puerto Rico, or the U.S. Virgin Islands by employers other than the Federal government, or $380 per week if employed in American Samoa by employers other than the Federal government), exclusive of board, lodging, or other facilities; or on a salary basis which is at least equal to PO 00000 Frm 00078 Fmt 4701 Sfmt 4700 the entrance salary for teachers in the educational establishment by which employed; and * * * * * ■ 5. In § 541.300, revise paragraph (a)(1) to read as follows: § 541.300 General rule for professional employees. (a) * * * (1) Compensated on a salary or fee basis pursuant to § 541.600 at a rate of not less than $684 per week (or $455 per week if employed in the Commonwealth of the Northern Mariana Islands, Guam, Puerto Rico, or the U.S. Virgin Islands by employers other than the Federal government, or $380 per week if employed in American Samoa by employers other than the Federal government), exclusive of board, lodging or other facilities; and * * * * * ■ 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 $684 per week (or $455 per week if employed in the Commonwealth of the Northern Mariana Islands, Guam, Puerto Rico, or the U.S. Virgin Islands by employers other than the Federal government, or $380 per week if employed in American Samoa by employers other than the Federal government), exclusive of board, lodging, or other facilities. * * * * * * * * ■ 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 $684 per week (or $455 per week if employed in the Commonwealth of the Northern Mariana Islands, Guam, Puerto Rico, or the U.S. Virgin Islands by employers other than the Federal Government, or $380 per week if employed in American Samoa by employers other than the Federal Government), exclusive of board, lodging or other facilities. * * * E:\FR\FM\27SER2.SGM 27SER2 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations actually only earns $12,000 in commissions. In this situation, the employer may within one month after the end of the year make a payment of at least $5,432 to the employee. Any such final payment made after the end of the 52-week period may count only toward the prior year’s total annual compensation and not toward the total annual compensation in the year it was paid. If the employer fails to make such a payment, the employee does not qualify as a highly compensated employee, but may still qualify as exempt under subparts B, C, or D of this part. * * * * * ■ 9. In § 541.602, revise paragraph (a)(3) § 541.601 Highly compensated employees. to read as follows: (a)(1) Beginning on January 1, 2020, § 541.602 Salary basis. an employee with total annual (a) * * * compensation of at least $107,432 is (3) Up to ten percent of the salary deemed exempt under section 13(a)(1) amount required by § 541.600(a) may be of the Act if the employee customarily and regularly performs any one or more satisfied by the payment of nondiscretionary bonuses, incentives of the exempt duties or responsibilities and commissions, that are paid annually of an executive, administrative or or more frequently. The employer may professional employee as identified in utilize any 52-week period as the year, subparts B, C or D of this part. such as a calendar year, a fiscal year, or (2) Where the annual period covers an anniversary of hire year. If the periods both prior to and after January employer does not identify some other 1, 2020, the amount of total annual year period in advance, the calendar compensation due will be determined year will apply. This provision does not on a proportional basis. apply to highly compensated employees (b)(1) ‘‘Total annual compensation’’ under § 541.601. must include at least $684 per week (i) If by the last pay period of the 52paid on a salary or fee basis as set forth week period the sum of the employee’s in §§ 541.602 and 541.605, except that § 541.602(a)(3) shall not apply to highly weekly salary plus nondiscretionary bonus, incentive, and commission compensated employees. Total annual payments received is less than 52 times compensation may also include commissions, nondiscretionary bonuses the weekly salary amount required by § 541.600(a), the employer may make and other nondiscretionary one final payment sufficient to achieve compensation earned during a 52-week period. Total annual compensation does the required level no later than the next pay period after the end of the year. Any not include board, lodging and other such final payment made after the end facilities as defined in § 541.606, and of the 52-week period may count only does not include payments for medical toward the prior year’s salary amount insurance, payments for life insurance, and not toward the salary amount in the contributions to retirement plans and year it was paid. the cost of other fringe benefits. (ii) An employee who does not work (2) If an employee’s total annual a full 52-week period for the employer, compensation does not total at least the either because the employee is newly amount specified in the applicable hired after the beginning of this period subsection of paragraph (a) by the last or ends the employment before the end pay period of the 52-week period, the of this period, may qualify for employer may, during the last pay exemption if the employee receives a period or within one month after the pro rata portion of the minimum end of the 52-week period, make one amount established in paragraph (a)(3) final payment sufficient to achieve the of this section, based upon the number required level. For example, for a 52of weeks that the employee will be or week period beginning January 1, 2020, has been employed. An employer may an employee may earn $90,000 in base salary, and the employer may anticipate make one final payment as under based upon past sales that the employee paragraph (a)(3)(i) of this section within one pay period after the end of also will earn $17,432 in commissions. employment. However, due to poor sales in the final quarter of the year, the employee * * * * * jbell on DSK3GLQ082PROD with RULES2 (b) The required amount of compensation per week may be translated into equivalent amounts for periods longer than one week. For example, the $684-per-week requirement will be met if the employee is compensated biweekly on a salary basis of not less than $1,368, semimonthly on a salary basis of not less than $1,482, or monthly on a salary basis of not less than $2,964. However, the shortest period of payment that will meet this compensation requirement is one week. * * * * * ■ 8. Amend § 541.601 by revising paragraphs (a) and (b) to read as follows: VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 PO 00000 Frm 00079 Fmt 4701 Sfmt 4700 51307 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 $684 each week paid on a salary basis may also receive additional compensation of a one percent commission on sales. An exempt employee also may receive a percentage of the sales or profits of the employer if the employment arrangement also includes a guarantee of at least $684 each week paid on a salary basis. Similarly, the exemption is not lost if an exempt employee who is guaranteed at least $684 each week paid on a salary basis also receives additional compensation based on hours worked for work beyond the normal workweek. Such additional compensation may be paid on any basis (e.g., flat sum, bonus payment, straight-time hourly amount, time and one-half or any other basis), and may include paid time off. (b) An exempt employee’s earnings may be computed on an hourly, a daily or a shift basis, without losing the exemption or violating the salary basis requirement, if the employment arrangement also includes a guarantee of at least the minimum weekly required amount paid on a salary basis regardless of the number of hours, days or shifts worked, and a reasonable relationship exists between the guaranteed amount and the amount actually earned. The reasonable relationship test will be met if the weekly guarantee is roughly equivalent to the employee’s usual earnings at the assigned hourly, daily or shift rate for the employee’s normal scheduled workweek. Thus, for example, an exempt employee guaranteed compensation of at least $725 for any week in which the employee performs any work, and who normally works four or five shifts each week, may be paid $210 per shift without violating the $684-per-week salary basis requirement. The reasonable relationship requirement applies only if the employee’s pay is computed on an hourly, daily or shift basis. It does not apply, for example, to an exempt store manager paid a guaranteed salary per week that exceeds the current salary level who also receives a commission of one-half percent of all sales in the store or five percent of the store’s profits, which in some weeks may total as much E:\FR\FM\27SER2.SGM 27SER2 51308 Federal Register / Vol. 84, No. 188 / Friday, September 27, 2019 / Rules and Regulations as, or even more than, the guaranteed salary. ■ 11. In § 541.605, revise paragraph (b) 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 jbell on DSK3GLQ082PROD with RULES2 * VerDate Sep<11>2014 18:58 Sep 26, 2019 Jkt 247001 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 $684 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: PO 00000 Frm 00080 Fmt 4701 Sfmt 9990 § 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 $1,043 per week (exclusive of board, lodging, or other facilities). * * * * * * * * [FR Doc. 2019–20353 Filed 9–26–19; 8:45 am] BILLING CODE 4510–27–P E:\FR\FM\27SER2.SGM 27SER2

Agencies

[Federal Register Volume 84, Number 188 (Friday, September 27, 2019)]
[Rules and Regulations]
[Pages 51230-51308]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-20353]



[[Page 51229]]

Vol. 84

Friday,

No. 188

September 27, 2019

Part II





 Department of Labor





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 Wage and Hour Division





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29 CFR Part 541





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

Federal Register / Vol. 84 , No. 188 / Friday, September 27, 2019 / 
Rules and Regulations

[[Page 51230]]


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DEPARTMENT OF LABOR

Wage and Hour Division

29 CFR Part 541

RIN 1235-AA20


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

AGENCY: Wage and Hour Division, Department of Labor.

ACTION: Final rule.

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SUMMARY: The Department of Labor is updating and revising the 
regulations issued under the Fair Labor Standards Act implementing the 
exemptions from minimum wage and overtime pay requirements for 
executive, administrative, professional, outside sales, and computer 
employees.

DATES: This final rule is effective on January 1, 2020.

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

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Executive Summary
II. Background
    A. The FLSA
    B. Regulatory History
    C. Overview of Existing Regulatory Requirements
    D. The Department's Proposal
    E. Final Rule Effective Date
III. Need for Rulemaking
IV. Final Regulatory Revisions
    A. Standard Salary Level
    B. Special Salary Tests
    C. Inclusion of Nondiscretionary Bonuses, Incentive Payments, 
and Commissions in the Salary Level Requirement
    D. Highly Compensated Employees
    E. Future Updates to the Earnings Thresholds
V. Paperwork Reduction Act
VI. Analysis Conducted in Accordance With Executive Order 12866, 
Regulatory Planning and Review, and Executive Order 13563, Improving 
Regulation and Regulatory Review
    A. Introduction
    B. Methodology To Determine the Number of Potentially Affected 
EAP Workers
    C. Determining the Revised Salary and Compensation Levels
    D. Effects of Revised Salary and Compensation Levels
VII. Final Regulatory Flexibility Analysis (FRFA)
    A. Objectives of, and Need for, the Final Rule
    B. The Agency's Response to Public Comments
    C. Comment by the Chief Counsel for Advocacy of the Small 
Business Administration
    D. Description of the Number of Small Entities to Which the 
Final Rule Will Apply
    E. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements of the Final Rule
    F. Steps the Agency Has Taken To Minimize the Significant 
Economic Impact on Small Entities
    G. Identification, to the Extent Practicable, of all Relevant 
Federal Rules That May Duplicate, Overlap, or Conflict With the 
Final Rule
VIII. Unfunded Mandates Reform Act Analysis
    A. Authorizing Legislation
    B. Assessment of Costs and Benefits
    C. Response to Comments
    D. Least Burdensome Option or Explanation Required
IX. Executive Order 13132, Federalism
X. Executive Order 13175, Indian Tribal Governments
Amendments to Regulatory Text

I. Executive Summary

    The Fair Labor Standards Act (FLSA or Act) requires covered 
employers to pay employees a minimum wage and, for employees who work 
more than 40 hours in a week, overtime premium pay of at least 1.5 
times the regular rate of pay. Section 13(a)(1) of the FLSA, commonly 
referred to as the ``white collar'' or ``EAP'' exemption, exempts from 
these minimum wage and overtime pay requirements ``any employee 
employed in a bona fide executive, administrative, or professional 
capacity.'' The statute delegates to the Secretary of Labor (Secretary) 
the authority to define and delimit the terms of the exemption. Since 
1940, the regulations implementing the exemption have generally 
required each of the following three tests to be met: (1) The employee 
must be paid a predetermined and fixed salary that is not subject to 
reduction because of variations in the quality or quantity of work 
performed (the ``salary basis test''); (2) the amount of salary paid 
must meet a minimum specified amount (the ``salary level test''); and 
(3) the employee's job duties must primarily involve executive, 
administrative, or professional duties as defined by the regulations 
(the ``duties test'').
    The Department of Labor (Department) has long used the salary level 
test as a tool to help define the white collar exemption on the basis 
that employees paid less than the salary level are unlikely to be bona 
fide executive, administrative, or professional employees, and, 
conversely, that nearly all bona fide executive, administrative, and 
professional employees are paid at least that much. The salary level 
test provides certainty for employers and employees, as well as 
efficiency for government enforcement agencies. The salary level test's 
usefulness, however, diminishes as the wages of employees entitled to 
overtime increase and inflation reduces the real value of the salary 
threshold.
    The Department increased the standard salary level from $455 per 
week ($23,660 per year) to $913 per week ($47,476 per year) in a final 
rule published May 23, 2016 (``2016 final rule''). That rulemaking was 
challenged in court, and on November 22, 2016, the U.S. District Court 
for the Eastern District of Texas enjoined the Department from 
implementing and enforcing the rule. On August 31, 2017, the court 
granted summary judgment against the Department, invalidating the 2016 
final rule because it ``makes overtime status depend predominately on a 
minimum salary level, thereby supplanting an analysis of an employee's 
job duties.'' Nevada v. U.S. Dep't of Labor, 275 F. Supp. 3d 795, 806 
(E.D. Tex. 2017). An appeal of that decision to the U.S. Court of 
Appeals for the Fifth Circuit is being held in abeyance. Currently, the 
Department is enforcing the regulations in effect on November 30, 2016, 
including the $455 per week standard salary level, which is the level 
that was set in a final rule issued April 23, 2004 (``2004 final 
rule'').
    Taking into account the Nevada district court's conclusion with 
respect to the salary level, public comments received in response to a 
July 26, 2017 Request for Information (RFI), and feedback received at 
public listening sessions, the Department has undertaken this 
rulemaking to revise the part 541 regulations so that they

[[Page 51231]]

effectively distinguish between the white collar employees whom 
Congress intended to be protected by the FLSA's minimum wage and 
overtime provisions and bona fide executive, administrative, and 
professional employees whom Congress intended to exempt from those 
statutory requirements.
    The Department published a Notice of Proposed Rulemaking (NPRM) on 
March 22, 2019. The NPRM stated that the standard salary level needed 
to exceed $455 per week to more effectively serve its purpose, but that 
the 2016 final rule's increase to $913 per week was inappropriate 
because it excluded from exemption 4.2 million employees whose duties 
would have otherwise qualified them for exemption, a result in 
significant tension with the text of section 13(a)(1). Noting the 
conclusions of the district court that invalidated the 2016 final rule, 
the Department explained that the 2016 final rule's inappropriately 
high salary level ``untethered the salary level test from its 
historical justification'' of ``[s]etting a dividing line between 
nonexempt and potentially exempt employees'' by screening out only 
those employees who, based on their compensation level, are unlikely to 
be bona fide executive, administrative, or professional employees. To 
address the district court's and the Department's concern with the 2016 
final rule and set a more appropriate salary level, the NPRM proposed 
to rescind the 2016 final rule and update the salary level by applying 
the same methodology as the 2004 final rule to current earnings data.
    In 2004, the Department set the standard salary level at $455 per 
week ($23,660 per year), which was approximately the 20th percentile of 
full-time salaried workers in the South and in the retail industry 
nationally.\1\ Accordingly, in the NPRM, the Department proposed to 
update the standard salary level to the 20th percentile of full-time 
salaried workers in the lowest-wage Census Region (the South) \2\ and/
or in the retail industry nationally using current data.\3\ This 
methodology resulted in a proposed standard salary level of $679 per 
week ($35,308 per year). Additionally, the Department proposed special 
salary levels for U.S. territories and an updated base rate for 
employees in the motion picture producing industry. The Department also 
proposed to allow employers to count nondiscretionary bonuses and 
incentive payments toward satisfying up to ten percent of the standard 
salary level or any of the special salary levels applicable to U.S. 
territories, so long as such bonuses are paid at least annually. 
Further, the Department proposed to update the highly compensated 
employee (HCE) total annual compensation level--a higher compensation 
level that is paired with a reduced duties requirement to provide an 
alternative basis for exemption under section 13(a)(1). The HCE level 
was set at $100,000 in the 2004 final rule and increased to $134,004 in 
the 2016 final rule, but the Department has continued to enforce the 
$100,000 level in light of the district court's invalidation of the 
2016 final rule. In the NPRM, the Department proposed to update the HCE 
level by setting it equal to the annualized value of the 90th 
percentile of weekly earnings of full-time salaried workers nationally, 
resulting in a level of $147,414 per year. The Department proposed to 
project both the standard salary level and HCE total annual 
compensation level to January 2020, the final rule's anticipated 
effective date. Finally, the Department explained its commitment to 
update the standard salary level and HCE total compensation levels more 
frequently in the future using notice-and-comment rulemaking every four 
years. The Department proposed no changes to the standard duties tests.
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    \1\ 69 FR 22171.
    \2\ The South Census Region comprises the following: Alabama, 
Arkansas, Delaware, District of Columbia, Florida, Georgia, 
Kentucky, Louisiana, Maryland, Mississippi, North Carolina, 
Oklahoma, South Carolina, Tennessee, Texas, Virginia, and West 
Virginia.
    \3\ In 2004, the Department looked to the 20th percentile of 
full-time salaried workers in the South and in the retail industry 
nationally to validate the standard salary level set in the final 
rule. In this final rule, the Department set the standard salary 
level at the 20th percentile of the combined subpopulations of full-
time salaried employees in the South and full-time salaried 
employees in the retail industry nationwide. Accordingly, the use of 
``and/or'' when describing the salary level methodology in this 
final rule reflects that this data set includes full-time salaried 
workers who work: (1) In the South but not in the retail industry; 
(2) in the retail industry but not in the South; and (3) in the 
South in the retail industry.
---------------------------------------------------------------------------

    The 60-day comment period on the NPRM ended on May 21, 2019, and 
the Department received more than 116,000 comments. The vast majority 
of these comments, including tens of thousands of duplicate or similar 
submissions, were campaign comments using similar template language.\4\ 
After considering the comments, the Department has decided in this 
final rule to maintain the proposed methodology for updating the part 
541 standard salary level, but not to inflate the salary level to 
January 2020. The Department is also finalizing the special salary 
levels for certain U.S. territories as proposed, and updating the base 
rate for employees in the motion picture producing industry. 
Additionally, the Department is finalizing its proposal to permit 
employers to count nondiscretionary bonuses, incentives, and 
commissions toward up to 10 percent of the standard salary level or the 
special salary levels applicable to the U.S. territories, so long as 
employers pay those amounts at least annually. The Department has also 
decided to set the HCE total annual compensation threshold equal to the 
80th percentile of earnings of full-time salaried workers nationally, 
without inflating the threshold to January 2020. When applied to 
updated data, these methodologies result in a standard salary level of 
$684 per week ($35,568 per year) and an HCE total annual compensation 
level of $107,432. Finally, the Department intends to update these 
thresholds more regularly in the future.
---------------------------------------------------------------------------

    \4\ Specifically, one organization submitted spreadsheets 
containing over 56,000 comments from individuals. Of the comments 
contained in this submission, more than 34,000 were duplicates of 
comments that were submitted separately by these individuals. 
Additionally, numerous individual comments associated with this 
campaign were submitted multiple times. Together, these comments 
make up the vast majority of the comments received.
---------------------------------------------------------------------------

    The Department estimates that in 2020, 1.2 million currently exempt 
employees who earn at least $455 per week but less than the standard 
salary level of $684 per week will, without some intervening action by 
their employers, gain overtime eligibility. The Department also 
estimates that an additional 2.2 million white collar workers who are 
currently nonexempt because they do not satisfy the EAP duties tests 
and currently earn at least $455 per week, but less than $684 per week, 
will have their overtime-eligible status strengthened in 2020 because 
these employees will now fail both the salary level and duties tests. 
Lastly, an estimated 101,800 employees who are currently exempt under 
the HCE test will be affected by the increase in the HCE total annual 
compensation level. The Department has not made any changes to the 
duties tests in this final rule.
    This rule is considered an Executive Order 13771 deregulatory 
action. When the Department uses a perpetual time horizon to allow for 
cost comparisons under Executive Order 13771, and using the 2016 rule 
as the baseline, the annualized cost savings of this rule is $534.8 
million with 7 percent discounting.
    Because the Department is currently enforcing the 2004 salary 
level, much of the economic analysis uses the 2004 rule as the baseline 
for calculating costs and transfers. The economic analysis

[[Page 51232]]

quantifies the direct costs resulting from the rule: (1) Regulatory 
familiarization costs; (2) adjustment costs; and (3) managerial costs. 
The Department estimates that annualized direct employer costs in the 
first 10 years following the rule's effective date will be $173.3 
million with 7 percent discounting, including $543.0 million in Year 1 
and $99.1 million in Year 10. This rulemaking will also give employees 
higher earnings in the form of transfers of income from employers to 
employees. Annualized transfers are estimated to be $298.8 million over 
the first ten years, with 7 percent discounting, including $396.4 
million in Year 1.

II. Background

A. The FLSA

    The FLSA generally requires covered employers to pay their 
employees at least the federal minimum wage (currently $7.25 an hour) 
for all hours worked, and overtime premium pay of at least 1.5 times 
the regular rate of pay for all hours worked over 40 in a workweek.\5\ 
However, there are a number of exemptions from the FLSA's minimum wage 
and overtime requirements. Section 13(a)(1) of the FLSA, codified at 29 
U.S.C. 213(a)(1), exempts from both minimum wage and overtime 
protection ``any employee employed in a bona fide executive, 
administrative, or professional capacity . . . or in the capacity of 
outside salesman (as such terms are defined and delimited from time to 
time by regulations of the Secretary, subject to the provisions of [the 
Administrative Procedure Act] . . .).'' The FLSA does not define the 
terms ``executive,'' ``administrative,'' ``professional,'' or ``outside 
salesman.'' Pursuant to Congress's grant of rulemaking authority, since 
1938 the Department has issued regulations at 29 CFR part 541 defining 
the scope of the section 13(a)(1) exemptions. Because Congress 
explicitly delegated to the Secretary the power to define and delimit 
the specific terms of the exemptions through notice and comment 
rulemaking, the regulations so issued have the binding effect of law. 
See Batterton v. Francis, 432 U.S. 416, 425 n.9 (1977).
---------------------------------------------------------------------------

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

    Employees who meet the requirements of part 541 are not subject to 
the FLSA's minimum wage and overtime pay requirements. Some state laws 
have stricter exemption standards than federal law. The FLSA does not 
preempt any such stricter state standards. If a State establishes a 
higher standard than the provisions of the FLSA, the higher standard 
applies in that State. See 29 U.S.C. 218(a); 29 CFR 541.4.

B. Regulatory History

    The Department has consistently used its rulemaking authority to 
define and clarify the section 13(a)(1) exemptions. The implementing 
regulations have generally required each of three tests to be met for 
the exemptions to apply: (1) The salary basis test; (2) the salary 
level test; and (3) the duties test.
    The first version of part 541, establishing the criteria for exempt 
status under section 13(a)(1), was promulgated in October 1938.\6\ The 
Department revised its regulations in 1940,\7\ 1949,\8\ 1954, 1958,\9\ 
1961, 1963, 1967, 1970, 1973, and 1975.\10\ A final rule increasing the 
salary levels was published on January 13, 1981, but was stayed 
indefinitely on February 12, 1981.\11\ In 1985, the Department 
published an Advance Notice of Proposed Rulemaking that was never 
finalized.\12\ In 1992, the Department twice revised the part 541 
regulations. First, the Department created a limited exception from the 
salary basis test for public employees.\13\ The Department then 
implemented the 1990 law exempting employees in certain computer-
related occupations.\14\
---------------------------------------------------------------------------

    \6\ 3 FR 2518 (Oct. 20, 1938).
    \7\ 5 FR 4077 (Oct. 15, 1940). The 1940 regulations were 
informed by what has come to be known as the Stein Report. See 
``Executive, Administrative, Professional . . . Outside Salesman'' 
Redefined, Wage and Hour Division, U.S. Department of Labor, Report 
and Recommendations of the Presiding Officer [Harold Stein] at 
Hearings Preliminary to Redefinition (Oct. 10, 1940) (``Stein 
Report'').
    \8\ 14 FR 7705 (Dec. 24, 1949); 14 FR 7730 (Dec. 28, 1949). The 
1949 regulations were informed by what has come to be known as the 
Weiss Report. See Report and Recommendations on Proposed Revisions 
of Regulations, Part 541, by Harry Weiss, Presiding Officer, Wage 
and Hour and Public Contracts Divisions, U.S. Department of Labor 
(June 30, 1949) (``Weiss Report'').
    \9\ 23 FR 8962 (Nov. 18, 1958). The 1958 regulations were 
informed by what has come to be known at the Kantor Report. See 
Report and Recommendations on Proposed Revision of Regulations, Part 
541, Under the Fair Labor Standards Act, by Harry S. Kantor, 
Assistant Administrator, Office of Regulations and Research, Wage 
and Hour and Public Contracts Divisions, U.S. Department of Labor 
(Mar. 3, 1958) (``Kantor Report'').
    \10\ See 19 FR 4405 (July 17, 1954); 26 FR 8635 (Sept. 15, 
1961); 28 FR 9505 (Aug. 30, 1963); 32 FR 7823 (May 30, 1967); 35 FR 
883 (Jan. 22, 1970); 38 FR 11390 (May 7, 1973); 40 FR 7091 (Feb. 19, 
1975).
    \11\ 46 FR 3010 (Jan. 13, 1981); 46 FR 11972 (Feb. 12, 1981).
    \12\ 50 FR 47696 (Nov. 19, 1985).
    \13\ 57 FR 37677 (Aug. 19, 1992).
    \14\ 57 FR 46742 (Oct. 9, 1992); see Sec. 2, Pub. L. 101-583, 
104 Stat. 2871 (Nov. 15, 1990), codified at 29 U.S.C. 213 Note.
---------------------------------------------------------------------------

    From 1949 until 2004, the part 541 regulations contained two 
different tests for exemption--a ``long'' test that paired a more 
rigorous duties test with a lower salary level, and a ``short'' test 
that paired a more flexible duties test with a higher salary level. On 
April 23, 2004, the Department issued a final rule, which replaced the 
``long'' and ``short'' test system for determining exemption status 
with a single ``standard'' salary level paired with a ``standard'' 
duties test.\15\ The Department set the standard salary level at $455 
per week, and made other changes, some of which are discussed below. In 
the 2004 final rule, the Department also created the HCE test for 
exemption, which paired a reduced duties requirement with a higher 
compensation level ($100,000 per year).
---------------------------------------------------------------------------

    \15\ 69 FR 22122 (Apr. 23, 2004).
---------------------------------------------------------------------------

    On May 23, 2016, the Department issued another final rule, which 
raised the standard salary level to the 40th percentile of earnings of 
full-time salaried workers in the lowest-wage Census Region, resulting 
in a salary level of $913 per week. Additionally, the Department set 
the HCE total annual compensation level equal to the 90th percentile of 
earnings of full-time salaried workers nationally ($134,004 annually). 
The Department also included in the final rule a mechanism to 
automatically update (every three years) the salary and compensation 
thresholds, and for the first time permitted nondiscretionary bonuses, 
incentives, and commissions paid at least quarterly to count toward up 
to 10 percent of the required salary level.
    On November 22, 2016, the United States District Court for the 
Eastern District of Texas issued a preliminary injunction, enjoining 
the Department from implementing and enforcing the 2016 final rule, 
pending further review.\16\ On August 31, 2017, the district court 
granted summary judgment against the Department.\17\ The court held 
that the 2016 final rule's salary level exceeded the Department's 
authority and that the entire final rule was therefore invalid. The 
court determined that a salary level that ``supplant[s] an analysis of 
an employee's job duties'' conflicts with Congress's command to exempt 
bona fide executive, administrative, and professional employees.\18\ As 
a result of these rulings, the Department has continued to enforce the 
salary level set in 2004.
---------------------------------------------------------------------------

    \16\ See Nevada v. U.S. Dep't of Labor, 218 F. Supp. 3d 520 
(E.D. Tex. 2016).
    \17\ See 275 F. Supp. 3d 795.
    \18\ Id. at 806.
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    On July 26, 2017, the Department published an RFI asking for public 
input

[[Page 51233]]

on what changes the Department should propose in a new NPRM on the EAP 
exemption.\19\ The Department received over 200,000 comments on the 
RFI. Between September 7 and October 17, 2018, the Department held 
listening sessions in all five Wage and Hour regions throughout the 
country, and in Washington, DC, to supplement feedback received as part 
of the RFI.\20\
---------------------------------------------------------------------------

    \19\ 82 FR 34616 (July 26, 2017).
    \20\ Listening Session transcripts may be viewed at 
www.regulations.gov, docket ID WHD-2017-0002.
---------------------------------------------------------------------------

    On October 30, 2017, the Government appealed the Nevada district 
court's summary judgment decision to the United States Court of Appeals 
for the Fifth Circuit. On November 6, 2017, the Fifth Circuit granted 
the Government's motion to hold that appeal in abeyance while the 
Department undertook further rulemaking to set a new salary level.
    On March 22, 2019, the Department issued its NPRM, proposing to 
update and revise the EAP regulations.

C. Overview of Existing Regulatory Requirements

    The regulations in 29 CFR part 541 contain specific criteria that 
define each category of exemption provided by section 13(a)(1) for bona 
fide executive, administrative, professional, and outside sales 
employees, as well as teachers and academic administrative personnel. 
The regulations also define those computer employees who are exempt 
under section 13(a)(1) and section 13(a)(17). The employer bears the 
burden of establishing the applicability of any exemption from the 
FLSA's pay requirements.\21\ Job titles, job descriptions, or the 
payment of a salary instead of an hourly rate are insufficient, 
standing alone, to confer exempt status on an employee.
---------------------------------------------------------------------------

    \21\ See, e.g., Idaho Sheet Metal Works, Inc. v. Wirtz, 383 U.S. 
190, 209 (1966); Walling v. Gen. Indus. Co., 330 U.S. 545, 547-48 
(1947).
---------------------------------------------------------------------------

    To qualify for the EAP exemption, employees must meet certain tests 
regarding their job duties \22\ and generally must be paid on a salary 
basis at least the amount specified in the regulations.\23\ Some 
employees, such as business owners, doctors, lawyers, teachers, and 
outside sales employees, are not subject to salary tests.\24\ Others, 
such as academic administrative personnel and computer employees, are 
subject to special, contingent earnings thresholds.\25\ In 2004, the 
standard salary level for EAP employees was set at $455 per week 
(equivalent to $23,660 per year for a full-year worker), and the total 
annual compensation level for highly compensated employees was set at 
$100,000.\26\ Due to the district court's decision invalidating the 
2016 final rule, these are the salary levels the Department is 
currently enforcing.\27\
---------------------------------------------------------------------------

    \22\ See Sec. Sec.  [thinsp]541.100 (executive employees); 
541.200 (administrative employees); 541.300-.303 (teachers and 
professional employees); 541.400 (computer employees); 541.500 
(outside sales employees).
    \23\ Alternatively, administrative and professional employees 
may be paid on a ``fee basis'' for a single job regardless of the 
time required for its completion as long as the hourly rate for work 
performed (i.e., the fee payment divided by the number of hours 
worked) would total at least the weekly amount specified in the 
regulation if the employee worked 40 hours. See Sec.  541.605.
    \24\ See Sec. Sec.  541.101;[thinsp]541.303(d); 541.304(d); 
541.500(c); 541.600(e). Such employees are also not subject to a 
fee-basis test.
    \25\ See Sec.  541.600(c)-(d).
    \26\ 69 FR 22123.
    \27\ The current text of the Code of Federal Regulations (CFR) 
reflects the updates made in the 2016 final rule. Therefore, unless 
otherwise indicated, citations to part 541 refer to the current CFR, 
and the amendments to the regulatory text reflect the current CFR's 
inclusion of the 2016 updates. However, because the Department is 
currently enforcing the 2004 standard salary and total annual 
compensation levels, the final rule references the 2004 standard 
salary and total annual compensation levels.
---------------------------------------------------------------------------

    The 2004 final rule created the HCE test for exemption. Under the 
HCE test, employees who receive at least a specified total annual 
compensation (which must include at least the standard salary amount 
per week paid on a salary or fee basis) are exempt from the FLSA's 
overtime requirements if they customarily and regularly perform at 
least one of the exempt duties or responsibilities of an executive, 
administrative, or professional employee identified in the standard 
tests for exemption.\28\ The HCE test applies only to employees whose 
primary duty includes performing office or non-manual work.\29\ Non-
management production line workers and employees who perform work 
involving repetitive operations with their hands, physical skill, and 
energy cannot be exempt under this section.\30\
---------------------------------------------------------------------------

    \28\ Sec.  [thinsp]541.601.
    \29\ Sec.  [thinsp]541.601(d).
    \30\ Id.
---------------------------------------------------------------------------

D. The Department's Proposal

    On March 22, 2019, the Department issued its proposal to update and 
revise the regulations issued under section 13(a)(1) of the FLSA.\31\ 
The Department proposed to update the standard salary level by applying 
to current data the same method as in the 2004 final rule--i.e., by 
looking at the 20th percentile of earnings of full-time salaried 
workers in the lowest-wage Census Region (then and now the South) and/
or in the retail industry nationwide. The Department also proposed to 
update the HCE total annual compensation level using the same method 
used in the 2016 final rule, setting it equivalent to the 90th 
percentile earnings of full-time salaried workers nationally. The 
Department proposed to project both levels to January 2020, the 
anticipated effective date of a final rule. Additionally, the 
Department proposed a special salary level of $380 per week for 
American Samoa, a special salary level of $455 per week for Puerto 
Rico, the U.S. Virgin Islands, Guam, and the Commonwealth of the 
Northern Mariana Islands, and a special ``base rate'' threshold of 
$1,036 for employees in the motion picture producing industry. The 
Department also proposed to permit employers to use nondiscretionary 
bonuses and incentive payments to satisfy up to 10 percent of the 
standard or special salary levels as long as such payments are made at 
least annually. As to future updates, the Department reaffirmed its 
commitment to evaluating the part 541 earnings thresholds more 
frequently, and stated its intent to propose updates to these levels 
quadrennially. The Department did not propose any changes to the duties 
tests.
---------------------------------------------------------------------------

    \31\ 84 FR 10900.
---------------------------------------------------------------------------

    The Department received more than 116,000 timely comments on the 
NPRM during the 60-day comment period that ended on May 21, 2019. The 
Department received comments from a broad array of constituencies, 
including small business owners, employer and industry associations, 
individual workers, worker advocacy groups, unions, non-profit 
organizations, law firms (representing both employers and employees), 
educational organizations and representatives, religious organizations, 
economists, Members of Congress, state and local governments, 
professional associations, and other interested members of the public. 
All timely received comments may be viewed on the http://www.regulations.gov website, docket ID WHD-2019-0001.
    Some of the comments the Department received were general 
statements of support or opposition, and the Department also received 
many identical or nearly identical ``campaign'' comments sent in 
response to organized comment initiatives. Nearly all commenters 
favored some change to the currently enforced regulations, and 
commenters expressed a wide variety of views on the merits of 
particular aspects of the Department's proposal. Some commenters, 
including tens of thousands who submitted similar comments as part of a 
comment

[[Page 51234]]

campaign (``Campaign Comments''),\32\ requested that the Department 
reject the proposal and defend the 2016 final rule. The Department has 
carefully considered the timely submitted comments addressing the 
proposed changes.
---------------------------------------------------------------------------

    \32\ See supra note 4.
---------------------------------------------------------------------------

    Significant issues raised in the comments are discussed below, 
along with the Department's responses to those comments. Some 
commenters appear to have mistakenly filed comments intended for this 
rulemaking into the dockets for the Department's rulemakings concerning 
the regular rate (docket ID WHD-2019-0002) or joint employer status 
(docket ID WHD-2019-0003) under the FLSA. The Department did not 
consider these misfiled comments in this rulemaking.
    The Department received a number of comments that are beyond the 
scope of this rulemaking. These include, for example, a request that 
the Department reconsider the scope of the exemption at 29 U.S.C. 
207(i) for certain employees of retail and service establishments, and 
a request for tax write-offs for businesses that pass an annual audit 
by the Department. In addition, some non-profit organizations asked the 
Department to work with other federal agencies to create a mechanism 
that non-profits with government grants and contracts could use to 
adjust reimbursement rates to cover unanticipated increased costs, such 
as labor costs due to this rule. For example, in a joint comment, the 
National Council of Nonprofits and others recommended addressing this 
issue through changes to the relevant Federal Acquisition Regulations. 
The Department does not address such issues in this final rule.
    Some commenters raised miscellaneous issues that more directly 
relate to other parts of the Department's regulations. For example, one 
commenter urged the Department to amend its regular rate regulations to 
allow the exclusion of any payments that do not count toward the salary 
level test; one commenter requested that private colleges and 
universities be permitted to use compensatory time off instead of cash 
payments for overtime hours; two commenters requested a safe harbor 
from joint-employment liability for franchisors who help their 
franchisees implement this rule; and one commenter asked the Department 
to permit hourly paid employees (beyond just computer employees) to 
qualify for the exemption. Some commenters requested that the 
Department make changes to the duties test, either as an alternative to 
raising the salary level more significantly or regardless of what 
salary level applies. The Department did not propose any of these 
changes in the NPRM, and declines to make such changes in this final 
rule.
    A number of commenters asked the Department to provide guidance on 
how the FLSA applies to non-profit organizations. See, e.g., Colorado 
Nonprofit Association; Independent Sector; National Council of 
Nonprofits. The Department notes that the FLSA does not provide special 
rules for non-profit organizations or their employees, nor does this 
final rule.\33\
---------------------------------------------------------------------------

    \33\ The Department has issued specific guidance on the 
application of the FLSA to non-profit entities. See Fact Sheet #14A: 
Non-Profit Organizations and the Fair Labor Standards Act (FLSA), 
available at: https://www.dol.gov/whd/regs/compliance/whdfs14a.pdf.
---------------------------------------------------------------------------

E. Final Rule Effective Date

    In the NPRM, the Department referenced an anticipated effective 
date of January 2020 for purposes of projecting forward the proposed 
standard salary level and proposed HCE total annual compensation level. 
Many commenters, while not expressly referencing the effective date, 
conveyed their view that updates to these regulations are ``long 
overdue.'' See, e.g., Legal Aid at Work; Public Housing Authorities 
Directors Association; Washington State Budget and Policy Center. 
Similarly, a few commenters encouraged the Department to increase the 
standard salary threshold, or to promulgate a final rule, ``as soon as 
possible.'' See, e.g., International Foodservice Distributors 
Association; Sergeants Benevolent Association.
    Other commenters did specifically address the final rule's 
effective date. Nearly all of these commenters conveyed the need for 
employers to have sufficient time to adjust to and implement the rule, 
but they disagreed on how much time the Department should provide. The 
National Association of Landscape Professionals favored a period of 90 
to 120 days between the rule's publication and its effective date, 
while several other commenters favored a minimum of 120 days, which was 
the applicable period of time in the 2004 final rule. See, e.g., 
Seyfarth Shaw LLP (Seyfarth Shaw); Society for Human Resource 
Management (SHRM). SHRM thought the effective date should be at least 
120 days from the date of publication of the final rule, but 
acknowledged that the proposed regulations are far more familiar to 
employers than the changes made in 2004. Other commenters favored a 
longer period, ranging from six to eighteen months from publication. 
The U.S. Public Interest Research Group suggested a two-year delay for 
public interest advocacy groups. Several employer representatives who 
opposed the proposed HCE level stated that adjusting to the new level 
would be particularly burdensome. For example, the National Association 
of Manufacturers stated that the proposed increase would require 
employers to spend significant time determining whether employees who 
previously met the HCE test satisfy the standard duties test (and thus 
remain exempt), and requested that if the Department were to finalize 
that increase as proposed, it should set a future compliance date that 
provides sufficient time for employers to adjust to the new HCE level.
    Relatedly, multiple commenters requested that the Department 
``phase in'' any new salary/compensation levels over a period of time. 
Suggested phase-in periods varied widely. Independent Sector and the 
National Council of Young Men's Christian Associations of the United 
States of America (YMCA) favored a two-year phase-in period. An 
individual employee commenter proposed a 3- to 5-year phase-in period 
for non-profit organizations. Some commenters who requested a phase-in 
period did not specify a particular timeframe. Many commenters who 
supported a phase-in cited the importance of providing sufficient time 
for employers to adapt to and implement the new levels. See, e.g., 
Lutheran Services in America; National Grocers Association (NGA).
    The Department has set an effective date of January 1, 2020, for 
the final rule. The Department agrees with the commenters who expressed 
the view that this update to the regulations is ``long overdue,'' and 
with those who encouraged the Department to increase the salary level 
as soon as possible. The time between this rule's publication and 
effective date exceeds the 30-day minimum required under the 
Administrative Procedure Act (APA), 5 U.S.C. 553(d), and the 60 days 
mandated for a ``major rule'' under the Congressional Review Act, 5 
U.S.C. 801(a)(3)(A). While the 2004 rule provided for 120 days between 
the rule's publication and effective date,\34\ the Department agrees 
with commenters who acknowledged that this final rule will be far more 
familiar to employers than the substantial changes provided in the 2004 
final rule.\35\

[[Page 51235]]

    Additionally, while the 2016 rule provided 192 days from the rule's 
publication until its effective date, the salary level increase in this 
rule is more modest, and affects fewer workers--two factors that favor 
a shorter period. Moreover, given that the Department is currently 
enforcing the 2004 standard salary level, which an overwhelming 
majority of commenters agreed needs to be updated, the Department 
concludes that a lengthier delayed effective date would be imprudent. 
Additionally, a January 1 date may be convenient for those employers 
who use the calendar year as their fiscal year, or who use budgets, 
software systems, or other practices on a calendar-year basis. The 
Department is also declining to delay the effective date, or create a 
phase-in, specifically for non-profits. As discussed in more detail in 
the standard salary level discussion below, consistent with past 
practice, the Department is declining to create special rules for the 
application of the part 541 exemptions to non-profits.
---------------------------------------------------------------------------

    \34\ See 79 FR 22126.
    \35\ The 2004 final rule included several significant changes, 
including: (1) A significant percentage increase in the salary 
threshold; (2) a significant reorganization of the part 541 
regulations; (3) the elimination of the short and long test 
structure that had been in place for more than 50 years and the 
creation of a single standard test; and (4) the creation of a new 
test for highly compensated employees. In contrast, here the 
Department is not changing the standard duties test or reorganizing 
the regulations, and so this rule will be much less complicated for 
employers to implement.
---------------------------------------------------------------------------

    While some employer representatives expressed concern that the 
proposed HCE level increase would pose unique challenges for employers 
compared to the change to the standard salary level, given the change 
in methodology for setting the HCE threshold in the final rule, 
discussed in further detail below, the Department does not believe a 
delayed effective date for this provision is necessary. The Department 
believes that the January 1, 2020 effective date will provide employers 
adequate time to make any changes that are necessary to comply with the 
final regulations, and for similar reasons concludes that a phase-in of 
the new thresholds is not warranted. The Department will also provide 
significant outreach and compliance assistance, and will issue a number 
of guidance documents in connection with the publication of this final 
rule.

III. Need for Rulemaking

    The primary goal of this rulemaking is to update the standard 
salary level that helps define and delimit the EAP exemption. This will 
ensure that the level works effectively with the standard duties test 
to distinguish potentially exempt EAP employees from overtime-protected 
white collar workers. Due to the Nevada district court's decision 
invalidating the 2016 final rule, the Department has been enforcing the 
standard salary level of $455 a week. The Department recognizes that 
this level should be updated to reflect current earnings. In the NPRM, 
the Department proposed using the methodology from the 2004 final rule 
to calculate the salary threshold using current data. The Department 
explained that this method would keep the standard salary level aligned 
with the intervening years' growth in earnings. It further stated that 
the 2004 approach has withstood the test of time, would restore the 
salary level to its traditional purpose of serving as a dividing line 
between nonexempt and potentially exempt employees, would address 
concerns that led to the 2016 rule's invalidation, and would ensure 
that the FLSA's intended overtime protections are fully implemented.
    The Department is also updating the total annual compensation 
requirement for the HCE test for exemption to ensure that this 
threshold remains a meaningful and appropriate standard when paired 
with the more-lenient HCE duties test. In an effort to modernize the 
part 541 regulations to account for changing methods of workplace 
compensation, the Department also proposed allowing nondiscretionary 
bonuses and incentive payments (including commissions) to count toward 
up to 10 percent of the standard or special salary levels. Finally, in 
its proposal the Department explained the importance of updating the 
salary thresholds more frequently. Regular updates promote greater 
stability, avoid the disruptive salary level increases that can result 
from lengthy gaps between updates, and provide appropriate wage 
protection for those under the threshold. With these goals in mind, in 
the NPRM, the Department affirmed its intention to issue a proposal to 
update the earnings thresholds every four years, unless the Secretary 
determines that economic or other factors warrant forestalling such an 
update.

IV. Final Regulatory Revisions

    The Department is formally rescinding the 2016 final rule and is 
replacing it with a new rule that updates the part 541 earnings 
thresholds. The Department is setting the standard salary level by 
applying the methodology from the 2004 final rule to current data, 
resulting in a new standard salary level of $684 per week. In addition, 
the Department is setting a special salary level of $455 per week for 
Puerto Rico, the U.S. Virgin Islands, Guam, and the Commonwealth of the 
Northern Mariana Islands; a special salary level of $380 per week for 
American Samoa; and an updated weekly ``base rate'' of $1,043 per week 
for the motion picture producing industry. Nondiscretionary bonuses and 
incentive payments (including commissions) paid on an annual or more 
frequent basis may be used to satisfy up to 10 percent of the standard 
salary level or the special salary levels applicable to the U.S. 
territories. The Department is also setting the HCE annual compensation 
amount at the 80th percentile of full-time salaried workers nationally, 
resulting in a new HCE level of $107,432. These revisions are discussed 
in further detail below.

