[Federal Register Volume 69, Number 79 (Friday, April 23, 2004)]
[Rules and Regulations]
[Pages 22122-22274]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-9016]
[[Page 22121]]
-----------------------------------------------------------------------
Part II
Department of Labor
-----------------------------------------------------------------------
Wage and Hour Division
-----------------------------------------------------------------------
29 CFR Part 541
Defining and Delimiting the Exemptions for Executive, Administrative,
Professional, Outside Sales and Computer Employees; Final Rule
Federal Register / Vol. 69, No. 79 / Friday, April 23, 2004 / Rules
and Regulations
[[Page 22122]]
-----------------------------------------------------------------------
DEPARTMENT OF LABOR
Wage and Hour Division
29 CFR Part 541
RIN 1215-AA14
Defining and Delimiting the Exemptions for Executive,
Administrative, Professional, Outside Sales and Computer Employees
AGENCY: Wage and Hour Division, Employment Standards Administration,
Labor.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: This document provides the text of final regulations under the
Fair Labor Standards Act implementing the exemption from minimum wage
and overtime pay for executive, administrative, professional, outside
sales and computer employees. These exemptions are often referred to as
the ``white collar'' exemptions. To be considered exempt, employees
must meet certain minimum tests related to their primary job duties
and, in most cases, must be paid on a salary basis at not less than
minimum amounts as specified in pertinent sections of these
regulations.
EFFECTIVE DATE: These rules are effective on August 23, 2004.
FOR FURTHER INFORMATION CONTACT: Richard M. Brennan, Senior Regulatory
Officer, Wage and Hour Division, Employment Standards Administration,
U.S. Department of Labor, Room S-3506, 200 Constitution Avenue, NW.,
Washington, DC 20210. Telephone: (202) 693-0745 (this is not a toll-
free number). For an electronic copy of this rule, go to DOL/ESA's Web
site (http://www.dol.gov/esa), select ``Federal Register'' under ``Laws
and Regulations,'' and then ``Final Rules.'' Copies of this rule may be
obtained in alternative formats (Large Print, Braille, Audio Tape or
Disc), upon request, by calling (202) 693-0023 (not a toll-free
number). TTY/TDD callers may dial toll-free 1-877-889-5627 to obtain
information or request materials in alternative formats.
Questions of interpretation and/or enforcement of regulations
issued by this agency or referenced in this notice may be directed to
the nearest Wage and Hour Division District Office. Locate the nearest
office by calling our toll-free help line at 1-866-4USWAGE (1-866-487-
9243) between 8 a.m. and 5 p.m., in your local time zone, or log onto
the Wage and Hour Division's Web site for a nationwide listing of Wage
and Hour District and Area Offices at: http://www.dol.gov/esa/contacts/whd/america2.htm.
SUPPLEMENTARY INFORMATION:
I. Summary of Major Changes and Economic Impact
The minimum wage and overtime pay requirements of the Fair Labor
Standards Act (FLSA) are among the nation's most important worker
protections. These protections have been severely eroded, however,
because the Department of Labor has not updated the regulations
defining and delimiting the exemptions for ``white collar'' executive,
administrative and professional employees. By way of this rulemaking,
the Department seeks to restore the overtime protections intended by
the FLSA.
Under section 13(a)(1) of the FLSA and its implementing
regulations, employees cannot be classified as exempt from the minimum
wage and overtime requirements unless they are guaranteed a minimum
weekly salary and perform certain required job duties. The minimum
salary level was last updated in 1975, almost 30 years ago, and is only
$155 per week. The job duty requirements in the regulations have not
been changed since 1949--almost 55 years ago.
Revisions to both the salary tests and the duties tests are
necessary to restore the overtime protections intended by the FLSA
which have eroded over the decades. In addition, workplace changes over
the decades and federal case law developments are not reflected in the
current regulations. Under the existing regulations, an employee
earning only $8,060 per year may be classified as an ``executive'' and
denied overtime pay. By comparison, a minimum wage employee earns about
$10,700 per year. The existing duties tests are so confusing, complex
and outdated that often employment lawyers, and even Wage and Hour
Division investigators, have difficulty determining whether employees
qualify for the exemption. The existing regulations are very difficult
for the average worker or small business owner to understand. The
regulations discuss jobs like key punch operators, legmen, straw bosses
and gang leaders that no longer exist, while providing little guidance
for jobs of the 21st Century.
Confusing, complex and outdated regulations allow unscrupulous
employers to avoid their overtime obligations and can serve as a trap
for the unwary but well-intentioned employer. In addition, more and
more, employees must resort to lengthy court battles to receive their
overtime pay. In the Department's view, this situation cannot be
allowed to continue. Allowing more time to pass without updating the
regulations contravenes the Department's statutory duty to ``define and
delimit'' the section 13(a)(1) exemptions ``from time to time.''
Accordingly, on March 31, 2003, the Department published a Notice
of Proposed Rulemaking (68 FR 15560) suggesting changes to the Part 541
regulations, including the largest increase of the salary levels in the
65-year history of the FLSA. The proposed changes to the duties tests
were designed to ensure that employees could understand their rights,
employers could understand their legal obligations, and the Department
could vigorously enforce the law.
During a 90-day comment period, the Department received 75,280
comments from a wide variety of employees, employers, trade and
professional associations, small business owners, labor unions,
government entities, law firms and others. In addition, the
Department's proposal prompted vigorous public policy debate in
Congress and the media. The public commentary revealed significant
misunderstandings regarding the scope of the ``white collar''
exemptions, but also provided many helpful suggestions for improving
the proposed regulations.
After carefully considering all of the relevant comments, and as
detailed in this preamble, the Department has made numerous changes
from the proposed rule to the final rule, including the following:
Scope of the Exemptions
New section 541.3(a) states that exemptions do
not apply to manual laborers or other ``blue collar'' workers who
perform work involving repetitive operations with their hands, physical
skill and energy. Thus, for example, non-management production-line
employees and non-management employees in maintenance, construction and
similar occupations such as carpenters, electricians, mechanics,
plumbers, iron workers, craftsmen, operating engineers, longshoremen,
construction workers and laborers have always been, and will continue
to be, entitled to overtime pay.
New section 541.3(b) states that the exemptions
do not apply to police officers, fire fighters, paramedics, emergency
medical technicians and similar public safety employees who perform
work such as preventing, controlling or extinguishing fires of any
type; rescuing fire, crime or accident victims; preventing or detecting
crimes; conducting investigations or inspections
[[Page 22123]]
for violations of law; performing surveillance; interviewing witnesses;
interrogating and fingerprinting suspects; preparing investigative
reports; and similar work.
New section 541.4 clarifies that the FLSA
provides minimum standards that may be exceeded, but cannot be waived
or reduced. Employers must comply with State laws providing additional
worker protections (a higher minimum wage, for example), and the Act
does not preclude employers from entering into collective bargaining
agreements providing wages higher than the statutory minimum, a shorter
workweek than the statutory maximum, or a higher overtime premium
(double time, for example).
Salary
The final rule nearly triples the current $155
per week minimum salary level required for exemption to $455 per week--
a $30 per week increase over the proposal and a $300 per week increase
over the existing regulations.
The ``highly compensated'' test in the final
rule applies only to employees who earn at least $100,000 per year, a
$35,000 increase over the proposal.
The ``highly compensated'' test in the final
rule applies only to employees who receive at least $455 per week on a
salary basis.
The final regulation adds a new requirement that
exempt highly compensated employees also must ``customarily and
regularly'' perform exempt duties.
Executive
The final rule deletes the special rules for
exemption applicable to ``sole charge'' executives.
The final rule adds the requirement that
employees who own at least a bona fide 20-percent equity interest in an
enterprise are exempt only if they are ``actively engaged in its
management.''
The final rule retains the ``long'' duties test
requirement that an exempt executive must have authority to ``hire or
fire'' other employees or must make recommendations as to the ``hiring,
firing, advancement, promotion or any other change of status'' which
are ``given particular weight,'' but provides a new definition of
``particular weight.''
Administrative
The final rule eliminates the proposed
``position of responsibility'' test for the administrative exemption.
The final rule eliminates the proposed ``high
level of skill or training'' standard under the administrative
exemption.
The final rule retains the existing requirement
(deleted in the proposed regulations) that exempt administrative
employees must exercise discretion and independent judgment.
Professional
The final section 541.301(e)(2) states that
licensed practical nurses and other similar health care employees do
not qualify as exempt professionals. The final rule retains the
provisions of the existing regulations regarding registered nurses.
As intended in the proposal, the final rule does
not make any changes to the educational requirements for the
professional exemption. Further, the Department never intended to allow
the professional exemption for any employee based on veterans' status.
The final rule has been modified to avoid any such misinterpretations.
The references to training in the armed forces, attending a technical
school and attending a community college have been removed from final
section 541.301(d).
The final rule defines ``work requiring advanced
knowledge,'' one of the three essential elements of the professional
primary duties test, as ``work which is predominantly intellectual in
character, and which includes work requiring the consistent exercise of
discretion and judgment.''
As a result of these changes, made in response to public
commentary, the final Part 541 regulations strengthen overtime
protections for millions of low-wage and middle-class workers, while
reducing litigation costs for employers. Both employees and employers
benefit from the final rules. Employees will be better able to
understand their rights to overtime pay, and employees who know their
rights are better able to complain if they are not being paid
correctly. Employers will be able to more readily determine their legal
obligations and comply with the law. The Department's Wage and Hour
Division will be better able to vigorously enforce the law.
The economic analysis found in section VI of this preamble
concludes that the final rule guarantees overtime protection for all
workers earning less than the $455 per week ($23,660 annually), the new
minimum salary level required for exemption. Because of the increased
salary level, overtime protection will be strengthened for more than
6.7 million salaried workers who earn between the current minimum
salary level of $155 per week ($8,060 annually) and the new minimum
salary level of $455 per week ($23,660 annually). These 6.7 million
salaried workers include:
1.3 million currently exempt white-collar
workers who will gain overtime protection;
2.6 million nonexempt salaried white-collar
workers who are at particular risk of being misclassified; and
2.8 million nonexempt workers in blue-collar
occupations whose overtime protection will be strengthened because
their protection, which is based on the duties tests under the current
rules, will be automatic under the final rules regardless of their job
duties.