A. Standard Salary Level

i. History of the Standard Salary Level
    Congress enacted the FLSA on June 25, 1938, and the first version 
of part 541, which the Department issued in October 1938, set a salary 
level of $30 per week for executive and administrative employees.\36\ 
The Department updated the salary levels in 1940, maintaining the 
salary level for executive employees, increasing the salary level for 
administrative employees, and establishing a salary level for 
professional employees. In setting those rates, the Department 
considered surveys of private industry by federal and state government 
agencies, experience gained under the National Industrial Recovery Act, 
and Federal Government salaries to identify a salary level that 
reflected a reasonable ``dividing line'' between employees performing 
exempt and nonexempt work.\37\ Taking into account salaries paid in 
numerous industries and the percentage of employees earning below these 
amounts, the Department set the salary level for each exemption 
slightly below the average salary dividing exempt and nonexempt 
employees.
---------------------------------------------------------------------------

    \36\ 3 FR 2518.
    \37\ Stein Report at 9, 20-21, 30-31.
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    In 1949, the Department evaluated salary data from state and 
federal agencies, including the Bureau of Labor Statistics (BLS). The 
Department considered wages in small towns and low-wage industries, 
wages of federal employees, average weekly earnings for exempt 
employees, starting salaries for college graduates, and salary ranges 
for different occupations such as bookkeepers, accountants, chemists, 
and mining engineers.\38\ The Department also looked at data showing 
increases in exempt employee salaries since 1940,

[[Page 51236]]

and supplemented it with nonexempt employee earnings data to 
approximate the ``prevailing minimum salaries of exempt employees.'' 
\39\ Recognizing that the ``increase in wage rates and salary levels'' 
since 1940 had ``gradually weakened the effectiveness of the present 
salary tests as a dividing line between exempt and nonexempt 
employees,'' the Department considered the increase in weekly earnings 
from 1940 to 1949 for various industries, and then adopted new salary 
levels at a ``figure slightly lower than might be indicated by the 
data'' to protect small businesses.\40\ Also in 1949, the Department 
established a second, less-stringent duties test for each exemption, 
which applied to employees paid at or above a higher ``short test'' 
salary level. The original, more-rigorous duties test became known as 
the ``long test.'' Apart from the differing salary requirements, the 
most significant difference between the short test and the long test 
was that the long test limited the amount of time an exempt employee 
could spend on nonexempt duties, while the short duties test did not 
include a specific limit on nonexempt work.\41\
---------------------------------------------------------------------------

    \38\ Weiss Report at 10, 14-17, 19-20.
    \39\ Id. at 12.
    \40\ Id. at 8, 14-20. The Department also justified its modest 
increases by noting evidence of slow wage growth for executive 
employees ``in some areas and some industries.'' Id. at 14.
    \41\ The Department instituted a 20 percent cap on nonexempt 
work as part of the long duties test for executive and professional 
employees in 1940, and for administrative employees in 1949. By 
statute, beginning in 1961, retail employees could spend up to 40 
percent of their hours worked performing nonexempt work and still be 
found to meet the duties tests for the EAP exemption. See 29 U.S.C. 
213(a)(1).
---------------------------------------------------------------------------

    In 1958, the Department set the long test salary levels using data 
collected by WHD on salaries paid to employees who met the applicable 
salary and duties tests, grouped by geographic region, broad industry 
groups, number of employees, and city size, and supplemented with BLS 
and Census data to reflect income increases for white collar and 
manufacturing employees during the period not covered by the 
Department's investigations.\42\ The Department then set the long test 
salary levels for exempt employees ``at about the levels at which no 
more than about 10 percent of those in the lowest-wage region, or in 
the smallest size establishment group, or in the smallest-sized city 
group, or in the lowest-wage industry of each of the categories would 
fail to meet the tests.'' \43\ Thus, the Department set the long test 
salary levels so that about 10 percent of workers performing EAP duties 
in the lowest-wage regions and industries would not meet the salary 
level test and would therefore be nonexempt based on their salary level 
alone.
---------------------------------------------------------------------------

    \42\ Kantor Report at 6.
    \43\ 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.\44\ The salary 
level for executive and administrative employees was increased to $100 
per week, for example, when the 1961 survey data showed that 13 percent 
of establishments paid one or more exempt executives less than $100 per 
week, and 4 percent of establishments paid one or more exempt 
administrative employees less than $100 per week.\45\ The professional 
salary level was increased to $115 per week when the 1961 survey data 
showed that 12 percent of establishments surveyed paid one or more 
professional employees less than $115 per week.\46\ The Department 
noted that these salary levels approximated the same percentages used 
to update the salary level in 1958.\47\
---------------------------------------------------------------------------

    \44\ 28 FR 7002 (July 9, 1963).
    \45\ Id. at 7004.
    \46\ Id.
    \47\ 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.\48\ The Department also increased 
the long test salary levels for administrative and professional 
employees to $125 and $140 per week, respectively.
---------------------------------------------------------------------------

    \48\ 35 FR 884-85.
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    In 1975, rather than follow the prior approaches, the Department 
updated the 1970 salary levels based on increases in the Consumer Price 
Index, but adjusted downward ``to eliminate any inflationary impact.'' 
\49\ This resulted in a long test salary level for the executive and 
administrative exemptions of $155 per week, and $170 per week for the 
professional exemption. The short test salary level increased to $250 
per week in 1975.\50\ The salary levels adopted were intended as 
interim levels ``pending the completion and analysis of a study by 
[BLS] covering a six-month period in 1975.'' \51\ Although the 
Department intended to increase the salary levels based on that study 
of actual salaries paid to employees, the process was never completed, 
and the ``interim'' salary levels remained in effect for the next 29 
years.
---------------------------------------------------------------------------

    \49\ 40 FR 7091.
    \50\ Id. at 7092. Each time the short test was increased between 
1949 and 1975, it was set significantly higher than the long test 
salary levels.
    \51\ Id. at 7091.

    In 2004, the Department replaced the separate long and short tests 
with a single ``standard'' salary level test of $455 per week, which 
was paired with a ``standard'' duties test for executive, 
administrative, and professional employees, respectively. The 
Department noted, in accord with numerous comments received during that 
rulemaking, that as a result of the outdated salary level, ``the `long' 
duties tests [had], as a practical matter, become effectively dormant'' 
because relatively few salaried employees earned below the short test 
salary level.\52\ The Department estimated that 1.3 million workers 
earning between $155 and $455 per week would become nonexempt under the 
new standard salary level.\53\
---------------------------------------------------------------------------

    \52\ 69 FR 22126.
    \53\ Id. at 22123.
---------------------------------------------------------------------------

    In setting the new standard salary level in 2004, the Department 
used Current Population Survey (CPS) Merged Outgoing Rotation Group 
(MORG) data collected by BLS that encompassed most salaried employees, 
including nonexempt salaried employees. The Department selected a 
standard salary level of $455 per week, which at the time was roughly 
equivalent to earnings at the 20th percentile of two subpopulations: 
(1) Salaried employees in the South and (2) salaried employees in the 
retail industry nationwide. Although prior salary levels had been based 
on salaries of approximately the lowest 10 percent of exempt salaried 
employees in low-wage regions and industries, the Department explained 
that the change in methodology was warranted in part to account for the 
elimination of the short and long tests, and because the data sample 
included nonexempt salaried employees, as opposed to only exempt 
salaried employees.\54\ As in the past, the Department used lower-
salary data sets to accommodate businesses for which salaries were 
generally lower due to geographic- or industry-specific reasons.
---------------------------------------------------------------------------

    \54\ Id. at 22167.

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[[Page 51237]]

    The Department published a final rule updating the salary level 
twelve years later, in 2016.\55\ The Department set the standard salary 
level at an amount that would exclude from exemption the bottom 40 
percent of full-time salaried workers (exempt and nonexempt) in the 
lowest-wage Census Region (the South).\56\ The Department estimated 
that increasing the standard salary level from $455 per week to $913 
per week would make 4.2 million workers earning between those levels 
newly nonexempt, absent other changes by their employers.\57\ The 
Department made no changes to the standard duties test. As previously 
discussed, on August 31, 2017, the U.S. District Court for Eastern 
District of Texas declared the 2016 final rule invalid, and the 
Department's appeal of that decision is being held in abeyance. Until 
the Department issues a new final rule, it is enforcing the part 541 
regulations in effect on November 30, 2016, including the $455 per week 
standard salary level.
---------------------------------------------------------------------------

    \55\ 81 FR 32391 (May 23, 2016).
    \56\ Id. at 32408.
    \57\ Id. at 32393.
---------------------------------------------------------------------------

ii. Purpose of the Salary Level Requirement
    The FLSA states that its minimum wage and overtime requirements 
``shall not apply with respect to . . . any employee employed in a bona 
fide executive, administrative, or professional capacity . . . (as such 
terms are defined and delimited from time to time by regulations of the 
Secretary . . .).'' \58\ The Department has long used a salary level 
test as part of its method for defining and delimiting that exemption.
---------------------------------------------------------------------------

    \58\ 29 U.S.C. 213(a)-(a)(1).
---------------------------------------------------------------------------

    In 1949, the Department summarized the role of the salary level 
tests over the preceding decade, explaining:

    In this long experience, the salary tests, even though too low 
in the later years to serve their purpose fully, have amply proved 
their effectiveness in preventing the misclassification by employers 
of obviously nonexempt employees, thus tending to reduce litigation. 
They have simplified enforcement by providing a ready method of 
screening out the obviously nonexempt employees, making an analysis 
of duties in such cases unnecessary. The salary requirements also 
have furnished a practical guide to the inspector as well as to 
employers and employees in borderline cases. In an overwhelming 
majority of cases, it has been found by careful inspection that 
personnel who did not meet the salary requirements would also not 
qualify under other sections of the regulations as the Divisions and 
the courts have interpreted them.\59\
---------------------------------------------------------------------------

    \59\ Weiss Report at 8.

    The Department again referenced these principles in the Kantor 
Report, reiterating, for example, that the salary level tests 
``provide[''] a ready method of screening out the obviously nonexempt 
employees[,]'' and that employees ``who do not meet the salary test are 
generally also found not to meet the other requirements of the 
regulations.'' \60\ The 2003-2004 rulemaking also referenced these 
principles.\61\ Likewise, this final rule updates the standard salary 
level in light of increased employee earnings, so that it maintains its 
usefulness in ``screening out the obviously nonexempt employees.''
---------------------------------------------------------------------------

    \60\ Kantor Report at 2-3; see also U.S. Dep't of Labor, 28th 
Annual Report of the Secretary of Labor for the Fiscal Year Ended 
June 30, 1940 (1940), at 236 (``[T]he power to define is the power 
to exclude.'').
    \61\ See 69 FR 22165; 68 FR 15560, 15570 (Mar. 31, 2003).
---------------------------------------------------------------------------

    For over 75 years the Department has used a salary level test as a 
criterion for identifying bona fide executive, administrative, and 
professional employees. Some statements in the Department's regulatory 
history have at times, however, suggested a greater role for the salary 
level test. These include, for instance, a statement from the 1940 
Stein Report that salary is `` `the best single test of the employer's 
good faith in characterizing the employment as of a professional 
nature.' '' \62\ The Stein Report also stated that ``if an employer 
states that a particular employee is of sufficient importance . . . to 
be classified as an 'executive' employee and thereby exempt from the 
protection of the [A]ct, the best single test of the employer's good 
faith in attributing importance to the employee's services is the 
amount he pays for them.'' \63\
---------------------------------------------------------------------------

    \62\ 81 FR 32413 (quoting Stein Report at 42); see also 69 FR 
22165 (quoting Stein Report at 42).
    \63\ Stein Report at 19; see also id. at 5 (``[T] he good faith 
specifically required by the [A]ct is best shown by the salary 
paid.''); id. at 19 (salary provides ``a valuable and easily applied 
index to the 'bona fide' character of the employment for which 
exemption is claimed''); cf. Weiss Report at 9 (``[S]alary is the 
best single indicator of the degree of importance involved in a 
particular employee's job.''); Kantor Report at 2 (``[Salary] is an 
index of the status that sets off the bona fide executive from the 
working squad-leader, and distinguishes the clerk or subprofessional 
from one who is performing administrative or professional work.''). 
The Department ``is not bound by the [Stein, Weiss, and Kantor] 
reports,'' though they have been carefully considered. 69 FR 22124.
---------------------------------------------------------------------------

    As explained in the NPRM, the Nevada district court's invalidation 
of the 2016 final rule has prompted the Department to clarify these and 
similar statements in light of the salary level test's purposes and 
regulatory history. The concept of a ``dividing line'' should not be 
misconstrued to suggest that the Department views the salary level test 
as an effort to divide all exempt employees from all nonexempt 
employees. A salary level is helpful to determine who is not an exempt 
executive, administrative or professional employee--the employees who 
fall beneath it. But the salary level has significantly less probative 
value for the employees above it. They may be exempt or nonexempt. 
Above the threshold, the Department evaluates an employee's status as 
exempt or nonexempt based on an assessment of the duties that employee 
performs. An approach that emphasizes salary alone, irrespective of 
employee duties, would stand in significant tension with the Act. 
Section 13(a)(1) directs the Department to define and delimit employees 
based on the ``capacity'' in which they are employed. Salary is a 
helpful indicator of the capacity in which an employee is employed, 
especially among lower-paid employees. But it is not ``capacity'' in 
and of itself.
    The district court's summary judgment decision endorsed the 
Department's historical approach to setting the salary level and held 
the 2016 final rule unlawful because it departed from it. The district 
court approvingly cited the Weiss Report and explained that setting 
``the minimum salary level as a floor to 'screen[ ] out the obviously 
nonexempt employees' '' is ``consistent with Congress's intent.'' \64\ 
Further endorsing the Department's earlier rulemakings, the district 
court stated that prior to the 2016 final rule, ``the Department ha[d] 
used a permissible minimum salary level as a test for identifying 
categories of employees Congress intended to exempt.'' \65\ The court 
then explained that in contrast to these acceptable past practices, the 
2016 standard salary level of $913 per week was unlawful because it 
would exclude from exemption ``so many employees who perform exempt 
duties.'' \66\ In support, the court cited the Department's estimate 
that, without some intervening action by their employers, the new 
salary level would result in 4.2 million workers who meet the duties 
test becoming nonexempt.\67\ The court also emphasized the magnitude of 
the salary level increase, stating that the 2016 final rule ``more than 
double[d] the previous minimum salary level'' and that ``[b]y raising 
the salary level in this manner, the Department effectively 
eliminate[d] a

[[Page 51238]]

consideration of whether an employee performs `bona fide executive, 
administrative, or professional capacity' duties.'' \68\ The district 
court declared the final rule invalid because the Department had 
unlawfully excluded from exemption ``entire categories of previously 
exempt employees who perform `bona fide executive, administrative, or 
professional capacity' duties.'' \69\
---------------------------------------------------------------------------

    \64\ 275 F. Supp. 3d at 806 (quoting Weiss Report at 7-8); see 
also id. at 807 at n.6 (supporting salary level that operates ``as 
more of a floor'') (internal quotation marks and citation omitted).
    \65\ Id. at 806 (emphasis in original).
    \66\ Id. at 807.
    \67\ Id. at 806.
    \68\ Id. at 807 (quoting 29 U.S.C. 213(a)(1)).
    \69\ Id. at 806 (quoting 29 U.S.C. 213(a)(1)).
---------------------------------------------------------------------------

    By excluding from exemption, without regard to their duties, 4.2 
million workers who would have otherwise been exempt because they 
passed the salary basis and duties tests established under the 2004 
final rule, the 2016 final rule was in tension with the Act and with 
the Department's longstanding policy of setting a salary level that 
does not ``disqualify[ ] any substantial number of'' bona fide 
executive, administrative, and professional employees from 
exemption.\70\ A salary level set that high does not further the 
purpose of the Act, and is inconsistent with the salary level test's 
useful, but limited, role in defining the EAP exemption.
---------------------------------------------------------------------------

    \70\ Kantor Report at 5. In contrast, had the Department simply 
applied the 2004 methodology to set the standard salary level, the 
2016 final rule would have resulted in approximately 683,000 workers 
who satisfied the duties test becoming nonexempt. See 81 FR 32504 
(Table 32).
---------------------------------------------------------------------------

    The Department has therefore reexamined the 2016 final rule in 
light of the district court's decision and the salary level's 
historical purpose. The district court's decision underscores that 
except at the relatively low levels of compensation where EAP employees 
are unlikely to be found, the salary level is not a substitute for an 
analysis of an employee's duties. It is, at most, an indicator of those 
duties. For most white collar, salaried employees, the exemption should 
turn on an analysis of their actual functions, not their salaries, as 
Congress instructed. The salary level test's primary and modest purpose 
is to identify potentially exempt employees by screening out obviously 
nonexempt employees.
    In light of these considerations, as noted in the NPRM, the 
Department has concluded that, while an increase in the standard salary 
level from $455 per week is warranted, the increase to $913 per week in 
the 2016 final rule was inappropriate. The Department has therefore 
engaged in this rulemaking to realign the salary level with its 
appropriate limited purpose, to address the concerns about the 2016 
final rule identified by the district court, and to update the salary 
level in light of increased employee earnings.
iii. Standard Salary Level Proposal
    In its NPRM, the Department proposed to rescind formally the 2016 
final rule and to update the salary level by setting the salary level 
equal to the 20th percentile of earnings of full-time salaried workers 
in the lowest-wage region (the South) and/or in the retail industry 
nationally. The Department applied this method to pooled CPS MORG data 
for 2015 to 2017, adjusted to 2017, producing a level of $641 per week. 
To reflect employees' anticipated compensation at the time the rule 
would become effective, the Department then inflated this level to 
January 2020 using the compound annual growth rate in earnings since 
the 2004 rule. This methodology resulted in a proposed salary level of 
$679 per week ($35,308 per year). The Department estimated that at this 
level, 1.1 million employees who earn at least $455 per week but less 
than $679 per week would, without some intervening action by their 
employers, gain overtime eligibility.
    The Department also stated that applying the 2004 final rule's 
methodology to set the salary level would ensure that overtime-eligible 
workers continue to receive the protections Congress intended, while 
avoiding the concerns that led to the invalidation of the 2016 rule. 84 
FR 10903. The Department explained that adhering to the 2004 final 
rule's methodology was reasonable and appropriate, noting that it has 
enforced the 2004 final rule's salary level for nearly 15 years--the 
second-longest period (after the salary levels set in 1975) for any 
part 541 salary test. Id. at 10909. The Department stated that applying 
this well-established method would also promote familiarity and 
stability in the workplace, without causing significant hardship or 
disruption to the economy. Id. The Department also noted that the 2004 
final rule has never been challenged, and so applying the 2004 salary 
level methodology would minimize the uncertainty and potential legal 
vulnerabilities that could accompany a novel and untested approach. Id.
iv. Standard Salary Level Final Rule
    In the final rule, the Department adopts its proposed methodology 
for setting the standard salary level, with one minor modification. The 
Department will set the salary level equal to the 20th percentile of 
earnings of full-time salaried workers in the lowest-wage region (the 
South) and/or in the retail industry nationally. To calculate the 
salary level, the Department used updated CPS earnings data that BLS 
has compiled since the Department drafted its proposal. Specifically, 
the Department applied the adopted methodology to pooled CPS MORG data 
for July 2016 to June 2019, adjusted to reflect 2018/2019. As discussed 
below, rather than projecting the salary level to January 2020, as 
proposed in the NPRM, the Department has instead used the most recent 
data available at the time the Department drafted this final rule. This 
results in a salary level of $684 per week.
    The Department believes that this method will set an appropriate 
dividing line between nonexempt and potentially exempt employees by 
screening out from exemption employees who, based on their 
compensation, are unlikely to be bona fide executive, administrative, 
or professional employees. In addition, the use of earnings data from 
the South and the retail industry will ensure that the salary level is 
suitable for employees in low-wage regions and industries. This 
approach will also maintain the prominence of the duties test by 
ensuring that the salary level alone does not disqualify from exemption 
a substantial number of employees who meet the duties test. This is 
consistent with the duties test's historical function, and will 
alleviate a major concern--overemphasis on the salary level test--that 
led to the 2016 rule's invalidation.
    Once this rule is effective, white collar employees who are subject 
to the salary level test and earn less than $684 per week will not 
qualify for the EAP exemption, and therefore will be entitled to 
overtime pay. Employees earning this amount or more on a salary or fee 
basis will be exempt if they meet the standard duties test. As a result 
of this updated salary level, 1.2 million currently exempt employees 
who earn at least $455 but less than the updated standard salary level 
of $684 per week will, without some intervening action by their 
employers, gain overtime eligibility. In addition, 2.2 million white 
collar workers earning within this salary range who are currently 
nonexempt because they do not meet the standard duties test will have 
their overtime-eligible status strengthened because their exemption 
status will be clear based on their salary alone.
v. Discussion of Comments
1. Threshold Issues
    As was the case in the responses to the July 26, 2017 RFI and in 
feedback received at the public listening sessions, commenters to the 
NPRM overwhelmingly agreed that the salary

[[Page 51239]]

level should be increased from the currently enforced level of $455 per 
week, which was set in 2004. Only a few commenters asserted that the 
salary level should not be updated; these commenters generally 
expressed concern that it would be difficult for employers to absorb 
any increase to the salary level. See Home Care Association of America; 
South Butler Community Library. Fisher & Phillips LLP and the National 
Federation of Independent Business (NFIB), however, questioned whether 
the Department has authority to set a salary level at all.
    The vast majority of commenters also agreed that the Department 
should continue to set the salary level on a nationwide basis rather 
than having different salary levels that vary by region, industry, or 
some other factor. See, e.g., Associated General Contractors of America 
(AGC); National Council of Nonprofits; National Employment Law Project 
(NELP); National Propane Gas Association; Partnership to Protect 
Workplace Opportunity (PPWO). A few commenters suggested that the 
Department set multiple salary levels, such as by region or state or 
for urban and rural areas. See Council for Christian Colleges and 
Universities; Idaho Division of Human Resources; Lutheran Services in 
America. A few other commenters advocated for industry-specific salary 
levels, see National Newspaper Association, or exemptions from the 
salary level test for specific industries, see Family Focused Treatment 
Association, or for ``seasonal'' employers, see Corps Network. Special 
Olympics sought a special salary level for non-profits, while the 
National Council of Nonprofits opposed such a carve-out.
    The Department maintains that the FLSA's delegation of authority to 
the Secretary to ``define[ ] and delimit[ ]'' the terms of the section 
13(a)(1) exemption includes the authority to set a salary level. While 
the language of section 13(a)(1) precludes the Department from adopting 
a salary-only test because salary ``is not 'capacity' in and of 
itself,'' 84 FR 10907; see also 81 FR 32429; 69 FR 22173, the 
Department's broad authority to ``define and delimit'' the terms of the 
EAP exemption permits it to use a salary level test as one criterion 
for identifying bona fide executive, administrative, and professional 
employees. The Department has used such a test for over 75 years, and 
its authority to establish a salary level is well-established. See, 
e.g., Wirtz v. Miss. Publishers Corp., 364 F.2d 603, 608 (5th Cir. 
1966); Fanelli v. U.S. Gypsum Co., 141 F.2d 216, 218 (2d Cir. 1944); 
Walling v. Yeakley, 140 F.2d 830, 832-33 (10th Cir. 1944). As noted in 
the NPRM, ``[a] salary level is helpful to determine who is not an 
executive, administrative or professional employee'' because it ``is a 
helpful indicator of the capacity in which an employee is employed, 
especially among lower-paid employees.'' 84 FR 10907.
    The Department agrees with the vast majority of commenters who 
supported increasing the salary level. The currently enforced level of 
$455 was set a decade and a half ago in 2004. Like all previous salary 
levels, its effectiveness as a dividing line between nonexempt and 
potentially exempt employees has diminished over time, and the level 
should therefore be updated to align with growth in earnings in the 
intervening years. While the Department is sensitive to the views of 
commenters who contended that any increase would be challenging for 
businesses, historical experience has shown that incremental, 
reasonable salary level increases such as the one in this final rule 
are feasible and do not have significant adverse economic consequences. 
Additionally, as discussed below, the salary level set in this final 
rule takes these commenters' concerns into account by using wages in 
the South and the retail industry.
    As in the past, the Department chooses to set a nationwide salary 
level and declines to establish multiple salary levels based on region, 
industry, employer size, or any other factor. Having multiple salary 
levels would make the regulations more complicated; for example, 
regional variations would introduce unnecessary complexity, 
particularly for employers and employees who operate or work across 
state lines. As the Department has explained when previously rejecting 
regional salary thresholds, adopting multiple different salary levels 
would, at minimum, create significant administrative difficulties 
``because of the large number of different salary levels this would 
require.'' 69 FR 22171; 81 FR 32411. Likewise, the Department declines 
to set any additional industry-specific salary levels. The Department 
has rarely created such levels.\71\ Instead, as the Department has 
previously noted, the 2004 methodology ``addresses the concerns'' of 
commenters advocating for multiple salary levels ``by looking toward 
the lower end of the salary levels and considering salaries in the 
South and in the retail industry.'' 69 FR 22171. This approach avoids 
the new compliance burdens that multiple salary levels would entail, 
while ensuring that the salary level is low enough that it exempts bona 
fide EAP employees in those regions and industries.\72\
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    \71\ A special level for the motion picture producing industry 
has been in place for over six decades due to the ``peculiar 
employment conditions existing in the industry.'' 18 FR 2881. 
Academic administrative employees meet the compensation requirement 
if they are paid on a salary basis ``at a rate at least equal to the 
entrance salary for teachers in the educational establishment by 
which the employee is employed.'' 29 CFR 541.600(c). The Department 
has otherwise refrained from setting industry-specific salary 
levels.
    \72\ Some commenters asked the Department to permit employers to 
prorate the salary level for part-time employees. See, e.g., College 
and University Professional Association for Human Resources (CUPA-
HR); Council for Christian Colleges and Universities; Idaho Division 
of Human Resources. The Department has never prorated the salary 
level for part-time positions, and it specifically considered and 
rejected similar requests in its 2004 and 2016 final rules. See 81 
FR 23422; 69 FR 22171. As the Department has previously explained, 
employees hired to work part time, by most definitions, do not work 
in excess of 40 hours in a workweek, and overtime pay is not at 
issue for these employees. An employer may pay a nonexempt employee 
a salary to work part time without violating the FLSA, so long as 
the salary equals at least the minimum wage when divided by the 
actual number of hours (40 or fewer) the employee worked. See 
FLSA2008-1NA (Feb. 14, 2008). To the extent that commenters are 
concerned about the exemption status of seasonal employees, the 
Department notes that ``[e]xempt employees need not be paid for any 
workweek in which they perform no work.'' 29 CFR 541.602(a)(1).
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2. The New Salary Level
    Commenters diverged regarding the appropriate level at which to set 
the new salary level. As a general matter, with some exceptions, 
employer representatives supported the Department's proposal, while 
employee representatives opposed it and favored a level at least as 
high as the one set in the 2016 final rule.
    The vast majority of employer representatives supported the 
Department's proposal to use the 2004 methodology to update the salary 
level. See, e.g., HR Policy Association; National Association of Home 
Builders (NAHB); Small Business Legislative Council; PPWO; Wage and 
Hour Defense Institute. Employer representatives who supported the 
proposed level generally agreed with the Department's assessment that 
the 2004 methodology was faithful to the salary level's purpose of 
screening out only those employees who are obviously nonexempt, while 
avoiding a de facto salary-only test that would impermissibly replace 
the role of the duties test. See, e.g., Bloomin' Brands; Job Creators 
Network; National Retail Federation (NRF); PPWO; Seyfarth Shaw.
    Commenters who supported the proposal also stated that unlike the 
2016 final rule, the proposal was suitable and manageable for low-wage 
regions and

[[Page 51240]]

industries, and for small businesses. See, e.g., American Hotel and 
Lodging Association (AHLA); American Society of Travel Advisors (ASTA); 
CUPA-HR; LeadingAge; Society of Independent Gasoline Marketers of 
America (SIGMA); YMCA. Many also conveyed that the proposed level would 
not produce the same negative effects--e.g., increased employer burdens 
and diminished workplace flexibility--as the 2016 final rule. See, 
e.g., National Association of Landscape Professionals; Seyfarth Shaw. 
Some also noted that the 2004 rule has withstood the test of time for 
the past 15 years and has never been challenged in court. See, e.g., 
Job Creators Network; SIGMA. Additionally, many of these commenters 
agreed with the Department that the proposed rule was responsive to the 
district court's concerns that led to the invalidation of the 2016 
final rule. See, e.g., Ogletree, Deakins, Nash, Smoak & Stewart, P.C.; 
SHRM.
    Many employer representatives maintained that the proposed rule's 
salary level resulted in a more appropriate number of employees who 
would become newly nonexempt--1.1 million in the first year--compared 
to the 2016 final rule, which would have resulted in 4.2 million such 
workers in the first year. They noted that the smaller number of newly 
nonexempt employees would make it easier for employers to absorb the 
costs of compliance, see U.S. Small Business Administration Office of 
Advocacy (SBA Advocacy), would lessen the legal risk associated with 
the rule, see National Restaurant Association (NRA); Wage and Hour 
Defense Institute, and would ensure that the salary level maintains its 
historic screening function, see AGC; Chamber of Commerce of the United 
States of America (Chamber); NRF.
    A few commenters, while generally supportive of the Department's 
approach in the NRPM, advocated for a salary level lower than the one 
proposed. These stakeholders maintained that to ensure that the salary 
level could accommodate low-wage regions and industries, the Department 
should exclude higher-wage states from the earnings data used to set 
the salary level. For example, some commenters urged the Department to 
include only the East South Central and West South Central Census 
Divisions, which include the lower-wage states of Kentucky, Tennessee, 
Alabama, Mississippi, Louisiana, Arkansas, Oklahoma, and Texas, see 
Chamber; Food Marketing Institute (FMI); International Franchise 
Association (IFA); NRA, while AHLA recommended excluding Maryland, 
Virginia, and the District of Columbia from the data set. Others 
suggested generally that the Department use a narrower geographic area 
than the entire South, using the East South Central Census Division 
(Alabama, Kentucky, Mississippi, and Tennessee) as an example. See 
Kentucky Retail Federation; SBA Advocacy.
    Employee representatives, conversely, generally stated that the 
salary level should be raised significantly above the level proposed in 
the NPRM or that the duties test should be significantly strengthened. 
See, e.g., National Women's Law Center (NWLC); Public Justice Center; 
UnidosUS. Many commenters supported the level in the 2016 final rule or 
something similar to it. See, e.g., American Association of Retired 
Persons (AARP); American Federation of State, County, and Municipal 
Employees (AFSCME); Campaign Comments; International Union, United 
Automobile, Aerospace & Agricultural Implement Workers of America 
(UAW). A few advocated that the salary level be set even higher, at 
$1,176 per week ($61,152 per year), using median earnings data. See 
National Employment Lawyers Association (NELA); Nichols Kaster, PLLP 
(Nichols Kaster); Rudy, Exelrod, Zieff & Lowe, LLP (Rudy Exelrod); 
Texas Employment Lawyers Association (TELA).
    Many employee representatives maintained that the salary level 
proposed in the NPRM is inconsistent with the purpose of the FLSA and 
the EAP exemption. In general, these commenters contended that the 
proposed salary level was too low to adequately distinguish between 
bona fide EAP employees and those who were intended to be eligible for 
overtime, and that the rule would result in the exemption of lower-wage 
workers with limited bargaining power, whom the statute was designed to 
protect. See, e.g., NELP; NELA; Texas RioGrande Legal Aid; Washington 
State Budget and Policy Center. Several commenters stated that the 
proposal would inappropriately exempt employees who perform significant 
amounts of nonexempt work. See, e.g., National Council of Jewish Women; 
Women Employed. The American Federation of Labor and Congress of 
Industrial Organizations (AFL-CIO) disagreed that the salary level 
test's primary purpose is to screen out obviously nonexempt employees, 
contending that statements to that effect in the Weiss and Stein 
reports were ``not proposals for setting the long duties salary 
threshold'' but ``defending the salary tests against criticism,'' and 
that the salary levels described in those reports as having 
``screening'' functions were accompanied by the more rigorous long 
duties test.
    Commenters also noted that according to the Department's own 
estimates, 84 FR 10951, the proposed rule would result in 2.8 million 
fewer workers newly entitled to overtime pay in the first year than the 
2016 final rule. See Joint Comment from 77 Members of Congress; 
National Partnership for Women and Families; Nichols Kaster. Many of 
these commenters also cited estimates by EPI, which projected that the 
proposed rule, compared to the 2016 final rule, would result in $1.2 
billion fewer dollars in earnings transfers to employees and would 
affect 8.2 million fewer workers, including 3.1 million workers who 
would have gained the right to overtime pay and 5.1 million workers who 
are already overtime-eligible but would have had their overtime 
protections strengthened by the 2016 final rule's higher salary level 
because of a reduced risk of misclassification. These commenters stated 
that the narrowed scope of the proposed rule would be detrimental to 
these employees, who include millions of women, people of color, and 
parents of children under 18. See EPI; National Partnership for Women 
and Families. Some maintained, for example, that a higher salary level 
that would affect more workers would provide such workers with more 
income, improve upward mobility, and/or provide workers with more time 
to spend with their families. See AARP; Campaign Comments. Several 
commenters highlighted the lower number of affected employees (compared 
to the 2016 final rule) in their particular states. See, e.g., Maryland 
Center on Economic Policy; Washington State Budget and Policy Center.
    Some commenters also asserted that the proposed salary level would 
result in a higher risk of misclassification relative to the 2016 final 
rule, as well as more litigation, because more employees' exempt status 
would turn on the duties test rather than the salary level test. See 
NELA; Winebrake & Santillo LLC. A group of 14 state attorneys general 
and the Attorney General for the District of Columbia (State AGs) 
stated that these misclassification consequences would extend to state 
wage-and-hour laws that contain EAP exemptions that track the federal 
standard.
    Commenters who opposed the proposed rule also criticized the 
Department's reliance on the reasoning of the Nevada district court's 
decision.

[[Page 51241]]

See AFL-CIO; EPI; NELP; NWLC; State AGs. These commenters took issue 
with the district court's conclusion that the 2016 final rule's salary 
level was too high because it classified as nonexempt over 4 million 
previously exempt workers based on their salaries alone, and as a 
result impermissibly displaced the role of the duties test. AFL-CIO and 
EPI asserted that the raw number of newly nonexempt workers under a new 
salary test should not determine the test's appropriateness since that 
number depends on several factors, such as the amount of time since the 
previous update and whether the methodology used in the last update was 
sound. Relatedly, the AFL-CIO stated that it is unclear why the 2016 
final rule's salary level, which would have resulted in 4.2 million 
newly nonexempt employees, was impermissibly high, but the proposed 
rule's salary level, which would result in 1.1 million (the 
Department's estimate) to 1.4 million (EPI's estimate) newly nonexempt 
employees, is not. The AFL-CIO also asserted that the Department 
preemptively responded to the district court's views in the 2016 final 
rule, while it and other employee representatives contended that the 
rationale that the Department put forth in support of the 2016 final 
rule was more persuasive than the district court decision that 
invalidated it. See AFL-CIO; EPI; NELP; NWLC.
    Many employee commenters asserted that if the Department did not 
substantially raise the salary level above the proposed level, it 
should establish a more rigorous duties test such as the former long 
test, which set specific limits on the performance of nonexempt work. 
See, e.g., AARP; House and Senate Democratic Caucuses of the Michigan 
Legislature; National Council of Jewish Women; Women Employed. Some 
commenters recommended instituting a more rigorous duties test 
regardless of the salary level the Department adopts. See AFL-CIO; 
State of Wisconsin Department of Workforce Development.
    Finally, several employee representatives also asserted that by 
adopting the 2004 methodology in the NPRM, the Department perpetuated a 
methodological error that the 2016 final rule characterized as a 
``mismatch.'' See AFL-CIO; Economic Policy Institute (EPI); NELP; NWLC; 
81 FR 34400. According to this view, while the Department had 
historically used two tests for exemption--a long test that paired a 
more rigorous duties test with a lower salary level, and a short test 
that paired a less rigorous duties test with a higher salary level--in 
2004, the Department instead paired a less rigorous duties test with a 
lower salary level, resulting in historically nonexempt workers being 
instead classified as exempt. These commenters stated that the 2004 
methodology failed to adjust for changes from the long/short test 
structure, and that a significantly higher salary level is necessary to 
account for the absence of the long duties test, which restricted the 
amount of nonexempt work lower-wage white collar employees could 
perform while still being classified as exempt. Some of these 
commenters contended that, as a result, the 2004 methodology results in 
a salary level that exempts certain historically nonexempt employees 
because employees who traditionally passed the long salary test and 
failed the long duties test became exempt under the 2004 final rule's 
standard salary level and duties tests. See, e.g., NELA; Nichols 
Kaster; Senator Patty Murray. Some commented that the Department 
unreasonably relied on the functional dormancy of the long test to 
justify its adoption of the standard test in 2004, given that the 
Department did not update the short and long test thresholds between 
1975 and 2004. One commenter, EPI, noted that the Department did not 
include the methodology for the Kantor long test, which used the lowest 
10 percent of exempt salaried employees in low-wage regions and 
industries, as an alternative in the NPRM or elsewhere in the proposal.
    Conversely, employer representatives disagreed with the 
``mismatch'' rationale. They stated, for example, that the standard 
duties test is not identical to the short duties test, and that in 
2004, the Department accounted for its change in the structure and data 
set used for the EAP exemption by adjusting the percentile used for 
determining the salary level. See Chamber; NRA. More generally, nearly 
all employer representatives opposed any changes to the standard duties 
test. See, e.g., Bowling Proprietors Association of America; NGA; PPWO.
    The Department appreciates the thoughtful comments it received 
regarding the salary level. After considering these comments, the 
Department has decided to retain the approach from the proposed rule 
with one small change. As proposed, the Department is using CPS 
earnings data to set the salary level equal to the 20th percentile of 
full-time salaried workers in the lowest-wage Census Region (the South) 
and/or the retail industry nationwide. To set the salary level, the 
Department applied this methodology to pooled CPS MORG data for July 
2016 to June 2019, adjusted to reflect 2018/2019. This results in a 
final rule salary level of $684 per week ($35,568 for a full-year 
worker). For the reasons discussed below, the Department is not 
inflating the salary level forward to January 2020 as was proposed in 
the NPRM, but instead has used the most recent available actual wage 
data.
    As an initial matter, the Department believes that the proposed 
salary level is consistent with, and faithful to, the FLSA's purpose. 
As noted in the NPRM, the FLSA explicitly directs that bona fide 
executive, administrative, and professional employees ``shall not'' be 
subject to the statute's minimum wage and overtime requirements. 29 
U.S.C. 213(a)(1); 84 FR 10903. As such, when defining the contours of 
the EAP exemption, while the Department must, of course, ensure that 
employees who are subject to the Act's coverage receive its benefits, 
it must also ensure that employees whom Congress has directed ``shall'' 
be exempt from coverage are, in fact, exempt. The 2016 final rule was 
in tension with this purpose, as it would have newly disqualified 4.2 
million workers from exemption simply because of their salaries, 
regardless of their duties.
    The Department believes that this final rule strikes the 
appropriate balance by using the salary level, in line with its 
historical purpose, to screen out obviously nonexempt employees. As 
explained above, the Department articulated this purpose in the Weiss 
Report in 1949, when it explained that the salary level tests 
``prevent[ed] the misclassification by employers of obviously nonexempt 
employees, thus tending to reduce litigation'' and ``simplified 
enforcement by providing a ready method of screening out the obviously 
nonexempt employees'' who, ``[i]n an overwhelming majority of cases . . 
. would also not qualify under other sections of the regulations as the 
Divisions and the courts have interpreted them.'' Weiss Report at 8. 
Likewise, in the Kantor Report, the Department stated the salary level 
tests ``provide[ ] a ready method of screening out the obviously 
nonexempt employees,'' and that employees ``who do not meet the salary 
test are generally also found not to meet the other requirements of the 
regulations.'' Kantor Report at 2-3. The Department referenced the 
screening function again in the 2004 final rule. See 69 FR 22165. This 
principle has been at the heart of the Department's interpretation of 
the EAP exemption for over 75 years.
    The Department disagrees with the proposition advanced by some 
employee representatives that this

[[Page 51242]]

articulation of the salary level's modest purpose misreads the Weiss 
and Kantor reports, or that it applies only when paired with the long 
duties test. Both reports explicitly characterize the minimum salary 
level as ``simplif[ying] enforcement by providing a ready method of 
screening out the obviously exempt employees.'' Kantor Report at 3; 
Weiss Report at 8. And both confirm that under an appropriate salary 
level test, employees earning below the salary level generally would 
not meet the requirements of the duties test.\73\ While these reports 
were written while a more rigorous duties test was in effect, they 
nonetheless affirm that a minimum salary level's purpose is to serve as 
a ``screening'' mechanism.
---------------------------------------------------------------------------

    \73\ See Kantor Report at 3 (``Employees who do not meet the 
salary test are generally also found not to meet the other 
requirements of the regulations.''); Weiss Report at 8 (``In an 
overwhelming majority of cases, it has been found by careful 
inspection that personnel who did not meet the salary requirements 
would also not qualify under other sections of the regulations as 
the Divisions and the courts have interpreted them.'').
---------------------------------------------------------------------------

    Conversely, as explained in the NPRM, the 2016 final rule went 
beyond this purpose, and instead suggested that the salary level had a 
much greater role to play in determining exempt status. For example, in 
the 2016 final rule the Department took the position that, in light of 
the single standard duties test that is less rigorous than the long 
duties test, ``the salary threshold must play a greater role in 
protecting overtime-eligible employees,'' and that ``it [was] necessary 
to set the salary level higher . . . because the salary level must 
perform more of the screening function previously performed by the long 
duties test.'' 81 FR 32412, 32465-66.\74\
---------------------------------------------------------------------------

    \74\ As noted in the NRPM, 84 FR 10908 n.76, the Department 
explained in the 2016 final rule that at the time of its analysis, 
12.2 million salaried white collar workers earned more than $455 per 
week but were overtime eligible because they failed the duties test, 
while 838,000 salaried white collar workers were overtime eligible 
because even though they passed the standard duties test they earned 
below $455 per week. The Department then estimated that a $913-per-
week salary level would result in 6.5 million salaried white collar 
workers who failed only the duties test, and increase to 5.0 million 
the number of salaried white collar workers who passed the duties 
test but would be overtime eligible because they failed the salary 
level test. See 81 FR 32464-65; see also id. at 32413. As the 
Department noted, however, it ``has never compared the number of 
employees who are nonexempt based exclusively on the salary or 
duties test, respectively, to determine the effectiveness of the 
salary level.'' 84 FR 10908.
---------------------------------------------------------------------------

    As a result, the $913 per week salary level newly excluded 4.2 
million salaried workers from exemption regardless of the duties they 
performed. The district court concluded that this would exclude from 
exemption ``so many employees who perform exempt duties,'' and in fact 
excluded ``entire categories of previously exempt employees who perform 
`bona fide executive, administrative, or professional capacity' 
duties[.]'' 275 F. Supp. 3d at 806-7. Accordingly, it invalidated the 
rule.
    In sum, as explained in the NPRM, the Department believes that the 
2016 final rule ``untethered the salary level test from its historical 
justification[,]'' 84 FR 10901, and that this resulted in its 
invalidation by the district court. For this reason, the Department 
declines to return to the 2016 methodology or to set an even higher 
salary level. In contrast, as noted in the NPRM, the methodology in the 
2004 final rule, which the Department is applying in this rule, ``has 
withstood the test of time, is familiar to employees and employers, and 
can be used without causing significant hardship or disruption to 
employers or the economy, while ensuring overtime-eligible workers 
continue to receive the protections intended by Congress.'' Id. at 
10903.
    The Department also believes that the number of workers affected by 
the salary level set in this final rule confirms that the level is 
appropriate. The Department estimates that the final rule will result 
in 1.2 million workers who will be newly overtime-eligible in the first 
year as a result of the increased salary level. The number of affected 
workers is very similar to the 1.3 million workers affected by the 2004 
rule's salary level increase. Id. at 10911 (citing 69 FR 22213, 22253). 
This similarity to the 2004 rule, which has never been challenged in 
court, is consistent with the Department's view that the salary level 
set in this final rule is reasonable and legally sound.
    Moreover, as the Department explained in the NPRM, because the 2016 
final rule set the salary level ``at the low end of the historical 
salary range of short test salary levels,'' 81 FR 32414, it failed to 
account for the absence of a long test that historically exempted white 
collar workers with lower salaries but whose duties confirmed they were 
bona fide EAP employees. Thus, the impact of the 2016 final rule would 
have been the inverse of the ``mismatch'' the Department sought to 
correct. It would have resulted in employees who, due to the nature of 
their duties, have historically been classified as exempt suddenly 
becoming nonexempt simply because of their salaries.
    As a result, the 2016 final rule was in tension with the salary 
level's limited role in defining the EAP exemption, as it conflicted 
with the Department's longtime practice of setting a salary level that 
did not ``disqualify[ ] any substantial number of'' bona fide 
executive, administrative, and professional employees from exemption, 
Kantor Report at 5, leading directly to the district court's 
invalidation of the rule. While the Department has long recognized that 
it is inevitable that some employees will be incorrectly excluded from 
exemption since the salary level is ``a dividing line [that] cannot be 
drawn with great precision but can at best be only approximate[,]'' 
Weiss Report at 11, the Department may not disregard Congress's express 
directive to exempt bona fide EAP employees. Conversely, the 1.2 
million lower-income workers who will become nonexempt as a result of 
this rule's increase to the standard salary level will not include a 
substantial number of workers whose duties have historically qualified 
them as bona fide EAP employees.
    Thus, while employee representatives criticized the narrower scope 
of this rule compared to the 2016 final rule, the fact that this final 
rule affects considerably fewer employees than the 2016 final rule 
confirms, rather than undermines, its appropriateness. Given that the 
2016 final rule was invalidated due to its overbreadth, that rule is 
not a reasonable benchmark for concluding that the number of affected 
employees under this rule is too low.
    As noted above, employee commenters also objected to the 
Department's reliance on the Nevada district court's decision 
invalidating the 2016 final rule. The Department believes that its 
reliance on the reasoning of the district court is well-founded.
    Such reliance is reasonable and prudent as it reduces the 
vulnerability of new rules to legal challenges or injunctions, and 
maximizes the likelihood that a new rule can be implemented 
immediately. Notably, it has been over three years since the 2016 rule 
was published, and nearly three years since its stated effective date. 
Because of the rule's invalidation, however, the currently enforced 
salary level remains at $455 per week, which the Department and nearly 
all commenters agree must be updated. Adoption of a salary level that 
reduces, to the extent possible, the likelihood that the rule will be 
enjoined is the best way to ensure that workers can reap the rule's 
benefits as soon as possible rather than waiting for the outcome of 
potentially lengthy litigation. The Department believes that the salary 
level in this final rule accomplishes that objective, particularly 
given the district court's implicit endorsement of the 2004 
methodology. See 275 F. Supp. 3d at

[[Page 51243]]

807 n.6 (noting the court's earlier observation that an updated 2004 
salary level likely would have not prompted the litigation that 
invalidated the 2016 final rule because it ``would still be operating . 
. . as more of a floor'') (internal quotation marks and citation 
omitted).
    Additionally, the Department is mindful of the concerns the 
district court cited. As articulated in the NPRM and above, the 2016 
final rule was, at minimum, in tension with the FLSA because it 
resulted in 4.2 million employees, including employees who were 
historically exempt under the long test, becoming nonexempt based on 
their salaries alone, even though the Act directs that the EAP 
exemption be based on ``capacity.'' This threatened to make ``salary 
rather than an employee's duties determinative'' of an employee's 
status under the EAP exemption.\75\ While the 2016 final rule naturally 
contains language disagreeing with these propositions, for the reasons 
explained above, the Department has reexamined the 2016 final rule in 
light of the district court's decision and the public comments it has 
received in response to the RFI and the NPRM, and ultimately finds that 
the concerns voiced by the district court and by many public commenters 
warrant adopting a lower salary level.
---------------------------------------------------------------------------

    \75\ 275 F. Supp. 3d at 807.
---------------------------------------------------------------------------

    The Department disagrees with the employee commenters who asserted 
that the 2004 methodology created a ``mismatch'' that must be corrected 
by a salary level comparable to the one from the 2016 final rule or a 
restoration of the long duties test. See, e.g., EPI (``The methodology 
for setting the standard salary threshold in the 2004 rule was 
fundamentally flawed.''); NELP. The 2004 final rule explained that it 
was difficult to coherently apply the long duties test's requirement 
that an EAP employee perform no more than 20 percent nonexempt 
work.\76\ Consequently, the Department switched from the long and short 
duties tests to a single duties test that, like the previous short 
duties test, did not include a quantitative limit on the percentage of 
time performing nonexempt work. And the Department set a standard 
salary level that was similar to that of the long test.
---------------------------------------------------------------------------

    \76\ 69 FR 22127 (``When employers, employees, as well as Wage 
and Hour Division investigators applied the `long' test exemption 
criteria in the past, distinguishing which specific activities were 
inherently a part of an employee's exempt work proved to be a 
subjective and difficult evaluative task that prompted contentious 
disputes.'').
---------------------------------------------------------------------------

    The commenters relying on the ``mismatch'' theory appear to assert 
that the 2004 final rule should have paired the single duties test with 
a higher salary threshold such as the short test because the Department 
was obligated to preserve the previous structure of pairing a more 
rigorous duties test with a lower salary level test, or a less rigorous 
duties test with a higher salary level. See, e.g., AFL-CIO, EPI. But 
the previous structure had been created by the Department as one among 
many permissible policy choices. It was not required by the statutory 
text. Indeed, the statutory text does not require the Department to 
determine any salary level. As such, the Department was under no legal 
obligation to preserve the previous salary/duties structure in the 2004 
final rule.
    Moreover, the Department believes it would have been inappropriate 
to adopt the higher short test salary level after removing the long 
duties test in the 2004 final rule. See 84 FR 10908. The long duties 
test ensured that white collar employees would not become nonexempt 
simply because their salaries fell below the short test's higher 
threshold, if their duties clearly indicated bona fide EAP status. If 
the 2004 final rule had adopted the short test's higher salary 
threshold after eliminating the long duties test, such employees would 
have been reclassified as nonexempt solely because of their salary 
level. This approach would have departed from the historical role of 
using the salary level to screen out only obviously nonexempt 
employees, and would have risked violating the statutory requirement to 
base EAP status on the ``capacity'' in which the employee is employed. 
29 U.S.C. 213(a)(1). Therefore, the Department believes that its' 
decision in 2004 not to pair the higher short test salary level with 
the standard duties test was a necessary measure to maintain policy 
consistency and follow statutory requirements.
    Indeed, the 2016 final rule's attempt to correct the ``mismatch'' 
by setting the salary level ``at the low end of the historical range of 
short test salary levels,'' 81 FR 32409, created the precise legal 
risks that the 2004 final rule attempted to avoid. While the Department 
previously relied on the mismatch theory in defending the 2016 final 
rule in litigation, the district court, in declaring the 2016 final 
rule invalid for the reasons set forth above, implicitly rejected 
application of the mismatch theory in reaching its conclusion. As 
explained above, the district court found that the salary level set by 
the 2016 final rule improperly substituted employee salaries for an 
analysis of employees' duties.\77\ 275 F. Supp. 3d at 806. In contrast, 
the 2004 methodology has never even been challenged in court--let alone 
invalidated--during the 15 years it has been enforced by the 
Department.
---------------------------------------------------------------------------

    \77\ Some commenters contend that the district court's decision 
was flawed because it did not address the ``mismatch'' theory in its 
opinion, even though it was the central theory behind the 2016 final 
rule. See AFL-CIO; NELP. However, as noted above, the district court 
implicitly rejected the mismatch theory.
---------------------------------------------------------------------------

    Additionally, as noted in the NPRM, the mismatch rationale failed 
to account for the substantial number of years during which the long 
duties test was effectively dormant. 84 FR 10908-09; see also 69 FR 
22126 (explaining that ``the `long' duties test [had], as a practical 
matter, become effectively dormant'' due to outdated salary levels, and 
quoting commenters who described the long duties test as 
``inoperative,'' ``rarely, if ever, used,'' ``largely . . . dormant,'' 
and ``lack[ing] current relevance''). The long test salary levels set 
in 1975 were equaled or surpassed by the minimum wage in 1991.\78\ 
Thus, since at least 1991, the short duties test and salary level 
determined whether workers qualified for the EAP exemption. Employers 
and employees alike have effectively operated for 28 years under a 
single-test system. Thus, although, as noted above, some employee 
commenters asserted that the 2004 methodology exempts certain 
historically nonexempt employees (i.e., those who had passed the long 
salary test and failed the long duties test), any of these employees 
who were nonexempt in the years leading up to 2004 were nonexempt 
because their salaries fell below the short test's salary threshold. It 
therefore appears that these commenters are requesting that the 
Department set the salary threshold at the historical short test level. 
The Department attempted to do this in the 2016 final rule, but as 
explained above, this approach created legal risks, as evidenced by the 
district court's conclusion.
---------------------------------------------------------------------------

    \78\ In 1975, the Department set a long test salary level of 
$155 per week for executive and administrative employees, and of 
$170 per week for professional employees. See 40 FR 7092. On April 
1, 1991, the federal minimum wage increased to $4.25 per hour, which 
equals $170 for a 40-hour workweek. See Sec. 2, Public Law 101-157, 
103 Stat. 938 (Nov. 17, 1989).
---------------------------------------------------------------------------

    The Department continues to believe that the post-1991 landscape is 
``highly relevant'' to its approach here, 84 FR 10909, and disagrees 
with the employee representatives contending otherwise. The one-test 
system effectively in place for the nearly three decades has created 
significant reliance interests and

[[Page 51244]]

understandings in the workplace under which employees and employers 
alike recognize certain positions as exempt. As the Nevada district 
court recognized, a salary level that deviates substantially from 
recent practice would result in ``entire categories of previously 
exempt employees who perform `bona fide executive, administrative, or 
professional capacity' duties'' becoming nonexempt. 275 F. Supp. 3d at 
806 (quoting 29 U.S.C. 213(a)(1)). Numerous employers indicated that 
they anticipated significant adverse effects from the 2016 final rule 
as a result of this widespread reclassification, including not only 
increased compliance costs but decreased employee flexibility, reduced 
morale, and increased employee turnover. See Independent Electrical 
Contractors; National Association of Truck Stop Operators; National 
Multifamily Housing Council and the National Apartment Association; 
PPWO; SBA Advocacy; Seyfarth Shaw.
    Regarding EPI's request that the Department ``include the value of 
the Kantor long test in the final rule,'' as explained below and as 
described in more detail in the economic analysis, the Department has 
considered the Kantor long test methodology as an alternative. But as 
the 2004 final rule explained, the Kantor method, which uses the lowest 
10 percent of exempt salaried employees in low-wage regions and 
industries, requires ``uncertain assumptions regarding which employees 
are actually exempt[.]'' 69 FR 22167. It is also more complex to model 
and thus is less accessible and transparent. And it presents a 
circularity problem: The Kantor method would determine the population 
of exempt salaried employees, while being determined by the make-up of 
that population. The 2004 methodology of setting the minimum salary 
level based on the lowest 20 percent of all salaried employees in the 
South and retail industry avoids these problems. See id. Additionally, 
as discussed in the economic analysis below, upon consideration of the 
Kantor method, the Department found that it would result in a salary 
threshold that differs from the level set in this final rule by $40 per 
week. EPI similarly estimated that the Kantor method would result in a 
salary threshold that deviates from the level proposed in the NPRM by 
$33 per week. The Department does not believe this fairly small 
difference justifies reverting back to the Kantor method, particularly 
because the 2004 methodology is familiar to employers and employees, 
does not require uncertain and circular assumptions, and has never been 
challenged in court.
    The Department also disagrees with commenters who stated that a 
significantly higher salary level is justified in order to reduce 
further the risk of employee misclassification. The Department 
recognizes that, in addition to conferring minimum wage and overtime 
protections on newly nonexempt employees, an updated salary level 
clarifies and strengthens the nonexempt status of employees who fail 
the duties test and earn between the previous salary level and the new 
one (i.e., those who are and will remain nonexempt), and thereby 
reduces the risk that those employees will be misclassified as exempt. 
Indeed, this final rule clarifies and strengthens the nonexempt status 
of 2.2 million salaried white collar workers and 1.9 million salaried 
blue collar workers earning between $455 and $684 per week. See infra 
Sec. Sec.  VI.A.iii, VI.D.iii.3.
    But the laudable goal of reducing misclassification cannot overtake 
the statutory text, which grounds an analysis of exemption status in 
the ``capacity'' in which someone is employed--i.e., that employee's 
duties. Accordingly, the salary level test's limited purpose is to 
screen out only those employees who are not performing bona fide EAP 
duties. See Weiss Report at 8 (noting that the salary levels ``have 
amply proved their effectiveness in preventing the misclassification by 
employers of obviously nonexempt employees'') (emphasis added). As 
explained at length above, if the salary level is too high, as was the 
case in the 2016 final rule, it results in a substantial number of 
historically exempt bona fide EAP employees being classified as 
nonexempt without any examination of their duties. Such action is 
inconsistent with the section 13(a)(1) exemption. The Department 
believes that potential misclassification of nonexempt employees as 
exempt is most appropriately addressed through compliance assistance 
and, if necessary, enforcement by the Department or private parties, 
rather than through an artificial increase to the salary level.\79\
---------------------------------------------------------------------------

    \79\ Regarding the view of the state attorneys general that the 
new salary level does not do enough to prevent misclassification 
under their states' wage-and-hour laws that track FLSA exemptions, 
nothing in this rule prevents any state from enacting a higher 
salary level, or a more restrictive duties test, than the FLSA if it 
believes it is necessary to prevent misclassification under state 
law.
---------------------------------------------------------------------------

    The Department also declines to adopt a lower salary level than the 
one proposed in the NPRM, as some employer representatives suggested. 
As explained above, by setting the salary level at the low end--the 
20th percentile--of the earnings of full-time salaried employees in the 
South and/or retail industry, the Department, consistent with its 
historical practice, has tailored the salary level to the needs of the 
lowest-wage regions and industries. While some employer representatives 
stated that the Department could use an even narrower subset of data by 
eliminating from consideration higher-wage states, the Department 
believes that using the entire South--the lowest-wage Census Region--in 
addition to the retail industry nationwide strikes the appropriate 
balance by setting a salary level that is based on low-wage areas but 
can still serve as a meaningful dividing line in higher-wage areas as 
well.\80\
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    \80\ The Chamber stated that the 2004 rule and the Department's 
application of that rule (in the NPRM) used different groups of 
states, and that the 2004 rule used only a subset of states in the 
South Census Region. The Chamber's characterization of the data set 
used in the 2004 rule is incorrect, as both this rule and the 2004 
final rule used the entire South Census Region in setting the salary 
level.
---------------------------------------------------------------------------

    In sum, after considering the comments received, the Department has 
decided to update the salary level by applying the 2004 methodology to 
current data. As noted in the NPRM, using this methodology ``promotes 
familiarity and stability for the workplace, ensures workers the 
important wage protections contained in the Act, . . . minimizes the 
uncertainty and potential legal vulnerabilities that could accompany a 
novel and untested approach,'' ``avoids new regulatory burdens,'' and 
sets a salary level that ``accounts for nationwide differences in 
employee earnings and . . . work[s] appropriately with the standard 
duties test.'' 84 FR 10909.
    The Department declines to make any changes to the duties test, 
such as adopting a duties test similar to the long duties test, which 
some employee representatives advocated as an alternative or complement 
to a higher salary level. As explained above, the standard duties test 
has been in effect for 15 years, and the short duties test, to which it 
is similar, was functionally the predominant test in use for the 
preceding 13 years. This approach has never been challenged. As a 
result, both employees and employers are accustomed to these tests. 
Moreover, a large body of jurisprudence interprets these duties tests, 
and so changing these tests could increase regulatory uncertainty and 
result in costly litigation. The Department also remains

[[Page 51245]]

mindful of employer concerns that reinstating the long test's cap on 
nonexempt work could introduce new compliance burdens. See, e.g., 
National Association of Truck Stop Operators; NRF; see also 81 FR 
32446; 69 FR 22127. Finally, the Department did not propose any changes 
to the duties test in the NPRM and does not believe that it would be 
appropriate to institute such a significant change to the part 541 
exemptions in this final rule.
    Accordingly, the Department declines to return to the more 
complicated long duties test. The Department believes that the standard 
duties test, which focuses on whether an employee's ``primary duty'' 
consists of EAP tasks, can appropriately distinguish bona fide EAP 
employees from nonexempt workers.
    The Department considered a number of alternatives to the salary 
level in this final rule.\81\ First, the Department considered not 
changing the salary level from the currently enforced level of $455 per 
week. The Department rejected this option because, as discussed above, 
the Department concluded that the $455 salary level set fifteen years 
ago no longer reflects current earnings and must be updated to serve as 
a meaningful dividing line between nonexempt and potentially exempt 
employees. The Department also considered maintaining the average 
minimum wage protection in place since 2004 by using the weighted 
average of hours at minimum wage and overtime pay represented by the 
minimum salary level (i.e., the $455 weekly threshold represented 72.2 
hours at minimum wage and overtime pay at the minimum wage in 2004; 
currently, that salary level represents 55.2 hours at minimum wage and 
overtime pay; the weighted average is 59.5 hours, which yields a salary 
of $502 per week). The Department rejected this option because it would 
not adequately address wage growth since 2004.
---------------------------------------------------------------------------

    \81\ The salary levels that would result from each of the 
alternatives are set forth in section VI.C.
---------------------------------------------------------------------------

    In light of comments from some employer representatives, the 
Department also considered using the 2004 methodology but eliminating 
the District of Columbia, Maryland, and Virginia from the data set used 
to determine the salary level due to their higher levels of employee 
earnings. However, as discussed above, the Department believes that 
using the entire South and the retail industry nationwide results in an 
appropriate nationwide salary level that is based on low-wage regions 
but can still serve as a meaningful dividing line in higher-wage 
regions. Using the entire South is also consistent with the methodology 
used in the 2004 final rule.
    In response to a comment from EPI, the Department also considered 
adopting the methodology that was used to derive the long test salary 
level prior to 2004 (the Kantor long test method), which used the 
lowest 10 percent of exempt salaried employees in low-wage regions and 
industries. However, as explained in greater detail above, the 
Department declined to do so because while the Kantor methodology 
produces a salary level that differs from the level set in this final 
rule by less than 6 percent, it depends on uncertain and circular 
assumptions, and is more complex to model and thus less accessible and 
transparent.
    Finally, the Department considered using the methodology from the 
2016 final rule to set the salary level, as suggested by many employee 
representatives. However, as explained at length above, the Department 
believes that methodology was inappropriate because it resulted in too 
many employees being newly classified as nonexempt based on their 
salaries alone, thus supplanting the role of the duties test. Moreover, 
the district court invalidated the 2016 final rule. Therefore, the 
Department has chosen to use the 2004 methodology, which, as noted 
above, screens out obviously nonexempt workers, works well with the 
standard duties test, and has never been challenged during the fifteen 
years in which it has been enforced by the Department.
3. Proposed Inflation to January 2020
    The Department proposed to inflate the salary level to reflect 
anticipated wage growth to January 2020, the final rule's estimated 
effective date. Most commenters did not address this aspect of the 
proposal, but some employer representatives opposed it. A few stated 
that the proposed approach was inconsistent with the Department's past 
practice of setting the salary level using the most recent available 
data on actual salaries paid to employees, rather than inflationary 
metrics. See, e.g., Center for Workplace Compliance; Chamber; FMI.
    In the final rule, instead of projecting the salary level to 
January 2020, the Department has set the salary level using the most 
recent data available at the time the Department has drafted the final 
rule. The Department is using pooled CPS MORG data from July 2016 to 
June 2019, adjusted to reflect 2018/2019. As some commenters noted, 
using recent actual wage data is consistent with the approach the 
Department has taken in prior rulemakings. See 81 FR 32403 (noting 
regulatory history reveals that in most prior rulemakings ``the 
Department examined a broad set of data on actual wages paid to 
salaried employees'' to set the salary level), id. at 32051 (``In 
keeping with our practice, the Department relies on the most up-to-date 
data available to derive the final salary level[.]'').
    It is also consistent with the Department's historical practice 
(with only one exception, in 1975) of declining to use inflation to 
adjust the salary level for the part 541 exemption. See 69 FR 12167 
(noting the Department's ``long-standing tradition of avoiding the use 
of inflation indicators for automatic adjustments to these salary 
requirements''). Additionally, the gap between the latest month covered 
by the data set--June 2019--and the rule's effective date--January 
2020--is only six months. This is a shorter gap than was the case in 
the 2016 rule, which had an effective date of December 1, 2016 and 
relied on salary data from the fourth quarter of 2015, and a 
significantly shorter gap than the 2004 rule, which had an effective 
date of August 23, 2004 and relied on 2002 CPS data. 81 FR 32391, 
32405; 69 FR 22122, 22168. Using a data set that includes such recent 
earnings data enables the Department to avoid the uncertainty and 
speculation that would accompany projecting earnings data.
4. Rescission of the 2016 Final Rule
    Many employer representatives who commented on the issue supported 
the NPRM's independent proposal to rescind the 2016 final rule. See, 
e.g., ASTA; Center for Workplace Compliance; NAHB; NFIB; Wage and Hour 
Defense Institute; Worldwide Cleaning Industry Association. These 
employers generally maintained that the 2016 final rule, unlike the 
proposed rule, was inconsistent with how the Department has previously 
set the salary level, and some highlighted that the 2016 final rule 
excluded many workers performing EAP duties. As noted above, employer 
representatives also asserted that the 2016 final rule salary level 
would have a number of adverse effects, including reductions in 
staffing levels, hours, and employee benefits; less flexibility in 
scheduling; and decreased employee morale. In contrast, other 
commenters, including the tens of thousands who submitted comments as 
part of a campaign, maintained that the 2016 final rule was appropriate 
and would have benefited more employees than the salary level proposed 
in the NPRM, and urged the Department to defend the 2016 final rule in 
the

[[Page 51246]]

currently stayed litigation. See, e.g., AFL-CIO; Campaign Comments; 
Senator Patty Murray; The Leadership Conference on Civil and Human 
Rights.
    The Department is finalizing the formal rescission of the 2016 
final rule as proposed. Thus, in addition to replacing the 2016 final 
rule functionally by revising the part 541 regulatory text in the Code 
of Federal Regulations, this final rule also formally rescinds the 2016 
final rule. This rescission operates independently of the new content 
in this final rule, as the Department intends it to be severable from 
the substantive rule for revising part 541. Thus, even if the 
substantive provisions of this final rule revising part 541 are 
invalidated, enjoined, or otherwise not put into effect, the Department 
intends the 2004 final rule to remain operative, not the enjoined 2016 
final rule that it is rescinding.
    Particularly given the recent history of litigation in this area, 
the rescission of the 2016 final rule is necessary to provide certainty 
and clarity to employees and employers about what salary level will be 
effective if this final rule were to be invalidated, enjoined, or 
otherwise not put into effect. As explained at length above, the 
Department believes that the salary level set in the 2016 final rule 
was inappropriate. Moreover, given the district court's invalidation of 
the 2016 final rule, the 2004 final rule, which has never been 
challenged in court, is the logical framework to take the place of this 
rule if this rule were to be struck down.

B. Special Salary Tests

i. Puerto Rico, Virgin Islands, Guam, and the Commonwealth of the 
Northern Mariana Islands \82\
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    \82\ The special salary tests do not apply to employees of the 
Federal government employed in Puerto Rico, the U.S. Virgin Islands, 
Guam, the Commonwealth of the Northern Mariana Islands, or American 
Samoa.
---------------------------------------------------------------------------

    The Department has applied the standard salary level to Puerto Rico 
since 2004.\83\ In 2016, Congress passed the Puerto Rico Oversight, 
Management, and Economic Stability Act (PROMESA).\84\ Section 404 of 
PROMESA states that ``any final regulations issued related to'' the 
Department's 2015 overtime rule NPRM--i.e., the 2016 final rule--
``shall have no force or effect'' in Puerto Rico until the Comptroller 
General of the Unites States completes and transmits a report to 
Congress assessing the impact of applying the final regulations to 
Puerto Rico, and the Secretary of Labor, ``taking into account the 
assessment and report of the Comptroller General, provides a written 
determination to Congress that applying such rule to Puerto Rico would 
not have a negative impact on the economy of Puerto Rico.'' \85\
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    \83\ See 69 FR 22172.
    \84\ See Public Law 114-187, 130 Stat. 549 (June 30, 2016).
    \85\ See 48 U.S.C. 2193(a)-(b). The Comptroller General's report 
was published on June 29, 2018 and is available at: https://www.gao.gov/products/GAO-18-483.
---------------------------------------------------------------------------

    It is the Department's belief that PROMESA does not apply to this 
final rule as it is a new rulemaking, and thus not ``related to'' the 
2015 overtime rule NPRM within the meaning of PROMESA. Section 404, 
however, reflected Congress's apprehension with increasing the salary 
level in Puerto Rico, and given the current economic climate there, the 
Department proposed to set a special salary level in Puerto Rico of 
$455 per week--the level that currently applies under PROMESA.
    The Department also currently applies the standard salary level to 
the Virgin Islands, Guam, and the Commonwealth of the Northern Mariana 
Islands (CNMI).\86\ The Department understands that U.S. territories 
face their own economic challenges and that an increase in the salary 
level affects them differently than the States. In recognition of these 
challenges, and to promote special salary level consistency across U.S. 
territories, the Department proposed setting a special salary level of 
$455 per week for the Virgin Islands, Guam, and the CNMI.
---------------------------------------------------------------------------

    \86\ In Guam and the CNMI, the Department has applied the salary 
level test(s) applicable to the States. In the Virgin Islands, the 
Department applied a special salary level test prior to 2004, but 
applied the standard salary level beginning in 2004.
---------------------------------------------------------------------------

    Few commenters addressed this issue, but those who did all 
supported the Department's proposal. The Saipan Chamber of Commerce, 
for example, stated that ``U.S. territories face economic challenges 
not experienced by businesses and employers on the U.S. mainland,'' and 
the World Floor Covering Association (WFCA) similarly cited the 
``unique economies'' in these territories. The Hotel Association of the 
Northern Mariana Islands referenced several CNMI-specific concerns, 
including that ``[w]ages across all industries in the CNMI, including 
the hospitality industry, have been historically lower than their 
stateside counterparts.'' The CNMI chapter of SHRM expressed similar 
concerns.
    After reviewing the comments received, the Department is finalizing 
this aspect of the NPRM as proposed. As such, in this final rule the 
Department will set a special salary level of $455 per week for Puerto 
Rico, the Virgin Islands, Guam, and the CNMI.
ii. American Samoa
    As discussed in the NPRM, the Department has historically applied a 
special salary level test to employees in American Samoa because 
minimum wage rates there have remained lower than the federal minimum 
wage.\87\ The Fair Minimum Wage Act of 2007, as amended, provides that 
industry-specific minimum wage rates in American Samoa will increase 
every three years until each equals the federal minimum wage.\88\ The 
disparity with the federal minimum wage is expected to remain for the 
foreseeable future.
---------------------------------------------------------------------------

    \87\ See 69 FR 22172.
    \88\ See Sec. 1, Public Law 114-61, 129 Stat. 545 (Oct. 7, 
2015).
---------------------------------------------------------------------------

    The special salary level test for employees in American Samoa has 
historically equaled approximately 84 percent of the standard salary 
level.\89\ The Department proposed to maintain this percentage and 
considered whether to set the special salary level in American Samoa 
equal to 84 percent of the proposed standard salary level ($679 per 
week)--resulting in a special salary level of $570 per week--or to set 
it equal to approximately 84 percent of the proposed special salary 
level applicable to the other U.S. territories ($455 per week)--
resulting in a special salary level of $380 per week. The Department 
proposed a special salary level of $380 per week in American Samoa. It 
explained that this approach would not only maintain the special salary 
level that the Department is currently enforcing in American Samoa, but 
would also ensure that American Samoa, which has a lower minimum wage 
than the other U.S. territories, would not have a higher special salary 
level.\90\
---------------------------------------------------------------------------

    \89\ See, e.g., 69 FR 22172.
    \90\ See 84 FR 10912.
---------------------------------------------------------------------------

    The Department received no comments on this proposal and will adopt 
the methodology set forth in the NPRM. Accordingly, in this final rule 
the Department will set a special salary level of $380 per week for 
employees in American Samoa.
iii. Motion Picture Producing Industry
    The Department has permitted employers to classify as exempt 
employees in the motion picture producing industry who are paid a 
specified base rate per week (or a proportionate amount based on the 
number of days worked), so long as they meet the duties tests for the 
EAP exemption.\91\ This exception from the

[[Page 51247]]

``salary basis'' requirement was created in 1953 to address the 
``peculiar employment conditions existing in the [motion picture 
producing] industry,'' and applies, for example, when a motion picture 
producing industry employee works less than a full workweek and is paid 
a daily base rate that would yield the weekly base rate if 6 days were 
worked.\92\ Consistent with its practice since the 2004 final rule, the 
Department proposed to increase the required base rate proportionally 
to the proposed increase in the standard salary level test, resulting 
in a proposed base rate of $1,036 per week.
---------------------------------------------------------------------------

    \91\ See Sec.  541.709.
    \92\ 18 FR 2881 (May 19, 1953).
---------------------------------------------------------------------------

    The Department did not receive any comments on the proposed base 
rate for motion picture employees. The final rule adopts the 
methodology set forth in our proposal, which using the new standard 
salary level ($684 per week) results in a base rate of $1,043 per week 
(or a proportionate amount based on the number of days worked).\93\
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    \93\ The Department calculated this figure by dividing the 
weekly salary level ($684) by $455, and then multiplying this result 
(rounded to the nearest hundredth) by the base rate set in the 2004 
final rule ($695 per week). This produced a new base rate of $1,043 
(per week), when rounded to the nearest whole dollar.
---------------------------------------------------------------------------

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

    In the 2016 final rule, the Department for the first time allowed 
employers to count nondiscretionary bonuses and incentive payments 
toward the standard or special salary levels.\94\ Under that rule, such 
bonuses must be paid quarterly or more frequently and may satisfy up to 
10 percent of the standard or special salary level. In the NPRM, the 
Department again proposed to permit nondiscretionary bonuses and 
incentive payments (including commissions) to satisfy up to 10 percent 
of the standard or special salary level tests for the EAP exemption. 
However, unlike the 2016 final rule's requirement that such payments 
must be paid on a quarterly or more frequent basis, the Department 
proposed to allow the crediting of payments made on an annual or more 
frequent basis. Additionally, the Department proposed to permit 
employers to make a final ``catch-up'' payment within one pay period 
after the end of each 52-week period to bring an employee's 
compensation up to the required level. See 84 FR 10912-13.
---------------------------------------------------------------------------

    \94\ Although a federal district court subsequently invalidated 
the 2016 final rule, the court's summary judgment decision did not 
address the bonuses provision. 275 F. Supp. 3d 795.
---------------------------------------------------------------------------

    Most commenters representing employers supported allowing 
nondiscretionary bonuses and incentive payments to count towards the 
standard salary level requirement. Employer representatives supporting 
the bonuses proposal (or an expanded version of it) asserted that 
nondiscretionary bonuses and incentive payments constitute a large and 
important part of the total compensation package for many exempt 
employees. Several commenters, including the Chamber, FMI, IFA, and 
NRA, noted that, in light of commenter feedback, the Department has 
previously acknowledged this point in the NPRM and in the 2016 final 
rule. See 81 FR 32423-24; 84 FR 10912. The Chamber additionally cited a 
survey from 2018 showing that 80 percent of non-profit and government 
employers surveyed use some type of ``short-term incentive plan.'' The 
National Association of Truck Stop Operators and PPWO asserted that the 
majority of employees who receive bonuses and incentive payments 
otherwise qualify for exempt status, while SIGMA and WFCA asserted that 
bonuses and incentive payments tied to an employer's success ``foster a 
sense of ownership'' among the managerial employees who receive them. 
Many employer representatives specifically approved of the Department's 
proposal to allow the crediting of nondiscretionary bonuses and 
incentive payments paid on an annual basis (rather than quarterly, as 
provided by the 2016 final rule), agreeing that annual bonuses are a 
common form of compensation for many EAP employees. See PPWO; SIGMA.
    Although several employer representatives supported the proposal 
without reservation, a larger number objected to the proposal's 
restriction that nondiscretionary bonuses and incentive payments could 
only satisfy up to 10 percent of the standard salary level. Some of 
these commenters urged the Department to allow bonuses to satisfy more 
than 10 percent of the standard salary level, but declined to specify 
an exact amount. See Center for Workplace Compliance; National 
Association of Federally-Insured Credit Unions; NGA. Others 
specifically proposed a higher percentage limit, including: WFCA 
(suggesting 20 percent); Small Business Legislative Council and 
TechServe Alliance (25 percent); ASTA (30 percent); National 
Independent Automobile Dealers Association (30 or 40 percent); and HR 
Policy Association and the Kentucky Retail Federation (50 percent). 
Finally, many employer representatives urged the Department not to 
impose any limit. See, e.g., American Network of Community Options and 
Resources; American Staffing Association; IFA; Mortgage Bankers 
Association; NRF; PPWO; Seyfarth Shaw.
    Some commenters critical of the proposed 10 percent limit asserted 
that it is not reflective of the compensation practices in their 
industry, where bonuses and incentive payments often exceed 10 percent 
of an employee's fixed salary. See, e.g., ASTA; NGA; WFCA. Others 
contended that to ``harmonize'' the respective regulations, any non-
hourly payments that count toward an employee's ``regular rate of pay'' 
when calculating overtime pay, see 29 CFR 778.211(c), should count 
towards the salary threshold as well. See, e.g., AGC; HR Policy 
Association; PPWO; Worldwide Cleaning Industry Association.\95\ The 
Chamber, IFA, and the National Lumber and Building Material Dealers 
Association criticized the NPRM's rationale that the 10 percent limit 
was necessary to help maintain parity between sectors that use such pay 
methods and those that traditionally have not done so,\96\ while ASTA 
and TechServe Alliance asserted that the 10 percent limit would have a 
negative impact on employers in industries that rely on incentive pay.
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    \95\ For the same reason, some commenters specifically requested 
the Department allow employers to credit the value of board and 
lodging towards the standard salary level. See AHLA (``If an 
employer must include a non-hourly payment in the regular rate, that 
payment should likewise count towards the salary threshold.''); see 
also CUPA-HR; PPWO; Seyfarth Shaw. AHLA and CUPA-HR asserted that 
board and lodging benefits are especially common for exempt 
employees in hospitality and higher education, respectively.
    \96\ The Chamber stated that such a consideration is ``beyond 
the Department's proper purview.'' The Chamber and IFA additionally 
stated that government and non-profit employers do not typically 
compete with for-profit employers over the same employee, and that 
the proposal would not alter any existing competitive imbalance in 
any event.
---------------------------------------------------------------------------

    Although few organizations representing employees commented on the 
bonuses proposal, those who did were unanimous in voicing their 
opposition. NELA, Nichols Kaster, Rudy Exelrod, and Smith Summerset & 
Associates LLC (Smith Summerset) asserted that allowing annual bonuses 
and incentive payments to satisfy any portion of the salary level test 
would undermine the premise that only workers with a minimum level of 
dependable and predictable pay should be exempt from the FLSA's 
overtime protections. Relatedly, the AFL-CIO expressed concern that the 
proposal would ``provide a means for employers to manipulate employees' 
salaries to

[[Page 51248]]

avoid paying overtime[.]'' See also NELA. Given these concerns, some 
employee representatives asserted that the proposal would be 
particularly inappropriately paired with a salary level substantially 
lower than the figure adopted in the 2016 final rule. See, e.g., NELA; 
Smith Summerset.
    Several commenters disputed that nondiscretionary bonuses and 
incentive payments are indicative of exempt status. For example, NELA 
and TELA emphasized that such payments do not convey ownership 
interests in the business, and asserted that their members ``have 
represented many categories of employees who receive various 
nondiscretionary bonuses, including middle management and lower level 
employees[.]'' By contrast, Smith Summerset asserted that 
nondiscretionary bonuses and incentive payments ``are not an important 
pay component for the relatively lowly paid employees who would be 
affected by the [proposal],'' who the firm described as ``most in need 
of the certainty and regularity of a salary'' (emphasis in original).
    Finally, employee representatives worried that the proposal would 
undermine the clarity and effectiveness of the salary level test. For 
example, AFL-CIO stated that ``[i]ncluding bonuses in the calculation 
could create confusion as to whether employees meet the salary 
threshold test and are overtime eligible.'' See also Nichols Kaster. 
Several commenters, including NELA, Rudy Exelrod, and TELA, asserted 
that the proposal would increase monitoring and compliance costs. Smith 
Summerset asserted that employers would have to keep new payroll and 
timekeeping records for their exempt staff, including for some 
individuals no longer employed by the company who might be awaiting a 
deferred compensation payment. Several employee representatives 
predicted that the proposal would result in increased litigation, 
particularly over the distinction between discretionary and 
nondiscretionary bonuses.\97\ Smith Summerset emphasized that the back 
wage claims in such disputes would be substantial, and could pose ``a 
surprising and unexpected liability to those unsophisticated employers 
who might stumble into the violation simply by reason of administrative 
oversight.''
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    \97\ NELA and other commenters asserted that ``[d]etermining 
whether bonuses are discretionary or nondiscretionary already 
generates considerable litigation in the context of whether certain 
kinds of bonuses must be included in the regular rate for purposes 
of calculating the overtime rate.'' See also Nichols Kaster; Rudy 
Exelrod; TELA.
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    After carefully considering commenter feedback, the Department has 
decided to adopt the proposal without modification--i.e., allowing 
employers to satisfy up to 10 percent of the standard or special salary 
levels \98\ with nondiscretionary bonuses and incentive payments 
(including commissions), provided that such payments are paid no less 
frequently than on an annual basis.\99\ This provision appropriately 
modernizes the regulations to account for EAP compensation practices in 
a growing number of workplaces, while at the same time preserving the 
important role of the salary basis and salary level tests in 
identifying EAP employees, simplifying compliance, and preventing 
abuse.
    Feedback from employer representatives responding to the NPRM has 
reinforced the Department's view in the previous rulemaking that the 
provision of nondiscretionary bonus and incentive payments has become 
sufficiently correlated with EAP status. At the same time, the 
Department acknowledges that nonexempt employees may receive 
nondiscretionary bonuses and incentive payments, and that the part 541 
regulations have historically looked only to payments made on a salary 
or fee basis to satisfy the minimum salary level. The Department 
believes that allowing employers to credit nondiscretionary bonuses 
towards up to 10 percent of the standard or special salary levels 
strikes an appropriate balance between accommodating legitimate pay 
practices for a growing number of bona fide EAP employees, while not 
undermining the salary basis requirement.
---------------------------------------------------------------------------

    \98\ Specifically, this rule permits employers to use 
nondiscretionary bonuses and incentive payments to satisfy up to 10 
percent of the standard salary level or any of the special salary 
levels applicable to U.S. territories. As discussed in greater 
detail below, however, HCEs must receive at least the standard 
salary amount each pay period on a salary or fee basis without 
regard to the payment of nondiscretionary bonuses and incentive 
payments.
    \99\ The employer may use any 52-week period, such as a calendar 
year, a fiscal year, or an anniversary of the hire year.
---------------------------------------------------------------------------

    The Department has decided against raising or eliminating the 
proposal's 10 percent limitation. The Department continues to believe 
in the basic logic of the salary requirement. Capping the crediting of 
nondiscretionary bonuses and incentive payments at 10 percent of the 
standard salary level ensures that the salary level test remains 
predominantly a test of salaried earnings, requiring that EAP employees 
subject to the salary criteria must earn at least 90 percent of the 
standard salary level on a salaried basis. Additionally, while several 
employer commenters asserted that nondiscretionary bonuses and 
incentive pay often comprise more than 10 percent of the total 
compensation paid to EAP employees, few specifically asserted that any 
significant number of EAP employees earn salaries of less than 90 
percent of the proposed salary threshold (i.e., $614.70 per week, or 
$31,964.40 per year). Thus, the Department disagrees that the 
cumulative effect of raising the standard salary level while limiting 
the amount that can be satisfied through nondiscretionary bonuses and 
incentive pay will result in a significant reduction in such payments. 
The regulations do not limit the amount of bonuses EAP employees may 
earn; it only limits the amount that can count toward the standard 
salary level.
    For similar reasons, the Department has decided against expanding 
the proposal to allow additional kinds of payments to count towards the 
standard salary level, such as discretionary bonuses, employer benefit 
contributions, or the value of board, lodging, and facilities. The 
Department has never allowed such payments to count towards any of the 
earning thresholds required for the EAP exemption, including under the 
HCE test created in 2004. See 541.601(b)(1). The Department did not 
propose to allow such payments to count towards the salary level test, 
and declines commenter suggestions to do so in this final rule.
    NELA, Smith Summerset, and other commenters questioned how the 
proposed rule would treat employees affected by the proposal whose 
employment ends before the end of a 52-week period. Here, consistent 
with the treatment of employees under the existing HCE test, see Sec.  
541.601(b)(3), the Department has amended the proposed regulatory text 
at Sec.  541.602(a)(3) to clarify that employers may pay employees a 
prorated amount for a designated 52-week period where an employee does 
not work for the entire period, because the employee either is newly 
hired after the period's start or ends employment before the period's 
end. Determining an employer's payment obligation to such employees to 
maintain their exempt status depends on the number of workweeks that 
the employee works within the 52-week period. Where employment ends 
before the end of the 52-week period, employers must ensure that the 
employee receives enough in pay to satisfy the standard salary level by 
the end of the next pay period

[[Page 51249]]

following the employee's end of employment.
    The final rule permits employers to meet the salary level 
requirement by making a catch-up payment within one pay period of the 
end of the 52-week period.\100\ In plain terms, each pay period an 
employer must pay the EAP employee on a salary basis at least 90 
percent of the standard salary level and, if at the end of the 52-week 
period the sum of the salary paid plus the nondiscretionary bonuses and 
incentive payments (including commissions) paid does not equal the 
standard salary level for the 52-week period, the employer has one pay 
period to make up for the shortfall (up to 10 percent of the required 
salary level). Any such catch-up payment will count only toward the 
previous 52-week period's salary amount and not toward the salary 
amount in the 52-week period in which it was paid.
---------------------------------------------------------------------------

    \100\ FMI, IFA, and other employer representatives requested 
giving employers more than one pay period to make any necessary 
catch-up payments, pointing out that the HCE test permits employers 
to make catch-up payments within one month after the end of the 52-
week period used for that test. See 29 CFR 541.601(b)(2). The 
Department declines this request because this new provision 
specifically affects the standard salary level requirement, not 
additional income received on top of that threshold by highly 
compensated employees.
---------------------------------------------------------------------------

    The Department is sensitive to concerns raised by employee 
representatives and some employer commenters that the bonuses provision 
may increase compliance costs and litigation. These effects, however, 
are mitigated by the fact that crediting nondiscretionary bonuses and 
incentive pay towards the standard salary level is purely optional. 
Employers, who would predominantly bear the cost of compliance and 
litigation expenses, are presumably best positioned to evaluate whether 
the potential costs of such crediting would outweigh the potential 
benefits. While the AFL-CIO contends that the bonuses proposal could 
theoretically ``lead to anomalous results, where employees working side 
by side performing the same job would be exempt and nonexempt, simply 
because inclusion of the bonus would raise one employee over the salary 
threshold[,]'' this has always been true of the salary level test, 
given that employees performing identical job duties may receive 
different salaries.
    The Department emphasizes that this rulemaking does not change the 
requirement in Sec.  541.601(b)(1) that highly compensated employees 
must receive at least the standard salary amount each pay period on a 
salary or fee basis without regard to the payment of nondiscretionary 
bonuses and incentive payments. While nondiscretionary bonuses and 
incentive payments (including commissions) may be counted toward the 
HCE total annual compensation requirement, the HCE test does not allow 
employers to credit these types of payments toward the standard salary 
requirement. The Department continues to believe that permitting 
employers to use nondiscretionary bonuses and incentive payments to 
satisfy the standard salary portion of the HCE test is not appropriate 
because employers are already permitted to fulfill more than three 
quarters of the HCE total annual compensation requirement with 
commissions, nondiscretionary bonuses, and other forms of 
nondiscretionary deferred compensation (paid at least annually). Thus, 
when conducting the HCE analysis, employers must remain mindful that 
HCEs must receive the full standard salary amount each pay period on a 
salary or fee basis.
    Finally, nothing adopted in this final rule alters the Department's 
longstanding position that employers may pay their exempt EAP employees 
additional compensation of any form beyond the minimum amount needed to 
satisfy the salary basis and salary level tests. See Sec.  541.604(a). 
Similarly, the Department emphasizes that nonexempt employees may 
continue to receive bonuses and incentive payments. Where 
nondiscretionary bonuses or incentive payments are made to nonexempt 
employees, the payments must be included in the regular rate when 
calculating overtime pay. The Department's regulations at Sec. Sec.  
778.208-.210 explain how to include nondiscretionary bonuses in the 
regular rate calculation.