The standard duties tests adopted in the final regulation are
equally or more protective than the short duties tests currently
applicable to workers who earn between $23,660 and $100,000 per year.
The final ``highly compensated'' test might result in 107,000 employees
who earn $100,000 or more per year losing overtime protection.
Because the rules have not been adjusted in decades, the final rule
does impose additional costs on employers, including up to $375 million
in additional annual payroll and $739 million in one-time
implementation costs. However, updating and clarifying the rule will
reduce Part 541 violations and are likely to save businesses at least
an additional $252.2 million every year that could be used to create
new jobs. The final rule is not likely to have a substantial impact on
small businesses, state and local governments, or any other geographic
or industry sector.
II. Background
The FLSA generally requires covered employers to pay employees at
least the federal minimum wage for all hours worked, and overtime
premium pay of time-and-one-half the regular rate of pay for all hours
worked over 40 in a single workweek. However, the FLSA includes a
number of exemptions from the minimum wage and overtime requirements.
Section 13(a)(1) of the FLSA provides an exemption from both minimum
wage and overtime pay for ``any employee employed in a bona fide
executive, administrative, or professional capacity * * * or in the
capacity of 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 * * *).'' 29 U.S.C.
213(a)(1).
Congress has never defined the terms ``executive,''
``administrative,'' ``professional,'' or ``outside salesman.'' Although
section 13(a)(1) was included in the original FLSA enacted in 1938,
specific references to the exemptions in the legislative history are
scant. The legislative history indicates that the
[[Page 22124]]
section 13(a)(1) exemptions were premised on the belief that the
workers exempted typically earned salaries well above the minimum wage,
and they were presumed to enjoy other compensatory privileges such as
above average fringe benefits and better opportunities for advancement,
setting them apart from the nonexempt workers entitled to overtime pay.
Further, the type of work they performed was difficult to standardize
to any time frame and could not be easily spread to other workers after
40 hours in a week, making compliance with the overtime provisions
difficult and generally precluding the potential job expansion intended
by the FLSA's time-and-a-half overtime premium. See Report of the
Minimum Wage Study Commission, Volume IV, pp. 236 and 240 (June 1981).
Pursuant to Congress' specific grant of rulemaking authority, the
Department of Labor has issued implementing regulations, at 29 CFR Part
541, defining the scope of the section 13(a)(1) exemptions. Because the
FLSA delegates to the Secretary of Labor the power to define and
delimit the specific terms of these 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).
The existing Part 541 regulations generally require each of three
tests to be met for the exemption to apply: (1) The employee must be
paid a predetermined and fixed salary that is not subject to reductions
because of variations in the quality or quantity of work performed (the
``salary basis test''); (2) the amount of salary paid must meet minimum
specified amounts (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
tests'').\1\
---------------------------------------------------------------------------
\1\ A number of states arguably have more stringent exemption
standards than those provided by Federal law. The FLSA does not
preempt any such stricter State standards. If a State or local law
establishes a higher standard than the provisions of the FLSA, the
higher standard applies. See Section 18 of the FLSA, 29 U.S.C. Sec.
218.
---------------------------------------------------------------------------
The major substantive provisions of the Part 541 regulations have
remained virtually unchanged for 50 years. The FLSA became law on June
25, 1938, and the first version of Part 541 was issued later that year
in October. 3 FR 2518 (Oct. 20, 1938). After receiving many comments on
the original regulations, the Wage and Hour Division issued revised
regulations in 1940. 5 FR 4077 (Oct. 15, 1940). See also, ``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) (``1940 Stein Report''). The Department
issued the last major revision of the duties test regulatory provisions
in 1949. 14 FR 7705 (Dec. 24, 1949). Also in 1949, an explanatory
bulletin interpreting some of the terms in the regulatory provisions
was published as Subpart B of Part 541. 14 FR 7730 (Dec. 28, 1949). See
also, Report and Recommendations on Proposed Revisions of Regulations,
Part 541, by Harry Weiss, Presiding Officer, Wage and Hour and Public
Contracts Divisions, U.S. Department of Labor (June 30, 1949) (``1949
Weiss Report''). In 1954, the Department issued the last major
revisions to the regulatory interpretations of the ``salary basis''
test. 19 FR 4405 (July 17, 1954). After the initial minimum salary
levels were set at $30 per week in 1938, the Department revised the
Part 541 regulations to increase the salary levels in 1940, 1949, 1958,
1963, 1970 and 1975. 5 FR 4077 (Oct. 15, 1940); 14 FR 7705 (Dec. 24,
1949); 23 FR 8962 (Nov. 18, 1958); 28 FR 9505 (Aug. 30, 1963); 35 FR
883 (Jan. 22, 1970); 40 FR 7092 (Feb. 15, 1975). See also, Report and
Recommendations on Proposed Revisions of Regulations, Part 541, under
the Fair Labor Standards Act, by Harry S. Kantor, Presiding Officer,
Wage and Hour and Public Contracts Divisions, U.S. Department of Labor
(March 3, 1958) (``1958 Kantor Report'').\2\
---------------------------------------------------------------------------
\2\ Revisions to increase the salary rates in January 1981 were
stayed indefinitely. 46 FR 11972 (Feb. 12, 1981). The Department
also revised the regulations to accommodate statutory amendments to
the FLSA in 1961, 1967, 1973, and 1992. 26 FR 8635 (Sept. 15, 1961);
32 FR 7823 (May 30, 1967); 38 FR 11390 (May 7, 1973); 57 FR 37677
(Aug. 19, 1992); 57 FR 46744 (Oct. 9, 1992).
---------------------------------------------------------------------------
The framework of the existing Part 541 regulation is based upon the
1940 Stein Report, the 1949 Weiss Report and the 1958 Kantor report,
which reflect the best evidence of the American workplace a half-
century ago. The existing regulation, therefore, reflects the structure
of the workplace, the type of jobs, the education level of the
workforce, and the workplace dynamics of an industrial economy that has
long been altered. As the workplace and structure of our economy has
evolved, so, too, must Part 541 be modernized to remain current and
relevant. This necessary adaptation forms the philosophical
underpinnings of this update and reflects the Department's efforts to
remain true to the intent of Congress, which mandated that the DOL
``from time to time'' define and delimit these exemptions and the
myriad terms contained therein.
The Department notes, however, that much of the reasoning of the
Stein, Weiss and Kantor reports remains as relevant as ever. This
preamble notes such instances, and articulates why the reasoning is
still sound. However, while the Department carefully has reviewed these
reports in undertaking this update, it is not bound by the reports. The
Department is responsible for updating regulations that, with each
passing decade of inattention, have become increasingly out of step
with the realities of the workplace. Indeed, under this rulemaking, the
Department is charged with utilizing record evidence submitted in 2003
* * * not in the 1940s or 1950s * * * in exercising its discretion to
update the terms of this Part.
Suggested changes to the Part 541 regulations have been the subject
of extensive public commentary for two decades, including public
comments responding to an Advance Notice of Proposed Rulemaking issued
by the Department in November 1985,\3\ a March 1995 oversight hearing
by the Subcommittee on Workforce Protections of the Committee on
Economic and Educational Opportunities, U.S. House of Representatives,
a report issued by the General Accounting Office (GAO) in September
1999,\4\ and a May 2000 hearing before the Subcommittee on Workforce
Protections of the Committee on Education and the Workforce, U.S. House
of Representatives. In its 1999 report to Congress and at the May 2000
hearing, the GAO chronicled the background and history of the
exemptions, estimated the number of workers who might be included
within the scope of the exemptions, identified the major concerns of
employers and employees regarding the exemptions, and suggested
possible solutions to the issues of concern raised by the affected
interests. In general, the employers contacted by the GAO were
concerned that the regulatory tests are too complicated, confusing, and
outdated for the modern workplace, and create potential liability for
violations when errors in classification occur. Employers were
particularly concerned about potential liability for violations of the
complex ``salary basis'' test, and complained that the ``discretion and
independent judgment'' standard for administrative employees is
confusing and applied inconsistently by the Wage
[[Page 22125]]
and Hour Division. They also noted the traditional limits of the
exemptions have blurred in the modern workplace. Employee
representatives contacted by the GAO, in contrast, were most concerned
that the use of the exemptions be limited to preserve existing overtime
work hour limits and the 40-hour standard workweek for as many
employees as possible. They believed the tests have become weakened as
applied today by judicial rulings and do not adequately restrict
employers' use of the exemptions. When combined with the low salary
test levels, the employee representatives felt that few protections
remain, particularly for low-income supervisory employees. The GAO
Report noted that the conflicting interests affected by these rules
have made consensus difficult and that, since the FLSA was enacted, the
interests of employers to expand the white collar exemptions have
competed with those of employees to limit use of the exemptions. To
resolve the issues presented, the GAO suggested that employers' desires
for clear and unambiguous regulatory standards must be balanced with
employees' desires for fair and equitable treatment in the workplace.
The GAO recommended that the Secretary of Labor comprehensively review
the regulations and restructure the exemptions to better accommodate
today's workplace and to anticipate future workplace trends.
---------------------------------------------------------------------------
\3\ 50 FR 47696 (Nov. 11, 1985).
\4\ Fair Labor Standards Act: White Collar Exemptions in the
Modern Work Place, GAO/HEHS-99-164, September 30, 1999 (GAO Report).
---------------------------------------------------------------------------
Responding to the extensive public commentary, on March 31, 2003,
the Department published proposed revisions to these regulations in the
Federal Register inviting public comments for 90 days (see 68 FR 15560;
March 31, 2003). In response to the proposed rule, the Department
received a total of 75,280 comments during the official comment period.
The Department received comments from a wide variety of individuals,
employees, employers, trade and professional associations, labor
unions, governmental entities, Members of Congress, law firms, and
others.
Most of the comments received were form letters submitted by e-mail
or facsimile. Form letters expressing general support of the proposal
were received, for example, from members of the Society for Human
Resource Management and from individuals who identified themselves as
being in agreement with the HR Policy Association or the National
Funeral Directors Association. More than 90 percent of the comments
were form letters generated by organizations affiliated with the
American Federation of Labor and Congress of Industrial Organizations
(AFL-CIO) expressing general opposition to the proposal. These largely
identical submissions raise concerns that the proposal would, for
example, ``diminish the application of overtime pay and seriously erode
the 40 hour workweek'' and lead to ``[c]utting overtime pay'' which
``would really hurt America's working families.'' The form letters,
however, do not address any particular aspect of the changes being
proposed to the existing regulations. Indeed, some letters and emails
appear to be from individuals who clearly perform non-exempt duties and
are not covered by the Part 541 exemptions.
Approximately 600 of the comments include substantive analysis of
the proposed revisions. Virtually all of these 600 comments favor some
change to the existing regulations. Among the commenters there are a
wide variety of views on the merits of particular sections of the
proposed regulations. Acknowledging that there are strong views on the
issues presented in this rulemaking, the Department has carefully
considered all of the comments and the arguments made for and against
the proposed changes.
The major comments received on the proposed regulatory changes are
summarized below, together with a discussion of the changes that have
been made in the final regulatory text in response to the comments
received. In addition to the more substantive comments discussed below,
the Department received some editorial suggestions, some of which have
been adopted and some of which have not. A number of other minor
editorial changes have been made to better organize or structure the
regulatory text. Finally, a number of comments were received on issues
that go beyond the scope or authority of these regulations (such as
eliminating all exemptions from overtime, lowering the overtime
threshold to fewer hours worked per week or per day, banning all
mandatory overtime, and basing overtime on a two-week/80-hour limit),
which the Department will not address in the discussion that follows.
III. Authority of the Secretary of Labor
Section 13(a)(1) of the FLSA provides exemptions from the minimum
wage and overtime requirements for employees ``employed in a bona fide
executive, administrative, or professional capacity or in the capacity
of outside salesman * * *.'' 29 U.S.C. 213(a)(1). Congress included
these exemptions in the original enactment of the FLSA in 1938, but the
statute contains no definitions, guidance or instructions as to their
meaning.
Rather than define the section 13(a)(1) exemptions in the statute,
Congress granted the Secretary of Labor broad authority to ``define and
delimit'' these terms ``from time to time by regulations.'' Id. A
unanimous Supreme Court reaffirmed the broad nature of this delegation
in Auer v. Robbins, 519 U.S. 452, 456 (1997), stating that the ``FLSA
grants the Secretary broad authority to `defin[e] and delimi[t]' the
scope of the exemption for executive, administrative and professionals
employees.'' See also Addison v. Holly Hill Fruit Products, Inc., 322
U.S. 607, 613 n.6 (1944) (authority given to define and delimit the
terms ``bona fide executive, administrative, professional''); Spradling
v. City of Tulsa, Oklahoma, 95 F.3d 1492, 1495 (10th Cir. 1996) (the
Department ``is responsible for determining the operative definitions
of these terms through interpretive regulations''), cert. denied, 519
U.S. 1149 (1997); Dalheim v. KDFW-TV, 918 F.2d 1220, 1224 (5th Cir.
1990) (the FLSA ``empowers the Secretary of Labor'' to define by
regulation the terms executive, administrative, and professional).
Several commenters, including the AFL-CIO, claim that the proposal
exceeds the authority of the Secretary and will not be entitled to
judicial deference. They assert that the proposal improperly broadens
the exemptions, fails to safeguard employees from being misclassified,
and is not consistent with Congressional intent. As an initial matter,
the Supreme Court's decision in Auer confirmed the Secretary's ``broad
authority'' to define and delimit these exemptions. 519 U.S. at 456.
Moreover, as this preamble establishes, the final rule will simplify,
clarify and better organize the regulations defining and delimiting the
exemptions for administrative, executive and professional employees.
Rather than broadening the exemptions, the final rule will enhance
understanding of the boundaries and demarcations of the exemptions
Congress created. The final rule will protect more employees from being
misclassified and reduce the likelihood of litigation over employee
classifications because both employees and employers will be better
able to understand and follow the regulations.
Other commenters contend that the proposal violates the rule of
interpretation articulated in Arnold v. Ben Kanowsky, Inc., 361 U.S.
388, 392 (1960), that FLSA exemptions are to be ``narrowly construed.''
However, in Auer v. Robbins, 519 U.S. at 462-63, the Supreme Court
addressed the difference between the ``narrowly construed'' rule of
judicial interpretation and the broad
[[Page 22126]]
authority possessed by the Secretary to promulgate these regulations:
Petitioners also suggest that the Secretary's approach contravenes
the rule that FLSA exemptions are to be ``narrowly construed against
* * * employers'' and are to be withheld except as to persons
``plainly and unmistakably within their terms and spirit.'' Arnold
v. Ben Kanowsky, Inc., 361 U.S. 388, 392, 80 S. Ct. 453, 456, 4 L.
Ed. 2d 393 (1960). But that is a rule governing judicial
interpretation of statutes and regulations, not a limitation on the
Secretary's power to resolve ambiguities in his own regulations. A
rule requiring the Secretary to construe his own regulations
narrowly would make little sense, since he is free to write the
regulations as broadly as he wishes, subject only to the limits
imposed by the statute.
Thus, the commenters' contentions are unfounded because the ``narrowly
construed'' standard does not govern or limit the Secretary's broad
rulemaking authority.
IV. Summary of Major Comments
Effective Date
There were very few comments concerning the effective date of the
regulations. The National Association of Convenience Stores (NACS)
recommends that the rules become effective 180 days after they are
published, but in no event before the passage of 90 days. NACS asserts
that ``employers will need considerable time to make and implement
important business decisions about how to arrange their affairs in
light of the revisions,'' and that a ``relatively long period is
certainly justified.'' The Department has set an effective date that is
120 days after the date of publication of these final regulations. The
Department believes that a period of 120 days will provide employers
ample time to make any changes necessary to ensure compliance with the
final regulations. Moreover, a 120-day effective date exceeds the 30-
day minimum required under the Administrative Procedure Act, 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).
The law firm of Morgan Lewis & Bockius and the Information
Technology Industry Council request that the Department establish a
``short-term `amnesty' program'' that would exist for two years after
the regulations'' effective date. The program, the commenters suggest,
would either allow or require employees seeking unpaid overtime wages
based on a misclassification occurring prior to the effective date of
the final regulations to submit their claims to the Department for
resolution. Under the program, the Department would request that the
employer conduct a self-audit of past compliance concerning the
positions at issue and would supervise payments of up to two years of
back wages, excluding liquidated damages. The statute of limitations
would be tolled during this administrative procedure. If the employer
refused to perform a self-audit, or did not pay the back wages due, the
employee could then bring a lawsuit. The commenters cite FLSA section
16(b) as the source of the Department's authority to implement such a
program. Section 16(b) provides aggrieved employees a private right of
action that terminates upon the Department's filing a lawsuit for back
wages for such employees under section 17. Nothing in section 16(b) or
in any other section of the statute authorizes the Department to create
the proposed amnesty program.
Structure and Organization
The existing Part 541 contains two subparts. Current Subpart A
provides the regulatory tests that define each category of the
exemption (executive, administrative, professional, and outside sales).
Current Subpart B provides interpretations of the terms used in the
exemptions. Subpart B was first issued as an explanatory bulletin in
1949 (effective in January 1950) to provide guidance to the public on
how the Wage and Hour Division interpreted and applied the exemption
criteria when enforcing the FLSA.
The Department proposed to eliminate this distinction between the
``regulations'' in Subpart A and the ``interpretations'' in Subpart B.
The proposed rule also reorganized the subparts according to each
category of exemption, eliminated outdated and uninformative examples,
updated definitions of key terms and phrases, and consolidated
provisions relevant to several or all of the exemption categories into
unified, common sections to eliminate unnecessary repetition (e.g., a
number of sections pertaining to salary issues were proposed to be
consolidated into a new Subpart G, Salary Requirements, discussed
below). The proposed rule also streamlined, reorganized, and updated
the regulations in other ways. The proposed regulations utilized
objective, plain language in an attempt to make the regulations more
understandable to employees and employee representatives, small
business owners and human resource professionals. This proposed
restructuring of Part 541 was intended to consolidate and streamline
the regulatory text, reduce unnecessary duplication and redundancies,
make the regulations easier to understand and decipher when applying
them to particular factual situations, and eliminate the confusion
regarding the appropriate level of deference to be given to the
provisions in each subpart.
The proposed regulations also streamlined the existing regulations
by adopting a single standard duties test for each exemption category,
rather than the existing ``long'' and ``short'' duties tests structure.
Because of the outdated salary levels, the ``long'' duties tests have,
as a practical matter, become effectively dormant. As the American
Payroll Association states, the ``long'' duties tests have ``become
`inoperative' because of the extremely low minimum salary test ($155
per week) and federal courts' refusal to apply the percentage
restrictions on nonexempt work in the modern workplace.'' The U.S.
Chamber of Commerce similarly notes that the ``elements unique to the
long test have largely been dormant for some time due to the
compensation levels.'' The U.S. House of Representatives' Committee on
Education and the Workforce also comments that the ``long'' duties
tests have ``become rarely, if ever, used.'' The Fisher & Phillips law
firm notes that ``the `long' test has played little role in the
executive exemption's application for many years.'' Similarly, the
American Bakers Association notes that the ``long'' duties tests
``lack[] current relevance.'' Finally, the National Association of
Federal Wage Hour Consultants states that the ``long'' duties tests are
``seldom used today in the business community.'' Faced with this
reality, the Department decided that elimination of most of the
``long'' duties tests requirements is warranted, especially since the
relatively small number of employees currently earning from $155 to
$250 per week, and thus tested for exemption under the ``long'' duties
tests, will gain stronger protections under the increased minimum
salary level which, under the final rule, guarantees overtime
protection for all employees earning less than $455 per week ($23,660
annually). Further, as explained in the preamble to the proposed rule,
the former tests are complicated and require employers to time-test
managers for the duties they perform, hour-by-hour in a typical
workweek. Reintroducing these effectively dormant requirements now
would add new complexity and burdens to the exemption tests that do not
currently apply. For example, employers are not generally required to
maintain any records of daily or weekly hours worked by exempt
employees (see 29 CFR 516.3), nor are they required to
[[Page 22127]]
perform a moment-by-moment examination of an exempt employee's specific
duties to establish that an exemption is available. Yet reactivating
the former strict percentage limitations on nonexempt work in the
existing ``long'' duties tests could impose significant new monitoring
requirements (and, indirectly, new recordkeeping burdens) and require
employers to conduct a detailed analysis of the substance of each
particular employee's daily and weekly tasks in order to determine if
an exemption applied. 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. Moreover, making such finite determinations would become even
more difficult in light of developments in case law that hold that an
exempt employee's managerial duties can be carried out at the same time
the employee performs nonexempt manual tasks. See, e.g., Jones v.