D. Highly Compensated Employees

    As noted in the NPRM, the Department's 2004 final rule created a 
new test under the EAP exemption, known as the highly compensated 
employee (HCE) test, based on the rationale that it is unnecessary to 
apply the standard duties test in its entirety to employees who earn at 
least a certain amount annually--an amount substantially higher than 
the annual equivalent of the weekly standard salary level--because such 
employees ``have almost invariably been found to meet all the other 
requirements of the regulations for exemption.'' \101\ The HCE test 
combines a high compensation requirement with a less-stringent duties 
test.
---------------------------------------------------------------------------

    \101\ 69 FR 22174 (quoting Weiss Report at 22).
---------------------------------------------------------------------------

    To meet the HCE test, an employee must earn at least the amount 
specified in the regulation in total annual compensation and must 
customarily and regularly perform any one or more of the exempt duties 
or responsibilities of an executive, administrative, or professional 
employee.\102\ This test applies ``only to employees whose primary duty 
includes performing office or non-manual work.'' \103\ Such an employee 
must receive at least the standard salary level each pay period on a 
salary or fee basis, while the remainder of the employee's total annual 
compensation may include commissions, nondiscretionary bonuses, and 
other nondiscretionary compensation.\104\ An employee is permitted to 
make a final ``catch-up'' payment ``during the last pay period or 
within one month after the end of the 52-week period'' to bring an 
employee's compensation up to the required level.\105\ If an employee 
works for less than a full year, either because the employee is newly 
hired after the beginning of the 52-week period or ends the employment 
before the end of this period, the employee may still qualify for 
exemption under the HCE test if the employee receives a pro rata 
portion of the required annual compensation, based upon the number of 
weeks of employment.\106\
---------------------------------------------------------------------------

    \102\ Sec.  541.601(a).
    \103\ Sec.  541.601(d).
    \104\ Sec.  541.601(b)(1). However, total annual compensation 
does not include board, lodging, and other facilities, or payments 
for medical insurance, life insurance, retirement plans, or other 
fringe benefits. Id.
    \105\ Sec.  541.601(b)(2).
    \106\ Sec.  541.601(b)(3).
---------------------------------------------------------------------------

    The Department stated in the NPRM that it continues to believe that 
the HCE test is a useful alternative to the standard salary level and 
duties tests for highly compensated employees.\107\ At the time this 
level was initially set in 2004 at $100,000, the Department concluded 
that ``white collar'' employees who earn above this threshold would 
nearly always satisfy any duties test.\108\ The Department proposed 
updating the HCE threshold to ensure that it remains a meaningful and 
appropriate standard when paired with the more-lenient HCE duties test. 
Specifically, the Department proposed setting the HCE threshold at the 
90th percentile of all full-time salaried workers nationally using 2017 
CPS data, then inflated to January 2020, resulting

[[Page 51250]]

in a proposed HCE threshold of $147,414, of which $679 would have to be 
paid weekly on a salary or fee basis.\109\
---------------------------------------------------------------------------

    \107\ 84 FR 10913.
    \108\ Id. The Department concluded that ``in the rare instances 
when these employees do not meet all other requirements of the 
regulations, a determination that such employees are exempt would 
not defeat the objectives of section 13(a)(1) of the Act.'' 69 FR 
22174 (quoting Weiss Report at 22-23).
    \109\ 84 FR 10913-14. Consistent with the 2016 final rule, the 
Department's proposal did not permit employers to use 
nondiscretionary bonuses to satisfy the weekly standard salary level 
requirement for HCE workers. Id. at 10914 n.129. As previously 
stated, the Department believes that permitting employers to use 
nondiscretionary bonuses and incentive payments to satisfy the 
standard salary portion of the HCE test is not appropriate because 
employers are already permitted to fulfill the majority of the HCE 
total annual compensation requirement with commissions, 
nondiscretionary bonuses, and other forms of nondiscretionary 
deferred compensation (paid at least annually).
---------------------------------------------------------------------------

    The Department received fewer comments addressing the HCE proposal 
than on many other issues in the NPRM, and those who addressed the HCE 
proposal often did not provide detailed feedback. Nearly all the 
commenters on the HCE proposal were employer representatives, most of 
whom opposed the Department's proposal to increase the HCE compensation 
level to a level equal to the 90th percentile of all full-time salaried 
workers ($147,414). These commenters instead supported keeping the HCE 
level at $100,000, see, e.g., HR Policy Association; National 
Association of Manufacturers; NRF, or increasing the HCE level but by a 
lower amount (resulting in a threshold between $100,000 and $147,414), 
see, e.g., Chamber; National Lumber and Building Material Dealers 
Association; WFCA. For example, some commenters suggested lowering the 
percentile from 90 percent to 80 percent of full-time salaried 
employees nationwide. See, e.g., Center for Workplace Compliance; 
WorldatWork. A few employer representatives noted that they did not 
object to the proposed HCE salary level. See ASTA; Credit Human Federal 
Credit Union. By and large, employee representatives did not 
specifically address the HCE proposal.\110\
---------------------------------------------------------------------------

    \110\ At least one individual commenter supported the proposed 
increase in the HCE compensation level.
---------------------------------------------------------------------------

    Commenters who favored keeping the HCE threshold at $100,000 or 
increasing it by a lower amount expressed concern that the proposed 
level was so high as to put the HCE test for the EAP exemption out of 
reach for employers in lower-wage regions and industries. For example, 
the Chamber stated that such employers would not be able to access the 
HCE test ``on equal terms,'' because ``[w]hether an employee qualifies 
for exemption under the highly compensated test would depend more on 
where the employee works than how much the employer values the 
employee's duties.'' Some of these commenters suggested that the 
Department should calculate the HCE threshold using data from a lower-
wage region of the country, such as the South Census Region or a subset 
thereof, which would result in a lower threshold than using a national 
data set. See, e.g., Chamber; NRA. Others suggested that the Department 
should continue to use national data, but should lower the threshold by 
pegging the HCE threshold at the 80th percentile of full-time salaried 
workers, rather than the 90th percentile proposed in the NPRM. See 
Center for Workforce Opportunity; WorldatWork. WorldatWork asserted 
that this approach would ``result in a far more workable standard, 
given the fluctuation in weekly earnings in different parts of the 
country and in different industries'' and would still ``identify[ ] 
those individuals who should be eligible for a more relaxed duties 
test.''
    Other commenters objected to the Department's proposed HCE 
threshold on the ground that it would require employers to reassess the 
exempt status of many employees using the standard duties test, rather 
than the simpler HCE test. The HR Policy Association and PPWO explained 
that ``[a] significant amount of administrative effort will be needed 
to determine that an employee who had been classified as exempt through 
application of the HCE test remains exempt under application of the 
standard duties test.'' The National Association of Manufacturers 
explained that this process ``is certain to be lengthy'' as ``employers 
will need to survey managers, conduct follow-up interviews, hold new 
budget discussions, and plan and implement changes to each individual 
employee's duties or status.''
    The Department has considered the comments regarding the HCE test 
for exemption and decided to lower the percentile at which to set the 
HCE threshold from that proposed in the NPRM. The Department agrees 
with commenters that increasing the HCE threshold so dramatically would 
result in significant administrative burdens and compliance costs, 
including costs associated with reassessing the exempt status of many 
highly paid white collar workers under the standard duties test. Yet 
while employers would incur these burdens and costs, the vast majority 
of currently exempt HCE employees would remain exempt (under the 
standard test).\111\ In short, the Department would be imposing 
significant administrative costs on employers for a limited effect. 
Additionally, the Department agrees with commenters that the proposed 
level was so high that it would have excluded employees who should be 
exempt under the provision, particularly those in lower-wage regions 
and industries. However, the Department disagrees with commenters who 
oppose any increase in the HCE threshold beyond the currently enforced 
level. The number of full-time salaried workers who earn above $100,000 
per year has increased significantly.\112\ The Department believes that 
some increase to the HCE threshold is necessary to ensure that the HCE 
threshold continues to provide a meaningful and appropriate complement 
to the more lenient HCE duties test.
---------------------------------------------------------------------------

    \111\ In the economic analysis below in section VI.B.v, the 
Department estimated that, under the baseline scenario in which the 
HCE threshold remains at $100,000, approximately 9.3 million workers 
will pass both the standard and HCE tests and 343,000 will pass only 
the HCE test. Stated differently, of those workers who will earn at 
least $100,000, approximately 96.4 percent would pass the standard 
duties test.
    \112\ 84 FR 10913 n.123.
---------------------------------------------------------------------------

    Accordingly, the Department is setting the HCE total annual 
compensation level at the 80th percentile of full-time salaried workers 
nationally using pooled 2018/2019 CPS data.\113\ This results in a 
level of $107,432, of which $684 must be paid weekly on a salary or fee 
basis.\114\ The Department believes this threshold is sufficiently high 
to ensure that it provides a meaningful and appropriate complement to 
the more lenient HCE duties test, and that nearly all of the highly-
paid white collar workers earning above this threshold ``would satisfy 
any duties test.'' Additionally, to be consistent with the methodology 
for setting the standard salary level, the Department now uses three-
year pooled data to estimate the HCE compensation level. The Department 
further believes that this straightforward approach will lower 
administrative costs, as compared to the initial proposal, while still 
ensuring that nearly all of the highly paid white collar workers 
earning above this threshold ``would satisfy any duties test.'' \115\
---------------------------------------------------------------------------

    \113\ In the NPRM, the Department used 2017 CPS data to set the 
HCE compensation level. See id. at 10913. To be consistent with the 
methodology for setting the standard salary level, in the final rule 
the Department is setting the HCE compensation level using pooled 
CPS data for July 2016 to June 2019, adjusted to reflect 2018/2019.
    \114\ The Department notes that no regional adjustment has been 
made to the HCE threshold in this final rule, just as this was not 
part of the determination of the HCE threshold in either the 2004 or 
2016 final rules.
    \115\ 84 FR 10914 (internal citation omitted).
---------------------------------------------------------------------------

E. Future Updates to the Earnings Thresholds

    As the Department noted in the NPRM, even a well-calibrated salary

[[Page 51251]]

level that is fixed becomes obsolete as wages for nonexempt workers 
increase over time. Long lapses between rulemakings have resulted in 
EAP salary levels based on outdated salary data. Such levels are ill-
equipped to help employers assess which employees are unlikely to meet 
the duties tests for the part 541 exemptions. As the Department noted 
in 2004, outdated regulations ``allow unscrupulous employers to avoid 
their overtime obligations and can serve as a trap for the unwary but 
well-intentioned employer;'' they can also lead increasing numbers of 
nonexempt employees to ``resort to lengthy court battles to receive 
their overtime pay.'' 69 FR 22212.
    Throughout the years, various stakeholders have submitted comments 
asking the Department to establish a mechanism to update the thresholds 
automatically. The Department has twice declined such requests, once in 
1970, when it concluded that ``such a proposal [would] require further 
study,'' 35 FR 884, and once in 2004, 69 FR 22171-72. However, in the 
2016 final rule, the Department for the first time adopted a mechanism 
to automatically update the earnings thresholds every three years, 
applying the same methodology used to initially set each threshold in 
that rulemaking. 81 FR 32430. The district court's summary judgment 
decision invalidating the 2016 final rule stated that because the 
standard salary level established by the 2016 final rule was unlawful, 
the mechanism to automatically update that standard salary level was 
``similarly . . . unlawful.'' \116\
---------------------------------------------------------------------------

    \116\ 275 F. Supp. 3d at 808.
---------------------------------------------------------------------------

    In the NPRM, the Department expressed its intent to evaluate the 
part 541 earnings thresholds more frequently through rulemaking. 84 FR 
10914-15. Specifically, the Department stated in the NPRM that it 
intended to propose updates to the standard salary level and HCE total 
compensation threshold on a quadrennial basis (i.e., once every four 
years) through notice-and-comment rulemaking, and that each proposal 
would use the same methodology as the most recently published final 
rule. The Secretary, however, could forestall proposed updates if 
economic or other factors so indicated. The Department also described 
how it could revise the part 541 regulations if it were to codify this 
intention in a final rule. Id. at 10915 n.140.
    Some commenters supported the Department's proposal to propose 
updates to the earnings thresholds every four years unless unwarranted 
due to economic or other factors. See National Association of 
Convenience Stores; National Association of Landscape Professionals; 
NGA; National Multifamily Housing Council and the National Apartment 
Association; SBA Advocacy. These commenters generally agreed that the 
Department's proposal would help the salary level keep pace with 
earnings growth, thus preventing dramatic increases after long gaps 
between updates. See, e.g., Credit Union National Association; Joint 
Comment from Golf Industry Representatives. Many of these commenters 
specifically expressed support for the Department's proposal to use 
notice-and-comment rulemaking to set future salary thresholds; such as 
NAHB, which commented that ``[b]y continuing its current practice of 
engaging the regulated community . . . DOL will receive timely and 
important information as it moves forward with proposed updates in the 
future.'' Commenters who supported the Department's proposal generally 
characterized this reliance on notice-and-comment rulemaking as 
preferable to the 2016 final rule's automatic updating provision, see, 
e.g., Job Creators Network; Joint Comment of 5 Senators, with some 
asserting that automatic updating, without notice-and-comment 
rulemaking, would be unlawful, see, e.g., Joint Comment by 
International Public Management Association for Human Resources and 
others; SIGMA.
    Other commenters did not support the Department's commitment to 
evaluate the thresholds regularly. Many commenters felt that there was 
no need to adhere to a fixed schedule, with some asserting that doing 
so could deprive the Department of flexibility to adapt to 
unanticipated circumstances. These commenters advocated for the 
Department to continue its practice of updating the salary whenever it 
deems such updates appropriate. See, e.g., AGC; Argentum and American 
Seniors Housing Association; HR Policy Association; Independent Bakers 
Association. A few commenters questioned the Department's authority to 
bind itself to conducting regular evaluations of the salary level. See 
AHLA; PPWO. Others felt that the proposed updating framework could 
expose the Department to legal risk because parties might challenge a 
decision by the Department not to engage in the anticipated rulemaking. 
See Associated Builders and Contractors; FMI. Some commenters who 
opposed the updating proposal asserted that it was unnecessary since 
the Department can engage in rulemaking at any time. See Associated 
Builders and Contractors, FMI, NRA.
    Other commenters, including employee representatives, took the 
opposite tack, requesting that the Department automatically update the 
salary thresholds. See, e.g., Center for Popular Democracy; Demos; 
Oxfam America. Some of these commenters asserted that past experience, 
including the long gaps between the most recent updates, has 
demonstrated that in the absence of regular updates, the salary level 
becomes obsolete, and that an announced intent to propose updates does 
not sufficiently ensure that the levels will, in fact, be updated. See, 
e.g., AARP; Joint Comment from 77 Members of Congress; Nichols Kaster. 
Many commenters who favored automatic updating specifically supported 
the updating provision that was included in the 2016 final rule. See 
AARP; NELA; NELP; NWLC; State AGs; The Leadership Conference on Civil 
and Human Rights. Some maintained that the lack of automatic updating 
would result in decreased earnings for workers, citing EPI's estimates 
that the gap in projected earnings transfers to workers between the 
2016 final rule and the proposal would increase from $1.2 billion to 
$1.6 billion due to the lack of automatic updates. See, e.g., EPI; 
NELP; UAW. NELP further stated that ``[i]ndexing would ensure 
predictability for workers and employers alike and eliminate the need 
for time-consuming federal regulations.''
    A number of commenters generally supported regular updates to the 
earnings thresholds, but suggested a frequency other than every four 
years. For instance, ASTA suggested that a six-year gap ``would strike 
a better balance in recognizing [its] and [its] member employers' 
legitimate concerns . . . than the four-year interval included in the 
NPRM.'' The Pennsylvania Credit Union Association wrote in support of 
updating the thresholds no less frequently than every three years, 
while Representative Daniel Lipinski ``urge[d] the Department to review 
the [standard salary] threshold more frequently than once every four 
years.'' AFSCME supported annual updates.
    In this final rule, the Department reaffirms its intent to update 
the standard salary level and HCE total annual compensation threshold 
more regularly in the future using notice-and-comment rulemaking. The 
Department agrees with those commenters who stated that long periods 
without updates serve neither employee nor employer interests, since 
they diminish the usefulness of the salary level test and cause future 
increases to be larger and

[[Page 51252]]

more challenging for businesses to absorb. Regular updates, on the 
other hand, ensure that the salary level test is based on the best 
available data (and thus remains a meaningful, bright-line test), 
produce more predictable and incremental changes in the salary level, 
and therefore provide certainty to employers and promote government 
efficiency.
    After reviewing the comments received on this issue, however, the 
Department declines to finalize its proposal to propose updates to the 
part 541 regulations quadrennially. The Department agrees with 
commenters who stated that this commitment could deprive the Department 
of flexibility to adapt to unanticipated circumstances, and believes 
that prevailing economic conditions, rather than fixed timelines, 
should drive future updates. While some commenters supported the 
Department's updating proposal, the reasons often underlying that 
support--e.g., the benefits of notice-and-comment rulemaking and of 
salary levels that keep pace with earnings growth--are not necessarily 
tied to updates occurring on a predetermined schedule, and would be met 
by the Department updating the salary thresholds more regularly. In 
addition, that many commenters who supported regular updates 
nonetheless disagreed on the optimal updating frequency reaffirms the 
Department's approach, as does the fact that few, if any, commenters 
supported the Department codifying its intent to propose updates 
quadrennially.
    The Department's intention to update the part 541 regulations more 
regularly using notice-and-comment rulemaking will also ensure ample 
opportunity for public input, and provide the Department with the 
flexibility to update the earnings thresholds in a manner that is 
tailored to wages and economic conditions at the time of the update. 
Because the Department believes that it is important to preserve the 
Department's flexibility to adapt to different types of circumstances, 
the Department declines the suggestions by employee representatives to 
adopt an automatic updating mechanism as in the 2016 final rule. 
Lastly, while the Department understands commenter concerns regarding 
the lengthy time periods between recent rulemakings, in this final rule 
the Department is reaffirming its commitment to better implement 
Congress's instruction to define and delimit the EAP exemptions ``from 
time to time'' \117\ through regulations. Regular updates ensure that 
the salary level test continues to screen from exemption obviously 
nonexempt employees who are unlikely to be performing the duties of 
bona fide executive, administrative, or professional employees.
---------------------------------------------------------------------------

    \117\ 29 U.S.C. 213(a)(1).
---------------------------------------------------------------------------

V. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA), 44 U.S.C. 3501 et seq., 
and its attendant regulations, 5 CFR part 1320, require that the 
Department consider the impact of paperwork and other information 
collection burdens imposed on the public. Under the PRA an agency may 
not collect or sponsor the collection of information, nor may it impose 
an information collection requirement, unless it displays a currently 
valid Office of Management and Budget (OMB) control number. See 5 CFR 
1320.8(b)(3)(vi). OMB has assigned control number 1235-0018 to the Fair 
Labor Standards Act (FLSA) information collections. OMB has assigned 
control number 1235-0021 to Employment Information Form collections, 
which the Department uses to obtain information from complainants 
regarding FLSA violations.
    In accordance with the PRA, the Department solicited comments on 
the FLSA information collections and the Employment Information Form 
collections in the NPRM published March 22, 2019, see 84 FR 10900, as 
the NPRM was expected to impact these collections. 44 U.S.C. 
3506(c)(2). The Department also submitted a contemporaneous request for 
OMB review of the proposed revisions to the FLSA information 
collections, in accordance with 44 U.S.C. 3507(d). On May 20, 2019, OMB 
issued a notice for each collection (1235-0018 and 1235-0021) that 
continued the previous approval of the FLSA information collections and 
the Employment Information Form collections under the existing terms of 
clearance. OMB asked the Department to resubmit the information 
collection request upon promulgation of the final rule and after 
considering public comments on the proposed rule.
    Circumstances Necessitating Collection: The FLSA, 29 U.S.C. 201 et 
seq., sets the federal minimum wage, overtime pay, recordkeeping, and 
youth employment standards of most general application. Section 11(c) 
of the FLSA requires all employers covered by the FLSA to make, keep, 
and preserve records of employees and of wages, hours, and other 
conditions and practices of employment. An FLSA covered employer must 
maintain the records for such period of time and make such reports as 
prescribed by regulations issued by the Secretary of Labor. The 
Department has promulgated regulations at part 516 to establish the 
basic FLSA recordkeeping requirements, which are approved under OMB 
control number 1235-0018.
    FLSA section 11(a) provides that the Secretary of Labor may 
investigate and gather data regarding the wages, hours, or other 
conditions and practices of employment in any industry subject to the 
FLSA, and may enter and inspect such places and such records (and make 
such transcriptions thereof), question such employees, and investigate 
such facts, conditions, practices, or matters deemed necessary or 
appropriate to determine whether any person has violated any provision 
of the FLSA. 29 U.S.C. 211(a). The information collection approved 
under OMB control number 1235-0021 provides a method for the Wage and 
Hour Division of the U.S. Department of Labor to obtain information 
from complainants regarding alleged violations of the labor standards 
the agency administers and enforces. This final rule revises the 
existing information collections previously approved under OMB control 
number 1235-0018 (Records to be Kept by Employers--Fair Labor Standards 
Act) and OMB control number 1235-0021 (Employment Information Form).
    This final rule does not impose new information collection 
requirements; rather, burdens under existing requirements are expected 
to increase as more employees receive minimum wage and overtime 
protections due to the proposed increase in the salary level 
requirement. More specifically, the changes adopted in this final rule 
may cause an increase in burden on the regulated community because 
employers will have additional employees to whom certain long-
established recordkeeping requirements apply (e.g., maintaining daily 
records of hours worked by employees who are not exempt from both the 
minimum wage and overtime provisions). Additionally, the changes 
adopted in this final rule may cause an initial increase in burden if 
more employees file complaints with WHD to collect back wages under the 
overtime pay requirements.
    Public Comments: The Department sought public comments regarding 
the burdens imposed by information collections contained in the 
proposed rule. The Department received few comments relevant to the 
PRA. A few commenters stated that employers would need to maintain 
records of hours worked for more employees as a result of an increase 
to the salary level.

[[Page 51253]]

See, International Bancshares Corporation; Washington Nonprofits. A few 
individual commenters expressed concerns surrounding costs associated 
with additional recordkeeping. A CEO of a professional placement firm 
indicated that tracking of hours would produce increased human 
resources paperwork and technology costs. Smith Summerset commented 
that those employers who take advantage of the allowance for up to ten 
percent of nondiscretionary bonuses and incentive payments to meet the 
standard salary level will have to maintain records documenting the 
applicable annual periods and detailing earnings and all payments 
(including catch-up payments) for each affected worker, including 
records such employers were not previously required to maintain.
    In response to these comments, the Department notes that most 
employers currently have both exempt and nonexempt workers and 
therefore have systems already in place for employers to track hours. 
The Department also notes that commenters did not offer alternatives 
for estimates or make suggestions regarding the methodology for 
calculating the PRA burdens. The actual recordkeeping requirements are 
not changing in the final rule. However, the pool of workers for whom 
employers will be required to make and maintain records has increased 
under the final rule, and as a result the burden hours have increased. 
Included in this PRA section are the regulatory familiarization costs 
for this final rule. We note, however, that this is a duplication of 
the regulatory familiarization costs contained in the economic impact 
analysis, see section VI.
    An agency may not conduct an information collection unless it has a 
currently valid OMB approval, and the Department has submitted the 
identified information collection contained in the proposed rule to OMB 
for review under the PRA under the Control Numbers 1235-0018 and 1235-
0021. See 44 U.S.C. 3507(d); 5 CFR 1320.11. The Department has 
resubmitted the revised FLSA information collections to OMB for 
approval, and intends to publish a notice announcing OMB's decision 
regarding this information collection request. A copy of the 
information collection request can be obtained at http://www.Reginfo.gov or by contacting the Wage and Hour Division as shown in 
the FOR FURTHER INFORMATION CONTACT section of this preamble.
    Total annual burden estimates, which reflect both the existing and 
new responses for the recordkeeping and complaint process information 
collections, are summarized as follows:
    Type of Review: Revisions to currently approved information 
collections.
    Agency: Wage and Hour Division, Department of Labor.
    Title: Records to be Kept by Employers--Fair Labor Standards Act.
    OMB Control Number: 1235-0018.
    Affected Public: Private sector businesses or other for-profits, 
farms, not-for-profit institutions, state, local and tribal 
governments, and individuals or households.
    Estimated Number of Respondents: 5,621,961 (2,616,667 by this 
rulemaking).
    Estimated Number of Responses: 46,959,856 (2,616,667 added by this 
rulemaking).
    Estimated Burden Hours: 3,625,986 hours (2,616,667 added by this 
rulemaking).
    Estimated Time per Response: Various (unaffected by this 
rulemaking).
    Frequency: Various (unaffected by this rulemaking).
    Other Burden Cost: 0.
    Title: Employment Information Form.
    OMB Control Number: 1235-0021.
    Affected Public: Businesses or other for-profit, farms, not-for-
profit institutions, state, local and tribal governments, and 
individuals or households.
    Total Respondents: 36,278 (651 added by this rulemaking).
    Estimated Number of Responses: 36,278 (651 added by this 
rulemaking).
    Estimated Burden Hours: 12,155 (217 hours added by this 
rulemaking).
    Estimated Time per Response: 20 minutes (unaffected by this 
rulemaking).
    Frequency: Once.
    Other Burden Cost: 0.

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

    Executive Orders 12866 and 13563 direct agencies to assess the 
costs and benefits of a regulation and to adopt a regulation only upon 
a reasoned determination that the regulation's net benefits (including 
potential economic, environmental, public health and safety effects, 
distributive impacts, and equity) justify its costs. Executive Order 
13563 emphasizes the importance of quantifying both costs and benefits, 
reducing costs, harmonizing rules, and promoting flexibility.
    Under Executive Order 12866, the Office of Management and Budget 
(OMB) determines whether a regulatory action is a ``significant 
regulatory action,'' which includes an economically significant action 
that has an annual effect of $100 million or more on the economy. 
Significant regulatory actions are subject to review by OMB. As 
described below, this final rule is economically significant.
    When the Department uses a perpetual time horizon to allow for cost 
comparisons under Executive Order 13771,\118\ the annualized cost 
savings of the final rule is $534.8 million with 7 percent discounting. 
This final rule is accordingly expected to be an Executive Order 13771 
deregulatory action.
---------------------------------------------------------------------------

    \118\ 82 FR 9339 (Feb. 3, 2017).
---------------------------------------------------------------------------

A. Introduction

i. Background
    The FLSA requires covered employers to: (1) Pay employees who are 
covered and not exempt from the Act's requirements not less than the 
federal minimum wage for all hours worked and overtime premium pay at a 
rate of not less than one and one-half times the employee's regular 
rate of pay for all hours worked over 40 in a workweek, and (2) make, 
keep, and preserve records of their employees and of the wages, hours, 
and other conditions and practices of employment.
    The FLSA provides a number of exemptions from the Act's minimum 
wage and overtime pay provisions, including one for bona fide 
executive, administrative, and professional (EAP) employees. The 
exemption applies to employees employed in a bona fide executive, 
administrative, or professional capacity and to outside sales 
employees, as those terms are ``defined and delimited'' by the 
Department.\119\ The Department's regulations implementing these 
``white collar'' exemptions are codified at 29 CFR part 541.
---------------------------------------------------------------------------

    \119\ 29 U.S.C. 213(a)(1).
---------------------------------------------------------------------------

    In 2004, the Department determined that two earnings level tests 
should be used to help employers distinguish nonexempt employees from 
exempt employees: The standard salary test, which it set at $455 a 
week, and the highly compensated employee (HCE) total-compensation 
test, which it set at $100,000 per year (see section II.C for further 
discussion). In 2016, the Department published a final rule setting the 
standard salary level at $913 per week and the HCE annual compensation 
level at $134,004. As previously discussed, the U.S. District Court for 
Eastern District of Texas declared the 2016 final rule invalid.
ii. Need for Rulemaking
    The Department has updated the salary level test many times since 
its implementation in 1938. Table 1 presents the weekly salary levels

[[Page 51254]]

associated with the EAP exemptions since 1938, organized by exemption 
and long/short/standard duties tests.\120\ In the 37 years between 1938 
and 1975, the Department increased salary test levels approximately 
every five to nine years. In subsequent years, the Department revised 
the levels less frequently, and it is currently enforcing the levels 
set in 2004.\121\
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    \120\ From 1949 until 2004 the regulations contained two 
different tests for exemption--a long test for employees paid a 
lower salary that included a more rigorous examination of employees' 
duties, and a short test for employees paid at a higher salary level 
that included a more flexible duties test. The standard duties test 
is used in conjunction with the standard salary level test, as set 
in 2004 and applied to date, to determine eligibility for the EAP 
exemptions. It replaced the short and long tests in effect from 1949 
to 2004.
    \121\ In 2016, the Department issued a final rule revising the 
EAP salary levels; however, on August 31, 2017, the U.S. District 
Court for Eastern District of Texas held that the 2016 final rule's 
standard salary level exceeded the Department's authority and was 
therefore invalid. See Nevada v. U.S. Dep't of Labor, 275 F. Supp. 
3d 795 (E.D. Tex. 2017). Until the Department issues a new final 
rule, it is enforcing the part 541 regulations in effect on November 
30, 2016, including the $455 per week standard salary level set in 
the 2004 final rule.

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

    To restore the value of the standard salary level as a line of 
demarcation between those workers for whom Congress clearly intended to 
provide minimum wage and overtime protections and other workers who may 
be bona fide EAPs, and to maintain the salary level's continued 
validity, the Department is updating the standard salary level by 
applying the 2004 methodology to current Current Population Survey 
(CPS) data.\122\ Using pooled CPS Merged Outgoing Rotation Group (MORG) 
\123\ data to represent the July 2018 through June 2019 period 
(hereafter referred to as 2019), the salary level of $684 ($35,568 
annually) set in this final rule corresponds to the 20th percentile of 
earnings for full-time salaried workers in the South Census Region and/
or in the retail industry.\124\ \125\ Similarly, the Department used 
the pooled 2018/19 CPS MORG data to set the updated HCE total annual 
compensation requirement at $107,432, which is the earnings for the 
80th percentile of all full-time salaried workers nationally.
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    \122\ The Department also notes that the terms employee and 
worker are used interchangeably throughout this analysis.
    \123\ The Merged Outgoing Rotation Group is a supplement to the 
CPS and is conducted on approximately one-fourth of the CPS sample 
monthly to obtain information on weekly hours worked and earnings.
    \124\ Excluding workers who are not subject to the FLSA, not 
subject to the salary level test, or in agriculture or 
transportation.
    \125\ As previously explained, in the 2004 final rule, the 
Department looked to the 20th percentile of full-time salaried 
workers in the South and in the retail industry nationally to 
validate the standard salary level set in the final rule. In this 
final rule, the Department set the standard salary level at the 20th 
percentile of the combined subpopulations of full-time salaried 
employees in the South and full-time salaried employees in the 
retail industry nationwide. Accordingly, the use of ``and/or'' when 
describing the salary level methodology in this final rule reflects 
that this data set includes full-time salaried workers who work: (1) 
In the South but not in the retail industry; (2) in the retail 
industry but not in the South; and (3) in the south in the retail 
industry.
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iii. Summary of Affected Workers, Costs, Benefits, and Transfers
    The Department estimated the number of affected workers and 
quantified costs and transfer payments associated with this final rule, 
using the currently-enforced 2004 salary level as the baseline. To 
produce these estimates, the Department used pooled CPS MORG data. See 
section VI.B.ii. Most critically, the Department estimates that 1.2 
million workers who would otherwise be exempt under the currently-
enforced standard salary level of $455 per week will either become 
eligible for overtime or have their salary increased to at least $684 
per week, and that 4.1 million employees paid between $455 and $684 per 
week who fail the standard duties test (i.e., that are and will remain 
nonexempt) will have their overtime eligibility made clearer because 
their salary will fall below the specified threshold (Table 2).\126\ 
Additionally, an estimated 101,800 workers will be affected by the 
increase in the HCE compensation test from $100,000 per year to 
$107,432 per year using the pooled 2018/19 CPS MORG data. By Year 10, 
the Department estimates that 723,000 workers will be affected by the 
change in the standard salary level test and 154,000 workers will be 
affected by the change in the HCE total annual compensation test, 
compared to a baseline assuming the currently-enforced earnings 
thresholds (i.e., $455 per week and $100,000 per year) remain 
unchanged.\127\
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    \126\ Here and elsewhere in this analysis, numbers are reported 
at varying levels of aggregation, and are generally rounded to a 
single decimal point. However, calculations are performed using 
exact numbers. Therefore, some numbers may not match the reported 
totals or the calculations shown due to rounding of components.
    \127\ In later years, earnings growth will cause some workers to 
no longer be affected because their earnings will exceed the new 
salary threshold. Additionally, some workers will become newly 
affected because their earnings will exceed $455 per week, and in 
the absence of this final rule would have lost their overtime 
protections. To estimate the total number of affected workers over 
time, the Department accounts for both of these effects.
---------------------------------------------------------------------------

    This analysis quantifies three direct costs to employers: (1) 
Regulatory familiarization costs; (2) adjustment costs; and (3) 
managerial costs (see section VI.D.iii for further discussion on 
costs). The costs presented here are the combined costs for both the 
change in the standard salary level test and the HCE total annual 
compensation level (these will be disaggregated in section VI.D.iii). 
Total annualized direct employer costs over the first 10 years

[[Page 51255]]

were estimated to be $173.3 million, assuming a 7 percent discount rate 
(Table 2).\128\
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    \128\ Hereafter, unless otherwise specified, annualized values 
will be presented using the 7 percent real discount rate.
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    In addition to the costs described above, this rule will also 
transfer income from employers to employees in the form of wages. The 
Department estimated annualized transfers will be $298.8 million. The 
majority of these transfers will be attributable to the FLSA's overtime 
provision; a smaller share will be attributable to the FLSA's minimum 
wage requirement. Transfers also include salary increases for some 
affected EAP workers \129\ to preserve their exempt status. Employers 
may incur additional costs, such as hiring new workers. These other 
potential costs are discussed in section VI.D.iii. Potential benefits 
of this rule could not be quantified due to data limitations, requiring 
the Department to discuss such benefits qualitatively. See Sec.  
VI.D.v.
---------------------------------------------------------------------------

    \129\ The term affected EAP workers refers to the population of 
potentially affected EAP workers who either pass the standard duties 
test and earn at least $455 but less than the new salary level of 
$684, or pass only the HCE duties test and earn at least $100,000 
but less than the new HCE compensation level of $107,432. This was 
estimated to be 1.3 million workers.

               Table 2--Summary of Regulatory Costs and Transfers, Standard and HCE Salary Levels
                                               [Millions in 2019$]
----------------------------------------------------------------------------------------------------------------
                                                         Future years \a\                Annualized value
                                                 ---------------------------------------------------------------
             Impact                   Year 1                                          3% real         7% real
                                                      Year 2          Year 10     discount  rate  discount  rate
----------------------------------------------------------------------------------------------------------------
                                            Affected Workers (1,000s)
----------------------------------------------------------------------------------------------------------------
Standard........................           1,156           1,069             723  ..............  ..............
HCE.............................           101.8             114             154  ..............  ..............
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
    Total.......................           1,257           1,183             877
----------------------------------------------------------------------------------------------------------------
                                   Costs and Transfers (Millions in 2019$) \b\
----------------------------------------------------------------------------------------------------------------
Direct employer costs...........          $543.0          $134.3           $99.1          $164.0          $173.3
Transfersthnsp;\c\..............           396.4           307.7           247.4           295.0           298.8
----------------------------------------------------------------------------------------------------------------
\a\ These cost and transfer figures represent a range over the nine-year span.
\b\ Costs and transfers for affected workers passing the standard and HCE tests are combined.
\c\ This is the net transfer from employers to workers. There may also be transfers of hours and income from
  some workers to others.

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

i. Overview
    This section explains the methodology used to estimate the number 
of workers who are subject to the part 541 regulations and the number 
of potentially affected EAP workers. In this final rule, as in the 2004 
final rule, the Department estimated the number of EAP exempt workers 
because there is no data source that identifies workers as EAP exempt. 
Employers are not required to report EAP exempt workers to any central 
agency or as part of any employee or establishment survey.\130\ The 
methodology described here is largely based on the approach the 
Department used in the 2004 and 2016 final rules.\131\
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    \130\ In 2015, RAND released results from a survey conducted to 
estimate EAP exempt workers. However, this survey does not have the 
variables or sample size necessary for the Department to base the 
RIA on this analysis. Rohwedder, S. and Wenger, J.B. (2015). The 
Fair Labor Standards Act: Worker Misclassification and the Hours and 
Earnings Effects of Expanded Coverage. RAND Labor and Population.
    \131\ See 69 FR 22196-209; 81 FR 32453-60. Where the proposal 
follows the methodology used to determine affected workers in both 
the 2004 and 2016 final rules citations to both rules are not always 
included.
---------------------------------------------------------------------------

ii. Data
    The estimates of EAP exempt workers were based on data drawn from 
the CPS MORG, which is sponsored jointly by the U.S. Census Bureau and 
BLS. The CPS is a large, nationally representative sample of the labor 
force. Households are surveyed for four months, excluded from the 
survey for eight months, surveyed for an additional four months, then 
permanently dropped from the sample. During the last month of each 
rotation in the sample (month 4 and month 16), employed respondents 
complete a supplementary questionnaire in addition to the regular 
survey.\132\ This supplement contains the detailed information on 
earnings necessary to estimate a worker's exemption status. Responses 
are based on the reference week, which is always the week that includes 
the 12th day of the month.
---------------------------------------------------------------------------

    \132\ This is the outgoing rotation group (ORG); however, this 
analysis uses the data merged over twelve months and thus will be 
referred to as MORG.
---------------------------------------------------------------------------

    Although the CPS MORG is a large scale survey, administered to 
approximately 15,000 households monthly representing the entire nation, 
it is still possible to have relatively few observations when looking 
at subsets of employees, such as exempt workers in a specific 
occupation employed in a specific industry, or workers in a specific 
geographic location. To increase the sample size, the Department pooled 
together three years of CPS MORG data (July 2016 through June 2019) to 
represent the single year from July 2018 through June 2019. Earnings 
for each observation from the last six months of 2016, 2017, and the 
first six months of 2018 were inflated to 2018/19 dollars using the 
Consumer Price Index for All Urban Consumers (CPI-U). For ease of 
presentation and because inflation is low enough for this to be 
trivial, these will be referred to as 2019 dollars throughout this 
analysis. The weight of each observation was adjusted so that the total 
number of potentially affected EAP workers in the pooled sample 
remained the same as the number for the July 2018 through June 2019 CPS 
MORG. Thus, the pooled CPS MORG sample uses roughly three times as many 
observations to represent the same total number of workers in 2018/19. 
The additional observations allow the Department to better characterize 
certain attributes of the potentially affected labor force. This pooled 
dataset

[[Page 51256]]

is used to estimate all impacts of the final rulemaking.\133\
---------------------------------------------------------------------------

    \133\ A few commenters commented on the Department's use of CPS 
data to calculate the salary level. EPI and NELP asked the 
Department to set the salary thresholds using a data series that BLS 
publishes on a regular basis, while the Chamber asked the Department 
to publish the data sets used to set the salary thresholds. The 
Department calculated the standard salary level and the HCE total 
annual compensation level using publicly-available CPS microdata 
(compiled by the U.S. Census Bureau). The Department has frequently 
set the salary level using its own enforcement data and/or data that 
is not publicly available, and believes that using publicly 
available CPS data to calculate the salary level in this final rule 
is appropriate.
---------------------------------------------------------------------------

    Some assumptions were necessary to use these data as the basis for 
the analysis. For example, the Department eliminated workers who 
reported that their weekly hours vary and provided no additional 
information on hours worked. This was done because the Department 
cannot estimate effects for these workers since it is unknown whether 
they work overtime and therefore unknown whether there would be any 
need to pay for overtime if their status changed from exempt to 
nonexempt. The Department reweighted the rest of the sample to account 
for this change (i.e., to keep the same total employment 
estimates).\134\ This adjustment assumes that the distribution of hours 
worked by workers whose hours do not vary is representative of hours 
worked by workers whose hours do vary. The Department believes that 
without more information this is an appropriate assumption.\135\
---------------------------------------------------------------------------

    \134\ The Department also reweighted for workers reporting zero 
earnings. In addition, the Department eliminated, without 
reweighting, workers who both reported usually working zero hours 
and working zero hours in the past week.
    \135\ This is justifiable because demographic and employment 
characteristics are similar across these two populations (e.g., age, 
gender, education, distribution across industries, share paid 
nonhourly). The share of all workers who stated that their hours 
vary (but provided no additional information) is 5.0 percent. To the 
extent these excluded workers are exempt, if they tend to work more 
overtime than other workers, then transfer payments and costs may be 
underestimated. Conversely, if they work fewer overtime hours, then 
transfer payments and costs may be overestimated.
---------------------------------------------------------------------------

iii. Number of Workers Covered by the Department's Part 541 Regulations
    To estimate the number of workers covered by the FLSA and subject 
to the Department's part 541 regulations, the Department excluded 
workers who are not subject to its regulations or whom the FLSA does 
not cover. This may happen, for instance, if a worker is not an 
employee under the FLSA. Excluded workers include military personnel, 
unpaid volunteers, self-employed individuals, clergy and other 
religious workers, and federal employees (with a few exceptions 
described below).
    Many of these workers are excluded from the CPS MORG, including 
members of the military on active duty and unpaid volunteers. Self-
employed and unpaid workers are included in the CPS MORG, but have no 
earnings data reported and thus are excluded from the analysis. The 
analysis excluded religious workers identified by their occupation 
codes: `clergy' (Census occupational code 2040), `directors, religious 
activities and education' (2050), and `religious workers, all other' 
(2060). Most employees of the federal government are covered by the 
FLSA but not the Department's part 541 regulations because the Office 
of Personnel Management (OPM) regulates their entitlement to minimum 
wage and overtime pay.\136\ Exceptions exist for U.S. Postal Service 
employees, Tennessee Valley Authority employees, and Library of 
Congress employees.\137\ The analysis identified and included these 
covered federal workers using occupation and/or industry codes.\138\ 
The FLSA also does not cover employees of firms that have annual 
revenue of less than $500,000 and who are not engaged in interstate 
commerce. The Department does not exclude them from the analysis, 
however, because there is no data set that would adequately inform an 
estimate of the size of this worker population, although the Department 
believes it is a small percentage of workers. The 2004 final rule 
analysis similarly did not adjust for these workers.
---------------------------------------------------------------------------

    \136\ See 29 U.S.C. 204(f). Federal workers are identified in 
the CPS MORG with the class of worker variable PEIO1COW.
    \137\ See id.
    \138\ Postal Service employees were identified with the Census 
industry classification for postal service (6370). Tennessee Valley 
Authority employees were identified as federal workers employed in 
the electric power generation, transmission, and distribution 
industry (570) and in Kentucky, Tennessee, Mississippi, Alabama, 
Georgia, North Carolina, or Virginia. Library of Congress employees 
were identified as federal workers under Census industry `libraries 
and archives' (6770) and residing in Washington DC
---------------------------------------------------------------------------

    The Department estimated that in Year 1 there will be 164.5 million 
wage and salary workers in the United States (Figure 1). Of these, 
139.4 million will be covered by the FLSA and subject to the 
Department's regulations (84.7 percent). The remaining 25.1 million 
workers will be excluded from FLSA coverage for the reasons described 
above. Figure 1 illustrates how the Department analyzed the U.S. 
civilian workforce through successive stages to estimate the number of 
potentially affected EAP workers.