Virginia Oil Co., 2003 WL 21699882, at *4 (4th Cir. 2003) (assistant
manager who spent 75 to 80 percent of her time performing basic line-
worker tasks held exempt because she ``could simultaneously perform
many of her management tasks''); Donovan v. Burger King Corp., 672 F.2d
221, 226 (1st Cir. 1982) (``an employee can manage while performing
other work,'' and ``this other work does not negate the conclusion that
his primary duty is management''). Accordingly, given these
developments, the Department believed that the percentage limitations
on particular duties formerly applied under the ``long'' tests were not
useful criteria that should be reintroduced for defining the ``white
collar'' exemptions in today's workplace, and that employees who would
have been tested under the ``long'' tests are better protected by the
final rule's guarantee of overtime protection to all employees earning
less than $455 per week.
Most comments addressing the structure and organization of the
proposed rule generally favor the proposed restructuring, indicating
the consolidation of the former regulations and interpretations into a
unified set of rules and other proposed changes provide needed
simplification and more clarity to a complex regulation. The weight of
comments support replacing the former ``long'' and ``short'' test
structure with the proposed standard tests and deleting the former
``long'' test percentage limits on performing nonexempt duties.\5\ For
example, the U.S. Chamber of Commerce comments that it was their
members' experience that the percentage limitations have been difficult
to apply and have been of little utility. The Associated Prevailing
Wage Contractors states that the percentage requirements created
additional and needless recordkeeping requirements. The National Small
Business Association comments that a move away from a percentage basis
test will alleviate the burden on small business owners.
---------------------------------------------------------------------------
\5\ See, e.g., Comments of American Bakers Association; American
Corporate Counsel Association; American Hotel and Lodging
Association; American Insurance Association; American Nursery and
Landscape Association; American Payroll Association; American
Network of Community Options and Resources (ANCOR); Associated
Builders and Contractors; Associated Prevailing Wage Contractors;
Colley & McCoy Company; Contract Services Association of America;
Financial Services Roundtable; Grocery Manufacturers of America;
National Association of Chain Drug Stores; National Association of
Manufacturers; National Council of Agricultural Employers; National
Grocers Association; National Newspaper Association; National
Restaurant Association; National Small Business Association; New
Jersey Restaurant Association; Pennsylvania Credit Union
Association; Public Sector FLSA Coalition; Society for Human
Resource Management; State of Oklahoma Office of Personnel
Management; Tennessee Valley Authority; the U.S. Chamber of
Commerce; and Virginia Department of Human Resource Management.
---------------------------------------------------------------------------
However, some commenters oppose these changes, asserting that they
weakened the requirements for exemption, would allow manipulation of
job titles to evade paying overtime to lower-level employees, would
open the floodgates to misclassification of employees, and lead to more
lawsuits. Some commenters state that the proposed language is too
simple for this complex subject or that the proposed language continues
to be vague in some areas, making it susceptible to differing
interpretations and a continuation of an overly complex subject under
the law. Other dissenting comments point to a loss of judicial and
opinion letter interpretative precedent that would occur by changing
the duties tests as the Department proposed.\6\
---------------------------------------------------------------------------
\6\ See, e.g., Comments of 9-5 National Association of Working
Women; AFL-CIO; American Federation of State, County and Municipal
Employees; American Federation of Teachers; Building and
Construction Trades Department, AFL-CIO; Communication Workers of
America; International Association of Fire Fighters; International
Association of Machinists and Aerospace Workers; International
Federation of Professional & Technical Engineers; National
Employment Law Project; New York State Public Employees Federation;
United Food and Commercial Workers Union; Weinberg, Roger and
Rosenfeld; and World at Work.
---------------------------------------------------------------------------
The Department has carefully considered these arguments, and
continues to believe that reducing the inherent complexity of the
exemption criteria by replacing the subjective and effectively dormant
``long'' test requirements is an essential goal to be pursued in this
rulemaking. Streamlining and simplification of the applicable standards
is critical to ensuring correct interpretations and proper application
of the exemptions in the workplace today. It serves no productive
interest if a complicated regulatory structure implementing a statutory
directive means that few people can arrive at a correct conclusion, or
that many people arrive at different conclusions, when trying to apply
the standards to widely varying and diverse employment settings. The
extensive public comments on the difficulties experienced under the
existing regulatory standards amply demonstrate the need for change, in
the Department's view. The comments suggesting there is no need to
change the current regulatory ``long'' and ``short'' test structure are
not persuasive when contrasted with the described difficulties under
the existing regulatory standards, as confirmed by many other
commenters. The Department also does not agree with the comments
suggesting that elimination of the ``long'' test percentage limitations
on nonexempt work, which are rarely applied today, and retention of the
primary duty approach as currently interpreted by federal courts, will
somehow increase litigation or decrease the protections currently
afforded to employees. Rather, we believe that employees are more
clearly protected by the final rule, which guarantees overtime
protection to all employees earning less than $455 per week, than by
the existing rule which contains confusing and differing requirements
for employees earning between $155 and $455 per week. Moreover, as
explained in more detail in Subpart B of the preamble, the Department's
final ``standard'' duties test for the executive exemption incorporates
the ``authority to hire or fire'' requirement from the existing long
test.
A number of commenters suggest that the 20-percent limitation on
nonexempt work is mandated by the FLSA itself because, when amending
the FLSA in 1961 to cover retail and service establishments, Congress
added in section 13(a)(1) that ``an employee of a retail or service
establishment shall not be excluded from the definition of employee
employed in a bona fide executive or administrative capacity because of
the number of hours in his workweek which he devotes to activities
[[Page 22128]]
not directly or closely related to the performance of executive or
administrative activities, if less than 40 per centum of his hours
worked in the workweek are devoted to such activities.''
The Department does not believe that eliminating the 20-percent
rule from the new standard test contravenes Congress' intent. By adding
the 40-percent language in 1961, Congress intended that the 20-percent
limitation in the ``long'' tests would not be used to prohibit
employers from applying the exemption to retail and service employees,
even if they spent more than 20 percent of their time in nonexempt
work. Thus, this statutory language is a limitation on the Department's
authority to define certain employees as nonexempt--not a Congressional
declaration that the Department can never reconsider the 20-percent
limitation. Congress could have imposed the 20-percent rule on all
employees in 1961, but it did not. In fact, the primary duty approach
of the final regulations was first adopted by the Department as part of
the ``short'' tests in 1949. When Congress amended the FLSA in 1961,
the primary duty tests were in effect and did not contain mandatory
percentage limitations on nonexempt work. See 29 CFR 541.103 (50
percent is ``rule of thumb''); Jones, 2003 WL 21699882, at *3 (the 50-
percent ``rule of thumb'' is not dispositive). Congress did not act to
abrogate the primary duty tests, and the Department believes that the
``short'' duties tests are in no way inconsistent with section 13(a)(1)
of the Act.
In reaching its regulatory decisions, the Department is mindful of
its obligations under the delegated statutory authority applicable in
this situation, and other laws and Executive Orders that apply to the
regulatory process, to define and delimit the ``white collar''
exemption criteria in ways that reduce unnecessary burdens (e.g., the
Paperwork Reduction Act, the Regulatory Flexibility Act, the Unfunded
Mandates Reform Act, and Executive Orders 12866, 13272, and 13132).
Under currently applicable guidelines, implementation of regulatory
standards should, to the maximum extent possible within the limits of
controlling statutory authority and intent, strike an appropriate
balance and be compatible with existing recordkeeping and other prudent
business practices, not unduly disruptive of them. Regulatory standards
should also strive to apply plain, coherent, and unambiguous
terminology that is easily understandable to everyone affected by the
rules. Consequently, the Department has decided to adopt the proposed
restructuring of the regulations into separate subparts containing
standard tests under each category of the exemption, which do not
include the former ``long'' test requirements that require calculating
the 20-percent (or 40-percent in retail or service establishments)
limits on the amount of time devoted to nonexempt tasks.
Subpart A, General Regulations
Proposed Subpart A included several general, introductory
provisions scattered throughout the existing regulations. Proposed
section 541.0 combined an introductory statement from existing section
541.99 and information currently located at section 541.5b regarding
the application of the equal pay provisions in section 6(d) of the FLSA
to employees exempt from the minimum wage and overtime provisions of
the FLSA under section 13(a)(1). Proposed section 541.0 also provided
new language to reflect legislative changes to the FLSA regarding
computer employees and information regarding the new organizational
structure of the proposed regulations. Proposed section 541.1 provided
definitions of ``Act'' and ``Administrator'' from their current
location in section 541.0. Finally, proposed section 541.2 provided a
general statement that job titles alone are insufficient to establish
the exempt status of an employee. This fundamental concept, equally
applicable to all the exemption categories, currently appears in
section 541.201(b) of the existing regulations regarding administrative
employees.
The Department received few comments on these general regulations.
Thus, Subpart A is adopted as proposed, except for the addition of a
new section 541.3 entitled ``Scope of the section 13(a)(1) exemptions''
and a new section 541.4 entitled ``Other laws and collective bargaining
agreements.'' The Department adds these new sections in response to
public commentary which evidenced general confusion, especially among
employees, regarding the scope of the exemptions and the impact of
these regulations on state laws and collective bargaining agreements.
The subsection 541.3(a) clarifies that the section 13(a)(1)
exemptions and the Part 541 regulations do not apply to manual laborers
or other ``blue collar'' workers who ``perform work involving
repetitive operations with their hands, physical skill and energy.''
Such employees ``gain the skills and knowledge required for performance
of their routine manual and physical work through apprenticeships and
on-the-job training, not through the prolonged course of specialized
intellectual instruction required of exempt learned professional
employees such as medical doctors, architects and archeologists. Thus,
for example, non-management production-line employees and non-
management employees in maintenance, construction and similar
occupations such as carpenters, electricians, mechanics, plumbers, iron
workers, craftsmen, operating engineers, longshoremen, construction
workers and laborers are entitled to minimum wage and overtime premium
pay under the Fair Labor Standards Act, and are not exempt under the
regulations in this part no matter how highly paid they might be.''
The new Sec. 541.3(a) responds to comments revealing a fundamental
misunderstanding of the scope and application of the Part 541
regulations among employees and employee representatives. To ensure
employees understand their rights, the new subsection 541.3(a) clearly
states that manual laborers and other ``blue collar'' workers cannot
qualify for exemption under section 13(a)(1) of the FLSA. The
description of a ``blue collar'' worker as an employee performing
``work involving repetitive operations with their hands, physical skill
and energy'' was derived from a standard dictionary definition of the
word ``manual.'' See, e.g., Adam v. United States, 26 Cl. Ct. 782, 792-
93 (1992) (``dictionary definition of `manual' is, `requiring or using
physical skill and energy' ''). The illustrative list of such ``blue
collar'' occupations included in this subsection is the same language
included in the proposed and final section 541.601 on highly
compensated employees.
Section 541.3(b)(1) provides that the section 13(a)(1) exemptions
and these regulations also do not apply to ``police officers,
detectives, deputy sheriffs, state troopers, highway patrol officers,
investigators, inspectors, correctional officers, parole or probation
officers, park rangers, fire fighters, paramedics, emergency medical
technicians, ambulance personnel, rescue workers, hazardous materials
workers and similar employees, regardless of rank or pay level, who
perform work such as preventing, controlling or extinguishing fires of
any type; rescuing fire, crime or accident victims; preventing or
detecting crimes; conducting investigations or inspections for
violations of law; performing surveillance; pursuing, restraining and
apprehending suspects; detaining or supervising suspected and convicted
criminals, including those on probation
[[Page 22129]]
or parole; interviewing witnesses; interrogating and fingerprinting
suspects; preparing investigative reports; or similar work.'' Final
subsection 541.3(b)(2) provides that such employees do not qualify as
exempt executive employees because their primary duty is not management
of the enterprise in which the employee is employed or a customarily
recognized department or subdivision thereof as required under section
541.100. Thus, for example, ``a police officer or fire fighter whose
primary duty is to investigate crimes or fight fires is not exempt
under section 13(a)(1) of the Act merely because the police officer or
fire fighter also directs the work of other employees in the conduct of
an investigation or fighting a fire.'' Final subsection 541.3(b)(3)
provides that such employees do not qualify as exempt administrative
employees because their primary duty is not the performance of work
directly related to the management or general business operations of
the employer or the employer's customers as required under section
541.200. Final subsection 541.3(b)(4) provides that such employees do
not qualify as exempt learned professionals because their primary duty
is not the performance of work requiring knowledge of an advanced type
in a field of science or learning customarily acquired by a prolonged
course of specialized intellectual instruction or the performance of
work requiring invention, imagination, originality or talent in a
recognized field of artistic or creative endeavor as required under
section 541.300. Final subsection 541.3(b)(4) also states that
``although some police officers, fire fighters, paramedics, emergency
medical technicians and similar employees have college degrees, a
specialized academic degree is not a standard prerequisite for
employment in such occupations.''
This new subsection 541.3(b) responds to commenters, most notably
the Fraternal Order of Police, expressing concerns about the impact of
the proposed regulations on police officers, fire fighters, paramedics,
emergency medical technicians (EMTs) and other first responders. The
current regulations do not explicitly address the exempt status of
police officers, fire fighters, paramedics or EMTs. This silence in the
current regulations has resulted in significant federal court
litigation to determine whether such employees meet the requirements
for exemption as executive, administrative or professional employees.
Most of the courts facing this issue have held that police
officers, fire fighters, paramedics and EMTs and similar employees are
not exempt because they usually cannot meet the requirements for
exemption as executive or administrative employees. In Department of
Labor v. City of Sapulpa, Oklahoma, 30 F.3d 1285, 1288 (10th Cir.
1994), for example, the court held that fire department captains were
not exempt executives because they were not in charge of most fire
scenes; had no authority to call additional personnel to a fire scene;
did not set work schedules; participated in all the routine manual
station duties such as sweeping and mopping floors, washing dishes and
cleaning bathrooms; and did not earn much more than the employees they
allegedly supervised. In Reich v. State of New York, 3 F.3d 581, 585-87
(2nd Cir. 1993), cert. denied, 510 U.S. 1163 (1994), the court granted
overtime pay to police investigators whose duties included
investigating crime scenes, gathering evidence, interviewing witnesses,
interrogating and fingerprinting suspects, making arrests, conducting
surveillance, obtaining search warrants, and testifying in court. The
court held that such police officers are not exempt administrative
employees because their primary duty is conducting investigations, not
administering the affairs of the department itself. See also Bratt v.
County of Los Angeles, 912 F.2d 1066, 1068-70 (9th Cir. 1990)
(probation officers who conduct investigations and make recommendations
to the court regarding sentencing are not exempt administrative
employees), cert. denied, 498 U.S. 1086 (1991); Mulverhill v. State of
New York, 1994 WL 263594 (N.D.N.Y. 1994) (investigators of
environmental crimes who carry firearms, patrol a sector of the state
and conduct covert surveillance, and rangers who prevent and suppress
forest fires, are not exempt administrative employees).
Similarly, federal courts have held that police officers,
paramedics, EMTs, and similar employees are not exempt professionals
because they do not perform work in a ``field of science or learning''
requiring knowledge ``customarily acquired by a prolonged course of
specialized intellectual instruction'' as required under the current
and final section 541.301 of the regulations. The paramedic plaintiffs
in Vela v. City of Houston, 276 F.3d 659, 674-676 (5th Cir. 2001), for
example, were required to complete 880 hours of classroom training,
clinical experience and a field internship. The EMT plaintiffs were
required to complete 200 hours of classroom training, clinical
experience and a field internship. The court held that the paramedics
and EMTs were not exempt professionals because they were not required
to have a college degree. See also Dybach v. State of Florida
Department of Corrections, 942 F.2d 1562, 1564-65 (11th Cir. 1991)
(probation officer held not exempt professional because the required
college degree could be in any field--`` `nuclear physics, or * * *
corrections, or * * * physical education or basket weaving'''--not in a
specialized field); Fraternal Order of Police, Lodge 3 v. Baltimore
City Police Department, 1996 WL 1187049 (D. Md. 1996) (police sergeants
and lieutenants held not exempt professionals, even though some
possessed college degrees, because college degrees were not required
for the positions); Quirk v. Baltimore County, Maryland, 895 F. Supp.
773, 784-86 (D. Md. 1995) (certified paramedics required to have a high
school education and less than a year of specialized training are not
exempt professionals).
The Department has no intention of departing from this established
case law. Rather, for the first time, the Department intends to make
clear in these revisions to the Part 541 regulations that such police
officers, fire fighters, paramedics, EMTs and other first responders
are entitled to overtime pay. Police sergeants, for example, are
entitled to overtime pay even if they direct the work of other police
officers because their primary duty is not management or directly
related to management or general business operations; neither do they
work in a field of science or learning where a specialized academic
degree is a standard prerequisite for employment.\7\
---------------------------------------------------------------------------
\7\ In addition to the case law and comments cited above, when
drafting this new section, the Department also looked to the
definitions of ``fire protection activities'' and ``law enforcement
activities'' contained in Sections 3(y) and 7(k) of the FLSA, and
their implementing regulations at 29 CFR 553.210 and 553.211, which
allow public agencies to pay overtime to fire and law enforcement
employees based on a 7 to 28 day period, rather than the 40-hour
workweek. These sections do not govern exempt status under section
13(a)(1) and, thus, are illustrative but not determinative of duties
performed by nonexempt fire and law enforcement employees. See 29
CFR 553.216.
---------------------------------------------------------------------------
Finally, such police officers, fire fighters, paramedics, EMTs and
other public safety employees also cannot qualify as exempt under the
highly compensated test in final section 541.601. As discussed below,
final section 541.601(b) provides that the highly compensated test
``applies only to employees whose primary duty includes performing
office or non-manual work.'' Federal courts have recognized that
[[Page 22130]]
such public safety employees do not perform ``office or non-manual''
work. Adam v. United States, 26 Cl. Ct. at 792-93, for example,
involved border patrol agents who spent a significant amount of time in
the field, wore ``uniforms and black work boots,'' and used ``a
handgun, a baton, night-vision goggles, and binoculars.'' Their work
required ``frequent and recurring walking and running over rough
terrain, stooping, bending, crawling in restricted areas such as
culverts, climbing fences and freight car ladders, and protecting one's
self and others from physical attacks.'' Their work also involved
``high speed pursuits, boarding moving trains and vessels, and physical
threat while detaining and arresting illegal aliens, smugglers, and
other criminal elements.'' The court held that these border patrol
agents are not exempt from the FLSA overtime requirements, stating that
the ``level of physical effort required in the environment described
plainly cannot be characterized as `office or other predominately
nonmanual work.' A dictionary definition of `manual' is, `requiring or
using physical skill and energy.' * * * Non-manual work, therefore,
would not call for significant use of physical skill or energy.
Certainly, the agents' job duties do not fit that definition.'' See
also, Roney v. United States, 790 F. Supp. 23, 25 (D.D.C. 1992) (Deputy
U.S. Marshal entitled to overtime pay where position requires ``
`physical strength and stamina to perform such activities as long
periods of surveillance, pursuing and restraining suspects, carrying
heavy equipment' '' and the employee `` `may be subject to physical
attack, including the use of lethal weapons' '') (citation omitted).