[[Page 51257]]

[GRAPHIC] [TIFF OMITTED] TR27SE19.000

iv. Number of Workers in the Analysis
    After limiting the analysis to workers covered by the FLSA and 
subject to the Department's part 541 regulations, several other groups 
of workers were identified and excluded from further analysis since 
this final rule is unlikely to affect them. These include blue collar 
workers, workers paid on an hourly basis, and workers who are exempt 
under certain other (non-EAP) exemptions.
    The Department excluded a total of 91.9 million workers from the 
analysis for one or more of these reasons, which often overlapped 
(e.g., many blue collar workers are also paid hourly). The Department 
estimated that in 2018/19 there were 50.0 million blue collar workers. 
These workers were identified in the CPS MORG data following the 
methodology from the U.S. Government Accountability Office's (GAO) 1999 
white collar exemptions report \139\ and the Department's 2004 
regulatory impact analysis. See 69 FR 22240-44. Supervisors in 
traditionally blue collar industries were classified as white collar 
workers because their duties are generally managerial or 
administrative, and therefore they were not excluded as blue collar 
workers. Using the CPS variable indicating a respondent's hourly wage 
status, the Department determined that 81.9 million workers were paid 
on an hourly basis in 2018/19.\140\
---------------------------------------------------------------------------

    \139\ GAO/HEHS. (1999). Fair Labor Standards Act: White Collar 
Exemptions in the Modern Work Place. GAO/HEHS-99-164, 40-41, https://www.gao.gov/assets/230/228036.pdf.
    \140\ CPS MORG variable PEERNHRY.
---------------------------------------------------------------------------

    Also excluded from further analysis were workers who were exempt 
under certain other (non-EAP) exemptions. Although some of these 
workers may also be exempt under the EAP exemptions, they would 
independently remain exempt from the minimum wage and/or overtime pay 
provisions based on the non-EAP exemptions. The Department excluded an 
estimated 5.0 million workers, including some agricultural and 
transportation workers, from further analysis because they would be 
subject to another (non-EAP) overtime exemption. See Appendix A: 
Methodology for Estimating Exemption Status, contained in the 
rulemaking docket, for details on how this population was identified.
    Agricultural and transportation workers are two of the largest 
groups of workers excluded from the population of potentially affected 
EAP workers in the current analysis, and with some exceptions, they 
were similarly excluded in 2004. The 2004 final rule excluded all 
workers in agricultural industries from the analysis,\141\ while the 
current analysis, similar to the 2016 analysis, only excludes 
agricultural workers from specified occupational-industry combinations 
since not all workers in agricultural industries qualify for the 
agricultural overtime pay exemptions. The exclusion of transportation 
workers matched the method for the 2004 final rule. Transportation 
workers were defined as those who are subject to the following FLSA 
exemptions: Section 13(b)(1), section 13(b)(2), section 13(b)(3), 
section 13(b)(6), or section 13(b)(10). The Department excluded 1.1 
million agricultural workers and 2.1 million transportation workers 
from the analysis. In addition, the Department excluded another 1.9 
million workers who fall within one or more other FLSA minimum wage and 
overtime

[[Page 51258]]

exemptions. The criteria for determining exempt status for agricultural 
and transportation workers are detailed in Appendix A. However, of 
these 1.9 million workers, all but 20,000 are either blue collar or 
hourly, and thus the effect of excluding these workers is negligible.
---------------------------------------------------------------------------

    \141\ 69 FR 22197.
---------------------------------------------------------------------------

v. Number of Potentially Affected EAP Workers
    After excluding workers not subject to the Department's FLSA 
regulations and workers who are unlikely to be affected by this final 
rule (i.e., blue collar workers, workers paid hourly, workers who are 
subject to another (non-EAP) overtime exemption), the Department 
estimated there will be 47.6 million salaried white collar workers for 
whom employers might claim either the standard EAP exemption or the HCE 
exemption. To be exempt under the standard EAP test, the employee must:
     Be paid a predetermined and fixed salary that is not 
subject to reduction because of variations in the quality or quantity 
of work performed (the salary basis test); \142\
---------------------------------------------------------------------------

    \142\ Some computer employees may be exempt even if they are not 
paid on a salary basis. Hourly computer employees who earn at least 
$27.63 per hour and perform certain duties are exempt under section 
13(a)(17) of the FLSA. These workers are considered part of the EAP 
exemptions but were excluded from the analysis because they are paid 
hourly and will not be affected by this final rule (these workers 
were similarly excluded in the 2004 analysis). Salaried computer 
workers are exempt if they meet the salary and duties tests 
applicable to the EAP exemptions, and are included in the analysis 
since they will be impacted by this final rule. Additionally, 
administrative and professional employees may be paid on a fee 
basis, as opposed to a salary basis. Sec.  541.605(a). Although the 
CPS MORG does not identify workers paid on a fee basis, they are 
considered nonhourly workers in the CPS and consequently are 
correctly classified as ``salaried'' (as was done in the 2004 final 
rule).
---------------------------------------------------------------------------

     earn at least a designated salary amount (the 2004 final 
rule set the salary level at $455 per week (the standard salary level 
test)); and
     primarily perform exempt work, as defined by the 
regulations (the standard duties test).
    The 2004 final rule's HCE test allows certain highly-paid employees 
to qualify for exemption as long as they customarily and regularly 
perform one or more exempt job duties. The HCE annual compensation 
level set in the 2004 final rule was $100,000, including at least $455 
per week paid on a salary or fee basis. The CPS annual earnings 
variable is topcoded at $150,000 (i.e., workers earning above $2,884.61 
($150,000/52 weeks) per week are reported as earning $2,884.61 per 
week). The Department imputed earnings for topcoded workers in the CPS 
data to adequately estimate the cost savings of this rule in comparison 
to the 2016 final rule under E.O. 13771.143 144 
---------------------------------------------------------------------------

    \143\ We used the standard Pareto distribution approach to 
impute earnings above the topcoded value as described in Armour, P. 
and Burkhauser, R (2013). Using the Pareto Distribution to Improve 
Estimates of Topcoded Earnings. Center for Economic Studies (CES).
    \144\ As a result of the 2016 final rule's automatic updating 
provision, the HCE compensation level in Year 7 following the 2016 
final rule would exceed $150,000. Imputing earnings improves the 
impact estimates and consequently the estimates of cost savings of 
this final rule.
---------------------------------------------------------------------------

Salary Basis
    The Department included only nonhourly workers in the analysis 
based on CPS data.\145\ For this rulemaking, the Department considered 
data representing compensation paid to nonhourly workers to be an 
appropriate proxy for compensation paid to salaried workers. The 
Department notes that it made the same assumption regarding nonhourly 
workers in the 2004 final rule.\146\
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    \145\ The CPS variable PEERNHRY identifies workers as either 
hourly or nonhourly.
    \146\ See 69 FR 22197.
---------------------------------------------------------------------------

    The CPS population of ``nonhourly'' workers includes workers who 
are paid on a piece-rate, a day-rate, or largely on bonuses or 
commissions. Data in the CPS are not available to distinguish between 
salaried workers and these other nonhourly workers. However, the Panel 
Study of Income Dynamics (PSID) provides additional information on how 
nonhourly workers are paid. In the PSID, respondents are asked how they 
are paid on their main job and are also asked for more detail if their 
response is other than salaried or hourly. Possible responses include 
piecework, commission, self-employed/farmer/profits, and by the job/
day/mile. The Department analyzed the PSID data and found that 
relatively few nonhourly workers were paid by methods other than 
salaried. The Department is not aware of any statistically robust 
source that more closely reflects salary as defined in its regulations.
Salary Level
    Weekly earnings are available in the CPS MORG data, which allowed 
the Department to estimate how many nonhourly workers pass the salary 
level tests.\147\ However, the CPS earnings variable does not perfectly 
reflect the Department's definition of earnings. First, the CPS 
includes all nondiscretionary bonuses and commissions, which may be 
used to satisfy up to 10 percent of the new standard salary level under 
this final rule. This discrepancy between the earnings variable used 
and the FLSA definition of salary may cause a slight overestimation of 
the number of workers estimated to meet the standard salary level test. 
Second, CPS earnings data includes overtime pay, commissions, and tips. 
The Department notes that employers may factor into an employee's 
salary a premium for expected overtime hours worked. To the extent they 
do so, that premium would be reflected in the data. Similarly, the 
Department believes tips will be an uncommon form of payment for these 
workers since tips are uncommon for white collar workers. The 
Department also believes that commissions make up a relatively small 
share of earnings among nonhourly employees.\148\
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    \147\ The CPS MORG variable PRERNWA, which measures weekly 
earnings, is used to identify weekly salary.
    \148\ In the PSID, relatively few nonhourly workers were paid by 
commission. Additionally, according to the BLS ECI, about 5 percent 
of the private workforce is incentive-paid workers (incentive pay is 
defined as payment that relates earnings to actual individual or 
group production). See William J. Wiatrowski, Bureau of Labor 
Statistics, The Effect of Incentive Pay on Rates of Change in Wages 
and Salaries (November 24, 2009), http://www.bls.gov/opub/mlr/cwc/the-effect-of-incentive-pay-on-rates-of-change-in-wages-and-salaries.pdf, at 1.
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Duties
    The CPS MORG data do not capture information about job duties; 
therefore, the Department used occupational titles, combined with 
probability estimates of passing the duties test by occupational title, 
to estimate the number of workers passing the duties test. This 
methodology is very similar to the methodology used in the 2004 
rulemaking, and the Department believes it is the best available 
methodology. In 2004, to determine whether a worker met the duties 
test, the Department used an analysis performed by WHD in 1998 in 
response to a request from the GAO. Because WHD enforces the FLSA's 
overtime requirements and regularly assesses workers' exempt status, 
WHD was uniquely qualified to provide the analysis. The analysis was 
used in both the GAO's 1999 white collar exemptions report \149\ and 
the Department's 2004 regulatory impact analysis.\150\
---------------------------------------------------------------------------

    \149\ Fair Labor Standards Act: White Collar Exemptions in the 
Modern Work Place, supra note 139, at 40-41.
    \150\ See 69 FR 22198.
---------------------------------------------------------------------------

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

[[Page 51259]]

determined that 251 occupational codes likely included EAP exempt 
workers and assigned one of four probability codes reflecting the 
estimated likelihood, expressed as ranges, that a worker in a specific 
occupation would perform duties required to meet the EAP duties tests. 
The Department supplemented this analysis in the 2004 final rule 
regulatory impact analysis when the HCE exemption was introduced. The 
Department modified the four probability codes for highly paid workers 
based upon its analysis of the provisions of the highly compensated 
test relative to the standard duties test (Table 3). To illustrate, WHD 
assigned exempt probability code 4 to the occupation ``first-line 
supervisors/managers of construction trades and extraction workers'' 
(Census code 6200), which indicates that a worker in this occupation 
has a 0 to 10 percent likelihood of meeting the standard EAP duties 
test. However, if that worker earned at least $100,000 annually, he or 
she was assigned a 15 percent probability of passing the more lenient 
HCE duties test.\151\
---------------------------------------------------------------------------

    \151\ The HCE duties test is used in conjunction with the HCE 
total annual compensation requirement, as set in 2004 and applied to 
date, to determine eligibility for the HCE exemption. It is much 
less stringent than the standard and short duties tests to reflect 
that very highly paid employees are much more likely to be properly 
classified as exempt.
---------------------------------------------------------------------------

    The occupations identified in GAO's 1999 report and used by the 
Department in the 2004 final rule map to an earlier occupational 
classification scheme (the 1990 Census occupational codes). For this 
final rule, the Department used occupational crosswalks to map the 
previous occupational codes to the 2002 Census occupational codes and 
then to the 2010 Census occupational codes, which are used in the CPS 
MORG 2016 through 2019 data.\152\ If a new occupation comprises more 
than one previous occupation, then the new occupation's probability 
code is the weighted average of the previous occupations' probability 
codes, rounded to the closest probability code.
---------------------------------------------------------------------------

    \152\ References to occupational codes in this analysis refer to 
the 2002 Census occupational codes. Crosswalks and methodology 
available at: https://www.census.gov/topics/employment/industry-occupation/guidance/code-lists.html.

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

    These codes provide information on the likelihood that an employee 
in a category met the duties test but they do not identify the workers 
in the CPS MORG who actually passed the test. Therefore, the Department 
designated workers as exempt or nonexempt based on the probabilities. 
For example, for every ten public relations managers, between five and 
nine were estimated to pass the standard duties test (based on 
probability category 2). However, it is unknown which of these ten 
workers are exempt; therefore, the Department must determine the status 
for these workers. Exemption status could be randomly assigned with 
equal probability, but this would ignore the earnings of the worker as 
a factor in determining the probability of exemption. The probability 
of qualifying for the exemption increases with earnings because higher 
paid workers are more likely to perform the required duties, an 
assumption to which both the Department in the 2004 final rule and the 
GAO in its 1999 Report adhered.\153\
---------------------------------------------------------------------------

    \153\ For the standard exemption, the relationship between 
earnings and exemption status is not linear and is better 
represented with a gamma distribution. For the HCE exemption, the 
relationship between earnings and exemption can be well represented 
with a linear function because the relationship is linear at high 
salary levels (as determined by the Department in the 2004 final 
rule). Therefore, the gamma model and the linear model would produce 
similar results. See 69 FR 22204-08, 22215-16.
---------------------------------------------------------------------------

    The Department estimated the probability of exemption for each 
worker as a function of both earnings and the occupation's exempt 
probability category using a gamma distribution.\154\ Based on these 
revised probabilities, each worker was assigned exempt or nonexempt 
status based on a random draw from a binomial distribution using the 
worker's revised probability as the probability of success. Thus, if 
this method is applied to ten workers who each have a 60 percent 
probability of being exempt, six workers would be expected to be 
designated as exempt.\155\ However, which particular workers are 
designated as exempt may vary with each set of ten random draws. For 
details, see Appendix A (in the rulemaking docket).
---------------------------------------------------------------------------

    \154\ The gamma distribution was chosen because, during the 2004 
revision, this non-linear distribution best fit the data compared to 
the other non-linear distributions considered (i.e., normal and 
lognormal). A gamma distribution is a general type of statistical 
distribution that is based on two parameters that control the scale 
(alpha) and shape (in this context, called the rate parameter, 
beta).
    \155\ A binominal distribution is frequently used for a 
dichotomous variable where there are two possible outcomes; for 
example, whether one owns a home (outcome of 1) or does not own a 
home (outcome of 0). Taking a random draw from a binomial 
distribution results in either a zero or a one based on a 
probability of ``success'' (outcome of 1). This methodology assigns 
exempt status to the appropriate share of workers without biasing 
the results with manual assignment.
---------------------------------------------------------------------------

    The Department acknowledges that the probability codes used to 
determine the share of workers in an occupation who are EAP exempt are 
21 years old. However, the Department believes the probability codes 
continue to estimate exemption status accurately given the fact that 
the standard duties test is not substantively different from the former 
short duties tests reflected in the codes. For the 2016 rulemaking, the 
Department looked at O*NET \156\ to determine the extent to which the 
1998 probability codes reflected current occupational duties. The 
Department's review of O*NET verified the continued appropriateness of 
the 1998 probability codes.\157\
---------------------------------------------------------------------------

    \156\ The O*NET database contains hundreds of standardized and 
occupation-specific descriptions. See http://www.onetcenter.org.
    \157\ 81 FR 32459.
---------------------------------------------------------------------------

Potentially Affected Exempt EAP Workers
    The Department estimated that of the 47.6 million salaried white 
collar workers considered in the analysis, 33.4 million qualified for 
the EAP exemption under the currently-enforced regulations. Some of 
these workers were

[[Page 51260]]

excluded from further analysis because the final rule will not affect 
them. This excluded group contains workers in named occupations who are 
not required to pass the salary requirements (although they must still 
pass a duties test) and therefore whose exemption status does not 
depend on their earnings. These occupations include physicians 
(identified with Census occupation codes 3010, 3040, 3060, 3120), 
lawyers (2100), teachers (occupations 2200-2550 and industries 7860 or 
7870), academic administrative personnel (school counselors (occupation 
2000 and industries 7860 or 7870) and educational administrators 
(occupation 0230 and industries 7860 or 7870)), and outside sales 
workers (a subset of occupation 4950). Out of the 33.4 million workers 
who were EAP exempt, 7.8 million, or 23.4 percent, were expected to be 
in named occupations. Thus, changes in the standard salary level and 
HCE compensation tests will not affect these workers. The 25.6 million 
EAP exempt workers remaining in the analysis are referred to in this 
final rule as ``potentially affected.''
    Based on analysis of the occupational codes and CPS earnings data 
(described above), the Department has concluded that in Year 1, in the 
baseline scenario in which the rule does not take effect, of the 25.6 
million potentially affected EAP workers, approximately 16.0 million 
will pass only the standard EAP test, 9.3 million will pass both the 
standard and the HCE tests, and approximately 343,000 will pass only 
the HCE test.

C. Determining the Revised Salary and Compensation Levels

    For the reasons discussed in section IV.A, the Department has 
decided to update the 2004 standard salary level by reapplying the 2004 
methodology. Using pooled 2018/19 CPS MORG data, the 20th percentile of 
earnings for full-time salaried workers in the South Census region and/
or in the retail industry nationally roughly corresponds to a standard 
salary level of $684. For the HCE compensation level, the Department 
used the 80th percentile of all full-time salaried workers nationwide, 
calculated using the 2018/19 CPS MORG. This results in an HCE annual 
compensation level of $107,432.
i. The Policy Methodologies Chosen
    This final rule uses the same methodology used in 2004 for the 
standard salary level, setting it at the 20th percentile of full-time 
salaried workers in the South and/or in the retail industry nationally. 
After considering public comments pertaining to the HCE total annual 
compensation requirement, as discussed in section IV.D, the Department 
has set this threshold so as to be equivalent to the earnings of the 
80th percentile of all full-time salaried workers nationally, as 
opposed to the 90th percentile as proposed in the NPRM. Additionally, 
to be consistent with the methodology for setting the standard salary 
level, the Department now uses three-year pooled data to estimate the 
HCE compensation level. Lastly, the Department has chosen not to 
project the earnings levels to January 2020 as proposed in the NPRM.
ii. Alternative Methods for Setting the Standard Salary Level
    For this final rule, the Department also considered several 
alternatives for setting the standard salary level. Table 4 presents 
alternative standard salary levels calculated using pooled 2018/19 CPS 
data for each alternative approach considered.
     Alternative 1: No change (i.e., keep the salary level at 
the currently-enforced level of $455 per week).
     Alternative 2: Maintain the average minimum wage 
protection in place since 2004 by using the weighted average of hours 
at minimum wage and overtime pay represented by the minimum salary 
level.
     Alternative 3: Use the 2004 method but exclude the 
relatively high-wage areas from the South Census Region (Washington, 
DC, Maryland, and Virginia).
     Alternative 4: Use the Kantor method to determine the long 
test salary level, and set the salary level at that level. The Kantor 
method calculates a long test salary level by selecting the 10th 
percentile of earnings of likely exempt workers.
     Alternative 5: Use the 2016 method (i.e., the 40th 
percentile of earnings of nonhourly full-time workers in the South 
Census Region).
    Section VI.D details the transfers, costs, and benefits of the new 
salary level and the above alternatives.

                           Table 4--Standard Salary Level and Alternatives in 2018/19
----------------------------------------------------------------------------------------------------------------
                                                                                        Total increase \a\
                        Alternative                              Salary level    -------------------------------
                                                              (weekly/annually)          $               %
----------------------------------------------------------------------------------------------------------------
Alt. #1: No change.........................................         $455/$23,660              $0             0.0
Alt. #2: Maintain average minimum wage protection since               502/26,082              47            10.3
 2004 \b\..................................................
Alt. #3: 2004 Method, South (excluding Washington D.C., MD            673/34,996             218            47.9
 & VA) or Retail \c\.......................................
Final rule: 2004 method \c\................................           684/35,568             229            50.3
Alt. #4: Kantor long test \d\..............................           724/37,648             269            59.1
Alt. #5: 2016 Method \e\...................................           976/50,752             521           114.5
----------------------------------------------------------------------------------------------------------------
\a\ Change between salary level or alternative and the salary level set in 2004 ($455 per week).
\b\ When the $455 weekly threshold was established in 2004, the federal minimum wage was $5.15, so the salary
  threshold equated to minimum wage and overtime pay at time and one-half for hours over 40 for an employee
  working no more than 72.2 hours. That amount fell with increases in the minimum wage and is now 55.2 hours.
  The weighted average across the 15 years since the overtime threshold was last changed is 59.5 hours, and a
  threshold that would provide 59.5 hours of $7.25 minimum wage and overtime pay would be $502.
\c\ Full-time salaried workers with various industry/region exclusions (excludes workers not subject to the
  FLSA, not subject to the salary level test, and in some workers in agriculture or transportation). Pooled CPS
  data for 7/2016-6/2019 adjusted to reflect 2018/2019.
\d\ 10th percentile of likely exempt workers. Pooled CPS data for 7/2016-6/2019 adjusted to reflect 2018/2019.
\e\ 40th percentile earnings of nonhourly full-time workers in the South Census region, provided by BLS. The
  salary level reflects the first automatic update that would have taken place under the 2016 final rule.

iii. Alternative Methods for Setting the HCE Total Annual Compensation 
Level
    As described above, the Department is updating the HCE compensation 
level using earnings for the 80th percentile of all full-time salaried 
workers nationally, $107,432 per year. The Department also evaluated 
the following alternative HCE compensation levels:
     HCE alternative 1: No change (i.e., leave the HCE 
compensation level at the

[[Page 51261]]

currently-enforced level of $100,000 per year).
     HCE alternative 2: Use the methodology proposed in the 
NPRM (i.e., use the 90th percentile earnings of full-time salaried 
workers nationally).\158\
---------------------------------------------------------------------------

    \158\ Because in the final rule the Department is using pooled 
CPS MORG data to set the HCE compensation level, it used the same 
data set to calculate this alternative compensation level. Thus, 
this method differs slightly from that proposed in the NPRM, which 
was calculated using the most recent year of data provided by BLS.
---------------------------------------------------------------------------

    Table 5 presents possible 2018/19 HCE levels as calculated using 
each alternative approach considered. Section VI.D details the 
transfers, costs, and benefits of the new HCE compensation level and 
the two alternatives.

                          Table 5--HCE Compensation Levels and Alternatives in 2018/19
----------------------------------------------------------------------------------------------------------------
                                                                                        Total increase \a\
                        Alternative                              Salary level    -------------------------------
                                                              (weekly/annually)          $               %
----------------------------------------------------------------------------------------------------------------
HCE alt. #1: No change.....................................      $1,923/$100,000              $0             0.0
Final rule: 80th percentile of full-time salaried workers          2,066/107,432           7,432             7.4
 \b\.......................................................
HCE alt. #2: 90th percentile of full-time salaried workers         2,807/145,964          45,964            46.0
 \b\.......................................................
----------------------------------------------------------------------------------------------------------------
\a\ Change between updated/alternative compensation level and the compensation level set in 2004 ($100,000
  annually).
\b\ Pooled CPS data for 7/2016-6/2019 adjusted to reflect 2018/2019.

    The Department believes that HCE alternative 1 is inappropriate 
because some increase to the HCE threshold is necessary to ensure that 
the HCE threshold continues to appropriately complement the more 
lenient HCE duties test. However, as explained in section IV.D, the 
Department does not believe the significantly higher threshold equal to 
the 90th percentile of full-time salaried workers nationally is 
necessary. Further, setting the HCE threshold at such a high level will 
result in significant administrative burdens, including the costs 
associated with the need to reassess, under the standard duties test, 
the exempt status of highly paid white collar workers, many of whom 
would remain exempt under that test. Accordingly, the Department 
rejected the second alternative because it believes that the HCE 
threshold set in this final rule is sufficiently high to ensure that 
those who meet that threshold will almost invariably pass the standard 
duties test.

D. Effects of Revised Salary and Compensation Levels

i. Overview and Summary of Quantified Effects
    The economic effects of increasing the EAP salary and compensation 
levels will depend on how employers respond. Employer response is 
expected to vary by the characteristics of the affected EAP workers. 
Transfers from employers to employees and between employees, and direct 
employer costs, depend on how employers respond to the final rule.
    The Department has derived the standard salary level using the 2004 
methodology, and has set the HCE compensation level at the 80th 
percentile of all full-time salaried workers nationwide. In both cases 
we used pooled 2018/19 CPS data to calculate the levels. Given that at 
the time this analysis was performed data was available through June 
2019, the Department believes that using current data to estimate the 
economic effects of the rule taking effect in January 2020 is 
appropriate.
    Table 6 presents the estimated number of affected workers, costs, 
and transfers associated with increasing the salary and compensation 
levels. The Department estimated that the direct employer costs of this 
final rule will total $543.0 million in the first year, with 10-year 
annualized direct costs of $164.0 million per year using a 3 percent 
real discount rate and $173.3 million per year using a 7 percent real 
rate.
    In addition to these direct costs, this final rule will transfer 
income from employers to employees. Estimated Year 1 transfers will 
equal $396.4 million, with annualized transfers estimated at $295.0 
million and $298.8 million per year using the 3-percent and 7-percent 
real discount rates, respectively. Potential employer costs due to 
reduced profits and additional hiring were not quantified but are 
discussed in section VI.D.iii.5.

  Table 6--Summary of Affected Workers and Regulatory Costs and Transfers, Standard and HCE Earnings Thresholds
----------------------------------------------------------------------------------------------------------------
                                                          Future years b                 Annualized value
                                                 ---------------------------------------------------------------
            Impact a                  Year 1                                          3% Real         7% Real
                                                      Year 2          Year 10      discount rate   discount rate
----------------------------------------------------------------------------------------------------------------
                                            Affected Workers (1000s)
----------------------------------------------------------------------------------------------------------------
Standard........................           1,156           1,069             723  ..............  ..............
HCE.............................             102             114             154  ..............  ..............
                                 -------------------------------------------------------------------------------
    Total.......................           1,257           1,183             877  ..............  ..............
----------------------------------------------------------------------------------------------------------------
                                    Direct Employer Costs (Millions in 2019$)
----------------------------------------------------------------------------------------------------------------
Regulatory familiarization......          $340.4            $0.0            $0.0           $38.7           $45.3
Adjustment c....................            68.2             2.0             4.6            10.5            11.7
Managerial......................           134.4           132.3            94.5           114.8           116.3
                                 -------------------------------------------------------------------------------

[[Page 51262]]

 
    Total direct costs d........           543.0           134.3            99.1           164.0           173.3
----------------------------------------------------------------------------------------------------------------
                            Transfers from Employers to Workers (Millions in 2019) e
----------------------------------------------------------------------------------------------------------------
Due to minimum wage.............            75.4            42.8            26.1            36.9            38.1
Due to overtime pay.............           321.0           264.9           221.3           258.1           260.6
                                 -------------------------------------------------------------------------------
    Total transfers d...........           396.4           307.7           247.4           295.0           298.8
----------------------------------------------------------------------------------------------------------------
a Additional costs and benefits of the rule that could not be quantified or monetized are discussed in the text.
b These costs/transfers represent a range over the nine-year span.
c Adjustment costs occur in all years when there are newly affected workers.
d Components may not add to total due to rounding.
e This is the net transfer from employers to workers. There may also be transfers between workers.

ii. Affected EAP Workers
1. Overview
    The Department estimated there are 25.6 million potentially 
affected EAP workers--that is, EAP workers who either (1) passed the 
salary basis test, the standard salary level test, and the standard 
duties test, or (2) passed the salary basis test, the standard salary 
level test, the HCE total compensation level test, and the HCE duties 
test (but not the standard duties test). This number excluded workers 
in named occupations, who are not subject to the salary tests, or those 
who qualify for another (non-EAP) exemption.
    Using the method described above, the Department estimated that the 
increase in the standard salary level from $455 per week to $684 per 
week will affect 1.2 million exempt workers in Year 1, while the 
increase in the HCE annual compensation level from $100,000 to $107,432 
will impact 101,800 workers (Figure 2).159 160 In total, the 
Department expects that 1.3 million workers will be affected in Year 1 
by the final rule earnings threshold increases, composing about 4.9 
percent of the pool of potentially affected EAP workers.
---------------------------------------------------------------------------

    \159\ This group includes workers who may currently be nonexempt 
under more protective state EAP laws and regulations, such as some 
workers in Alaska, California, and New York.
    \160\ The 2016 final rule applied joint probabilities to 
estimate the number of affected HCE workers (i.e., the number of HCE 
workers who pass the HCE duties test but fail the standard duties 
test). In order to provide a more accurate estimate, this final rule 
applies conditional probabilities to determine the number of 
affected HCE workers.
[GRAPHIC] [TIFF OMITTED] TR27SE19.001

    Table 7 presents the number of affected EAP workers, the mean 
number of overtime hours they work per week, and their average weekly 
earnings. The 1.2 million workers affected by the increase in the 
standard salary level work on average 1.6 usual hours of overtime per 
week and earn on average $581 per week.\161\ However, the majority of 
these workers (about 86 percent) work zero usual hours of overtime. The 
14 percent of affected workers who regularly work overtime average 11.7 
hours of overtime per week. The 101,800 EAP workers affected by the 
change in the HCE compensation level average 4.2 hours of overtime per 
week and earn an average of $1,989 per week ($103,450 per year). About 
65 percent of these workers work zero usual hours of overtime while the 
35 percent who work usual hours of overtime average 11.9 hours of 
overtime per week.
---------------------------------------------------------------------------

    \161\ CPS defines ``usual hours'' as hours worked 50 percent or 
more of the time.
---------------------------------------------------------------------------

    Although most affected EAP workers who typically do not work 
overtime are unlikely to experience significant

[[Page 51263]]

changes in their daily work routine, those who regularly work overtime 
may experience significant changes. Moreover, affected EAP workers who 
routinely work overtime and earn less than the minimum wage are most 
likely to experience significant changes because of the revised 
standard salary level.\162\ Employers might respond by paying overtime 
premiums; reducing or eliminating overtime hours; reducing employees' 
regular wage rates (provided that the reduced rates still exceed the 
minimum wage); increasing employees' salaries to the updated salary 
level to preserve their exempt status (although this will be less 
common for affected workers earning below the minimum wage); or using 
some combination of these responses.
---------------------------------------------------------------------------

    \162\ A small proportion (1.9 percent) of affected EAP workers 
earn implicit hourly wages that are less than the applicable minimum 
wage (the higher of the state or federal minimum wage). The implicit 
hourly wage is calculated as an affected EAP employee's total weekly 
earnings divided by total weekly hours worked. For example, workers 
earning the currently-enforced $455 per week standard salary level 
would earn less than the federal minimum wage if they work 63 or 
more hours in a week ($455/63 hours = $7.22 per hour).

         Table 7--Number of Affected EAP Workers, Mean Overtime Hours, and Mean Weekly Earnings, Year 1
----------------------------------------------------------------------------------------------------------------
                                          Affected EAP workers a
   Type of affected EAP worker   ----------------------------------------    Mean overtime     Mean usual weekly
                                    Number (1,000s)       % of Total             hours             earnings
----------------------------------------------------------------------------------------------------------------
                                              Standard Salary Level
----------------------------------------------------------------------------------------------------------------
All affected EAP workers........  1,156.............  100%..............  1.6...............  $581
Earn less than the minimum wage   22................  1.9...............  21.4..............  524
 b.
Regularly work overtime.........  158...............  13.7..............  11.7..............  582
CPS occasionally work overtime c  42................  3.7...............  8.3...............  581
----------------------------------------------------------------------------------------------------------------
                                             HCE Compensation Level
----------------------------------------------------------------------------------------------------------------
All affected EAP workers........  102...............  100...............  4.2...............  1,989
Earn less than the minimum wage   ..................  ..................  ..................  ..................
 b.
Regularly work overtime.........  36................  35.1..............  11.9..............  1,968
CPS occasionally work overtime c  4.................  3.5...............  9.7...............  1,995
----------------------------------------------------------------------------------------------------------------
Note: Pooled CPS data for 7/2016-6/2019 adjusted to reflect 2018/2019.
a Estimated number of workers exempt under the EAP exemptions who will be entitled to overtime protection under
  the updated salary levels (if their weekly earnings do not increase to the new salary levels).
b The applicable minimum wage is the higher of the federal minimum wage and the state minimum wage. HCE workers
  will not be affected by the minimum wage provision. These workers all regularly work overtime and are also
  included in that row.
c Workers who do not usually work overtime but did in the CPS reference week. Mean overtime hours are actual
  overtime hours in the reference week. Other workers may occasionally work overtime in other weeks. These
  workers are identified later.

    The Department considered two types of overtime workers in this 
analysis: Regular overtime workers and occasional overtime 
workers.\163\ Regular overtime workers typically worked more than 40 
hours per week. Occasional overtime workers typically worked 40 hours 
or less per week, but they worked more than 40 hours in the week they 
were surveyed. The Department considered these two populations 
separately in the analysis because labor market responses to overtime 
pay requirements may differ for these two types of workers.
---------------------------------------------------------------------------

    \163\ Regular overtime workers were identified in the CPS MORG 
with variable PEHRUSL1. Occasional overtime workers were identified 
with variables PEHRUSL1 and PEHRACT1.
---------------------------------------------------------------------------

    In a representative week, the increases in the standard salary 
level and the HCE compensation level affected an estimated 45,900 
occasional overtime workers (3.7 percent of all affected EAP workers). 
They averaged 8.4 hours of overtime in the weeks they worked overtime. 
This group represents the number of workers with occasional overtime 
hours in the week the CPS MORG survey was conducted. Because the survey 
week is a representative week, the Department believes the prevalence 
of occasional overtime in the survey week, and the characteristics of 
these workers, is representative of other weeks (even though a 
different group of workers would be identified as occasional overtime 
workers in a different week).
2. Characteristics of Affected EAP Workers
    In this section, the Department examined the characteristics of 
affected EAP workers. Table 8 presents the distribution of affected EAP 
workers by industry and occupation, using Census industry and 
occupation codes. The industry with the most affected EAP workers is 
education and health services (288,000), while the industry with the 
highest percentage of affected EAP workers is leisure and hospitality 
(about 10 percent). The occupation category with the most affected EAP 
workers is management, business, and financial (506,000), while the 
occupation category with the highest percentage of affected EAP workers 
is services (about 15 percent).
    Finally, 6.1 percent of potentially affected workers in private 
nonprofits are affected compared with 4.6 percent in private for-profit 
firms. However, as discussed in section VI.B.iii, the estimates of 
workers subject to the FLSA include workers employed by enterprises 
that do not meet the enterprise coverage requirements because there is 
no data set that would adequately inform an estimate of the size of 
this worker population. Although failing to exclude workers who work 
for non-covered enterprises would only affect a small percentage of 
workers generally, it may have a larger effect (and result in a larger 
overestimate) for workers in nonprofits because when determining 
enterprise coverage only

[[Page 51264]]

revenue derived from business operations, not charitable activities, is 
included.

     Table 8--Estimated Number of Exempt Workers With the Current and Updated Salary Levels, by Industry and
                                               Occupation, Year 1
----------------------------------------------------------------------------------------------------------------
                                      Workers       Potentially                                     Affected as
                                    subject to     affected EAP    Not-affected      Affected        share of
  Industry/occupation/nonprofit        FLSA           workers     (millions) \b\  (millions) \c\    potentially
                                    (millions)    (millions) \a\                                   affected (%)
----------------------------------------------------------------------------------------------------------------
Total...........................          139.43           25.59           24.33            1.26             4.9
----------------------------------------------------------------------------------------------------------------
                                                  By Industry d
----------------------------------------------------------------------------------------------------------------
Agriculture, forestry, fishing,             1.33            0.04            0.04            0.00             5.4
 & hunting......................
Mining..........................            0.73            0.19            0.18            0.00             2.6
Construction....................            8.49            1.02            0.97            0.05             5.0
Manufacturing...................           15.56            3.61            3.52            0.09             2.5
Wholesale & retail trade........           19.08            2.60            2.44            0.17             6.4
Transportation & utilities......            7.65            0.92            0.88            0.04             4.1
Information.....................            2.73            1.01            0.97            0.04             4.2
Financial activities............            9.66            3.81            3.64            0.17             4.3
Professional & business services           15.80            5.75            5.53            0.21             3.7
Education & health services.....           34.24            4.15            3.86           0.288             6.9
Leisure & hospitality...........           13.13            0.92            0.83            0.09             9.8
Other services..................            5.62            0.64            0.59            0.05             8.3
Public administration...........            5.40            0.93            0.88            0.05             5.5
----------------------------------------------------------------------------------------------------------------
                                                 By Occupation d
----------------------------------------------------------------------------------------------------------------
Management, business, &                    21.12           12.76           12.25            0.51             4.0
 financial......................
Professional & related..........           32.96            9.02            8.61            0.41             4.6
Services........................           24.16            0.22            0.18            0.03            14.6
Sales and related...............           13.78            2.44            2.26            0.18             7.6
Office & administrative support.           17.64            0.95            0.84            0.11            11.7
Farming, fishing, & forestry....            1.01            0.00            0.00            0.00             0.0
Construction & extraction.......            6.75            0.02            0.02            0.00             3.2
Installation, maintenance, &                4.59            0.04            0.04            0.00             3.9
 repair.........................
Production......................            8.48            0.11            0.10            0.00             3.9
Transportation & material moving            8.93            0.03            0.03            0.00             9.1
----------------------------------------------------------------------------------------------------------------
                                       By Nonprofit and Government Status
----------------------------------------------------------------------------------------------------------------
Nonprofit, private..............            9.65            2.04            1.91            0.12             6.1
For profit, private.............          111.04           21.52           20.52            1.00             4.6
Government (state, local, and              18.73            2.03            1.90            0.13             6.5
 federal).......................
----------------------------------------------------------------------------------------------------------------
Note: Pooled CPS data for 7/2016-6/2019 adjusted to reflect 2018/2019.
\a\ Exempt workers who are white collar, salaried, not eligible for another (non-EAP) overtime exemption, and
  not in a named occupation.
\b\ Workers who continue to be exempt after the increases in the salary levels (assuming affected workers'
  weekly earnings do not increase to the new salary level).
\c\ Estimated number of workers exempt under the EAP exemptions who will be entitled to overtime protection
  under the updated salary levels (if their weekly earnings do not increase to the new salary levels).
\d\ Census industry and occupation categories.

    Table 9 presents the distribution of affected EAP workers based on 
Census Regions and Divisions, and metropolitan statistical area (MSA) 
status. The region with the most affected workers will be the South 
(544,000), but the South's percentage of potentially affected workers 
who are affected is still small (6.1 percent). Although 90 percent of 
affected EAP workers will reside in MSAs (1.13 of 1.26 million), so do 
a corresponding 88 percent of all workers subject to the FLSA.\164\
---------------------------------------------------------------------------

    \164\ Identified with CPS MORG variable GTMETSTA.
---------------------------------------------------------------------------

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

[[Page 51265]]



  Table 9--Estimated Number of Potentially Affected EAP Workers With the Current and Updated Salary Levels, by
                                    Region, Division, and MSA Status, Year 1
----------------------------------------------------------------------------------------------------------------
                                      Workers       Potentially                                     Affected as
  Region/division/metropolitan      subject to     affected EAP    Not-affected      Affected        share of
             status                    FLSA           workers     (millions) \b\  (millions) \c\    potentially
                                    (millions)    (millions) \a\                                   affected (%)
----------------------------------------------------------------------------------------------------------------
    Total.......................          139.43           25.59           24.33            1.26             4.9
----------------------------------------------------------------------------------------------------------------
                                               By Region/Division
----------------------------------------------------------------------------------------------------------------
Northeast.......................           25.38            5.30            5.07            0.23             4.4
    New England.................            7.03            1.56            1.50            0.06             3.7
    Middle Atlantic.............           18.35            3.74            3.57            0.17             4.6
Midwest.........................           30.59            5.23            5.01            0.23             4.4
    East North Central..........           20.77            3.56            3.40            0.16             4.4
    West North Central..........            9.82            1.67            1.60            0.07             4.4
South...........................           50.90            8.93            8.39            0.54             6.1
    South Atlantic..............           26.77            5.01            4.72            0.30             5.9
    East South Central..........            7.59            1.09            1.01            0.08             7.7
    West South Central..........           16.55            2.83            2.67            0.16             5.7
West............................           32.56            6.12            5.87            0.25             4.1
    Mountain....................           10.30            1.74            1.66            0.08             4.7
    Pacific.....................           22.26            4.38            4.21            0.17             3.9
----------------------------------------------------------------------------------------------------------------
                                             By Metropolitan Status
----------------------------------------------------------------------------------------------------------------
Metropolitan....................          122.63           23.98           22.84            1.13             4.7
Non-metropolitan................           15.85            1.51            1.39            0.12             7.7
Not identified..................            0.95            0.10            0.10            0.01             6.0
----------------------------------------------------------------------------------------------------------------
Note: Pooled CPS data for 7/2016-6/2019 adjusted to reflect 2018/2019.
\a\ Exempt workers who are white collar, salaried, not eligible for another (non-EAP) overtime exemption, and
  not in a named occupation.
\b\ Workers who continue to be exempt after the increases in the salary levels (assuming affected workers'
  weekly earnings do not increase to the new salary level).
\c\ Estimated number of workers exempt under the EAP exemptions who will be entitled to overtime protection
  under the updated salary levels (if their weekly earnings do not increase to the new salary levels).

3. NPRM Comments on Affected Worker Calculation
    EPI and a few other commenters asserted that the Department's use 
of pooled 2015-2017 data to calculate the number of affected workers 
``leads to an underestimate because it doesn't account for employment 
growth and other changes in the three years between 2017 and 2020.'' 
The Department is using pooled CPS MORG data for July 2016 through June 
2019, adjusted to reflect 2018/2019, in this final rule. The Department 
is not modeling employment growth between 2018/19 and the final rule's 
effective date because of uncertainty in the appropriate growth rates 
to project earnings and employment, and because of the relatively short 
period of time separating June 2019--the most recent CPS MORG data 
available at the time this impact analysis was developed--and January 
1, 2020--the effective date of the final rule. However, as a 
sensitivity analysis undertaken in response to these comments, the 
Department used the BLS National Employment Matrix (NEM) for 2016 to 
2026 to calculate growth rates for each occupation-industry category. 
Using these rates to adjust the number of affected employees in 2018/19 
for one and a half years of employment growth increased the estimated 
number of affected workers by less than 1.8 percent.
iii. Costs
1. Summary
    The Department quantified three direct costs to employers in this 
analysis: (1) Regulatory familiarization costs; (2) adjustment costs; 
and (3) managerial costs. The Department estimated that in Year 1 
(2020), regulatory familiarization costs will be $340.4 million, 
adjustment costs will be $68.2 million, and managerial costs will be 
$134.4 million (Table 10). Total direct employer costs in Year 1 will 
be $543.0 million.

                                Table 10--Summary of Year 1 Direct Employer Costs
                                                   [Millions]
----------------------------------------------------------------------------------------------------------------
                                                                                        HCE
                      Direct employer costs                          Standard      compensation        Total
                                                                   salary level        level
----------------------------------------------------------------------------------------------------------------
Regulatory familiarization \a\..................................  ..............  ..............          $340.4
Adjustment......................................................           $62.7            $5.5            68.2
Managerial......................................................           121.5            12.9           134.4
                                                                 -----------------------------------------------
    Total direct costs..........................................           184.1            18.4           543.0
----------------------------------------------------------------------------------------------------------------
\a\ Regulatory familiarization costs are assessed jointly for the change in the standard salary level and the
  HCE compensation level.