Federal courts have found high-level police and fire officials to
be exempt executive or administrative employees only if, in addition to
satisfying the other pertinent requirements, such as directing the work
of two or more other full time employees as required for the executive
exemption, their primary duty is performing managerial tasks such as
evaluating personnel performance; enforcing and imposing penalties for
violations of the rules and regulations; making recommendations as to
hiring, promotion, discipline or termination; coordinating and
implementing training programs; maintaining company payroll and
personnel records; handling community complaints, including determining
whether to refer such complaints to internal affairs for further
investigation; preparing budgets and controlling expenditures; ensuring
operational readiness through supervision and inspection of personnel,
equipment and quarters; deciding how and where to allocate personnel;
managing the distribution of equipment; maintaining inventory of
property and supplies; and directing operations at crime, fire or
accident scenes, including deciding whether additional personnel or
equipment is needed. See, e.g., West v. Anne Arundel County, Maryland,
137 F.3d 752 (4th Cir.) (EMT captains and lieutenants), cert. denied,
525 U.S. 1048 (1998); Smith v. City of Jackson, Mississippi, 954 F.2d
296 (5th Cir. 1992) (fire chiefs); Masters v. City of Huntington, 800
F. Supp. 363 (S.D.W. Va. 1992) (fire deputy chiefs and captains);
Simmons v. City of Fort Worth, Texas, 805 F. Supp. 419 (N.D. Tex. 1992)
(fire deputy and district chiefs); Keller v. City of Columbus, Indiana,
778 F. Supp. 1480 (S.D. Ind. 1991) (fire captains and lieutenants).
Another important fact considered in at least one case is that exempt
police and fire executives generally are not dispatched to calls, but
rather have discretion to determine whether and where their assistance
is needed. See, e.g., Anderson v. City of Cleveland, Tennessee, 90 F.
Supp.2d 906, 909 (E.D. Tenn. 2000) (police lieutenants ``monitor the
radio in order to keep tabs on their men and determine where their
assistance is needed'').\8\
---------------------------------------------------------------------------
\8\ Some police officers, fire fighters, paramedics and EMTs
treated as exempt executives under the current regulations may be
entitled to overtime under the final rule because of the additional
requirement in the standard duties test that an exempt executive
must have the authority to ``hire or fire'' other employees or make
recommendations given particular weight on hiring, firing,
advancement, promotion or other change of status.
---------------------------------------------------------------------------
A new section 541.4 highlights that the FLSA establishes a minimum
standard that may be exceeded, but cannot be waived or reduced. See
Brooklyn Savings Bank v. O'Neil, 324 U.S. 697, 706 (1945). Section 18
of the FLSA states that employers must comply ``with any Federal or
State law or municipal ordinance establishing a minimum wage higher
than the minimum * * * or a maximum workweek lower than the maximum
workweek established under the Act.'' 29 U.S.C. 218. Similarly,
employers, on their own initiative or in collective bargaining
negotiations with a labor union, are not precluded by the FLSA from
providing a wage higher than the statutory minimum, a shorter workweek
than provided by the FLSA, or a higher overtime premium (double time,
for example) than provided by the FLSA. See, e.g., Barrentine v.
Arkansas-Best Freight System, Inc., 450 U.S. 728, 739 (1981) (``In
contrast to the Labor Management Relations Act, which was designed to
minimize industrial strife and to improve working conditions by
encouraging employees to promote their interests collectively, the FLSA
was designed to give specific minimum protections to individual workers
and to ensure that each employee covered by the Act would receive `[a]
fair day's pay for a fair day's work' and would be protected from `the
evil of overwork as well as underpay.' '') (citation omitted); NLRB v.
R & H Coal Co., 992 F.2d 46 (4th Cir. 1993) (purpose of FLSA is to
guarantee minimum level of compensation to workers, regardless of
outcome of bargaining process; by contrast, purpose of National Labor
Relations Act is to facilitate collective bargaining process and ensure
that its outcome is enforced). Thus, the new section 541.4 states:
``The Fair Labor Standards Act provides minimum standards that may be
exceeded, but cannot be waived or reduced. Employers must comply, for
example, with any Federal, State or municipal laws, regulations or
ordinances establishing a higher minimum wage or lower maximum workweek
than those established under the Act. Similarly, employers, on their
own initiative or under a collective bargaining agreement with a labor
union, are not precluded by the Act from providing a wage higher than
the statutory minimum, a shorter workweek than the statutory maximum,
or a higher overtime premium (double time, for example) than provided
by the Act. While collective bargaining agreements cannot waive or
reduce the Act's protections, nothing in the Act or the regulations in
this part relieves employers from their contractual obligations under
collective bargaining agreements.''
Subpart B, Executive Employees
Section 541.100 General Rule for Executive Employees
The Department's proposal streamlined the existing regulations by
adopting a single standard duties test in proposed section 541.100. The
proposed standard duties test provided that an exempt executive
employee must: have a primary duty of managing the enterprise in which
the employee is employed or of a customarily recognized department or
subdivision thereof; customarily and regularly direct the work of two
or more other employees; and have the authority to hire or fire other
employees or have particular weight given to suggestions and
recommendations as to the hiring, firing, advancement, promotion or any
other change of status of other
[[Page 22131]]
employees. This standard test, consisting of the current short test
requirements plus a third objective requirement taken from the long
test, was more protective than the existing ``short'' duties test
applied to employees earning $250 or more per week ($13,000 annually).
The Department has retained this standard test for the final rule
but has made minor changes to section 541.100(a)(2). Subsection
541.100(a)(2) has been modified now to read ``whose primary duty is
management of the enterprise in which the employee is employed or of a
customarily recognized department or subdivision thereof.'' This change
was made in response to several commenters, such as the AFL-CIO, who
felt that the change from ``whose'' primary duty as written in the
existing regulations to ``a'' primary duty as written in the proposal
weakened this prong of the test by allowing for more than one primary
duty and not requiring that the most important duty be management. As
the Department did not intend any substantive change to the concept
that an employee can only have one primary duty, the final rule uses
the introductory phrasing from the existing regulations.
Several commenters state that the phrases ``change in status'' and
``particular weight'' contained in both the existing regulations and
proposed 541.100(a)(4) are vague and should be defined. The Department
has added a definition of ``particular weight'' based on case law,
which now appears in section 541.105, as discussed below. Although the
Department has not added a definition of ``change of status'' to the
final regulation, the Department intends that this phrase be given the
same meaning as that given by the Supreme Court in defining the term
``tangible employment action'' for purposes of Title VII liability. In
Burlington Industries, Inc. v. Ellerth, 524 U.S. 742, 761-62 (1998),
the Supreme Court defined ``tangible employment action'' as ``a
significant change in employment status, such as hiring, firing,
failing to promote, reassignment with significantly different
responsibilities, or a decision causing a significant change in
benefits.'' The Department believes that this discussion provides the
necessary guidance to reflect the types of employment actions a
supervisor would have to make recommendations regarding, other than
hiring, firing or promoting, to meet this prong of the executive test.
Because the Department intends to follow the Supreme Court's
disjunctive definition of ``tangible employment action'' in Ellerth, we
also reject comments from the AFL-CIO and others requesting that
proposed subsection 541.100(a)(4) be changed to requiring ``hiring or
firing and advancement, promotion or any other change of status.'' An
employee who provides guidance on any one of the specified changes in
employment status may meet the section 541.100(a)(4) requirement.
The New York State Public Employees Federation suggests that the
Department should provide a definition of the phrase ``authority to
hire or fire'' which would require that a significant part of the
employee's responsibility must involve either hiring or firing. The
Department believes that these terms are straightforward and should be
interpreted in accordance with their customary definition, i.e., to
engage or disengage an individual for employment. Therefore, the
Department has determined that such a definition need not be
incorporated into the final regulation.
Several commenters from the public sector, such as the Metropolitan
Transportation Authority, the New York State Police, and the Public
Sector FLSA Coalition, indicate that the requirement in the proposal
that an employee have the authority to hire or fire will cause many
exempt employees to lose exempt status since employees in the public
sector do not have authority to make such decisions. According to the
Metropolitan Transportation Authority, ``the authority to hire or fire
(or to have his recommendation to change an employee's employment
status given strong consideration) only exists at the highest levels in
public employment'' because of such factors as ``unionization within
the state and local public sector and statutory constraints, such as
civil service laws, which have been developed to protect employees in
the public sector from various factors, including the political
process, favoritism or for other reasons.'' The Society for Human
Resource Management (SHRM) similarly states that this requirement would
be ``particularly troublesome'' for public entities governed by civil
service rules that dictate the use of a board to make hiring or firing
decisions. SHRM recommends that this requirement be deleted or that the
Department define the term ``particular weight'' in the regulations.
The Johnson County Government also asks for clarification of the term
``particular weight.'' The Department has evaluated these comments and,
as noted above, has included a definition of the term ``particular
weight'' in section 541.105. That definition clarifies that an
executive does not have to possess full authority to make the ultimate
decision regarding an employee's status, such as where a higher level
manager or a personnel board makes the final hiring, promotion or
termination decision. With this clarification, and with the
clarification that this rule encompasses other tangible employment
actions, we have determined that this requirement should not pose a
hardship since public sector supervisory employees provide
recommendations as to hiring, firing or other personnel decisions that
are given ``particular weight'' to the extent allowed under civil
service laws and thus may meet this requirement for exemption. As the
National School Board Association comments, although state law may vest
the school board with the exclusive authority to discharge an employee,
such an action is precipitated by a department supervisor who evaluates
the employee's performance and recommends the action, and the
superintendent's recommendation to the board is based on the department
supervisor's recommendations. In addition, such employees may also
qualify for exemption as administrative or professional employees.
A number of employer groups urge the Department to eliminate
proposed 541.100(a)(4) entirely. These commenters argue that this
requirement will cause many employees to lose their exempt executive
status because the ``hire or fire'' requirement is not contained in the
current short test and therefore has been effectively dormant for
practical purposes as a measure of exempt executive status. The
Department carefully reviewed these comments and believes that this
requirement may result in some currently exempt employees becoming
nonexempt; however, the number is too small to estimate quantitatively.
Subsection 541.100(a)(4) is an important and objective measure of
executive exempt status which is simple to understand and easy to
administer. As the 1940 Stein Report stated at page 12: ``[i]t is
difficult to see how anyone, whether high or low in the hierarchy of
management, can be considered as employed in a bona fide executive
capacity unless he is directly concerned either with the hiring or the
firing and other change of status of the employees under his
supervision, whether by direct action or by recommendation to those to
whom the hiring and firing functions are delegated.'' Although this new
requirement may exclude a few employees from the executive exemption,
the Department has determined that it will have a minimal impact on
employers. Most supervisors
[[Page 22132]]
and managers should at least have their suggestions and recommendations
as to the hiring, firing, advancement, promotion or any other change of
status of other employees be given particular weight. Further,
employees who cannot meet the ``hire or fire'' requirement in section
541.100(a)(4) may nonetheless qualify for exemption as administrative
or professional employees.
Section 541.101 Business Owner
Section 541.101 of the proposed rule provided that an employee
``who owns at least a 20-percent equity interest in the enterprise in
which the employee is employed, regardless of whether the business is a
corporate or other type of organization,'' is exempt as an executive
employee.
The Department made two modifications to the provision in the final
rule. First, we inserted the term ``bona fide'' before the phrase ``20-
percent equity interest.'' Second, we added a duties requirement that
the 20-percent business owner must be ``actively engaged in its
management.''
These changes were made to address commenter concerns that this
section could be subject to abuse. For example, the McInroy & Rigby law
firm argues that the exemption would be subject to ``great abuse.'' The
firm speculates that ``[s]mall business employers could grant employees
an illusory ownership interest and avoid having to even pay the minimum
wage to such employees. One would anticipate many sham transactions
conveying illusory ownership interests if the provision is adopted.''
Adding the modifier ``bona fide'' before the phrase ``20-percent equity
interest'' serves to emphasize that the employee's ownership stake in
the business must be genuine. The AFL-CIO argues that this section
``cannot stand'' because it would allow the exemption for employees who
perform no management duties: ``an individual may have a 20 percent
interest in an independent gas station, or a small food mart. In order
to break even, the business stays open through the night, and as the
minority owner that person keeps the operations going during those
hours. He makes no management decisions, supervises no one, and has no
authority over personnel, and could make less than the minimum wage.
Under the Department's proposal, this employee meets the test for the
bona fide executive.'' The Department agrees that such an employee
should not qualify for the exemption. Thus, we have added the duties
requirement that the 20-percent owner be actively engaged in
management. See 1949 Weiss Report at 42 (section is ``intended to
recognize the special status of an owner, or partial owner, of an
enterprise who is actively engaged in its management'') (emphasis
added).
The proposed rule contained no salary level or salary basis
requirements for the business owner. The Department requested comments
on whether the salary level and/or salary basis tests should be
included in the provision. 65 FR 15560, 15565 (March 31, 2003).
Commenters typically favor the exemption and agree with the Department
that the salary requirements are not necessary, given the likelihood
that an employee who owns a bona fide 20-percent equity interest in the
enterprise will share in its profits. Thus, this ownership interest is
an adequate substitute for the salary requirements. Additionally,
several commenters, for example, the Workplace Practices Group, note
that business owners at this level are able to receive compensation in
other ways and have sufficient control over the business to prevent
abuse. Thus, in the final rule, as in the proposal, the salary
requirements do not apply to a 20-percent equity owner. However,
requiring a ``bona fide'' ownership interest and that the 20-percent
owner be actively engaged in management will prevent abuses such as
that described by commenters and in Lavian v. Haghnazari, 884 F. Supp.
670, 678 (E.D.N.Y. 1995). In Lavian, an uncle invested more than
$70,000 in his nephew's pharmacy business in exchange for a promise of
49 percent stock ownership interest in the closely-held corporation.
After working at the pharmacy for two years without compensation, and
never receiving share certificates, the uncle sued. The court denied a
motion to dismiss an FLSA claim, noting that the court must accept as
true the uncle's allegations that his duties were ``clerical, and
lacking in actual supervisory and discretionary authority in relation
to the enterprise.'' Id., at 680. The final rule ensures that employees
with such limited job duties in a company would not meet the definition
of ``actively engaged in its management.''
Section 541.102 Management (Proposed Sec. 541.103, ``Management of the
Enterprise'' and Proposed Sec. 541.102, ``Sole Charge Executive'')
The proposed regulations at section 541.102 provided a modified
test for the executive exemption for an employee who is in sole charge
of an independent establishment or a physically separated branch
establishment. Proposed section 541.103 defined the term ``management
of the enterprise.'' For the reasons discussed below, the final rule
deletes the ``sole charge'' provision and renumbers the remaining
sections of Subpart B.
Under proposed section 541.102, an employee in sole charge of an
independent or branch establishment would qualify for the executive
exemption if the employee (1) is compensated on a salary basis at a
rate of not less than $425 per week (or $360 per week, if employed in
American Samoa by employers other than the Federal Government),
exclusive of board, lodging or other facilities; (2) is the top and
only person in charge of the company activities at the location where
employed; and (3) has authority to make decisions regarding the day-to-
day operations of the establishment and to direct the work of any other
employees at the establishment or branch. Under the proposal, an
``independent establishment or physically separated branch
establishment'' was defined as ``an establishment that has a fixed
location and is geographically separated from other company property.''
The proposal permitted a leased department to qualify as a physically
separated branch establishment when the lessee operated under a
separate trade name, with its own separate employees and records, and
in other respects conducted its business independent of the lessor's
with regard to such matters as hiring and firing of employees, other
personnel policies, advertising, purchasing, pricing, credit
operations, insurance and taxes.
The final rule deletes this section in its entirety.
Commenters such as the AFL-CIO, the National Employment Law
Project, the National Employment Lawyers Association and the Goldstein,
Demchak, Baller, Borgen & Dardarian law firm object to this provision
as allowing the exemption for employees who perform mostly nonexempt
tasks (such as opening and closing up the location, ringing up cash
register sales, stocking shelves, answering phones, serving customers,
etc.) and few, if any, management functions. These commenters also
believe that, when no other employees worked at the establishment, the
provision would allow an employee to qualify for the exemption without
having supervisory responsibility for any other employees. The
International Association of Fire Fighters expresses strong concerns
that the sole charge provision would exempt a low-ranking officer in
charge of a fire station during a particular shift, even though a
higher ranking officer is in charge of the overall management of the
station. The Department agrees with these commenter concerns. In
addition,
[[Page 22133]]
the Department recognizes that, although not intended, section 541.102
as proposed could be construed as allowing the exemption for fairly
low-level employees with fewer management duties than those required
for ``highly compensated'' employees in final section 541.601.
Before deciding to eliminate this section entirely, the Department
considered comments of groups such as the U.S. Chamber of Commerce, the
National Retail Federation, the National Association of Convenience
Stores, the Fisher & Phillips law firm, the National Association of
Chain Drug Stores, the FLSA Reform Coalition, the Illinois Credit Union
League, the Food Marketing Institute, the National Grocers Association,
the International Mass Retail Association, the League of Minnesota
Cities and others that request changes to expand the ``sole charge''
provision. For example, these commenters suggest eliminating the salary
level and salary basis requirements; including in the exemption all
employees who are in charge of an establishment at any time during the
day or week; allowing more than occasional visits by the sole charge
executive's superior; eliminating the requirement that the independent
establishment must be geographically separate from other company
property; and eliminating the requirements that a leased department
must operate under a separate trade name and be responsible for its own
insurance, advertising, taxes, purchasing, pricing and credit
operations. In the existing regulations, the ``sole charge'' rule is an
exception from the 20-percent restriction on nonexempt work in the
``long'' duties test. After considering all comments, and for the
reasons stated above, the Department concludes that this rule is not
appropriate as a stand-alone test for the executive exemption.
Proposed section 541.103, defining the term ``management of the
enterprise'' as used in subsection 541.100(a)(2), has been renumbered
as final section 541.102. The proposed definition of ``management''
included the following list of activities that would generally meet
this definition: ``interviewing, selecting, and training of employees;
setting and adjusting their rates of pay and hours of work; directing
the work of employees; maintaining production or sales records for use
in supervision or control; appraising employees' productivity and
efficiency; handling employee complaints and grievances; disciplining
employees; planning the work; determining the techniques to be used;
apportioning the work among the employees; determining the type of
materials, supplies, machinery or tools to be used or merchandise to be
bought, stocked and sold; controlling the flow and distribution of
materials or merchandise and supplies; and providing for the safety of
the employees or the property.''
In response to comments, the Department has amended section 541.102
to rename the section as ``management,'' add language to make clear
that the list is not exhaustive, and add the management functions of
``planning and controlling the budget'' and ``monitoring or
implementing legal compliance measures.''
Comments from the Fisher & Phillips law firm and the National
Association of Convenience Stores ask the Department to change the
phrase ``management of the enterprise'' to ``management,'' pointing out
that the current regulatory section is simply entitled ``management''
and the name ``management of the enterprise'' suggests that these
management duties apply to an entity broader than that required by
section 541.100. Because section 541.100(a)(2) requires that the
primary duty of the employee involve management of the ``enterprise or
of a customarily recognized department or subdivision thereof,'' the
Department has renamed the section ``management'' to avoid any
confusion.
The Department also received a number of comments, including from
the Fisher & Phillips law firm, the National Retail Federation, the
National Association of Federal Wage Hour Consultants, the National
Council of Chain Restaurants and the National Association of Chain Drug
Stores, asking the Department to make clear that the list was not
exhaustive and other types of functions could constitute ``management''
activities. The Department believes that such a change is consistent
with the current interpretive guidelines which make clear the factors
listed are just examples, and the final rule has been revised
accordingly.
Several commenters did ask that specific functions be added to the
list. The Morgan Lewis & Bockius law firm comments that the examples
used in this section were too focused on supervision and suggested that
this section should recognize management of processes, projects and
contracts in addition to employees. The Department agrees that
management activities are not limited to supervisory functions.