[[Page 51266]]

    Adjustment costs and managerial costs are recurring, so we also 
projected them for years 2 through 10 in section VI.D.viii. The 
Department discusses costs that are not quantified in section 
VI.D.iii.5.
2. Regulatory Familiarization Costs
    This rule will impose direct costs on firms by requiring them to 
review the regulation. To estimate these ``regulatory familiarization 
costs,'' three pieces of information must be estimated: (1) The number 
of affected establishments; (2) a wage level for the employees 
reviewing the rule; and (3) the amount of time employees spend 
reviewing the rule.
    It is unclear whether regulatory familiarization costs are a 
function of the number of establishments or the number of firms. To 
avoid underestimating these costs, the Department assumed that 
regulatory familiarization occurs at a decentralized level and used the 
number of establishments in its cost estimate; this results in a higher 
estimate than would result from using the number of firms. The most 
recent data on private sector establishments at the time this final 
rule was drafted are from the 2016 Statistics of U.S. Businesses 
(SUSB), which reports 7.76 million establishments with paid 
employees.\165\ Additionally, there were an estimated 90,126 state and 
local governments in 2017, the most recent data available.\166\ The 
Department thus estimated 7.85 million establishments altogether (for 
ease, the Department uses the term ``establishments'' to refer to the 
total of establishments and government entities) might incur regulatory 
familiarization costs.
---------------------------------------------------------------------------

    \165\ Statistics of U.S. Businesses 2016, https://www.census.gov/programs-surveys/susb.html.
    \166\ 2017 Census of Governments. Table 1, https://www.census.gov/data/tables/2017/econ/gus/2017-governments.html.
---------------------------------------------------------------------------

    The Department believes that all establishments will incur some 
regulatory familiarization costs, even if they do not employ exempt 
workers, because all establishments will need to confirm whether this 
rule includes any provisions that may affect their employees. Firms 
with more affected EAP workers will likely spend more time reviewing 
the regulation than firms with fewer or no affected EAP workers (since 
a careful reading of the regulation will probably follow the initial 
decision that the firm is affected). However, the Department did not 
know the distribution of affected EAP workers across firms, so it used 
an average cost per establishment.
    The Department believes one hour per establishment is appropriate 
because the EAP exemptions have existed in one form or another since 
1938. The most significant change in this rulemaking is setting a new 
standard salary level for exempt workers, and the changed regulatory 
text is only a few pages. The Department thus believes that one hour is 
an appropriate average estimate for the time each establishment will 
spend reviewing the changes made by this rulemaking. Time spent to 
implement the necessary changes was included in adjustment costs. The 
Department's analysis assumed that mid-level human resource workers 
with a median wage of $26.56 per hour will review the final rule.\167\ 
The Department also assumed that benefits are paid at a rate of 46 
percent of the base wage \168\ and overhead costs are paid at a rate of 
17 percent of the base wage,\169\ resulting in an hourly rate of 
$43.38. The Department thus estimates regulatory familiarization costs 
in Year 1 will be $340.4 million ($43.38 per hour x 1 hour x 7.85 
million establishments).\170\
---------------------------------------------------------------------------

    \167\ The median wage in the pooled 2018/19 CPS data for workers 
with the Census 2010 occupations ``human resources workers'' (0630); 
``compensation, benefits, and job analysis specialists'' (0640); and 
``training and development specialists'' (0650). The Department 
determined these occupations include most of the workers who would 
conduct these tasks. See Bureau of Labor Statistics, U.S. Department 
of Labor, Occupational Outlook Handbook.
    \168\ The benefits-earnings ratio is derived from BLS's Employer 
Costs for Employee Compensation data using variables 
CMU1020000000000D and CMU1030000000000D. This fringe benefit rate 
includes some fixed costs such as health insurance.
    \169\ The Department believes that the overhead costs associated 
with this rule are small because existing systems maintained by 
employers to track currently hourly employees can be used for newly 
overtime-eligible workers. However, acknowledging that there might 
be additional overhead costs, we have included an overhead rate of 
17 percent. Because the 2016 final rule did not include overhead 
costs in its cost and transfer estimates, estimated costs and 
transfers associated with the 2016 final rule have been recalculated 
for comparison purposes in section VI.D.ix.
    \170\ As previously noted, the Department used the number of 
establishments rather than the number of firms, which results in a 
higher estimate of the regulatory familiarization cost. Using the 
number of firms, 6.0 million, would result in a reduced regulatory 
familiarization cost estimate of $262.2 million in Year 1.
---------------------------------------------------------------------------

    Some commenters asserted these cost estimates are too low. For 
example, SBA Office of Advocacy (SBA Advocacy) wrote: ``we spoke to a 
small retail business in Alabama, who retained the services of an 
attorney for 10-15 hours to review the 2016 final rule.'' International 
Bancshares Corporation described the necessary hours for regulatory 
familiarization and adjustment costs as ``countless.'' An individual 
commenter stated that the Department's estimated costs are too low but 
did not provide any information on what costs should be.
    The Department continues to believe that an average of one hour per 
establishment is appropriate. The EAP exemptions have been in existence 
in one form or another since 1938, and a final rule was published as 
recently as 2016. Furthermore, employers who use the exemptions must 
apply them every time they hire an employee whom they seek to classify 
as exempt. Thus, employers should be familiar with the exemptions. The 
most significant change promulgated in this rulemaking is setting new 
earnings thresholds for exempt workers. The Department believes that, 
on average, one hour is sufficient to time to read and understand, for 
example, the changes to these thresholds, and we note that the 
regulatory text changes comprise only a few pages. Additionally, the 
estimated one hour for regulatory familiarization represents an average 
for all establishments in the U.S., even those without any affected or 
exempt workers, which are unlikely to spend much time reviewing the 
rule. Some businesses, of course, will spend more than one hour, and 
some will spend less, but for the reasons stated above, the Department 
believes that an average of one hour is an appropriate estimate.
3. Adjustment Costs
    This rule will also impose direct costs on firms by requiring them 
to evaluate the exemption status of employees, update and adapt 
overtime policies, notify employees of policy changes, and adjust their 
payroll systems.\171\ The Department believes the size of these 
``adjustment costs'' will depend on the number of affected EAP workers 
and will occur in any year when exemption status is changed for any 
workers. To estimate adjustment costs, three pieces of information must 
be estimated: (1) A wage level for the employees making the 
adjustments; (2) the amount of time spent making the adjustments; and 
(3) the estimated number of newly affected EAP workers. The Department 
again estimated that the average wage with benefits and overhead costs 
for a mid-level human resource worker will be $43.38 per hour (as 
explained above).
    The Department estimated that it will take establishments an 
average of 75

[[Page 51267]]

minutes per affected worker to make the necessary adjustments. Little 
applicable data were identified from which to estimate the amount of 
time required to make these adjustments.\172\ Therefore, in the NPRM 
the Department used the estimate of 1.25 hours from the 2016 final rule 
after reviewing public comments on the 2015 NPRM, and it is again using 
this estimate in this final rule. The estimated number of affected EAP 
workers in Year 1 is 1.3 million (as discussed in section VI.D.ii). 
Therefore, total estimated Year 1 adjustment costs will be $68.2 
million ($43.38 x 1.25 hours x 1.3 million workers).
---------------------------------------------------------------------------

    \171\ While some companies may need to reconfigure information 
technology systems to include both exempt and overtime-protected 
workers, the Department notes that most organizations affected by 
the rule already employ overtime-eligible workers and have in place 
payroll systems and personnel practices (e.g., requiring advance 
authorization for overtime hours) such that additional costs 
associated with the rule should be relatively small in the short 
run.
    \172\ Costs from the 2004 final rule were considered, but 
because that revision included changes to the duties test, the cost 
estimates are not directly applicable; in addition, the 2004 final 
rule did not separately account for managerial costs. The 2015 NPRM 
separately accounted for managerial costs. Some commenters responded 
with higher time estimates, but these estimates were not 
substantiated with data.
---------------------------------------------------------------------------

    A reduction in the cost to employers of determining employees' 
exempt status may partially offset adjustment costs. Currently, to 
determine whether an employee is exempt, employers must apply the 
duties test to salaried workers who earn at least $455 per week. 
However, when the rule takes effect, firms will no longer be required 
to apply the potentially time-consuming duties test to employees 
earning less than the new standard salary level. This will be a clear 
cost savings to employers for the approximately 4.1 million salaried 
employees (2.2 million in white collar occupations and 1.9 million in 
blue collar occupations) who do not pass the duties test and earn at 
least $455 per week but less than the updated salary level. The 
Department did not estimate the potential size of this cost savings.
    A few commenters expressed concern that the time estimate is too 
low. For example, as noted above, International Bancshares Corporation 
described the necessary hours for regulatory familiarization and 
adjustment costs as ``countless.'' SBA Advocacy wrote: ``Small 
businesses have told Advocacy that it may take them many hours and 
several weeks to understand and implement this rule for their small 
businesses.'' Two commenters, the National Association of Manufacturers 
and the HR Policy Association, expressed particular concern with 
adjustment costs stemming from the proposed increase in the HCE 
compensation level, noting that for each worker earning between 
$100,000 and the new HCE compensation level, the employee's job duties 
will need to be reassessed to determine whether the worker remains 
exempt under the standard salary level exemption. The National 
Association of Manufacturers elaborated that ``across the manufacturing 
sector, the change in HCE threshold [proposed in the NPRM] may be even 
more difficult and consequential than updating the standard salary 
threshold.''
    The Department is retaining its estimate of adjustment costs as 75 
minutes per affected worker in the final rule. The Department notes 
that the vast majority of commenters, including employer 
representatives, did not contest this estimate. Additionally, this 
estimate is drawn from the 2016 final rule, and represents a 25 percent 
increase, in response to concerns from employer representatives, over 
the Department's original estimate of one hour per worker in the 2015 
NPRM.\173\ Moreover, SBA Advocacy's numbers are not necessarily 
inconsistent with the Department's estimates. For example, if a small 
business has 15 affected employees, then the Department estimated it 
will (on average) take 19.75 hours to make the appropriate adjustments, 
an amount of time that some small businesses might consider ``many 
hours'' and that could take place over ``several weeks.''
---------------------------------------------------------------------------

    \173\ 81 FR at 32475.
---------------------------------------------------------------------------

    The Department also believes that the 75-minute-per-worker average 
time estimate appropriately takes into account adjustment time for HCE-
affected workers (those passing only the HCE duties test and not the 
standard duties test). This estimate assumes that the average is 
concentrated in the subset of employees requiring more analysis to make 
a decision. For example, employers are likely to incur relatively low 
adjustment costs for some workers, such as those who work no overtime 
(described below as Type 1 workers). This leaves more time for 
employers to spend on adjustment costs for other workers, such as 
affected HCE employees who become newly subject to the more rigorous 
standard duties test. The Department further notes that in this final 
rule, the number of affected HCE employees has declined from the NPRM 
as a result of the Department's decision to decrease the HCE threshold 
from the proposed amount of $147,414 to $107,432. This adjustment also 
addresses concerns about the burdens that would have been associated, 
under the NPRM, with applying the standard duties test to a large 
number of formerly HCE exempt employees, many of whom would have 
remained exempt under the standard duties test. Thus, although some 
employers may spend more time adjusting for HCE-affected workers than 
for other workers, HCE workers will now comprise a smaller portion of 
the of the total number of affected workers, further affirming the 
Department belief that its estimate of 75 minutes per worker on average 
is appropriate.
4. Managerial Costs
    If employers reclassify employees as overtime-eligible due to the 
changes in the salary levels, then firms may incur ongoing managerial 
costs because the employer may spend more time developing work 
schedules and closely monitoring an employee's hours to minimize or 
avoid overtime. For example, the manager of a reclassified worker may 
have to assess whether the marginal benefit of scheduling the worker 
for more than 40 hours exceeds the marginal cost of paying the overtime 
premium. Additionally, the manager may have to spend more time 
monitoring the employee's work and productivity since the marginal cost 
of employing the worker per hour has increased. Unlike regulatory 
familiarization and adjustment costs, which occur primarily in Year 1, 
managerial costs are incurred more uniformly every year. The Department 
applied managerial costs to workers who (1) are reclassified as 
nonexempt, overtime-protected and (2) either regularly work overtime or 
occasionally work overtime, but on a predictable basis--an estimated 
304,500 workers (see Table 13 and accompanying explanation). The 
Department estimated these costs assuming that management spends an 
additional ten minutes per week scheduling and monitoring each affected 
worker expected to be reclassified as nonexempt, overtime-eligible as a 
result of this rule, and whose hours are adjusted. As discussed in 
detail below, most affected workers do not currently work overtime, and 
there is no reason to expect their hours worked to change when their 
status changes from exempt to nonexempt. For that group of workers, 
management will have little or no need to increase their monitoring of 
hours worked; therefore, these workers are not included in the 
managerial cost calculation. Under these assumptions, the additional 
managerial hours worked per week will be 50,751 hours ((10 minutes/60 
minutes) x 304,500 workers).
    The median hourly wage in 2018/19 for a manager was $31.18 and 
benefits were estimated to be paid at a rate of 46 percent of the base 
wage.\174\ Together

[[Page 51268]]

with the 17 percent overhead costs used for this analysis, this totals 
$50.92 per hour. Thus, the estimated Year 1 managerial costs total 
$134.4 million (50,751 hours/week x 52 weeks x $50.92/hour). Although 
the exact magnitude will vary with the number of affected EAP workers 
each year, the Department anticipates that employers will incur 
managerial costs annually.
---------------------------------------------------------------------------

    \174\ Calculated as the median wage in the pooled 2018/19 CPS 
MORG data for workers in management occupations (excluding chief 
executives). The adjustment ratio is derived from BLS' Employer 
Costs for Employee Compensation data using variables 
CMU1020000000000D and CMU1030000000000D.
---------------------------------------------------------------------------

    There was little precedent or data to aid in evaluating managerial 
costs. With the exception of the 2016 rulemaking, prior part 541 
rulemakings did not estimate managerial costs. The Department likewise 
found no estimates of managerial costs after reviewing the literature. 
Thus, in the NPRM, the Department used the same methodology as the 2016 
final rule, which the Department adopted after considering comments on 
the 2015 NPRM. However, for this final rule, the Department has 
increased the time estimate from 5 minutes to 10 minutes.
    A few commenters generally expressed concern about the managerial 
costs for businesses. For example, one commenter noted: ``There is no 
easy way to track hours for salaried folks easily, in most businesses. 
As a result, companies will be forced to begin this practice, adding 
more costs in administrative ways.'' Another individual wrote that the 
proposed rule ``would create a challenge by placing a burden on the 
employers to exaustively [sic] track these newly nonexempt employees' 
hours to ensure compliance with overtime pay and other requirements. 
This tracking of hours would also produce increased human resources 
paperwork and technology costs to our company.'' The Kentucky Retail 
Federation wrote: ``Reclassifying managers to hourly workers will 
require hours spent scheduling work hours to avoid overtime costs.'' 
SBA Advocacy, asserting that the Department underestimated compliance 
costs, wrote: ``Employers reclassifying managers to hourly staff may 
spend many hours a week scheduling and keeping track of employee work 
to avoid these extra overtime costs.''
    The Department acknowledges that firms may incur costs monitoring 
and managing the hours of formerly exempt staff. In addition, the 
Department acknowledges that to the extent workers who lose their 
exempt status as a result of the change in the standard salary level 
telecommute, but hourly and other nonexempt salaried workers do not 
telecommute, it may be necessary to develop ways of tracking such work 
by newly nonexempt workers. However, the Department does not expect 
that such firms will spend ``many hours a week'' on such tasks, and 
believes an estimate of 10 minutes per worker per week is appropriate. 
First, the Department notes that EAP exempt employees account for less 
than 20 percent of the U.S. labor force; as such, the Department 
expects that the vast majority of employers of EAP exempt workers also 
employ nonexempt workers. Such employers already have in place 
recordkeeping systems and standard operating procedures for ensuring 
employees work overtime under only employer-prescribed circumstances. 
Thus, such systems generally do not need to be invented for managing 
formerly-exempt EAP employees. Second, the Department also notes that 
under the FLSA recordkeeping regulations in part 516, employers 
determine how to make and keep an accurate record of hours worked by 
employees; for example, employers may tell their workers to write their 
own time records and any timekeeping plan is acceptable as long as it 
is complete and accurate. Additionally, if the nonexempt employee works 
a fixed schedule, e.g., 9:00 a.m.-5:30 p.m. Monday-Friday, the employer 
may keep a record showing the exact schedule of daily and weekly hours 
and merely indicate exceptions to that schedule. See Fact Sheet #21: 
Recordkeeping Requirements under the Fair Labor Standards Act (https://www.dol.gov/whd/regs/compliance/whdfs21.pdf). However, as previously 
noted, in response to concerns raised by commenters the Department has 
doubled the amount of time attributed to managerial costs.
5. Other Potential Costs
    In addition to the costs discussed above, the final rule may impose 
additional costs that have not been quantified. These costs are 
discussed qualitatively below, but we note that in some cases (e.g., 
schedule flexibility, salaried status) these costs may directly affect 
workers' wages because workers face a tradeoff in the labor market 
between cash wages and the nonpecuniary aspects of jobs.\175\
---------------------------------------------------------------------------

    \175\ See, e.g., Ashenfelter, O. & Layard, R. (1986). Handbook 
of Labor Economics. Volume 1 641-92. https://www.sciencedirect.com/science/article/abs/pii/S1573446386010155.
---------------------------------------------------------------------------

Reduced Scheduling Flexibility
    Exempt workers may enjoy more scheduling flexibility because their 
hours are less likely to be monitored than nonexempt workers. If so, 
the final rule could impose costs on newly nonexempt, overtime-eligible 
workers by, for example, limiting their ability to adjust their 
schedules to meet personal and family obligations. But the rule does 
not require employers to reduce scheduling flexibility. Employers can 
continue to offer flexible schedules and require workers to monitor 
their own hours and to follow the employers' timekeeping rules. 
Additionally, some exempt workers already monitor their hours for 
billing purposes. For these reasons, and because there is little data 
or literature on these costs, the Department did not quantify potential 
costs regarding scheduling flexibility.
Preference for Salaried Status
    Some of the workers who become nonexempt as a result of the final 
rule and whose pay is changed by their employer from salaried to hourly 
status may have preferred to remain salaried. Research has shown that 
salaried workers are more likely than hourly workers to receive 
benefits such as paid vacation time and health insurance,\176\ and are 
more satisfied with their benefits.\177\ Additionally, when employer 
demand for labor decreases, hourly workers tend to see their hours cut 
before salaried workers, making earnings for hourly workers less 
predictable.\178\ However, this literature generally does not control 
for differences between salaried and hourly workers such as education, 
job title, or earnings; therefore, this correlation is not necessarily 
attributable to hourly status.
---------------------------------------------------------------------------

    \176\ Lambert, S.J. (2007). Making a Difference for Hourly 
Employees. In A. Booth, & A.C. Crouter, Work-Life Policies that Make 
a Real Difference for Individuals, Families, and Communities. 
Washington, DC: Urban Institute Press.
    \177\ Balkin, D.B., & Griffeth, R.W. (1993). The Determinants of 
Employee Benefits Satisfaction. Journal of Business and Psychology, 
7(3), 323-339.
    \178\ Lambert, S.J., & Henly, J.R. (2009). Scheduling in Hourly 
Jobs: Promising Practices for the Twenty-First Century Economy. The 
Mobility Agenda. Lambert, S.J. (2007). Making a Difference for 
Hourly Employees. In A. Booth, & A.C. Crouter, Work-Life Policies 
that Make a Real Difference for Individuals, Families, and 
Communities. Washington, DC: Urban Institute Press.
---------------------------------------------------------------------------

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

[[Page 51269]]

premium on that base wage for any overtime hours each week.\179\ 
Similarly, employers may continue to provide these workers with the 
same level of benefits as previously, whether paid on an hourly or 
salary basis.
---------------------------------------------------------------------------

    \179\ Sec. Sec.  778.113-.114.
---------------------------------------------------------------------------

Quality of Public Services
    To the extent that employers respond to this rule by restricting 
employee work hours, this rulemaking could negatively affect the 
quality of public services provided by local governments and 
nonprofits. However, the Department believes the effect of the rule on 
public services will be small. The Department acknowledges that some 
employees who work overtime providing public services may see a 
reduction in hours as an effect of the rulemaking. But if the services 
are in demand, the Department believes additional workers may be hired, 
as funding availability allows, to make up some of these hours, and 
productivity increases may offset some reduction in services. In 
addition, the Department expects many employers will adjust base wages 
downward to some degree so that even after paying the overtime premium, 
overall pay and hours of work for many employees will be relatively 
minimally impacted. Additionally, as noted above, many nonprofits are 
non-covered enterprises because when determining enterprise coverage 
only revenue derived from business operations, not charitable 
activities, is included.
Increased Prices
    Business firms may pass along increased labor costs to consumers 
through higher prices. The Department anticipates that some firms may 
offset part of the additional labor costs through charging higher 
prices for the firms' goods and services. However, because costs and 
transfers are, on average, small relative to payroll and revenues, the 
Department does not expect the final rule to have a significant effect 
on prices. The Department estimated that, on average, costs and 
transfers make up less than 0.02 percent of payroll and less than 0.003 
percent of revenues, although for specific industries and firms this 
percentage may be larger. Therefore, any potential change in prices 
would be modest. Further, any significant price increases would not 
represent a separate category of effects from those estimated in this 
economic analysis; rather, such price increases (where they occur) 
would be the channel through which consumers, rather than employers or 
employees, bear rule-induced costs (including transfers).
    International Bancshares Corporation commented that the increased 
salary level could lead to increased prices, if ``anticipated wage 
gains do not result in productivity increases.'' As noted above, 
however, costs and transfers make up less than 0.02 percent of payroll; 
furthermore, payroll comprises only a fraction of the costs of 
producing goods and services in the U.S. economy. Therefore, the 
Department concludes the final rule will add little upward pressure to 
prices. To the extent that EAP-exempt employees are concentrated in 
some industries more than others, and thus specific industries might 
experience more pressure on wages, the Department notes that even in 
the industry where costs and transfers compose the highest percentage 
of payroll (agriculture, forestry, fishing, and hunting), that 
percentage is only 0.038 percent.
Reduced Profits
    The increase in workers' earnings resulting from the revised salary 
level is a transfer of income from firms to workers, not a cost. The 
Department acknowledges that the increased employer costs and transfer 
payments as a result of this final rule may reduce the profits of 
business firms, although (1) some firms may offset some of these costs 
and transfers by making payroll adjustments, and (2) some firms may 
mitigate their reduced profits due to these costs and transfers through 
increased prices. To the extent that the final rule reduces profits at 
some business firms after all these adjustments are made, these firms 
would have marginally lower after-tax returns on new investments in 
equipment, structures, and intellectual property and could therefore 
make fewer such investments going forward. All else equal, less 
business investment slows economic growth and reduces employment. 
However, the Department expects that any anti-growth effects of the 
final rule would be minimal.
Hiring Costs
    To the extent that firms respond to an update to the salary level 
test by reducing overtime hours, they may do so by spreading hours to 
other workers, including current workers employed for less than 40 
hours per week by that employer, current workers who retain their 
exempt status, and newly hired workers. If new workers are hired to 
absorb these transferred hours, then the associated hiring costs are a 
cost of this final rule.
Other Costs Raised by Commenters
    Some commenters asserted that the proposed rule would entail 
additional costs not detailed above. A few believe that the rule will 
result in increased employee turnover. SBA Advocacy wrote: ``Small 
businesses that reclassified their salaried staff to hourly staff as a 
result of the 2016 final rule reported that their employee turnover 
increased by up to 50 percent,'' forcing them to incur costs to hire 
and train new workers. According to SBA Advocacy, small businesses 
attributed this turnover to previously-exempt managers feeling 
``demoralized'' by having to ``clock in'' due to their changed status, 
and suggested that this rule may have similar effects. Similarly, 
International Bancshares Corporation predicted that the proposed rule 
would result in layoffs, asserting that costs associated with 
``reviewing the final regulations and building a software system to 
implement and monitor their compliance with the regulations'' would 
make it ``extremely difficult for community and regional banks to . . . 
[avoid] laying off employees or curtailing their operations.''
    The Department believes these concerns are overstated. First, this 
final rule's increases to the earnings thresholds are much more modest 
than the 2016 final rule's, and the associated impacts are 
correspondingly more moderate. Thus, the Department believes that any 
adverse effects, such as increased turnover, will be minimal. 
Therefore, the Department has not quantified the potential costs 
associated with increased turnover. Likewise, the Department does not 
believe that this final rule will cause a significant number of 
layoffs. As explained above, the vast majority of firms employ both 
exempt and nonexempt workers and therefore have systems in place for 
managing nonexempt employees, and affected employees comprise less than 
4 percent of EAP exempt employees. As such, the Department does not 
believe that the increased earnings thresholds in this final rule will 
cause layoffs to any significant extent, and has not quantified such 
costs.
iv. Transfers
1. Overview
    Transfer payments occur when income is redistributed from one party 
to another. The Department has quantified two transfers from employers 
to employees that will result from the final rule: (1) Transfers to 
ensure compliance with the FLSA minimum wage provision; and (2) 
transfers to ensure compliance with the FLSA

[[Page 51270]]

overtime pay provision. Transfers in Year 1 due to the minimum wage 
provision were estimated to be $75.4 million. The increase in the HCE 
compensation level does not affect minimum wage transfers because 
workers eligible for the HCE exemption earn well above the minimum 
wage. The Department estimates that transfers due to the overtime pay 
provision will be $321.0 million: $220.7 million from the increased 
standard salary level and $100.3 million from the increased HCE 
compensation level. Total Year 1 transfers are estimated at $396.4 
million (Table 11).

                                Table 11--Summary of Year 1 Regulatory Transfers
                                                   [Millions]
----------------------------------------------------------------------------------------------------------------
                                                                                        HCE
               Transfer from employers to workers                    Standard      compensation        Total
                                                                   salary level        level
----------------------------------------------------------------------------------------------------------------
Due to minimum wage.............................................           $75.4            $0.0           $75.4
Due to overtime pay.............................................           220.7           100.3           321.0
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
    Total transfers.............................................           296.1           100.3           396.4
----------------------------------------------------------------------------------------------------------------

    Because the overtime premium depends on the base wage, the 
estimates of minimum wage transfers and overtime transfers are linked. 
This can be considered a two-step approach. The Department first 
identified affected EAP workers with an implicit regular hourly wage 
lower than the minimum wage, and then calculated the wage increase 
necessary to reach the minimum wage.
2. Transfers Due to the Minimum Wage Provision
    For purposes of this analysis, the hourly rate of pay was 
calculated as usual weekly earnings divided by usual weekly hours 
worked. To earn less than the federal or most state minimum wages, this 
set of workers must work many hours per week. For example, a worker 
paid $455 per week must work 62.8 hours to earn less than the federal 
minimum wage of $7.25 per hour ($455/$7.25 = 62.8).\180\ The applicable 
minimum wage is the higher of the federal minimum wage and the state 
minimum wage as of July 1, 2018. Most affected EAP workers already 
receive at least the minimum wage; only an estimated 1.8 percent of 
them (22,200 in total) earn an implicit hourly rate of pay less than 
the minimum wage. The Department estimated transfers due to payment of 
the minimum wage by calculating the change in earnings if wages rose to 
the minimum wage for workers who become nonexempt.\181\
---------------------------------------------------------------------------

    \180\ Workers in states with minimum wages higher than the 
federal minimum wage could earn less than the state minimum wage 
working fewer hours.
    \181\ Because these workers' hourly wages will be set at the 
minimum wage after this final rule, their employers will not be able 
to adjust their wages downward to offset part of the cost of paying 
the overtime pay premium (which will be discussed in the following 
section). Therefore, these workers will generally receive larger 
transfers attributed to the overtime pay provision than other 
workers.
---------------------------------------------------------------------------

    In response to an increase in the regular rate of pay to the 
minimum wage, employers may reduce the workers' hours. Since the 
quantity of labor hours demanded is inversely related to wages, a 
higher mandated wage will result in fewer hours of labor demanded. For 
the first year, the Department estimated the potential disemployment 
effects (i.e., the estimated reduction in hours) of the transfer 
attributed to the minimum wage by multiplying the percent change in the 
regular rate of pay by a labor demand elasticity of -0.2 (years 2-10 
use a long run elasticity of -0.4) 182 183
---------------------------------------------------------------------------

    \182\ Labor demand elasticity is the percentage change in labor 
hours demanded in response to a one percent change in wages.
    \183\ This elasticity estimate represents a short run demand 
elasticity for general labor, and is based on the Department's 
analysis of Lichter, A., Peichl, A. & Siegloch, A. (2014). The Own-
Wage Elasticity of Labor Demand: A Meta-Regression Analysis. IZA DP 
No. 7958. We selected a general labor demand elasticity because 
employers will adjust their demand based on the cumulative change in 
employees' earnings, not on a conceptual differentiation between 
increases attributable to the minimum wage and the overtime 
provisions of the FLSA.
---------------------------------------------------------------------------

    At the new standard salary level, the Department estimated that 
22,200 affected EAP workers will, on average, see an hourly wage 
increase of $1.39, work 2.4 fewer hours per week, and receive an 
increase in weekly earnings of $65.29 as a result of coverage by the 
minimum wage provisions (Table 12). The total change in weekly earnings 
due to the payment of the minimum wage was estimated to be $1.4 million 
per week ($65.29 x 22,200) or $75.4 million in Year 1.

   Table 12--Minimum Wage Only: Mean Hourly Wages, Usual Overtime Hours, and Weekly Earnings for Affected EAP
                                                 Workers, Year 1
----------------------------------------------------------------------------------------------------------------
                                                                                                   Total weekly
                                                    Hourly wage    Usual weekly    Usual weekly      transfer
                                                        \a\            hours         earnings        (1,000s)
----------------------------------------------------------------------------------------------------------------
Before Final Rule...............................           $8.75            61.4         $524.37  ..............
After Final Rule................................           10.14            59.0          589.66  ..............
Change..........................................            1.39            -2.4           65.29           1,450
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for 7/2016-6/2018 adjusted to reflect 2018/2019.
\a\ The applicable minimum wage is the higher of the federal minimum wage and the state minimum wage.


[[Page 51271]]

3. Transfers Due to the Overtime Pay Provision
Introduction
    The final rule will transfer income to affected workers who work in 
excess of 40 hours per week. Requiring an overtime premium increases 
the marginal cost of labor, which employers will likely try to offset 
by adjusting wages and/or hours of affected workers. The size of the 
transfer will depend largely on how employers respond to the updated 
salary levels. Employers may respond by: (1) Paying overtime premiums 
to affected workers; (2) reducing overtime hours of affected workers 
and potentially transferring some of these hours to other workers; (3) 
reducing the regular rate of pay for affected workers working overtime 
(provided that the reduced rates still exceed the minimum wage); (4) 
increasing affected workers' salaries to the updated salary or 
compensation level to preserve their exempt status; or (5) using some 
combination of these responses. How employers will respond depends on 
many factors, including the relative costs of each of these 
alternatives; in turn, the relative costs of each of these alternatives 
are a function of workers' earnings and hours worked.
Literature on Employer Adjustments
    Two conceptual models are useful for thinking about how employers 
may respond to reclassifying certain employees as overtime-eligible: 
(1) The ``fixed-wage'' or ``labor demand'' model, and (2) the ``fixed-
job'' or ``employment contract'' model.\184\ These models make 
different assumptions about the demand for overtime hours and the 
structure of the employment agreement, which result in different 
implications for predicting employer responses. The fixed-wage model 
assumes that the standard hourly wage is independent of the statutory 
overtime premium. Under the fixed-wage model, a reclassification of 
workers from overtime exempt to overtime nonexempt would cause a 
reduction in overtime hours for affected workers, an increase in the 
prevalence of a 40-hour workweek among affected workers, and an 
increase in the earnings of affected workers who continue to work 
overtime.
---------------------------------------------------------------------------

    \184\ See Trejo, S.J. (1991). The Effects of Overtime Pay 
Regulation on Worker Compensation. American Economic Review, 81(4), 
719-740, and Barkume, A. (2010). The Structure of Labor Costs with 
Overtime Work in U.S. Jobs. Industrial and Labor Relations Review, 
64(1), 128-142.
---------------------------------------------------------------------------

    In contrast, the fixed-job model assumes that the standard hourly 
wage is affected by the statutory overtime premium. Thus, employers can 
neutralize any reclassification of workers from overtime exempt to 
overtime nonexempt by reducing the standard hourly wage of affected 
workers so that their weekly earnings and hours worked are unchanged, 
except when minimum wage laws prevent employers from lowering the 
standard hourly wage below the minimum wage. Under the fixed-job model, 
a reclassification of workers from overtime exempt to overtime 
nonexempt would have different effects on minimum-wage workers and 
above-minimum-wage workers. Similar to the fixed-wage model, minimum-
wage workers would experience a reduction in overtime hours, an 
increase in the prevalence of a 40-hour workweek at a given employer 
(though not necessarily overall), and an increase in earnings for the 
portion of minimum-wage workers who continue to work overtime for a 
given employer. Unlike the fixed-wage model, however, above-minimum-
wage workers would experience no change.
    The Department conducted a literature review to evaluate studies of 
how labor markets adjust to a change in the requirement to pay 
overtime. In general, these studies are supportive of the fixed-job 
model of labor market adjustment, in that wages adjust to offset the 
requirement to pay an overtime premium as predicted by the fixed-job 
model, but do not adjust enough to completely offset the overtime 
premium as predicted by the model.
    The Department believes the two most important papers in this 
literature are the studies by Trejo (1991) and Barkume (2010). 
Analyzing the economic effects of the overtime pay provisions of the 
FLSA, Trejo (1991) found ``the data analyzed here suggest the wage 
adjustments occur to mitigate the purely demand-driven effects 
predicted by the fixed-wage model, but these adjustments are not large 
enough to neutralize the overtime pay regulations completely.'' Trejo 
noted, ``In accordance with the fixed job model, the overtime law 
appears to have a greater impact on minimum-wage workers.'' He also 
stated, ``[T]he finding that overtime pay coverage status 
systematically influences the hours-of-work distribution for non-
minimum wage works is supportive of the fixed-wage model. No 
significant differences in weekly earnings were discovered between the 
covered and non-covered sectors, which is consistent with the fixed-job 
model.'' However, ``overtime pay compliance is higher for union than 
for nonunion workers, a result that is more easily reconciled with the 
fixed wage model.'' Trejo's findings are supportive of the fixed-wage 
model whose adjustment is incomplete largely due to the minimum-wage 
requirement.\185\
---------------------------------------------------------------------------

    \185\ Trejo, S. J. (1991). The Effects of Overtime Pay 
Regulation on Worker Compensation. American Economic Review, 81(4), 
719-740.
---------------------------------------------------------------------------

    A second paper by Trejo (2003) took a different approach to testing 
the consistency of the fixed-wage adjustment models with overtime 
coverage and data on hours worked. In this paper, he examined time-
series data on employee hours by industry. After controlling for 
underlying trends in hours worked over 20 years, he found changes in 
overtime coverage had no impact on the prevalence of overtime hours 
worked. This result supports the fixed-job model. Unlike the 1991 
paper, however, he did not examine impacts of overtime coverage on 
employees' weekly or hourly earnings, so this finding in support of the 
fixed-job model only analyzes one implication of the model.\186\
---------------------------------------------------------------------------

    \186\ Trejo, S. J. (2003). Does the Statutory Overtime Premium 
Discourage Long Workweeks? Industrial and Labor Relations Review, 
56(3), 375-392.
---------------------------------------------------------------------------

    Barkume (2010) built on the analytic method used in Trejo 
(1991).\187\ However, Barkume observed that Trejo did not account for 
``quasi-fixed'' employment costs (e.g., benefits) that do not vary with 
hours worked, and therefore affect employers' decisions on overtime 
hours worked. After incorporating these quasi-fixed costs in the model, 
Barkume found results consistent with those of Trejo (1991): ``though 
wage rates in otherwise similar jobs declined with greater overtime 
hours, they were not enough to prevent the FLSA overtime provisions 
from increasing labor costs.'' Barkume also determined that the 1991 
model did not account for evidence that in the absence of regulation 
some employers may voluntarily pay workers some overtime premium to 
entice them to work longer hours, to compensate workers for unexpected 
changes in their schedules, or as a result of collective 
bargaining.\188\ Barkume found that how much wages and hours worked 
adjusted in response to the overtime pay requirement

[[Page 51272]]

depended on what overtime pay would be in absence of regulation.
---------------------------------------------------------------------------

    \187\ Barkume, A. (2010). The Structure of Labor Costs with 
Overtime Work in U.S. Jobs. Industrial and Labor Relations Review, 
64(1), 128-142.
    \188\ Barzel, Y. (1973). The Determination of Daily Hours and 
Wages. The Quarterly Journal of Economics, 87(2), 220-238, 
demonstrated that modest fluctuations in labor demand could justify 
substantial overtime premiums in the employment contract model. 
Hart, R. A. and Yue, M. (2000). Why Do Firms Pay an Overtime 
Premium? IZA Discussion Paper No. 163, showed that establishing an 
overtime premium in an employment contract can reduce 
inefficiencies.
---------------------------------------------------------------------------

    In addition, Bell and Hart (2003) examined the standard hourly 
wage, average hourly earnings (including overtime), the overtime 
premium, and overtime hours worked in Britain. Unlike the United 
States, Britain does not have national labor laws regulating overtime 
compensation. Bell and Hart found that after accounting for overtime, 
average hourly earnings are generally uniform in a given industry 
because firms paying below-market level straight-time wages tend to pay 
above-market overtime premiums and firms paying above-market level 
straight-time wages tend to pay below-market overtime premiums. Bell 
and Hart concluded ``this is consistent with a model in which workers 
and firms enter into an implicit contract that specifies total hours at 
a constant, market-determined, hourly wage rate.\189\ Their research is 
also consistent with studies showing that employers may pay overtime 
premiums either in the absence of a regulatory mandate (e.g., Britain), 
or when the mandate exists but the requirements are not met (e.g., 
United States).\190\
---------------------------------------------------------------------------

    \189\ Bell, D. N. F. and Hart, R. A. (2003). Wages, Hours, and 
Overtime Premia: Evidence from the British Labor Market, Industrial 
and Labor Relations Review, 56(3), 470-480.
    \190\ Hart, R. A. and Yue, M. (2000). Why Do Firms Pay an 
Overtime Premium? IZA Discussion Paper No. 163.
---------------------------------------------------------------------------

    Finally, Kuroda and Yamamoto (2009) examined ``name only managers'' 
in Japanese labor markets and found essentially 100 percent adjustment 
of implicit hourly wages to offset the overtime pay 
requirement.191 192 This study suggests that these affected 
workers are all employed under the pure fixed-job model, so the 
implicit wage adjusted so that workers received no additional pay, and 
had essentially no change to hours worked. If applied to this 
rulemaking, transfers from employers to employees would occur only in 
cases in which the implicit hourly rate is less than the minimum wage. 
The Department estimates transfers would be about $193.4 million in 
Year 1 with 100 percent adjustment to the fixed-job model (compared 
with the Department's estimate of $396.4 million using the substantial, 
but incomplete fixed-job model, described in further detail below).
---------------------------------------------------------------------------

    \191\ Kuroda, S. and Yamamoto, I. (2009). How Are Hours Worked 
and Wages Affected by Labor Regulations?: The White-Collar Exemption 
and `Name-Only Managers' in Japan. University of Tokyo Institute of 
Social Science. Discussion Paper Series No. F-147.
    \192\ The implicit hourly wage is calculated by dividing 
reported weekly earnings by reported hours worked.
---------------------------------------------------------------------------

    However, there are some challenges in generalizing Kuroda and 
Yamamoto's results to U.S. labor markets. First, ``name-only-managers 
would not be exempt in the U.S. because they do not meet the duties 
test for exemption. ``Name-only-managers'' are essentially identical to 
their peers, have no managerial responsibilities, and are distinguished 
only by their job title. This is not directly analogous to the case of 
EAP exempt employees, who do have managerial responsibilities, and must 
pass the duties test while other similar (but nonexempt) employees do 
not. Second, Kuroda also found that the pure fixed-job model results 
may not hold under all conditions. For example, in a following paper he 
found that during a recession, the labor market for ``name-only-
managers'' behaved more like the fixed-wage model than the fixed-job 
model.\193\ Third, some commenters on the NPRM provided survey results 
supporting that, among other responses, employers planned to respond to 
this rule (or responded or planned to respond to the 2016 final rule) 
by increasing salaries of some exempt employees to maintain their 
exempt status (see section VI.D.iv.5). This is inconsistent with Kuroda 
and Yamamoto's findings.
---------------------------------------------------------------------------

    \193\ Kuroda, S. and Yamamoto, I. (2012). Impact of Overtime 
Regulations on Wages and Work Hours, Journal of the Japanese and 
International Economies, 26(2), 249-262.
---------------------------------------------------------------------------

    On balance, the Department finds strong support for the fixed-job 
model as the best approximation for the likely effects of a 
reclassification of above-minimum-wage workers from overtime exempt to 
overtime nonexempt and the fixed-wage model as the best approximation 
of the likely effects of a reclassification of minimum-wage workers 
from overtime exempt to overtime nonexempt. In addition, the studies 
suggest that although observed wage adjustment patterns are consistent 
with the fixed-job model, this evidence also suggests that the actual 
wage adjustment might, especially in the short run, be less than 100 
percent as predicted by the fixed-job model. Thus, the hybrid model 
used in this analysis may be described as a substantial, but incomplete 
fixed-job model.
    To determine the magnitude of the adjustment, the Department 
accounted for the following findings. Earlier research had demonstrated 
that in the absence of regulation some employers may voluntarily pay 
workers some overtime premium to entice them to work longer hours, to 
compensate workers for unexpected changes in their schedules, or as a 
result of collective bargaining.\194\ Barkume (2010) found that the 
measured adjustment of wages and hours to overtime premium requirements 
depended on what overtime premium might be paid in absence of any 
requirement to do so. Thus, when Barkume assumed that workers would 
receive an average voluntary overtime pay premium of 28 percent in the 
absence of an overtime pay regulation, which is the average overtime 
premium that Bell and Hart (2003) found British employers paid in the 
absence of any overtime regulations, the straight-time hourly wage 
adjusted downward by 80 percent of the amount that would occur with the 
fixed-job model.\195\ When Barkume assumed workers would receive no 
voluntary overtime pay premium in the absence of an overtime pay 
regulation, the results were more consistent with Trejo's (1991) 
findings that the adjustment was a smaller percentage. The Department 
modeled an adjustment process between these two findings. Although it 
seemed reasonable that some premium was paid for overtime in the 
absence of regulation, Barkume's assumption of a 28 percent initial 
overtime premium is likely too high for the salaried workers 
potentially affected by a change in the salary and compensation level 
requirements for the EAP exemptions because this assumption is based on 
a study of workers in Britain. British workers were likely paid a 
larger voluntary overtime premium than American workers because Britain 
did not have a required overtime pay regulation and so collective 
bargaining played a larger role in implementing overtime pay.\196\ If 
the Department were to use only Barkume's assumptions and results to 
model employer adjustment to the overtime wage premium requirement for 
affected workers, estimated Year 1 transfers would total $247.9 
million; further estimates derived from Barkume's findings will be 
presented later in the analysis. However, in the sections that

[[Page 51273]]

immediately follow, the Department uses both papers to model transfers.
---------------------------------------------------------------------------

    \194\ Barzel, Y. (1973). The Determination of Daily Hours and 
Wages. The Quarterly Journal of Economics, 87(2), 220-238, 
demonstrated that modest fluctuations in labor demand could justify 
substantial overtime premiums in the employment contract model. 
Hart, R. A. and Yue, M. (2000). Why Do Firms Pay an Overtime 
Premium? IZA Discussion Paper No. 163, showed that establishing an 
overtime premium in an employment contract can reduce 
inefficiencies.
    \195\ Barkume, A. (2010). The Structure of Labor Costs with 
Overtime Work in U.S. Jobs. Industrial and Labor Relations Review, 
64(1), 128-142.
    \196\ Bell, D. N. F. and Hart, R. A. (2003). Wages, Hours, and 
Overtime Premia: Evidence from the British Labor Market, Industrial 
and Labor Relations Review, 56(3), 470-480.
---------------------------------------------------------------------------

Identifying Types of Affected Workers
    The Department identified four types of workers whose work 
characteristics affect how it modeled employers' responses to the 
changes in both the standard and HCE salary levels:
     Type 1: Workers who do not work overtime.
     Type 2: Workers who do not regularly work overtime but 
occasionally work overtime.
     Type 3: Workers who regularly work overtime and become 
overtime eligible (nonexempt).
     Type 4: Workers who regularly work overtime and remain 
exempt, because it is less expensive for the employer to pay the 
updated salary level than to pay overtime and incur additional 
managerial costs.
    The Department began by identifying the number of workers in each 
type. After modeling employer adjustments, it estimated transfer 
payments. Type 3 and 4 workers were identified as those who regularly 
work overtime (CPS variable PEHRUSL1 greater than 40). Distinguishing 
Type 3 workers from Type 4 workers involved a four-step process. First, 
the Department identified all workers who regularly work overtime. Then 
the Department estimated each worker's weekly earnings if they became 
nonexempt, to which it added weekly managerial costs for each affected 
worker of $8.49 ($50.92 per hour x (10 minutes/60 minutes)).\197\ Last, 
the Department identified as Type 4 those workers whose expected 
nonexempt earnings plus weekly managerial costs exceeds the updated 
standard salary level, and, conversely, as Type 3 those whose expected 
nonexempt earnings plus weekly managerial costs are less than the new 
standard salary.\198\ The Department assumed that firms will include 
incremental managerial costs in their determination of whether to treat 
an affected employee as a Type 3 or Type 4 worker because those costs 
are only incurred if the employee is a Type 3 worker.
---------------------------------------------------------------------------

    \197\ See supra Sec.  VI.D.iii.4 (managerial costs).
    \198\ When analyzing impacts of increasing the standard salary 
level, Rohwedder and Wenger conducted a similar analysis; however, 
they use straight-time pay rather than overtime pay to calculate 
earnings in the absence of a pay raise to remain exempt. Rohwedder, 
S. and Wenger, supra note 130.
---------------------------------------------------------------------------

    Identifying Type 2 workers involved two steps. First, using CPS 
MORG data, the Department identified those who do not usually work 
overtime but did work overtime in the survey week (the week referred to 
in the CPS questionnaire, variable PEHRACT1 greater than 40). Next, the 
Department supplemented the CPS data with data from the Survey of 
Income and Program Participation (SIPP) to look at likelihood of 
working some overtime during the year. Based on 2012 data, the most 
recent available, the Department found that 39.4 percent of non-hourly 
workers worked overtime at some point in a year. Therefore, the 
Department classified a share of workers who reported they do not 
usually work overtime, and did not work overtime in the reference week 
(previously identified as Type 1 workers), as Type 2 workers such that 
a total of approximately 39.4 percent of affected workers were Type 2, 
3, or 4.
Modeling Changes in Wages and Hours
    The substantial, but incomplete fixed-job model (hereafter referred 
to as the incomplete fixed-job model) predicts that employers will 
adjust wages of regular overtime workers but not to the full extent 
indicated by fixed-job model, and thus some employees may receive a 
small increase in weekly earnings due to overtime pay coverage. When 
modeling employer responses with respect to the adjustment to the 
regular rate of pay, the Department used the incomplete fixed-job 
model.
    In this portion of the analysis, the Department presents an 
estimate of the effect on the implicit hourly rate of pay for regular 
overtime workers should be determined using the average of two 
estimates of the incomplete fixed-job model adjustments: Trejo's (1991) 
estimate that the overtime-induced wage change is 40 percent of the 
adjustment toward the amount predicted by the fixed-job model, assuming 
an initial zero overtime pay premium, and Barkume's (2010) estimate 
that the wage change is 80 percent of the predicted adjustment assuming 
an initial 28 percent overtime pay premium.\199\ This is approximately 
equivalent to assuming that salaried overtime workers implicitly 
receive the equivalent of a 14 percent overtime premium in the absence 
of regulation (the midpoint between 0 and 28 percent).
---------------------------------------------------------------------------

    \199\ Both studies considered a population that included hourly 
workers. Evidence is not available on how the adjustment towards the 
employment contract model differs between salaried and hourly 
workers. The employment contract model may be more likely to hold 
for salaried workers than for hourly workers since salaried workers 
directly observe their weekly total earnings, not their implicit 
equivalent hourly wage. Thus, applying the partial adjustment to the 
employment contract model as estimated by these studies may 
overestimate the transfers from employers to salaried workers. We do 
not attempt to quantify the magnitude of this potential 
overestimate.
---------------------------------------------------------------------------

    Modeling changes in wages, hours, and earnings for Type 1 and Type 
4 workers was relatively straightforward. Type 1 affected EAP workers 
will become overtime-eligible, but because they do not work overtime, 
they will see no change in their weekly earnings. Type 4 workers will 
remain exempt because their earnings will be raised to at least the 
updated EAP level (either the standard salary level or HCE compensation 
level). These workers' earnings will increase by the difference between 
their current earnings and the amount necessary to satisfy the new 
salary or compensation level. It is possible employers will increase 
these workers' hours in response to paying them a higher salary, but 
the Department did not have enough information to model this potential 
change.\200\
---------------------------------------------------------------------------

    \200\ Cherry, Monica, ``Are Salaried Workers Compensated for 
Overtime Hours?'' Journal of Labor Research 25(3): 485-494, 
September 2004, found that exempt full-time salaried employees earn 
more when they work more hours, but her results do not lend 
themselves to the quantification of the effect on hours of an 
increase in earnings.
---------------------------------------------------------------------------

    Modeling changes in wages, hours, and earnings for Type 2 and Type 
3 workers was more complex. The Department distinguished those who 
regularly work overtime (Type 3 workers) from those who occasionally 
work overtime (Type 2 workers) because employer adjustment to the final 
rule may differ accordingly. Employers are more likely to adjust hours 
worked and wages for regular overtime workers because their hours are 
predictable. However, in response to a transient, perhaps unpredicted, 
shift in market demand for the good or service such employers provide, 
employers are more likely to pay for occasional overtime rather than 
adjust hours worked and pay.
    The Department treated Type 2 affected workers in two ways due to 
the uncertainty of the nature of these occasional overtime hours. The 
Department assumed that 50 percent of these occasional overtime workers 
worked expected overtime hours and the other 50 percent worked 
unexpected overtime. Workers were randomly assigned to these two 
groups. Workers with expected occasional overtime hours were treated 
like Type 3 affected workers (incomplete fixed-job model adjustments). 
Workers with unexpected occasional overtime hours were assumed to 
receive a 50 percent pay premium for the overtime hours worked and 
receive no change in base wage or hours (full overtime premium

[[Page 51274]]

model).\201\ When modeling Type 2 workers' hour and wage adjustments, 
the Department treated those identified as Type 2 using the CPS data as 
representative of all Type 2 workers. The Department estimated employer 
adjustments and transfers assuming that the patterns observed in the 
CPS reference week are representative of an average week in the year. 
Thus, the Department assumes total transfers for the year are equal to 
52 times the transfers estimated for the single representative week for 
which the Department has CPS data. However, these transfers are spread 
over a larger group including those who occasionally work overtime but 
did not do so in the CPS reference week.\202\
---------------------------------------------------------------------------

    \201\ We use the term ``full overtime premium'' to describe the 
adjustment process as modeled. The full overtime premium model is a 
special case of the general fixed-wage model in that the Department 
assumes the demand for labor under these circumstances is completely 
inelastic. That is, employers make no changes to employees' hours in 
response to these temporary, unanticipated changes in demand.
    \202\ If a different week was chosen as the survey week, then 
likely some of these workers would not have worked overtime. 
However, because the data are representative of both the population 
and all twelve months in a year, the Department believes the share 
of Type 2 workers identified in the CPS data in the given week is 
representative of an average week in the year.
---------------------------------------------------------------------------

    Since employers must now pay more for the same number of labor 
hours, for Type 2 and Type 3 EAP workers, the quantity of labor hours 
demanded by employers will decrease. It is the net effect of these two 
changes that will determine the final weekly earnings for affected EAP 
workers. The reduction in hours is calculated using the elasticity of 
labor demand with respect to wages. The Department used a short-term 
demand elasticity of -0.20 to estimate the percentage decrease in hours 
worked in Year 1 and a long-term elasticity of -0.4 to estimate the 
percentage decrease in hours worked in Years 2-10.\203\
---------------------------------------------------------------------------

    \203\ This elasticity estimate is based on the Department's 
analysis of Lichter, A., Peichl, A. & Siegloch, A. (2014). The Own-
Wage Elasticity of Labor Demand: A Meta-Regression Analysis. IZA DP 
No. 7958. Some researchers have estimated larger impacts on the 
number of overtime hours worked (Hamermesh, D. and S. Trejo. 
(2000)). The Demand for Hours of Labor: Direct Evidence from 
California. The Review of Economics and Statistics, 82(1), 38-47 
concludes the price elasticity of demand for overtime hours is at 
least -0.5. The Department decided to use a general measure of 
elasticity applied to the average change in wages since the increase 
in the overtime wage is somewhat offset by a decrease in the non-
overtime wage as indicated in the fixed-job model.
---------------------------------------------------------------------------

    For Type 3 affected workers, and the 50 percent of Type 2 affected 
workers who worked expected overtime, the Department estimated adjusted 
total hours worked after making wage adjustments using the incomplete 
fixed-job model. To estimate adjusted hours worked, the Department set 
the percent change in total hours worked equal to the percent change in 
average wages multiplied by the wage elasticity of labor demand.\204\
---------------------------------------------------------------------------

    \204\ In this equation, the only unknown is adjusted total hours 
worked. Since adjusted total hours worked is in the denominator of 
the left side of the equation and is also in the numerator of the 
right side of the equation, solving for adjusted total hours worked 
requires solving a quadratic equation.
---------------------------------------------------------------------------

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

[[Page 51275]]

[GRAPHIC] [TIFF OMITTED] TR27SE19.002


[[Page 51276]]


[GRAPHIC] [TIFF OMITTED] TR27SE19.003

Estimated Number of and Effects on Affected EAP Workers
    The Department estimated the final rule will affect 1.3 million 
workers (Table 13), of which 762,200 were Type 1 workers (60.6 percent 
of all affected EAP workers), 300,900 were estimated to be Type 2 
workers (23.9 percent of all affected EAP workers), 154,000 were Type 3 
workers (12.3 percent of all affected EAP workers), and 40,100 were 
estimated to be Type 4 workers (3.2 percent of all affected workers). 
All Type 3 workers and half of Type 2 employees (304,500) are assumed 
to work predictable overtime.

                             Table 13--Affected EAP Workers by Type (1,000s), Year 1
----------------------------------------------------------------------------------------------------------------
                                                                                         Regular overtime
                                                    No overtime     Occasional   -------------------------------
                                       Total           (T1)        overtime (T2)       Newly       Remain exempt
                                                                                  nonexempt (T3)       (T4)
----------------------------------------------------------------------------------------------------------------
Standard salary level...........         1,155.6           700.3           296.8           126.8            31.7
HCE compensation level..........           101.8            62.0             4.1            27.2             8.5
                                 -------------------------------------------------------------------------------
    Total.......................         1,257.3           762.2           300.9           154.0            40.1
----------------------------------------------------------------------------------------------------------------
Note: Pooled CPS data for 7/2016-6/2019 adjusted to reflect 2018/2019.
* Type 1: Workers without regular OT and without occasional OT and become overtime eligible.
* Type 2: Workers without regular OT but with occasional OT. These workers become overtime eligible.
* Type 3: Workers with regular OT who become overtime eligible.
* Type 4: Workers with regular OT who remain exempt (i.e., earnings increase to the updated salary level).

    The final rule will affect some affected workers' hourly wages, 
hours, and weekly earnings. Predicted changes in implicit wage rates 
are outlined in Table 14, changes in hours in Table 15, and changes in 
weekly earnings in Table 16. How these will change depends on the type 
of worker, but on average the Department projects that weekly earnings 
will be unchanged or increase while hours worked will be unchanged or 
decrease.
    Type 1 workers will have no change in wages, hours, or 
earnings.\205\ Employers were assumed to be unable to adjust the hours 
or regular rate of pay for the occasional overtime workers whose 
overtime is irregularly scheduled and unpredictable. The Department 
used the incomplete fixed-job model to estimate changes in the regular 
rate of pay for Type 3 workers and the 50 percent of Type 2 workers who 
regularly work occasional overtime. As a group, Type 2 workers will see 
a decrease in their average regular hourly wage; however, because these 
workers will now receive a 50 percent premium on their regular hourly 
wage for each hour worked in excess of 40 hours per week, average 
weekly earnings for Type 2 workers will increase.\206\
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    \205\ It is possible that these workers may experience an 
increase in hours and weekly earnings because of transfers of hours 
from other newly nonexempt workers who do usually work overtime. Due 
to the high level of uncertainty in employers' responses regarding 
the transfer of hours, the Department did not have credible evidence 
to support an estimation of the number of hours transferred to other 
workers.
    \206\ Type 2 workers do not see increases in regular earnings to 
the new salary level (as Type 4 workers do) even if their new 
earnings in this week exceed that new level. This is because the 
estimated new earnings only reflect their earnings in that week when 
overtime is worked; their earnings in typical weeks that they do not 
work overtime do not exceed the salary level.
---------------------------------------------------------------------------

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

[[Page 51277]]



                  Table 14--Average Regular Rate of Pay by Type of Affected EAP Worker, Year 1
----------------------------------------------------------------------------------------------------------------
                                                                                         Regular overtime
                                                    No overtime     Occasional   -------------------------------
                                       Total           (T1)        overtime (T2)       Newly       Remain exempt
                                                                                  nonexempt (T3)       (T4)
----------------------------------------------------------------------------------------------------------------
                                              Standard Salary Level
----------------------------------------------------------------------------------------------------------------
Before Final Rule...............          $15.85          $16.71          $16.15          $11.39          $11.91
After Final Rule................          $15.81          $16.71          $16.09          $10.97          $12.51
Change ($)......................          -$0.04           $0.00          -$0.06          -$0.42           $0.60
Change (%)......................           -0.3%            0.0%           -0.4%           -3.7%            5.1%
----------------------------------------------------------------------------------------------------------------
                                             HCE Compensation Level
----------------------------------------------------------------------------------------------------------------
Before Final Rule...............          $46.94          $51.63          $49.81          $38.80          $37.46
After Final Rule................          $46.32          $51.63          $47.53          $36.55          $38.27
Change ($)......................          -$0.63           $0.00          -$2.29          -$2.26           $0.81
Change (%)......................           -1.3%            0.0%           -4.6%           -5.8%            2.2%
----------------------------------------------------------------------------------------------------------------
Note: Pooled CPS data for 7/2016-6/2019 adjusted to reflect 2018/2019.
* Type 1: Workers without regular OT and without occasional OT and become overtime-eligible.
* Type 2: Workers without regular OT but with occasional OT. These workers become overtime eligible.
* Type 3: Workers with regular OT who become overtime eligible.
* Type 4: Workers with regular OT who remain exempt (i.e., earnings increase to the updated salary level).

    Hours for Type 1 workers will not change. Similarly, hours will not 
change for the half of Type 2 workers who work irregular overtime. Half 
of Type 2 and all Type 3 workers will see a small decrease in their 
hours of overtime worked. This reduction in hours is relatively small 
and is due to the effect on labor demand from the increase in the 
average hourly wage as predicted by the incomplete fixed-job model 
(Table 15). Type 4 workers' hours may increase, but due to lack of 
data, the Department assumed hours would not change.

                     Table 15--Average Weekly Hours for Affected EAP Workers by Type, Year 1
----------------------------------------------------------------------------------------------------------------
                                                                                            Regular OT
                                                    No overtime    Occasional OT -------------------------------
                                       Total        worked (T1)        (T2)            Newly       Remain exempt
                                                                                  nonexempt (T3)       (T4)
----------------------------------------------------------------------------------------------------------------
                                             Standard Salary Level a
----------------------------------------------------------------------------------------------------------------
Before Final Rule...............            39.9            37.5            39.2            50.4            56.6
After Final Rule................            39.8            37.5            39.1            49.8            56.6
Change (hours)..................            -0.1             0.0             0.0            -0.6             0.0
Change (%)......................           -0.2%            0.0%           -0.1%           -1.2%            0.0%
----------------------------------------------------------------------------------------------------------------
                                            HCE Compensation Level a
----------------------------------------------------------------------------------------------------------------
Before Final Rule...............            44.2            39.4            48.4            51.0            54.9
After Final Rule................            44.1            39.4            48.2            50.7            54.9
Change (hours)..................            -0.1             0.0            -0.3            -0.3             0.0
Change (%)......................           -0.2%            0.0%           -0.5%           -0.7%            0.0%
----------------------------------------------------------------------------------------------------------------
Note: Pooled CPS data for 7/2016-6/2019 adjusted to reflect 2018/2019.
a Usual hours for Types 1, 3, and 4 but actual hours for Type 2 workers identified in the CPS MORG.
* Type 1: Workers without regular OT and without occasional OT and become overtime eligible.
* Type 2: Workers without regular OT but with occasional OT. These workers become overtime eligible.
* Type 3: Workers with regular OT who become overtime eligible.
* Type 4: Workers with regular OT who remain exempt (i.e., earnings increase to the updated salary level).

    Because most Type 1 workers will not experience a change in their 
regular rate of pay or hours, they will have no change in earnings due 
to the final rule (Table 16).\207\ Although Type 2 and Type 3 workers 
will, on average, experience a decrease in both their regular rate of 
pay and hours worked, their weekly earnings will increase as a result 
of the overtime premium. Weekly earnings after the standard salary 
level increased were estimated using the new wage (i.e., the incomplete 
fixed-job model wage) and the reduced number of overtime hours worked. 
Type 4 workers' salaries will increase to the new standard salary level 
or the HCE compensation level.
---------------------------------------------------------------------------

    \207\ The small increase in average weekly earnings for Type 1 
workers is due to increasing the weekly earnings in the District of 
Columbia to the minimum wage ($13.25 per hour).

[[Page 51278]]



                   Table 16--Average Weekly Earnings for Affected EAP Workers by Type, Year 1
----------------------------------------------------------------------------------------------------------------
                                                                                         Regular overtime
                                                                                 -------------------------------
                                       Total       No  overtime     Occasional         Newly
                                                       (T1)       overtime  (T2)     nonexempt    Remain  exempt
                                                                                       (T3)             (T4)
----------------------------------------------------------------------------------------------------------------
                                             Standard Salary Level a
----------------------------------------------------------------------------------------------------------------
Before Final Rule...............         $581.42         $575.71         $594.52         $566.67         $643.94
After Final Rule................         $586.34         $575.72         $599.48         $589.91         $684.00
Change ($)......................           $4.93           $0.01           $4.96          $23.24          $40.06
Change (%)......................            0.8%            0.0%            0.8%            4.1%            6.2%
----------------------------------------------------------------------------------------------------------------
                                            HCE Compensation Level a
----------------------------------------------------------------------------------------------------------------
Before Final Rule...............       $1,989.41       $1,973.57       $2,415.63       $1,950.93       $2,021.82
After Final Rule................       $2,008.37       $1,973.57       $2,467.78       $2,000.16       $2,066.00
Change ($)......................          $18.96           $0.00          $52.15          $49.24          $44.18
Change (%)......................            1.0%            0.0%            2.2%            2.5%            2.2%
----------------------------------------------------------------------------------------------------------------
Note: Pooled CPS data for 7/2016-6/2019 adjusted to reflect 2018/2019.
a The mean of the hourly wage multiplied by the mean of the hours does not necessarily equal the mean of the
  weekly earnings because the product of two averages is not necessarily equal to the average of the product.
* Type 1: Workers without regular OT and without occasional OT and become overtime eligible.
* Type 2: Workers without regular OT but with occasional OT. These workers become overtime eligible.
* Type 3: Workers with regular OT who become overtime eligible.
* Type 4: Workers with regular OT who remain exempt (i.e., earnings increase to the updated salary level).

    At the new standard salary level, the average weekly earnings of 
affected workers will increase $4.93 (0.8 percent), from $581.42 to 
$586.34. Multiplying the average change of $4.93 by the 1.2 million EAP 
workers affected by the change in the standard salary level and 52 
weeks equals an increase in earnings of $296.1 million in the first 
year (Table 17). For workers affected by the change in the HCE 
compensation level, average weekly earnings will increase by $18.96. 
When multiplied by 101,800 affected workers and 52 weeks, the national 
increase will be $100.3 million in the first year. Thus, total Year 1 
transfer payments attributable to this final rule will total $396.4 
million.

  Table 17--Total Change in Weekly and Annual Earnings for Affected EAP
                      Workers by Provision, Year 1
------------------------------------------------------------------------
                                                          Annual  change
                        Provision                          in  earnings
                                                             (1,000s)
------------------------------------------------------------------------
Total...................................................        $396,424
Standard salary level:
    Total...............................................         296,078
    Minimum wage only...................................          75,376
    Overtime pay only a.................................         220,702
HCE compensation level:
    Total...............................................         100,345
    Minimum wage only...................................  ..............
    Overtime pay only a.................................         100,345
------------------------------------------------------------------------
a Estimated by subtracting the minimum wage transfer from the total
  transfer.

    Rohwedder and Wenger (2015) analyzed the effects of increasing the 
standard salary level.\208\ They compared hourly and salaried workers 
in the CPS using quantile treatment effects. This methodology estimates 
the effect of a worker becoming nonexempt by comparing similar workers 
who are hourly and salaried. They found no statistically significant 
change in hours or wages on average. However, their point estimates, 
averaged across all affected workers, show small increases in earnings 
and decreases in hours, similar to our analysis. For example, using a 
salary level of $750, they estimated weekly earnings may increase 
between $2 and $22 and weekly hours may decrease by approximately 0.4 
hours. The Department estimated weekly earnings for workers affected by 
the standard salary level will increase by $4.93 and hours will 
decrease by 0.1 hours.
---------------------------------------------------------------------------

    \208\ Rohwedder and Wenger, supra note 130.
---------------------------------------------------------------------------

4. Potential Transfers Not Quantified
    There may be additional transfers attributable to this final rule; 
however, the magnitude of these other transfers could not be quantified 
and therefore are discussed only qualitatively.
Reduced Earnings for Some Workers
    Holding regular rate of pay and work hours constant, payment of an 
overtime premium will increase weekly earnings for workers who work 
overtime. However, as discussed previously, employers may try to 
mitigate cost increases by reducing the number of overtime hours 
worked, either by transferring these hours to other workers or 
monitoring hours more closely. Depending on how hours are adjusted, a 
specific worker may earn less pay after this final rule.
Additional Work for Some Workers
    Affected workers who remain exempt will see an increase in pay but 
may also see an increase in workload. The Department estimated the net 
changes in hours, but due to the data limitations as noted in section 
VI.D.iv.3, did not estimate changes in hours for affected workers whose 
salary is increased to the new threshold so they remain overtime 
exempt.
Reduction in Bonuses and Benefits for Some Workers
    Employers may offset increased labor costs by reducing bonuses or 
benefits instead of reducing base wages or hours worked. Due to data 
limitations, the Department has not modeled this effect separately. The 
Department observes that any reductions in bonuses or benefits would be 
likely accompanied by smaller reductions in base wages or hours worked.
    Several commenters stated that in order to pay for the higher 
payroll costs, they would decrease employee benefits. These comments 
were mostly general statements, often included in a list of changes the 
employer intends to make in response to the increased salary threshold. 
Others stated that employees would lose benefits due to being 
reclassified as hourly workers. However, as the Department previously 
noted, this regulation does not require that workers who become 
nonexempt must be

[[Page 51279]]

reclassified as hourly nor does it require that hourly workers receive 
fewer benefits than salaried workers. Additionally, some commenters 
stated that these employees would have reductions in their ability to 
earn commissions, bonuses, or other types of incentive payments, but 
these commenters generally did not discuss the net impact on these 
employees' earnings. These comments did not provide information that 
would allow the Department to estimate the purported impact of the 
final rule on employee benefits.
5. NPRM Comments on Transfer Calculations
    In response to the NPRM, the Department's RFI, and at listening 
sessions, some commenters provided information concerning their 
proposed wage and hour adjustments in anticipation of an increase to 
the standard salary level and HCE total compensation level. In comments 
on the NPRM, Capital Associated Industries submitted the results from a 
survey of their members, which conveyed that employers plan to respond 
in different ways such as increasing salaries of exempt employees so 
that they remain exempt, or decreasing the hours or hourly rates of 
newly nonexempt employees. A survey of members of the International 
Public Management Association for Human Resources found ``an almost 
even split between those who would increase salaries of exempt 
employees to the new threshold and those who would shift currently 
exempt employees to nonexempt status'' in response to the proposed 
standard salary level.
    In responses to the Department's RFI, commenters representing 
employer interests indicated that employers would respond to a new 
salary level by making a variety of adjustments to wages, hours worked, 
or both. Some commenters' feedback supports adoption of an incomplete 
fixed-job model. For example, Littler Mendelson and the U.S. Chamber of 
Commerce reported that, among surveyed employers with exempt employees 
who would become nonexempt under the 2016 final rule, 28.7 percent 
reported that they planned to ``allow [newly nonexempt employees] to 
work the same number of hours and earn overtime compensation without 
restriction,'' compared to just 18.6 percent who planned to reduce 
effective hourly rates ``so that their total pay remained the same.'' 
The Chamber's survey did not ask whether employers planned to adopt a 
combination of those two responses (i.e., paying overtime premiums 
while partially reducing effective hourly rates).
    In this final rule, the Department estimated that some workers will 
see their earnings increase to the new earnings levels and remain 
exempt. There is some evidence that employers will respond in this 
manner. For example, in response to the RFI, the Chamber reported that, 
of surveyed employers who had implemented or made plans to implement 
changes to comply with the 2016 final rule, 76.4 percent reported that 
they had increased or planned to increase the salaries of some exempt 
employees to retain their exempt status. Similarly, the American Hotel 
and Lodging Association reported that 43 percent of their members 
raised the salaries of at least one worker to a figure above the 2016 
final rule's salary threshold. It is possible that employers will 
increase the salaries paid to some ``occasional'' overtime workers to 
maintain the exemption for those workers, but the Department has no way 
of identifying these workers.
    Regarding the proposed transfer calculations, SBA Advocacy took 
issue with the Department's estimates that affected small business 
establishments would have, on average, $422 to $3,187 in additional 
payroll costs in the first year of the proposed rule. Rather, SBA 
Advocacy stated that ``[s]mall businesses have told Advocacy that their 
[additional] payroll costs will be in the thousands of dollars.'' This 
comment, however, does not explain what methodological approach the 
Department should use to estimate transfers; what error(s), if any, the 
Department's method contains; or how much, if at all, the Department's 
approach underestimated such transfers. Therefore, the Department has 
not made any changes to the methodology in response to this comment.
    The National Association of Manufacturers (NAM), in its comment 
opposing the proposed rule's HCE total annual compensation threshold of 
$147,414, stated that such a threshold would impact many manufacturers 
who currently employ numerous exempt HCE employees. It contended that 
``[i]n the representative case of one large manufacturer, approximately 
1,200 individuals--nearly 11% of the company's workforce--are exempt 
employees earning between $100,000 and $147,414 annually. For this 
manufacturer, the difference between `exempt' and `almost exempt' is 
estimated to be between $8 million and $20 million in potential 
overtime exposure per year.'' Using the upper end of NAM's transfer 
cost range, this equates to $16,667 per affected worker. This single 
anecdote, however, does not provide a sufficient basis for the 
Department to change the methodology used to calculate transfers. 
Moreover, NAM's concerns are mitigated by the Department's decision to 
set the HCE total annual compensation level to $107,432 instead of to 
$147,414.
    The Department further notes that its estimates of transfers are 
informed by its projection that employers will respond to the final 
rule in a number of ways. If, for example, an employer simply pays each 
affected employee the overtime premium for each hour worked in excess 
of 40 hours per week, without making any adjustments to wages, hours or 
duties, such an approach would maximize transfers from employers to 
employees. However, as discussed above, the Department believes that 
employers will respond to the final rule by adjusting wages, hours, and 
duties to minimize the cost of the rule. The Department's approach is 
supported by both the literature the Department reviewed examining 
employers' response to overtime premium pay requirements, as well as 
survey data and anecdotal evidence provided in response to the NPRM and 
RFI regarding employers' responses to the 2016 final rule and planned 
responses to this rulemaking. Accordingly, the actual amount of 
transfers will fall well short of the transfers that would result if 
employers simply paid each affected employee overtime premiums without 
adjusting wages, hours, or duties.
v. Benefits and Cost Savings
Potential Benefits and Effects Not Discussed Elsewhere
    The Department has determined that the final rule will provide some 
benefits; however, these benefits could not be quantified due to data 
limitations, requiring the Department to discuss such benefits only 
qualitatively.
1. Reduce Employee Misclassification
    The revised salary level reduces the likelihood of workers being 
misclassified as exempt from overtime pay, providing an additional 
measure of the effectiveness of the salary level as a bright-line test 
delineating exempt and nonexempt workers. The Department's analysis of 
misclassification drew on CPS data and looked at workers who are white 
collar, salaried, subject to the FLSA and covered by part 541 
regulations, earn a weekly salary of at least $455 but less than $684, 
and fail the duties test. Because only workers who work overtime may 
receive overtime pay, when determining the share of workers who are 
misclassified

[[Page 51280]]

the sample was limited to those who usually work overtime. Workers were 
considered misclassified if they did not receive overtime pay.\209\ The 
Department estimated that 9.3 percent of workers in this analysis who 
usually worked overtime did not receive overtime compensation and are 
therefore misclassified as exempt. Applying this estimate to the sample 
of white collar salaried workers who fail the duties test and earn at 
least $455 but less than $684, the Department estimated that there are 
approximately 206,900 white collar salaried workers who are overtime-
eligible but whose employers do not recognize them as such.\210\ These 
employees' entitlement to overtime pay will now be abundantly evident.
---------------------------------------------------------------------------

    \209\ Overtime pay status was based on worker responses to the 
CPS MORG question concerning whether they receive overtime pay, 
tips, or commissions at their job (``PEERNUOT'' variable).
    \210\ The Department applies the misclassification estimate 
derived here to both the group of workers who usually work more than 
40 hours and to those who do not.
---------------------------------------------------------------------------

    RAND has conducted a survey to identify the number of workers who 
may be misclassified as EAP exempt. The survey, a special module to the 
American Life Panel, asks respondents: (1) Their hours worked, (2) 
whether they are paid on an hourly or salary basis, (3) their typical 
earnings, (4) whether they perform certain job responsibilities that 
are treated as proxies for whether they would justify exempt status, 
and (5) whether they receive any overtime pay. Using these data, Susann 
Rohwedder and Jeffrey B. Wenger \211\ found that ``11.5 percent of 
salaried workers were classified as exempt by their employer although 
they did not meet the criteria for being so.'' Using RAND's estimate of 
the rate of misclassification (11.5 percent), the Department estimated 
that approximately 255,400 salaried workers earning between $455 and 
$684 per week who fail the standard duties test are currently 
misclassified as exempt.\212\ By raising the salary level the final 
rule will increase the likelihood that these workers will be correctly 
classified as nonexempt.
---------------------------------------------------------------------------

    \211\ Rohwedder and Wenger, supra note 130.
    \212\ The number of misclassified workers estimated based on the 
RAND research cannot be directly compared to the Department's 
estimates because of differences in data, methodology, and 
assumptions. Although it is impossible to reconcile the two 
different approaches without further information, by calculating 
misclassified workers as a percent of all salaried workers in its 
sample, RAND uses a larger denominator than the Department. If 
calculated on a more directly comparable basis, the Department 
expects the RAND estimate of the misclassification rate would still 
be higher than the Department's estimate.
---------------------------------------------------------------------------

2. Reduced Litigation
    One result of enforcing the 2004 standard salary level for 15 years 
is that the established ``dividing line'' between EAP workers who are 
exempt and not exempt has gradually eroded and no longer holds the same 
relative position in the distribution of nominal wages and salaries. 
Therefore, as nominal wages and salaries for workers have increased 
over time, while the standard salary level has remained constant, more 
workers earn above the ``dividing line'' and have moved from nonexempt 
to potentially exempt. The Department's enforcement of the 2004 salary 
levels has burdened employers with performing duties tests to determine 
overtime exemption status of white collar workers for a larger 
proportion of workers than in 2004 and has created uncertainty 
regarding the correct classification of workers as nonexempt or exempt. 
This may have contributed to an increase in FLSA lawsuits since 
2004,\213\ much of which has involved cases regarding whether workers 
who satisfy the salary level test also meet the duties test for 
exemption.
---------------------------------------------------------------------------

    \213\ See Lydia DePillis, Why wage and hour litigation is 
skyrocketing, Washington Post (Nov. 25, 2015), https://www.washingtonpost.com/news/wonk/wp/2015/11/25/people-are-suing-more-than-ever-over-wages-and-hours; Uptick in FLSA Litigation 
Expected to Continue in 2016, BNA Daily Labor Report (Nov. 25, 
2015), https://bnanews.bna.com/daily-labor-report/uptick-in-flsa-litigation-expected-to-continue-in-2016.
---------------------------------------------------------------------------

    Updating the standard salary level should restore the relative 
position of the standard salary level in the overall distribution of 
nominal wages and salaries as set forth in the 2004 rule. Increasing 
the standard salary level from $455 per week to the level set in this 
final rule of $684 per week will increase the number of white collar 
workers for whom the standard salary level test is determinative of 
their nonexempt status, and employers will no longer have to perform a 
duties analysis for these employees. This final rule's update to the 
standard salary level will reduce the burden on employers and may 
reduce legal challenges and the overall cost of litigation faced by 
employers in FLSA overtime lawsuits, specifically litigation that turns 
on whether workers earning above the current salary and earnings 
thresholds but below the levels set in this final rule pass the duties 
test. The size of the potential social benefit from fewer legal 
challenges and the corresponding decline in overall litigation costs is 
difficult to quantify, but a reduction in litigation costs would 
benefit employers and workers.
    To provide a general estimate of the size of the potential benefits 
from reducing litigation, the Department used data from the federal 
courts' Public Access to Court Electronic Records (PACER) system and 
the CPS to estimate the number and percentage of FLSA cases that 
concern EAP exemptions and are likely to be affected by the final rule. 
For this step of the analysis, to avoid using data that could reflect 
changed behavior in anticipation of the 2016 final rule, the Department 
used the data gathered during the 2016 rulemaking. As explained in that 
rule, to determine the potential number of cases that will likely be 
affected by the final rule, the Department obtained a list of all FLSA 
cases closed in 2014 from PACER (8,256 cases).\214\ From this list, the 
Department selected a random sample of 500 cases. The Department 
identified the cases within this sample that were associated with the 
EAP exemptions. The Department found that 12.0 percent of these FLSA 
cases (60 of 500) were related to the EAP exemptions. Next, the 
Department determined what share of these cases could potentially be 
avoided by an increase in the standard salary and HCE compensation 
levels.
---------------------------------------------------------------------------

    \214\ See 81 FR 32501.
---------------------------------------------------------------------------

    The Department estimated the share of EAP cases that may be avoided 
due to the final rule by using data on the salaried earnings 
distribution from the 2018/19 CPS MORG to determine the share of EAP 
cases in which workers earn at least $455 but less than $684 per week 
or at least $100,000 but less than $107,432 annually. From CPS, the 
Department selected white collar, nonhourly workers as the appropriate 
reference group for defining the earnings distribution rather than 
exempt workers because if a worker is litigating his or her exempt 
status, then we do not know if that worker is exempt or not. Based on 
this analysis, the Department determined that 13.5 percent of white 
collar nonhourly workers had earnings within these ranges. Applying 
these findings to the 12 percent of cases associated with the EAP 
exemption yields an estimated 1.6 percent of FLSA cases, or about 133 
cases, that may be avoidable. The assumption underlying this method is 
that workers who claim they are misclassified as EAP exempt have a 
similar earnings distribution as all white collar nonhourly workers.
    After determining the potential number of EAP cases that the final 
rule may avoid, the Department examined a selection of 56 FLSA cases 
concluded between 2012 and 2015 that contained litigation cost 
information to estimate the average costs of litigation to assign

[[Page 51281]]

to the potentially avoided EAP cases.\215\ To calculate average 
litigation costs associated with these cases, the Department looked at 
records of court filings in the Westlaw Case Evaluator tool and on 
PACER to ascertain how much plaintiffs in these cases were paid for 
attorney fees, administrative fees, and/or other costs, apart from any 
monetary damages attributable to the alleged FLSA violations. (The FLSA 
provides for successful plaintiffs to be awarded reasonable attorney's 
fees and costs, so this data is available in some FLSA cases.) After 
determining the plaintiff's total litigation costs for each case, the 
Department then doubled the figures to account for litigation costs 
that the defendant employers incurred.\216\ According to this analysis, 
the average litigation cost for FLSA cases concluded between 2012 and 
2015 was $654,182.\217\ Applying this figure to the approximately 133 
EAP cases that could be prevented as a consequence of this rulemaking, 
the Department estimated that avoided litigation costs resulting from 
the rule may total approximately $87.0 million per year. The Department 
believes these totals may underestimate total litigation costs because 
some FLSA overtime cases are heard in state court and thus were not 
captured by PACER; some FLSA overtime matters are resolved before 
litigation or by alternative dispute resolution; and some attorneys 
representing FLSA overtime plaintiffs may take a contingency fee atop 
their statutorily awarded fees and costs.
---------------------------------------------------------------------------

    \215\ The 56 cases used for this analysis were retrieved from 
Westlaw's Case Evaluator database using a keyword search for case 
summaries between 2012 and 2015 mentioning the terms ``FLSA'' and 
``fees.'' Although the initial search yielded 64 responsive cases, 
the Department excluded one duplicate case, one case resolving 
litigation costs through a confidential settlement agreement, and 
six cases where the defendant employer(s) ultimately prevailed. 
Because the FLSA only entitles prevailing plaintiffs to litigation 
cost awards, information about litigation costs was only available 
for the remaining 56 FLSA cases that ended in settlement agreements 
or court verdicts favoring the plaintiff employees.
    \216\ This is likely a conservative approach to estimate the 
total litigation costs for each FLSA lawsuit, as defendant employers 
tend to incur greater litigation costs than plaintiff employees 
because of, among other things, typically higher discovery costs.
    \217\ The median cost was $111,835 per lawsuit.
---------------------------------------------------------------------------

    The Department did not receive any comments on the methodology it 
used to estimate potential reduced litigation costs.
3. NPRM Comments on Benefits
    Some commenters contended that the proposed salary level would not 
yield the benefits that a higher salary level would. They asserted that 
raising the salary level higher than the proposed level would result in 
less misclassification and less litigation. The law firm Winebrake & 
Santillo, LLC estimated that ``if the executive exemption carried a 
$50,000/year salary threshold, over 75% of the [lawsuits the firm 
litigated involving alleged misclassification under the executive 
exemption] would never have been filed.'' NELA provided an example of a 
misclassification case involving managers at a fast food chain earning 
$32,000-$40,000 whom a jury found had been misclassified, and stated 
that such litigation would have been unnecessary under a higher salary 
level such as the one in the 2016 final rule. EPI, a group of 14 State 
attorneys general and the Attorney General for the District of 
Columbia, and other commenters similarly stated that a higher salary 
level was necessary to further reduce the risk of employee 
misclassification and the costs of litigation.
    While a higher salary level would likely result in fewer workers 
being misclassified as exempt, and potentially less litigation as a 
result, as explained above, the aim of reducing misclassification 
cannot be prioritized over the statutory text, which grounds an 
analysis of exemption status in the ``capacity'' in which someone is 
employed--i.e., that employee's duties. The salary level test's limited 
purpose is therefore to screen out only those employees who are clearly 
nonexempt because they are not performing bona fide EAP duties.
    Likewise, many commenters expressed concern that the proposed 
salary level is too low and thus does not do enough to address income 
inequality. Other commenters asserted that a higher salary level would 
create jobs and/or stimulate the economy. As explained in greater 
detail above, however, the Department declined to set a higher salary 
level because it believes that the salary level set in this final rule 
appropriately screens out obviously nonexempt workers and distinguishes 
between nonexempt and potentially exempt employees, without threatening 
to supplant the role of the duties test. Accordingly, the Department 
declines to change the salary level methodology in response to these 
comments.
vi. Sensitivity Analysis
    This section includes estimated costs and transfers using either 
different assumptions or segments of the population. First, the 
Department presents bounds on transfer payments estimated using 
alternative assumptions. Second, the Department considers costs and 
transfers by region and by industry.
1. Bounds on Transfer Payments
    Because the Department cannot predict employers' precise reactions 
to the final rule, the Department calculated bounds on the size of the 
estimated transfers from employers to workers. These bounds on 
transfers do not generate bounded estimates for costs.
    For a reasonable upper bound on transfer payments, the Department 
assumed that all occasional overtime workers and half of regular 
overtime workers will receive the full overtime premium (i.e., such 
workers will work the same number of hours but be paid 1.5 times their 
implicit initial hourly wage for all overtime hours) (Table 18). The 
full overtime premium model is a special case of the fixed-wage model 
where there is no change in hours. For the other half of regular 
overtime workers, the Department assumed in the upper-bound method that 
they will have their implicit hourly wage adjusted as predicted by the 
incomplete fixed-job model (wage rates fall and hours are reduced but 
total earnings continue to increase, as in the preferred method). In 
the preferred model, the Department assumed that only 50 percent of 
occasional overtime workers and no regular overtime workers will 
receive the full overtime premium.
    The plausible lower-transfer bound also depends on whether 
employees work regular overtime or occasional overtime. For those who 
regularly work overtime hours and half of those who work occasional 
overtime, the Department assumes the employees' wages will fully adjust 
as predicted by the fixed-job model.\218\ For the other half of 
employees with occasional overtime hours, the lower bound assumes they 
will be paid one and one-half times their implicit hourly wage for 
overtime hours worked (full overtime premium).
---------------------------------------------------------------------------

    \218\ The straight-time wage adjusts to a level that keeps 
weekly earnings constant when overtime hours are paid at 1.5 times 
the straight-time wage. In cases where adjusting the straight-time 
wage results in a wage less than the minimum wage, the straight-time 
wage is set to the minimum wage.

[[Page 51282]]



    Table 18--Summary of the Assumptions Used To Calculate the Lower
      Estimate, Preferred Estimate, and Upper Estimate of Transfers
------------------------------------------------------------------------
                                                        Upper transfer
     Lower transfer estimate      Preferred estimate       estimate
------------------------------------------------------------------------
                  Occasional Overtime Workers (Type 2)
------------------------------------------------------------------------
50% fixed-job model.............  50% incomplete      100% full overtime
                                   fixed-job model.    premium.
50% full overtime premium.......  50% full overtime   ..................
                                   premium.
------------------------------------------------------------------------
                    Regular Overtime Workers (Type 3)
------------------------------------------------------------------------
100% fixed-job model............  100% incomplete     50% incomplete
                                   fixed-job model.    fixed-job model.
                                                      50% full overtime
                                                       premium.
------------------------------------------------------------------------
* Full overtime premium model: Regular rate of pay equals the implicit
  hourly wage prior to the regulation (with no adjustments); workers are
  paid 1.5 times this base wage for the same number of overtime hours
  worked prior to the regulation.
* Fixed-job model: Base wages are set at the higher of: (1) A rate such
  that total earnings and hours remain the same before and after the
  regulation; thus the base wage falls, and workers are paid 1.5 times
  the new base wage for overtime hours (the fixed-job model) or (2) the
  minimum wage.
* Incomplete fixed-job model: Regular rates of pay are partially
  adjusted to the wage implied by the fixed-job model.

    The cost and transfer payment estimates associated with the bounds 
are presented in Table 19. Regulatory familiarization costs and 
adjustment costs do not vary across the scenarios. Managerial costs are 
lower under these alternative employer response assumptions because 
fewer workers' hours are adjusted by employers and thus managerial 
costs, which depend in part on the number of workers whose hours 
change, will be smaller.\219\ Depending on how employers adjust the 
implicit regular hourly wage, estimated transfers may range from $233.7 
million to $644.8 million, with the preferred estimate equal to $396.4 
million.
---------------------------------------------------------------------------

    \219\ In the lower transfer estimate, managerial costs are for 
employees whose hours change because their hourly rate increased to 
the minimum wage.

                     Table 19--Bounds on Year 1 Cost and Transfer Payment Estimates, Year 1
                                                   [Millions]
----------------------------------------------------------------------------------------------------------------
                                                                       Lower                           Upper
                          Cost/transfer                              transfer        Preferred       transfer
                                                                     estimate        estimate        estimate
----------------------------------------------------------------------------------------------------------------
Direct employer costs...........................................          $413.5          $476.6          $422.9
    Reg. familiarization........................................           340.4           340.4           340.4
    Adjustment costs............................................            68.2            68.2            68.2
    Managerial costs............................................             9.8           134.4            27.7
Transfers.......................................................           233.7           396.4           644.8
----------------------------------------------------------------------------------------------------------------
Note 1: Pooled CPS data for 7/2016-6/2019 adjusted to reflect 2018/2019.

2. Effects by Regions and Industries
    This section presents estimates of the effects of this final rule 
by region and by industry. The Department compared the number of 
affected workers, costs, and transfers across the four Census Regions. 
The region with the largest number of affected workers will be the 
South (544,000). As a share of potentially affected workers in the 
region, the South has somewhat more affected workers relative to other 
regions (6.1 percent are affected compared with 4.1 to 4.4 percent in 
other regions). However, as a share of all workers in the region, the 
South will not be particularly affected relative to other regions (1.1 
percent are affected compared with 0.7 to 0.9 percent in other 
regions).

                                         Table 20--Potentially Affected and Affected Workers, by Region, Year 1
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                 Affected workers
                                                                                         ---------------------------------------------------------------
                                                              Workers       Potentially                                      Affected
                                                            subject to       affected                       Percent  of    workers as a      Affected
                         Region                                FLSA           workers         Number           total        percent of     workers as a
                                                            (millions)     (millions) a    (millions) b      affected       potentially     percent of
                                                                                                              workers        affected       all workers
                                                                                                                              workers
--------------------------------------------------------------------------------------------------------------------------------------------------------
All.....................................................           139.4            25.6           1.257             100             4.9             0.9
Northeast...............................................            25.4             5.3           0.231            18.4             4.4             0.9
Midwest.................................................            30.6             5.2           0.229            18.2             4.4             0.7
South...................................................            50.9             8.9           0.544            43.2             6.1             1.1
West....................................................            32.6             6.1           0.253            20.2             4.1             0.8
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Pooled CPS data for 7/2016-6/2019 adjusted to reflect 2018/2019.
a EAP exempt workers who are white collar, salaried, not eligible for another (non-EAP) overtime exemption, and not in a named occupation.

[[Page 51283]]

 
b Currently EAP exempt workers who will be entitled to overtime protection under the updated earnings levels or whose weekly earnings will increase to
  the new earnings levels to remain exempt.

    Total transfers in the first year were estimated to be $396.4 
million (Table 21). As expected, the transfers in the South will be the 
largest portion because the largest number of affected workers will be 
in the South; however, transfers per affected worker will be the lowest 
in the South. Annual transfers per worker will be $255 in the South, 
and $317 to $436 in other regions.

                                      Table 21--Transfers by Region, Year 1
----------------------------------------------------------------------------------------------------------------
                                                                   Total  change
                             Region                                in  earnings     Percent  of    Per affected
                                                                    (millions)         total          worker
----------------------------------------------------------------------------------------------------------------
All.............................................................          $396.4             100         $315.29
Northeast.......................................................            73.3            18.5          317.35
Midwest.........................................................            73.8            18.6          321.60
South...........................................................           138.8            35.0          255.39
West............................................................           110.6            27.9          436.18
----------------------------------------------------------------------------------------------------------------
Note: Pooled CPS data for 7/2016-6/2019 adjusted to reflect 2018/2019.

    Direct employer costs are composed of regulatory familiarization 
costs, adjustment costs, and managerial costs. The Department estimates 
that total direct employer costs will be the highest in the South 
($208.3 million) and lowest in the Northeast ($100.4 million) (Table 
22). Direct employer costs in each region, as a percentage of the total 
direct costs, will range from 18.5 percent in the Northeast to 38.4 
percent in the South. These proportions are almost the same as the 
proportions of the total workforce in each region: 18.2 percent in the 
Northeast and 36.5 percent in the South.

                                Table 22--Direct Employer Costs by Region, Year 1
----------------------------------------------------------------------------------------------------------------
                                                 Regulatory                                        Total direct
                   Region                     familiarization     Adjustment       Managerial         costs
----------------------------------------------------------------------------------------------------------------
                                                Costs (Millions)
----------------------------------------------------------------------------------------------------------------
All.........................................           $340.4            $68.2           $134.4           $543.0
----------------------------------------------------------------------------------------------------------------
Northeast...................................             65.7             12.5             22.2            100.4
Midwest.....................................             74.8             12.4             27.7            114.9
South.......................................            119.6             29.5             59.2            208.3
West........................................             80.3             13.7             25.3            119.4
----------------------------------------------------------------------------------------------------------------
                                        Percent of Total Costs by Region
----------------------------------------------------------------------------------------------------------------
All.........................................            100.0            100.0            100.0            100.0
Northeast...................................             19.3             18.4             16.5             18.5
Midwest.....................................             22.0             18.2             20.6             21.2
South.......................................             35.1             43.2             44.0             38.4
West........................................             23.6             20.2             18.9             22.0
----------------------------------------------------------------------------------------------------------------
Note: Pooled CPS data for 7/2016-6/2019 adjusted to reflect 2018/2019.

    Another way to compare the relative effects of this final rule by 
region is to consider the transfers and costs as a proportion of 
payroll and revenues (Table 23). Nationally, employer costs and 
transfers will be approximately 0.012 percent of payroll. By region, 
direct employer costs and transfers as a percent of payroll will be 
approximately the same (between 0.010 and 0.013 percent of payroll). 
Employer costs and transfers as a percent of revenue will be 0.002 
percent nationally and in each region.

           Table 23--Annual Transfers and Costs as Percent of Payroll and of Revenue by Region, Year 1
----------------------------------------------------------------------------------------------------------------
                                                                                        Costs and transfers
                                                      Payroll         Revenue    -------------------------------
                     Region                         (billions)      (billions)    As percent  of  As percent  of
                                                                                      payroll         revenue
----------------------------------------------------------------------------------------------------------------
All.............................................          $7,867         $45,023           0.012           0.002
Northeast.......................................           1,733           9,048           0.010           0.002
Midwest.........................................           1,673          10,251           0.011           0.002
South...........................................           2,618          16,109           0.013           0.002

[[Page 51284]]

 
West............................................           1,843           9,616           0.012           0.002
----------------------------------------------------------------------------------------------------------------
Notes: Pooled CPS data for 7/2016-6/2019 adjusted to reflect 2018/2019. Payroll, revenue, costs, and transfers
  all exclude the federal government.
Sources: Private sector payroll and revenue data from 2012 SUSB. State and local payroll and revenue data from
  State and Local Government Finances Summary: FY2016. Inflated to 2018$ using GDP deflator.

    In order to gauge the effect of the final rule on industries, the 
Department compared estimates of combined direct costs and transfers as 
a percent of payroll, profit, and revenue for the 13 major industry 
groups (Table 24).\220\ This provides a common method of assessing the 
relative effects of the rule on different industries, and the magnitude 
of adjustments the rule may require on the part of enterprises in each 
industry. The relative costs and transfers expressed as a percentage of 
payroll are particularly useful measures of the relative size of 
adjustment faced by organizations in an industry because they benchmark 
against the cost category directly associated with the labor force. 
Measured in these terms, costs and transfers as a percent of payroll 
will be highest in agriculture, forestry, fishing, and hunting; leisure 
and hospitality; and other services. However, the magnitude of the 
relative shares will be small, representing less than 0.04 percent of 
payroll costs in all industries.
---------------------------------------------------------------------------

    \220\ Note that the totals in this table do not match the totals 
in other sections due to the exclusion of transfers to federal 
workers and costs to federal entities. Federal costs and transfers 
are excluded to be consistent with payroll and revenue which exclude 
the federal government.
---------------------------------------------------------------------------

    The Department also estimated transfers and costs as a percent of 
profits.\221\ Benchmarking against profits is potentially helpful in 
the sense that it provides a measure of the final rule's effect against 
returns on investment. However, this metric must be interpreted 
carefully as it does not account for differences across industries in 
risk-adjusted rates of return, which are not readily available for this 
analysis. The ratio of costs and transfers to profits also does not 
reflect differences in the firm-level adjustment to changes in profits 
reflecting cross-industry variation in market structure.\222\ 
Nonetheless, the magnitude of costs and transfers as a percentage of 
profits will be small, with total costs and transfers as a percent of 
profits will vary among industries, ranging from a low of 0.01 percent 
(financial activities and manufacturing) to a high of 0.18 percent 
(other services). However, because the share is not more than 0.2 
percent, even for the industry with the largest impact, we believe this 
final rule will not disproportionately affect any industries.
---------------------------------------------------------------------------

    \221\ Internal Revenue Service. (2013). Corporation Income Tax 
Returns. Available at: https://www.irs.gov/statistics/soi-tax-stats-corporation-complete-report. Table 5 of the IRS report provides 
information on total receipts, net income, and deficits. The 
Department calculated the ratio of net income (column (7)) less any 
deficit (column (8)) to total receipts (column (3)) for all firms by 
major industry categories. Costs and transfers as a percent of 
revenues were divided by the profit to receipts ratios to calculate 
the costs and transfers as a percent of profit.
    \222\ In particular, a basic model of competitive product 
markets would predict that highly competitive industries with lower 
rates of return would adjust to increases in the marginal cost of 
labor arising from the rule through an overall, industry-level 
increase in prices and a reduction in quantity demanded based on the 
relative elasticities of supply and demand. Alternatively, more 
concentrated markets with higher rates of return would be more 
likely to adjust through some combination of price increases and 
profit reductions based on elasticities as well as interfirm pricing 
responses.
---------------------------------------------------------------------------

    Finally, the Department's estimates of transfers and costs as a 
percent of revenue by industry also indicated very small effects (Table 
24) of less than 0.01 percent of revenues in any industry. The industry 
with the largest costs and transfers as a percent of revenue will be 
leisure and hospitality. However, the difference between this industry 
and the industry with the lowest costs and transfers as a percent of 
revenue (public administration) is only 0.008 percentage points. Table 
24 illustrates that the differences in costs relative to revenues will 
be quite small across industry groupings.

 Table 24--Annual Transfers, Total Costs, and Transfers and Costs as Percent of Payroll, Revenue, and Profit by
                                                Industry, Year 1
----------------------------------------------------------------------------------------------------------------
                                                                                Costs and transfers
                                     Transfers     Direct costs  -----------------------------------------------
            Industry                (millions)      (millions)    As percent  of  As percent  of   As percent of
                                                                      payroll         revenue        profit a
----------------------------------------------------------------------------------------------------------------
All.............................          $396.3          $528.6           0.012           0.002            0.03
Agriculture, forestry, fishing,              1.5             1.4           0.038           0.007            0.16
 & hunting......................
Mining..........................             2.0             2.1           0.005           0.001            0.02
Construction....................            20.1            37.4           0.017           0.003            0.10
Manufacturing...................            36.0            27.5           0.008           0.001            0.01
Wholesale & retail trade........            64.5            97.2           0.017           0.001            0.04
Transportation & utilities......             9.7            16.4           0.008           0.002            0.06
Information.....................            22.8            13.5           0.011           0.002            0.03
Financial activities............            38.6            60.4           0.013           0.002            0.01
Professional & business services            73.5            90.9           0.010           0.005            0.06
Education & health services.....            57.3            81.4           0.012           0.005            0.09
Leisure & hospitality...........            47.6            49.7           0.029           0.008            0.16
Other services..................            12.5            40.2           0.028           0.007            0.18

[[Page 51285]]

 
Public administration...........            10.2            10.6           0.002           0.001             (b)
----------------------------------------------------------------------------------------------------------------
Notes: Pooled CPS data for 7/2016-6/2019 adjusted to reflect 2018/2019. Payroll, revenue, costs, and transfers
  all exclude the federal government.
Sources: Private sector payroll and revenue data from 2012 Economic Census. State and local payroll and revenue
  data from State and Local Government Finances Summary: FY2016 are used for the Public Administration industry.
  Profit to revenue ratios calculated from 2012 Internal Revenue Service Corporation Income Tax Returns.
  Inflated to 2018$ using GDP deflator.
a Profit data based on corporations only.
b Profit is not applicable for public administration.

    Although labor market conditions vary by Census Region and 
industry, the effects from updating the standard salary level and the 
HCE compensation level will not unduly affect any of the regions or 
industries. The proportion of total costs and transfers in each region 
will be fairly consistent with the proportion of total workers in each 
region. Additionally, although the shares will be larger for some firms 
and smaller for others, the average estimated costs and transfers from 
this final rule are very small relative to current payroll or current 
revenue--less than a tenth of a percent of payroll and less than one-
hundredth of a percent of revenue in each region and in each industry.
vii. Regulatory Alternatives
    As mentioned earlier, the Department considered a range of 
alternatives before selecting its methods for updating the standard 
salary level and the HCE compensation level (see Sec.  VI.C). As seen 
in Table 25, the Department has calculated the salary levels, the 
number of affected workers, and the associated costs and transfers for 
the alternative methods that the Department considered.

Table 25--Updated Standard Salary and HCE Compensation Levels and Alternatives, Affected EAP Workers, Costs, and
                                                Transfers, Year 1
----------------------------------------------------------------------------------------------------------------
                                                                                     Year 1 effects (millions)
                                                                   Affected EAP  -------------------------------
                   Alternative                     Salary  level      workers         Adj. &
                                                         a           (1,000s)       managerial       Transfers
                                                                                      costs b
----------------------------------------------------------------------------------------------------------------
                                         Standard Salary Level (Weekly)
----------------------------------------------------------------------------------------------------------------
Alt. #1: No change..............................            $455               0  ..............  ..............
Alt. #2: Maintain average minimum wage                       502             218            27.1            29.6
 protection since 2004 b........................
Alt. #3: 2004 Method, South (excluding                       673           1,043           169.4           276.7
 Washington D.C., MD & VA) or Retail c..........
Final rule: 2004 method c.......................             684           1,156           184.1           296.1
Alt. #4: Kantor long test d.....................             724           1,552           247.4           406.1
Alt. #5: 2016 method e..........................             976           4,345           732.9         1,325.8
----------------------------------------------------------------------------------------------------------------
                                        HCE Compensation Level (Annually)
----------------------------------------------------------------------------------------------------------------
HCE alt. #1: No change..........................         100,000               0  ..............  ..............
Final rule: 80th percentile of full-time                 107,432             102            18.4           100.3
 salaried workers...............................
HCE alt. #2: 90th percentile of full-time                145,964             246            53.3           301.7
 salaried workers...............................
----------------------------------------------------------------------------------------------------------------
Note: Impacts estimated using pooled CPS data for 7/2016-6/2019 adjusted to reflect 2018/2019.
\a\ Regulatory familiarization costs are excluded because they do not vary significantly based on the selected
  values of the salary levels.
\b\ When the $455 weekly threshold was established in 2004, the federal minimum wage was $5.15, so the salary
  threshold equated to minimum wage and overtime pay at time-and-one-half for hours over 40 for an employee
  working no more than 72.2 hours. That amount fell with increases in the minimum wage and is now 55.2 hours.
  The weighted average across the 15 years since the overtime threshold was last changed is 59.5 hours, and a
  threshold that would provide 59.5 hours of $7.25 minimum wage and overtime pay would be $502.
\c\ Full-time salaried workers with various industry/region exclusions (excludes workers not subject to the
  FLSA, not subject to the salary level test, and in some workers in agriculture or transportation). Pooled CPS
  data for 7/2016-6/2019 adjusted to reflect 2018/2019.
\d \ 10th percentile of likely exempt workers. Pooled CPS data for 7/2016-6/2019 adjusted to reflect 2018/2019.
\e\ 40th percentile earnings of nonhourly full-time workers in the South Census region, provided by BLS. The
  salary level reflects the first automatic update that would have taken place under the 2016 final rule.

viii. Projections
1. Methodology
    The Department projected affected workers, costs, and transfers 
forward for ten years. This involved several steps.
    First, the Department calculated workers' projected earnings in 
future years. The wage growth rate is calculated as the compound annual 
growth rate in median wages using the historical CPS MORG data for 
occupation-industry categories from 2007 to 2017.\223\ This is the 
annual

[[Page 51286]]

growth rate that when compounded (applied to the first year's wage, 
then to the resulting second year's wage, etc.) yields the last 
historical year's wage. In occupation-industry categories where the CPS 
MORG data had an insufficient number of observations to reliably 
calculate median wages, the Department used the growth rate in median 
wages calculated from BLS' Occupational Employment Statistics 
(OES).\224\ Any remaining occupation-industry combinations without 
estimated median growth rates were assigned the median of the growth 
rates in median wages from the CPS MORG data for all industries and 
occupations. For projecting costs, we similarly projected wage rates 
for the human resource and managerial workers whose time is spent on 
these tasks.
---------------------------------------------------------------------------

    \223\ To increase the number of observations, three years of 
data were pooled for each of the endpoint years. Specifically, data 
from 2006, 2007, and 2008 (converted to 2007 dollars) were used to 
calculate the 2007 median wage and data from 2016, 2017, and 2018 
(converted to 2017 dollars) were used to calculate the 2017 median 
wage.
    \224\ To lessen small sample bias, this rate was only calculated 
using CPS MORG data when these data contained at least 30 
observations in each period.
---------------------------------------------------------------------------

    Second, the Department compared workers' counter-factual earnings 
(i.e., absent this final rule) to the earnings levels. If the counter-
factual earnings are below the relevant level (i.e., standard or HCE) 
then the worker is considered affected. In other words, in each year 
affected EAP workers were identified as those who would be exempt in 
Year 1 absent any change to the current regulations but have projected 
earnings in the future year that are less than the relevant salary 
level.
    Third, sampling weights were adjusted to reflect employment growth. 
The employment growth rate is the compound annual growth rate based on 
the ten-year employment projection from BLS' National Employment Matrix 
(NEM) for 2016 to 2026 within an occupation-industry category.
    Adjusted hours for workers affected in Year 1 were re-estimated in 
Year 2 using a long-run elasticity of labor demand of -0.4.\225\ For 
workers newly affected in Year 2 through Year 10, employers' wage and 
hour adjustments are estimated in that year, as described in section 
VI.D.iv, except the long-run elasticity of labor demand of -0.4 is 
used. Employer adjustments are made in the first year the worker is 
affected and then applied to all future years in which the worker 
continues to be affected (unless the worker switches to a Type 4 
worker). Workers' earnings in predicted years are earnings post 
employer adjustments, with overtime pay, and with ongoing wage growth 
based on historical growth rates (as described above).
---------------------------------------------------------------------------

    \225\ This elasticity estimate is based on the Department's 
analysis of the following paper: Lichter, A., Peichl, A. & Siegloch, 
A. (2014). The Own-Wage Elasticity of Labor Demand: A Meta-
Regression Analysis. IZA DP No. 7958.
---------------------------------------------------------------------------

2. Estimated Projections
    The Department estimated that the final rule will affect 1.3 
million EAP workers in Year 1 and 0.9 million workers in Year 10 (Table 
26). The projected number of affected workers includes workers who were 
not EAP exempt in the base year but would have become exempt in the 
absence of this final rule in Years 2 through 10. For example, a worker 
who passes the standard duties test may earn less than $455 in Year 1 
but between $455 and the new salary level in subsequent years; such a 
worker will be counted as an affected worker.
    The Department quantified three types of direct employer costs in 
the ten-year projections: (1) Regulatory familiarization costs; (2) 
adjustment costs; and (3) managerial costs. Regulatory familiarization 
costs only occur in Year 1. Although start-up firms must still become 
familiar with the FLSA following Year 1, the difference between the 
time necessary for familiarization with the current part 541 
regulations and the regulations as modified by the final rule is 
essentially zero. Therefore, projected regulatory familiarization costs 
for new entrants over the next nine years are zero.
    Adjustment costs will occur in any year in which workers are newly 
affected. After Year 1, these costs will be relatively small since the 
majority of workers will be affected in Year 1. Management costs will 
recur each year for all affected EAP workers whose hours are adjusted. 
However, managerial costs generally decrease over time as the number of 
affected EAP workers decreases. The Department estimated that Year 1 
managerial costs will be $134.4 million; by Year 10 these costs decline 
to $94.5 million.
    The Department projected two types of transfers from employers to 
employees associated with workers affected by the regulation. Transfers 
due to the minimum wage provision will be $75.4 million in Year 1 and 
will fall to $26.1 million in Year 10 as increased earnings over time 
move workers' implicit rate of pay above the minimum wage.\226\ 
Transfers due to overtime pay also decrease because wage growth raises 
workers' earnings above the earnings thresholds over time thus 
decreasing the number of affected workers. Thus, transfers due to the 
overtime pay provision are estimated to decrease from $321.0 million in 
Year 1 to $221.3 million in Year 10. Projected costs and transfers were 
deflated to 2019 dollars using the Congressional Budget Office's 
projections for the CPI-U.\227\
---------------------------------------------------------------------------

    \226\ Increases in minimum wages were not projected. If state or 
federal minimum wages increase during the projected timeframe then 
projected minimum wage transfers may be underestimated.
    \227\ Congressional Budget Office. 2018. The Budget and Economic 
Outlook: 2018 To 2028. See https://www.cbo.gov/publication/53651.

                                         Table 26--Projected Costs and Transfers, Standard and HCE Salary Levels
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                             Affected EAP                           Costs                                        Transfers
               Year (year #)                    workers    ---------------------------------------------------------------------------------------------
                                              (millions)     Reg.  fam.  Adjustment \a\   Managerial     Total      Due to  MW   Due to  OT     Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                    (Millions 2019$)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Year:
    Year 1................................             1.3       $340.4           $68.2       $134.4       $543.0        $75.4       $321.0       $396.4
    Year 2................................             1.2          0.0             2.0        132.3        134.3         42.8        264.9        307.7
    Year 3................................             1.1          0.0             1.9        126.7        128.5         37.4        266.5        303.9
    Year 4................................             1.1          0.0             2.7        121.4        124.1         33.2        248.7        281.9
    Year 5................................             1.1          0.0             3.1        116.8        119.9         31.2        269.0        300.1
    Year 6................................             1.0          0.0             2.9        110.7        113.6         29.5        257.3        286.8
    Year 7................................             1.0          0.0             3.2        103.9        107.1         29.5        236.9        266.5
    Year 8................................             0.9          0.0             3.8         99.8        103.6         28.0        241.8        269.7
    Year 9................................             0.9          0.0             4.1         95.3         99.4         26.4        235.0        261.4
    Year 10...............................             0.9          0.0             4.6         94.5         99.1         26.1        221.3        247.4
Annualized value:

[[Page 51287]]

 
    3% real discount rate.................  ..............         38.7            10.5        114.8        164.0         36.9        258.1        295.0
    7% real discount rate.................  ..............         45.3            11.7        116.3        173.3         38.1        260.6        298.8
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ Adjustment costs occur in all years when there are newly affected workers.

    Table 26 also summarizes annualized costs and transfers over the 
ten-year projection period, using 3 percent and 7 percent real discount 
rates. The Department estimated that total direct employer costs have 
an annualized value of $173.3 million per year over ten years when 
using a 7 percent real discount rate. The annualized value of total 
transfers was estimated to equal $298.8 million.
ix. Alternative Regulatory Baseline, Including Calculation of Cost 
Savings Under Executive Order 13771
    Other portions of this regulatory impact analysis contain estimates 
of the impacts of this final rule relative to the 2004 final rule, 
which is the rule that the Department is currently enforcing. However, 
OMB Circular A-4 states that multiple regulatory baselines may be 
analytically relevant. In this case, a second informative baseline is 
the 2016 final rule, which is currently in the Code of Federal 
Regulations (CFR).\228\ Moreover, for purposes of determining whether 
this rule is deregulatory under E.O. 13771, the economic impacts should 
be compared to what is currently published in the CFR. As such, most of 
this section presents an estimate of the cost savings of this final 
rule relative to the 2016 rule, and in addition to estimating 
annualized cost savings for the final rule using a 10-year time 
horizon, we also estimated annualized cost savings in perpetuity in 
accordance with E.O. 13771 accounting standards. This perpetual time 
horizon makes it especially important to avoid overemphasizing short-
run compensation stickiness in the estimation approach; as such, the 
quantitative estimates will incorporate a relatively high compensation 
adjustment, the 80 percent derived from Barkume (2010), which assumes 
an initial overtime premium is paid, rather than the adjustment 
reflected in the estimates that are elsewhere identified as 
primary.\229\ Later in this section, the Department presents transfer 
and benefits estimates from the analysis accompanying the 2016 final 
rule--values that are also relevant to this second regulatory baseline.
---------------------------------------------------------------------------

    \228\ 29 CFR part 541.
    \229\ As noted previously, even Barkume's result was estimated 
for a population that included hourly workers. The fixed-job model 
is probably more likely to hold for salaried workers than for hourly 
workers because salaried workers directly observe their weekly total 
earnings, not their implicit equivalent hourly wage; therefore, 
applying the partial adjustment to the fixed-job model as estimated 
by these studies may overestimate the transfers between employers 
and salaried workers and other associated impacts.
---------------------------------------------------------------------------

    To ensure that the estimated costs of the 2016 final rule can be 
directly and appropriately compared with the costs estimated for this 
final rule, the Department started with the analytic model for this 
final rule and replaced this final rule's salary and compensation 
thresholds with the thresholds that would be required by the 2016 final 
rule, including that rule's provision to automatically update the 
salary level on a triennial basis. The Department assumed that initial 
regulatory familiarization costs would be identical under adoption of 
either this final rule or the 2016 final rule, because the same number 
of employers would be potentially affected in Year 1. In addition, 
implementation of the 2016 rule would have resulted in the first 
automatic update occurring in 2020, and therefore the Department used 
that value to represent Year 1 of the 2016 rule for 2020. Similarly, 
automatic updates in Years 7 and 10 from the 2016 final rule become the 
second and third automatic updates in the comparison. Finally, the 
Department projected earnings levels for year 13 of the 2016 rule to 
use as the final automatic update in the comparison. Therefore, the 
only differences in estimated costs presented here between the 2016 
final rule and this final rule are attributable to the difference in 
earnings thresholds and the effects of the 2016 final rule's automatic 
updating mechanism.

              Table 27--Weekly Earnings Thresholds Used in Comparison of 2016 and 2019 Final Rules
----------------------------------------------------------------------------------------------------------------
                                                         2016 Final rule a                2019 Final rule
                                                 ---------------------------------------------------------------
                      Year                           Standard           HCE          Standard           HCE
                                                      salary       compensation       salary       compensation
                                                     threshold       threshold       threshold       threshold
----------------------------------------------------------------------------------------------------------------
2020 b..........................................            $984          $2,837            $684          $2,066
2023............................................           1,049           3,080             684           2,066
2026............................................           1,118           3,345             684           2,066
2029............................................           1,192           3,632             684           2,066
----------------------------------------------------------------------------------------------------------------
\a\ Earnings levels in 2020, 2023, and 2026 are the projected salary levels as reported in the 2016 final rule.
  The 2029 levels were calculated using the same growth rate as was used in the 2016 final rule to estimate the
  projected levels in 2023 and 2026; the growth rate of the 40th percentile in the South from FY2005 to FY2015.
\b\ Standard salary threshold reflects the 2016 final rule projection for 2020. If the earnings levels were
  recalculated using current data (2018Q3 through 2019Q2) they would be $976 and $2,888.

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

[[Page 51288]]

published 2016 cost estimates and those presented here are primarily 
due to: Earnings levels associated with 2020; an increase in the number 
of establishments that would incur regulatory familiarization costs to 
account for economic growth between 2012 (estimates for the 2016 final 
rule were based on 2012 SUSB data) and 2016 (estimates for this final 
rule are based on 2016 SUSB data); the use of more recent CPS MORG data 
(the 2016 final rule used pooled CPS data for 2013 through 2015 
inflated to represent FY 2017); the use of the Barkume-derived 80 
percent compensation adjustment estimate, rather than the estimate that 
averages Barkume's findings with Trejo's; an increase in the wage rates 
used to value staff time spent on regulatory familiarization, 
adjustment, and monitoring; an increase in the managerial time estimate 
from 5 to 10 minutes; incorporating a 17 percent overhead rate in those 
wage rates; and minor improvements to the model.\230\
---------------------------------------------------------------------------

    \230\ As previously discussed, one such improvement is the 
Department's application of conditional probabilities to estimate 
the number of HCE workers. See supra note 160.
---------------------------------------------------------------------------

    The estimated total perpetual annualized costs of the 2016 rule are 
$676.9 million using a 7 percent discount rate. For purposes of this 
E.O. 13771 analysis, the estimated total perpetual annualized costs of 
this final rule are $142.0 million using a 7 percent discount rate. The 
Department then subtracted direct regulatory costs expected to have 
been incurred under the 2016 final rule from the direct costs estimated 
under this final rule. Direct employer costs of this final rule are 
estimated to be, on average, $534.8 million lower per year in 
perpetuity than the 2016 final rule (using a 7 percent discount rate).
    The cost savings from this final rule are primarily attributable to 
two factors. First, a lower standard salary level will result in fewer 
affected workers in any given year. If fewer workers are affected, then 
management must consider and make earnings adjustments for fewer 
employees, and must monitor hours worked for fewer employees. Second, 
this analysis does not incorporate automatic updating whereas the 2016 
final rule incorporated a triennial automatic updating mechanism. 
Therefore, regulatory familiarization costs are now only incurred in 
Year 1 and adjustment costs are primarily incurred in Year 1. 
Additionally, managerial costs now gradually decrease over time rather 
than increasing every three years.
    In the 2016 final rule, the Department estimated average annualized 
transfers of $1,189.1 million over a ten-year period using a discount 
rate of 7 percent. The Department also estimated that avoided 
litigation costs resulting from the rule could total approximately 
$31.2 million per year.\231\ The Department includes these values here 
for reference.
---------------------------------------------------------------------------

    \231\ In this final rule, the Department has revised (from the 
2016 rule) how it calculates avoided litigation costs so the number 
referenced here for the 2016 final rule is not directly comparable 
to the calculation of reduced litigation costs for this final rule.
---------------------------------------------------------------------------

    EPI compared the estimated number of affected workers under the 
2016 final rule to the estimate in the proposed rule, and commented 
that the Department's estimate ``that 2.8 million fewer workers will be 
impacted under its proposal than under the 2016 rule . . . is a vast 
underestimate.'' The alleged underestimate of affected workers resulted 
in part from EPI comparing the estimated impacts of the 2016 final rule 
in 2020 (i.e., Year 4 of the 2016 rule) with the 2020 impacts of this 
rule (i.e., Year 1 of this final rule).\232\ Thus, EPI used the 
earnings levels associated with the first automatic update (which it 
calculated to be $51,053 for the standard salary level) for the 2016 
rule. The Department has adjusted the calculation to use the 2016 final 
rule's predicted salary levels for 2020 when calculating Year 1 
impacts.\233\
---------------------------------------------------------------------------

    \232\ See https://www.epi.org/files/pdf/165984.pdf, at 7.
    \233\ The Department also notes there are a variety of reasons 
for the discrepancy between the Department's and EPI's calculations, 
including use of different data and methodological differences.
---------------------------------------------------------------------------

    EPI also contended that the Department underestimated the 
difference between the number of workers affected by the 2016 final 
rule and the number affected by the NPRM because the Department's 
analysis ``[left] out an entire group of workers who would be affected 
by the rule--those who will no longer get strengthened protections.'' 
The majority of the difference between EPI's estimate of the number of 
affected workers and the NPRM's estimate is due to EPI including 
workers whose overtime protections were strengthened in the estimate of 
affected workers. However, in both this rule and the 2016 final rule, 
workers with strengthened overtime protections--those who fail the 
standard duties test and earn at least $455 but below the new standard 
salary level--are included in the description of affected workers but 
not in the official calculation of affected workers. This is because 
workers with strengthened protections are not directly impacted by 
changes in the regulations; they only directly benefit from the 
rulemaking if they are currently misclassified as exempt. Even so, the 
Department notes that this final rule will strengthen overtime 
protections for 4.1 million workers who currently fail the standard 
duties test and now will also earn below the standard salary level.

VII. Final Regulatory Flexibility Analysis (FRFA)

    The Regulatory Flexibility Act of 1980 (RFA) as amended by the 
Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA), 
hereafter jointly referred to as the RFA, requires that an agency 
prepare an initial regulatory flexibility analysis (IRFA) when 
proposing, and a final regulatory flexibility analysis (FRFA) when 
issuing, regulations that will have a significant economic impact on a 
substantial number of small entities. The agency is also required to 
respond to public comment on the NPRM.\234\ The Chief Counsel for 
Advocacy of the Small Business Administration submitted public comments 
on the NPRM which are addressed below.
---------------------------------------------------------------------------

    \234\ See 5 U.S.C. 604.
---------------------------------------------------------------------------

A. Objectives of, and Need for, the Final Rule

    The FLSA requires covered employers to: (1) Pay employees who are 
covered and not exempt from the Act's requirements not less than the 
Federal minimum wage for all hours worked and overtime premium pay at a 
rate of not less than one and one-half times the employee's regular 
rate of pay for all hours worked over 40 in a workweek, and (2) make, 
keep, and preserve records of the persons employed by the employer and 
of the wages, hours, and other conditions and practices of employment.
    The FLSA provides a number of exemptions from the Act's minimum 
wage and overtime pay provisions, including one for bona fide 
executive, administrative, and professional (EAP) employees. The 
exemption applies to employees employed in a bona fide executive, 
administrative, or professional capacity and for outside sales 
employees, as those terms are ``defined and delimited'' by the 
Department. 29 U.S.C. 213(a)(1). The Department's regulations 
implementing these ``white collar'' exemptions are codified at 29 CFR 
part 541.
    For an employer to exclude an employee from minimum wage and 
overtime protection pursuant to the EAP exemption, the employee 
generally must

[[Page 51289]]

meet three criteria: (1) The employee must be paid a predetermined and 
fixed salary that is not subject to reduction because of variations in 
the quality or quantity of work performed (the ``salary basis test''); 
(2) the amount of salary paid must meet a minimum specified amount (the 
``salary level test''); and (3) the employee's job duties must 
primarily involve executive, administrative, or professional duties as 
defined by the regulations (the ``duties test''). The salary level 
requirement was created to identify the dividing line distinguishing 
workers who may be performing exempt duties from the nonexempt workers 
whom Congress intended to be protected by the FLSA's minimum wage and 
overtime provisions.
    The Department has periodically updated the regulations governing 
these tests since the FLSA's enactment in 1938. The Department is 
currently enforcing the 2004 final rule, which, among other revisions, 
created the standard duties test and paired it with a salary level test 
of $455 per week. The 2004 final rule also created a new ``highly 
compensated'' test for exemption. Under this test, employees who are 
paid total annual compensation of at least $100,000 (which must include 
at least $455 per week paid on a salary or fee basis) are exempt from 
the FLSA's overtime requirements if they customarily and regularly 
perform at least one of the duties or responsibilities of an exempt EAP 
employee identified in the standard tests for exemption.\235\
---------------------------------------------------------------------------

    \235\ Sec.  541.601.
---------------------------------------------------------------------------

    The Department's primary objective in this rulemaking is to ensure 
that the revised salary levels will continue to provide a useful and 
effective test for exemption. The premise behind the standard salary 
level is to be an appropriate dividing line between employees who are 
nonexempt and employees who may be performing exempt duties. The 
threshold essentially screens out obviously nonexempt employees whom 
Congress intended to be protected by the FLSA's minimum wage and 
overtime provisions. If left unchanged, the effectiveness of the salary 
level test as a means to help determine exempt status diminishes as 
nonexempt employee wages increase over time.
    Employees who meet the requirements of part 541 are excluded from 
the Act's minimum wage and overtime pay protections. As a result, 
employees may work any number of hours in the workweek and not be 
subject to the FLSA's overtime pay requirements. Some state laws have 
stricter exemption standards than those described above. The FLSA does 
not preempt any such stricter state standards. If a state law 
establishes a higher standard than the provisions of the FLSA, the 
higher standard applies as a matter of state law in that specific 
state.\236\
---------------------------------------------------------------------------

    \236\ See 29 U.S.C. 218(a).
---------------------------------------------------------------------------

    To restore the function of the standard salary level and the HCE 
total compensation requirements as appropriate bright-line tests 
between overtime-protected employees and those who may be bona fide EAP 
employees, the Department is increasing the minimum salary level 
necessary for exemption from the FLSA's minimum wage and overtime 
requirements as an EAP employee from $455 to $684 a week for the 
standard salary test, and from $100,000 to $107,432 per year for the 
HCE test.

B. The Agency's Response to Public Comments

    Small business commenters expressed concerns with the Department's 
estimates of the proposed rule's costs and other impacts. These 
concerns are acknowledged and addressed in sections VI.d.iii and 
VI.d.iv, which we incorporate herein.

C. Comment by the Chief Counsel for Advocacy of the Small Business 
Administration

    SBA's Office of Advocacy (SBA Advocacy) generally supported the 
Department's proposal. SBA Advocacy's comment was based largely on 
feedback received from small businesses, many of whom told SBA Advocacy 
that the higher threshold in the 2016 final rule ($47,476) would have 
been disruptive and costly to small businesses. In its roundtables on 
the 2019 rulemaking, in contrast, SBA Advocacy heard that most small 
businesses would only have a few affected employees, and could absorb 
the costs from this rulemaking. SBA Advocacy listed a few 
recommendations for the Department to consider. Several of these 
recommendations (and related issues raised by other commenters) are 
also addressed elsewhere in this final rule.
    SBA Advocacy recommended an adjustment to the calculation of the 
standard salary level. It indicated that some small businesses 
recommended that the Department ``adopt a narrower Census definition 
for areas with the lowest wages in the south when calculating and 
adjusting the new minimum salary threshold.'' SBA Advocacy, along with 
other commenters, specifically recommended that the Department ``focus 
on [a] more narrow geographic area like the East-South Central Census 
[Division] (which includes Alabama, Kentucky, Mississippi, and 
Tennessee) when adjusting the national wages; or provide more 
flexibility for these areas.'' The Department evaluated an alternative 
that eliminates higher-wage areas (District of Columbia, Maryland, and 
Virginia) from the data set used to determine the salary level (see 
Sections VI.D.vii and IV.A.v.). As previously discussed, the Department 
ultimately decided not to adopt this alternative, because it believes 
that using the entire South Census Region and the retail industry 
nationwide results in an appropriate nationwide salary level that is 
based on a low-wage region but can still serve as a meaningful dividing 
line in higher-wage regions. Using the entire South is also consistent 
with the methodology used in the 2004 final rule.
    SBA Advocacy and a few other commenters also asserted that the 
Department underestimated small business compliance costs. SBA Advocacy 
stated that small businesses disagreed with the Department's estimate 
that, on average, establishments (including small businesses) will have 
a one-hour burden for rule familiarization, a 1.25-hour burden per 
affected worker in adjustment costs, and a 5-minute burden per worker 
per week for scheduling and monitoring. SBA Advocacy stated that small 
businesses have told them ``that it may take . . . many hours and 
several weeks to understand and implement this rule,'' and that 
``[m]any small businesses spend a disproportionately higher amount of 
time and money on outside compliance staff.'' As discussed in more 
detail above, however, the Department believes that its estimates of 
time for rule familiarization and adjustment costs are appropriate, 
particularly given that the final rule is limited in scope and that 
most small businesses are already likely familiar with their 
responsibilities under the part 541 regulations. Additionally, these 
estimates represent an average of all establishments, some of which 
will spend little time on these activities and some of whom will spend 
more time than the average. However, the Department acknowledges that 
the prior 5 minutes per newly nonexempt overtime worker may be low and 
has doubled this estimate to 10 minutes.
    Regarding the proposed transfer calculations, SBA Advocacy took 
issue with the Department's estimates that affected small business 
establishments would have, on average, $422 to $3,187

[[Page 51290]]

in additional payroll costs in the first year (based on the proposed 
rule). Rather, SBA Advocacy stated that ``[s]mall businesses have told 
Advocacy that their payroll costs will be in the thousands of 
dollars.'' This comment, however, does not explain what methodological 
approach the Department should use to estimate transfers, or how much, 
if at all, the Department's approach underestimated such transfers. 
Therefore, the Department concludes that this comment does not provide 
a sufficient basis for changing its transfer calculation methodology.

D. Description of the Number of Small Entities to Which the Final Rule 
Will Apply

i. Definition of Small Entity
    The RFA defines a ``small entity'' as a (1) small not-for-profit 
organization, (2) small governmental jurisdiction, or (3) small 
business. The Department used the entity size standards defined by SBA, 
in effect as of October 1, 2017, to classify entities as small.\237\ 
SBA establishes separate standards for individual 6-digit NAICS 
industry codes, and standard cutoffs are typically based on either the 
average number of employees, or the average annual receipts. For 
example, small businesses are generally defined as having fewer than 
500, 1,000, or 1,250 employees in manufacturing industries and less 
than $7.5 million in average annual receipts for nonmanufacturing 
industries. However, some exceptions do exist, the most notable being 
that depository institutions (including credit unions, commercial 
banks, and non-commercial banks) are classified by total assets (small 
defined as less than $550 million in assets). Small governmental 
jurisdictions are another noteworthy exception. They are defined as the 
governments of cities, counties, towns, townships, villages, school 
districts, or special districts with populations of less than 50,000 
people.\238\
---------------------------------------------------------------------------

    \237\ See https://www.sba.gov/sites/default/files/files/Size_Standards_Table_2017.pdf.
    \238\ See http://www.sba.gov/advocacy/regulatory-flexibility-act 
for details.
---------------------------------------------------------------------------

    Parameters that are used in the small business cost analysis are 
provided in Table 28.

   Table 28--Overview of Parameters Used for Costs to Small Businesses
------------------------------------------------------------------------
          Small business costs                         Cost
------------------------------------------------------------------------
                        Direct and Payroll Costs
------------------------------------------------------------------------
Average total cost per affected entity   $3,656.
 \a\.
Range of total costs per affected        $1,678-$31,118.
 entity \a\.
Average percent of revenue per affected  0.15%.
 entity \a\.
Average percent of payroll per affected  0.81%.
 entity \a\.
Average percent of small business        0.05%.
 profit.
------------------------------------------------------------------------
                              Direct Costs
------------------------------------------------------------------------
Regulatory familiarization:
    Time (first year)..................  1 hour per establishment.
    Hourly wage........................  $43.38.
Adjustment:
    Time (first year affected).........  75 minutes per newly affected
                                          worker.
    Hourly wage........................  $43.38.
Managerial:
    Time (weekly)......................  10 minutes per affected worker.
    Hourly wage........................  $50.92.
------------------------------------------------------------------------
                            Payroll Increases
------------------------------------------------------------------------
Average payroll increase per affected    $2,393.
 entity \a\.
Range of payroll increases per affected  $0-$26,943.
 entity \a\.
------------------------------------------------------------------------
\a\ Using the methodology where all employees at an affected small firm
  are affected. This assumption generates upper-end estimates. Lower-end
  cost estimates are significantly smaller.

ii. Data Sources and Methods
    The Department obtained data from several sources to determine the 
number of small entities and employment in these entities for each 
industry. However, the Statistics of U.S. Businesses (SUSB) was used 
for most industries. Industries for which the Department used 
alternative sources include credit unions,\239\ commercial banks and 
savings institutions,\240\ agriculture,\241\ and public 
administration.\242\ Unless otherwise noted, the Department used the 
latest available data in each case, so data years differ between 
sources.
---------------------------------------------------------------------------

    \239\ National Credit Union Association. (2012). 2012 Year End 
Statistics for Federally Insured Credit Unions. Available at: 
https://www.cuna.org/uploadedFiles/Global/About_Credit_Unions/NationalProfile-M18-Bank.pdf.
    \240\ Federal Depository Insurance Corporation. (2018). 
Statistics on Depository Institutions--Compare Banks. Available at: 
https://www5.fdic.gov/SDI/index.asp. Data are from 3/31/18 for 
employment and from 6/30/2017 for share of firms and establishments 
that are ``small.''
    \241\ United States Department of Agriculture. (2019). 2017 
Census of Agriculture: United States Summary and State Data: Volume 
1, Geographic Area Series, Part 51. Available at: https://www.nass.usda.gov/Publications/AgCensus/2017/Full_Report/Volume_1,_Chapter_1_US/usv1.pdf.
    \242\ Census of Governments. 2017. Available at: https://www.census.gov/data/tables/2017/econ/gus/2017-governments.html.
---------------------------------------------------------------------------

    For each industry, the SUSB 2012 data tabulates total employment, 
establishment, and firm counts by both enterprise employment size 
(e.g., 0-4 employees, 5-9 employees) and receipt size (e.g., less than 
$100,000, $100,000-$499,999).\243\ The Department combined these 
categories with the SBA size standards to estimate the proportion of 
establishments and employees in each industry that are considered small 
or employed by a small entity, respectively. The general

[[Page 51291]]

methodological approach was to classify all establishments or employees 
in categories below the SBA cutoff as in ``small entity'' 
employment.\244\ If a cutoff fell in the middle of a defined category, 
a uniform distribution of employees across that bracket was assumed to 
determine what proportion should be classified as small. The Department 
assumed that the small entity share of credit card issuing and other 
depository credit intermediation institutions (which were not 
separately represented in FDIC asset data), is similar to that of 
commercial banking and savings institutions. The estimated share of 
employment in small entities was applied to the CPS data to estimate 
the number of affected workers in small entities. Similarly, the 
estimated share of establishments that are small was applied to the 
most recent SUSB data available (2016) to determine the number of small 
entities.
---------------------------------------------------------------------------

    \243\ The SUSB defines employment as of March 12th.
    \244\ The Department's estimates of the numbers of affected 
small entities and affected workers who are employees of small 
entities are likely overestimates as the Department had no credible 
way to estimate which enterprises with annual revenues below 
$500,000 also did not engage in interstate commerce.
---------------------------------------------------------------------------

    The Department also estimated the number of small establishments by 
employer type (nonprofit, for-profit, government). The calculation of 
the number of establishments by employer type is similar to the 
calculation of the number of establishments by industry. However, 
instead of using SUSB data by industry, the Department used SUSB data 
by Legal Form of Organization for nonprofit and for-profit 
establishments, and data from the 2012 Census of Governments for small 
governments. The 2012 Census of Governments report includes a breakdown 
of state and local governments by the population of their underlying 
jurisdiction, allowing us to estimate the number of governments that 
are small. The estimated share of establishments that are small was 
applied to the 2016 SUSB data available and the estimated share of 
governments that are small was applied to the 2017 Census of 
Governments.
iii. Number of Small Entities and Employees
    Table 29 presents the estimated number of establishments and small 
establishments in the U.S. (hereafter, the terms ``establishment'' and 
``entity'' are used interchangeably and are considered equivalent for 
the purposes of this FRFA).\245\ Based on the methodology described 
above, the Department found that of the 7.8 million establishments 
relevant to this analysis, 81 percent (6.3 million) are small by SBA 
standards. These small establishments employ about 53.1 million 
workers, about 37 percent of workers employed by all establishments 
(excluding self-employed, unpaid workers, and members of the armed 
forces), and account for roughly 36 percent of total payroll ($2.9 
trillion of $8.0 trillion).\246\
---------------------------------------------------------------------------

    \245\ SUSB reports data by ``enterprise'' size designations (a 
business organization consisting of one or more domestic 
establishments that were specified under common ownership or 
control). However, the number of enterprises is not reported for the 
size designations. Instead, SUSB reports the number of 
``establishments'' (individual plants, regardless of ownership) and 
``firms'' (a collection of establishments with a single owner within 
a given state and industry) associated with enterprises size 
categories. Therefore, numbers in this analysis are for the number 
of establishments associated with small enterprises, which may 
exceed the number of small enterprises. We based the analysis on the 
number of establishments rather than firms for a more conservative 
estimate (potential overestimate) of the number of small businesses.
    \246\ Since information is not available on employer size in the 
CPS MORG, respondents were randomly assigned as working in a small 
business based on the SUSB probability of employment in a small 
business by detailed Census industry. Annual payroll was estimated 
based on the CPS weekly earnings of workers by industry size.

                          Table 29--Number of Establishments and Employees by SBA Size Standards, by Industry and Employer Type
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                                                              Establishments (1,000s)          Workers (1,000s) \a\          Annual payroll (billions)
                                                         -----------------------------------------------------------------------------------------------
                 Industry/employer type                                                                   Small business
                                                               Total           Small           Total         employed          Total           Small
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    Total...............................................         7,847.9         6,345.4       143,184.6        53,058.6        $7,976.2        $2,868.0
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                                                                       Industry b
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Agriculture.............................................             9.3             8.6           (\c\)           (\c\)           (\c\)           (\c\)
Forest., log., fish., hunt., and trap...................            13.3            12.9           (\c\)           (\c\)           (\c\)           (\c\)
Mining..................................................            27.2            22.0           (\c\)           (\c\)           (\c\)           (\c\)
Construction............................................           696.7           676.9         8,525.6         5,482.7           478.8           309.5
Nonmetallic mineral prod. manuf.........................            15.0            11.5           (\c\)           (\c\)           (\c\)           (\c\)
Prim. metals and fab. metal prod........................            59.4            55.8         1,652.6         1,004.7            91.6            54.7
Machinery manufacturing.................................            23.5            21.5         1,240.7           673.2            79.9            44.0
Computer and elect. prod. manuf.........................            12.4            11.0         1,173.5           552.2           109.9            53.5
Electrical equip., appliance manuf......................             5.7             4.9           (\c\)           (\c\)           (\c\)           (\c\)
Transportation equip. manuf.............................            11.7            10.1         2,616.6           728.6           183.3            47.0
Wood products...........................................            14.3            13.1           (\c\)           (\c\)           (\c\)           (\c\)
Furniture and fixtures manuf............................            15.0            14.6           (\c\)           (\c\)           (\c\)           (\c\)
Misc. and not spec. manuf...............................            26.0            25.1         1,512.1           888.6            92.9            53.8
Food manufacturing......................................            27.1            23.9         1,809.0           829.3            81.2            35.9
Beverage and tobacco products...........................             8.5             7.6           (\c\)           (\c\)           (\c\)           (\c\)
Textile, app., and leather manuf........................            15.6            15.2           575.8           390.3            26.0            17.5
Paper and printing......................................            29.6            27.6           871.7           464.6            49.5            25.3
Petroleum and coal prod. manuf..........................             2.2             1.2           (\c\)           (\c\)           (\c\)           (\c\)
Chemical manufacturing..................................            13.5            10.7         1,423.2           553.8           121.0            45.4
Plastics and rubber products............................            12.1            10.1           (\c\)           (\c\)           (\c\)           (\c\)
Wholesale trade.........................................           412.5           328.3         3,440.5         1,583.3           216.4            98.3
Retail trade............................................         1,069.1           688.8        15,694.5         5,398.1           617.8           234.8
Transport. and warehousing..............................           231.0           183.8         6,355.2         1,740.6           329.9            84.4
Utilities...............................................            18.2             7.8         1,391.6           264.2           110.6            20.3
Publishing ind. (ex. internet)..........................            27.5            21.2           (\c\)           (\c\)           (\c\)           (\c\)
Motion picture and sound recording......................            25.5            22.3           (\c\)           (\c\)           (\c\)           (\c\)
Broadcasting (except internet)..........................             8.3             4.6           554.0           129.4            39.2             8.6
Internet publishing and broadcasting....................             8.1             6.8           (\c\)           (\c\)           (\c\)           (\c\)
Telecommunications......................................            59.2            13.3           (\c\)           (\c\)           (\c\)           (\c\)

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Internet serv. providers and data.......................            13.6             9.0           (\c\)           (\c\)           (\c\)           (\c\)
Other information services..............................             4.2             3.6           (\c\)           (\c\)           (\c\)           (\c\)
Finance.................................................           295.5           129.8         4,506.3           847.0           374.8            70.7
Insurance...............................................           181.5           141.7         2,746.7           722.0           197.0            51.8
Real estate.............................................           336.8           286.4         2,091.1         1,274.7           126.5            77.5
Rental and leasing services.............................            53.7            26.7           (\c\)           (\c\)           (\c\)           (\c\)
Professional and technical services.....................           903.5           819.1        10,196.2         4,770.7           897.3           414.2
Management of companies and enterprises.................            55.4            34.1           (\c\)           (\c\)           (\c\)           (\c\)
Admin. and support services.............................           384.9           328.8         5,080.7         2,309.8           210.7            87.7
Waste manag. and remed. Services........................            24.6            18.4           (\c\)           (\c\)           (\c\)           (\c\)
Educational services....................................           103.4            90.6        14,196.6         3,089.0           793.8           162.1
Hospitals...............................................             7.1             1.7           (\c\)           (\c\)           (\c\)           (\c\)
Health care services, except hospitals..................           700.5           575.8        10,074.6         4,787.1           496.9           236.3
Social assistance.......................................           182.9           149.0         3,040.0         1,703.7           113.2            60.5
Arts, entertainment, and recreation.....................           137.2           126.3         2,760.6         1,394.5           108.9            54.4
Accommodation...........................................            66.8            55.8         1,475.8           566.4            55.6            21.1
Food services and drinking places.......................           636.7           500.7         8,946.1         2,422.7           240.4            65.4
Repair and maintenance..................................           214.8           199.8         1,614.1         1,214.7            72.9            53.9
Personal and laundry services...........................           230.3           201.6         1,763.1         1,300.1            57.1            41.6
Membership associations & organizations.................           309.2           298.3         2,104.1         1,545.8           112.2            80.9
Private households......................................           (\d\)           (\d\)           (\c\)           (\c\)           (\c\)           (\c\)
Public administration \e\...............................            90.1            72.8         7,527.9           685.8           499.4            40.1
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                                                                      Employer Type
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Nonprofit, private......................................           584.0           504.6        10,190.1         4,170.3           586.5           216.4
For profit, private.....................................         7,173.8         5,753.9       111,050.8        46,579.0         6,080.5         2,525.3
Government (state and local)............................            90.1            72.9        18,078.8         2,309.4         1,020.2           126.3
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Note: Establishment data are from the Survey of U.S. Businesses 2016; worker and payroll data from pooled CPS data for 7/2016-6/2019 adjusted to reflect
  2018/2019.
\a\ Excludes the self-employed and unpaid workers.
\b\ Summation across industries may not add to the totals reported due to suppressed values and some establishments not reporting an industry.
\c\ Data not displayed because sample size of affected workers in small establishments is less than 10 due to reliability concerns.
\d\ SUSB does not provide information on private households.
\e\ Establishment number represents the total number of governments, including state and local. Data from Census of Governments, 2017.

    As discussed in section VI.B.iii, estimates of workers subject to 
the FLSA do not exclude workers employed by enterprises that do not 
meet the enterprise coverage requirements because there is no data set 
that would adequately inform an estimate of the size of this worker 
population. Although not excluding such workers only affects a small 
percentage of workers generally, it may have a larger effect (and 
result in a larger overestimate) for non-profits, because revenue from 
charitable activities is not included when determining enterprise 
coverage.
iv. Number of Affected Small Entities and Employees
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    \247\ The Department used CPS microdata to estimate th