Accordingly, the final rule adds the management functions of ``planning
and controlling the budget'' and ``monitoring or implementing legal
compliance measures.'' Further, the Department notes that management of
processes, projects or contracts are also appropriately considered
exempt administrative duties. The National Retail Federation asks that
the list be ``augmented to confirm that additional duties are exempt
when performed by retail employees in the course of managing: such as
walking the floor, interacting with customers to determine satisfaction
* * *, team building, conducting inspections, evaluating efficiency,
monitoring or implementing legal compliance measures, training * * *,
attending management meetings, planning meetings and developing meeting
materials, planning and conducting marketing activities * * *, and
investigating or otherwise addressing matters regarding personnel,
proficiency, productivity, staffing or management issues.'' The
National Council of Chain Restaurants suggests that ``handling customer
complaints'' is just as much a management function as handling employee
complaints and therefore should be added to the list of examples, along
with ``coaching employees in proper job performance techniques and
procedures.'' The Department believes that it is not appropriate to
further augment the list. Although many of these suggestions are
appropriate examples of ``management'' functions, some appear
duplicative of functions already included in the section and others,
such as ``handling customer complaints'' and ``conducting
inspections,'' are functions that could qualify as either management or
production type functions depending on the specific facts involved. A
case-by-case analysis would be more appropriate to determine whether
such functions meet the definition of ``management.'' Moreover, because
the Department has added language to make clear that the list is not
exhaustive, such functions could be considered management functions in
appropriate circumstances. For example, a customer service
representative may routinely handle customer complaints but not be
acting in a management capacity. In contrast, a manager in a restaurant
may be the person responsible for handling such complaints as the
individual responsible for the functioning of the operation and
therefore would be operating in a management capacity.
Finally, the management function listed as ``appraising their
productivity and efficiency'' has been augmented with the phrase from
the current regulations, ``for the purpose of recommending promotions
or other changes in their status.'' The AFL-CIO argues that the
elimination of this
[[Page 22134]]
phrase would allow the definition of management to include low-level
personnel functions. As the Department did not intend to change the
meaning of this phrase, this language has been added to the final rule.
Section 541.103 Department or Subdivision (Proposed Sec. 541.104)
Proposed section 541.104 stated that the phrase ``department or
subdivision'' is ``intended to distinguish between a mere collection of
employees assigned from time to time to a specific job or series of
jobs and a unit with permanent status and function.'' The section
defined ``department or subdivision'' as requiring ``a permanent status
and a continuing function.'' Proposed subsection 541.104(b) recognized
that ``when an enterprise has more than one establishment, the employee
in charge of each establishment may be considered in charge of a
recognized subdivision of the enterprise.'' Proposed subsection
541.104(c) stated that ``a recognized department or subdivision need
not be physically within the employer's establishment and may move from
place to place'' and provided that the ``mere fact that the employee
works in more than one location does not invalidate the exemption if
other factors show that the employee is actually in charge of a
recognized unit.'' Finally, proposed subsection 541.104(d) stated that
``continuity of the same subordinate personnel is not essential to the
existence of a recognized unit with a continuing function. An otherwise
exempt employee will not lose the exemption merely because the employee
draws and supervises workers from a pool or supervises a team of
workers drawn from other recognized units, if other factors are present
that indicate that the employee is in charge of a recognized unit with
a continuing function.''
The only changes to proposed section 541.104 are to renumber the
section as 541.103 in the final rule, and to delete the sentence in
subsection (b) that ``[t]he employee also may qualify for the sole
charge exemption, if all of the requirements of Sec. 541.102 are
satisfied.'' This sentence is no longer necessary because of the
deletion of the ``sole charge'' exemption in proposed section 541.102.
No other changes have been made.
Several commenters request that the Department expand or clarify
the phrase ``department or subdivision.'' The Morgan Lewis & Bockius
law firm asks the Department to expand the phrase ``department or
subdivision'' to include ``grouping.'' The Public Sector FLSA Coalition
suggests that the phrase be broadened to account for a functional unit
which would provide for a more flexible or fluid organizational
philosophy. The National Council of Chain Restaurants asks for
confirmation of the Department's historic enforcement position that
``front of the house'' and ``back of the house'' are recognized
subdivisions. The U.S. Chamber of Commerce states that the phrase
``department or subdivision'' is outdated and the applicable units
should provide for project teams. Finally, the League of Minnesota
Cities questions whether a subdivision would include supervision of a
day shift.
The Department has decided not to expand the term ``department or
subdivision'' because the phrase has not caused confusion or excessive
litigation. Expanding the definition would unduly complicate this
requirement and likely lead to unnecessary litigation. Indeed, the
courts already have provided clarification of the phrase on a number of
occasions. For example, several courts have stated that a shift can
constitute a department or subdivision, which responds to the question
raised by the League of Minnesota Cities. See West v. Anne Arundel
County, Maryland, 137 F.3d 752, 763 (4th Cir. 1998); Joiner v. City of
Macon, 647 F. Supp. 718, 721-22 (M.D. Ga. 1986); Molina v. Sea Land
Services, Inc., 2 F. Supp. 2d 185, 188 (D.P.R. 1998). The Department
notes that the issue identified by the National Retail Federation as to
whether ``front of the house'' in a store constitutes a department or
subdivision was answered by at least one court in the affirmative. See
Debartolo v. Butera Finer Foods, 1995 WL 516990, at *4 (N.D. Ill.
1995). Finally, the Department observes that ``groupings'' or ``teams''
may constitute a department or subdivision under the existing
definition, but a case-by-case analysis is required. See Gorman v.
Continental Can Co., 1985 WL 5208, at *6 (N.D. Ill. 1985) (department
or subdivision can ``include small groups of employees working on a
related project within a larger department, such as a group leader of
four draftsmen in the gauge section of a much larger department''). The
Department believes these cases correctly define and delimit the term
``department or subdivision.''
Section 541.104 Two or More Other Employees (Proposed Sec. 541.105)
Proposed section 541.105 defined the term ``two or more other
employees'' to mean ``two full-time employees or their equivalent. One
full-time and two half-time employees, for example, are equivalent to
two full-time employees. Four half-time employees are also
equivalent.'' Proposed section 541.105(b) stated that the ``supervision
can be distributed among two, three or more employees, but each such
employee must customarily and regularly direct the work of two or more
other full-time employees or the equivalent. Thus, for example, a
department with five full-time nonexempt workers may have up to two
exempt supervisors if each such supervisor customarily and regularly
directs the work of two of those workers.'' However, under proposed
subsections (c) and (d), an ``employee who merely assists the manager
of a particular department and supervises two or more employees only in
the actual manager's absence does not meet this requirement,'' and
``[h]ours worked by an employee cannot be credited more than once for
different executives.'' Thus, ``a shared responsibility for the
supervision of the same two employees in the same department does not
satisfy this requirement.''
Except for renumbering the section as 541.104, no other changes
were made.
In its proposal, the Department invited comments on whether the
supervision of ``two or more employees'' required for exemption should
be modified to include ``the customary or regular leadership, alone or
in combination with others, of two or more other employees.'' See 61 FR
15565 (March 31, 2003). In response to this request, the Department
received a large number of comments both in support of and against the
modification. Commenters such as the U.S. Chamber of Commerce, the
National Association of Manufacturers, the League of Minnesota Cities,
the Financial Services Roundtable, the National Automobile Dealers
Association, the State of Oklahoma, the State of Kansas Department of
Administration Division of Personnel Services, the Tennessee Valley
Authority, the Public Sector FLSA Coalition, and the FLSA Reform
Coalition support the modified language as more applicable to the
realities of the modern workforce. In contrast, other commenters
believe this language would compromise the executive exemption or
create confusion. For example, the National Employment Lawyers
Association ``disputes that there is any need for modification changing
the long-established requirement that an exempt executive must
supervise two or more employees'' because those ``who supervise fewer
than two employees are, as [a] practical matter, clearly not performing
exempt activity at a level that could conceivably justify their
characterization as bona
[[Page 22135]]
fide executives.'' The Contract Services Association of America states
that the ``word `leadership' has too many connotations to be practical
in the work environment.''
After full consideration of these comments, the Department has
decided to retain the existing and proposed language that the employee
direct the work of ``two or more other employees'' to qualify as an
executive under the final rule. The Department agrees with the comments
opposing this change, and has rejected the ``leadership'' modification
because the present requirement provides a well established, easily
applied, bright-line test for exemption, and the ambiguity attached to
the term ``lead,'' the Department believes, could spark needless
litigation. Also, an employee whose primary duty is management and who
customarily and regularly leads other employees, alone or with another,
may qualify for exemption under the administrative exemption.
The Department also received a number of other comments and
requests for clarification on this section. The FLSA Reform Coalition
asks that the Department clarify what the term ``full-time'' means, and
requests that the clarification include a statement that the term
should be defined by the employer's practices. The Department does not
believe additional clarification is necessary, and stands by its
current interpretation that an exempt supervisor generally must direct
a total of 80 employee-hours of work each week. As the Wage and Hour
Division's Field Operations Handbook (FOH) states, however,
circumstances might justify lower standards. For example, firms in some
industries have standard workweeks of 37\1/2\ hours or 35 hours for
their full-time employees. In such cases, supervision of employees
working a total of 70 or 75 hours in a workweek will constitute the
equivalent of two full-time employees. FOH 22c00.
Several commenters, such as the Financial Services Roundtable and
the Mortgage Bankers Association of America, urge the Department to
clarify the phrase ``in the manager's actual absence'' in subsection
(c). The Department continues to believe that the phrase provides
useful guidance in defining the exempt executive, and intends that this
phrase be interpreted to mean that an employee who simply supervises on
a short-term basis, such as during a lunch break or while a manager is
on vacation, is not meeting the requirement of customarily and
regularly supervising two or more employees.
Several commenters ask that the requirement of directing two or
more employees be eliminated. Other commenters state that the
requirement should be lowered to directing only one other employee. Yet
others argue that the number of employees supervised should be raised.
For example, the National Association of Federal Wage Hour Consultants
states that the requirement should be five employees while the Labor
Board, Inc. suggests the number should be four employees. The
Department continues to believe that the current requirement of
directing two or more employees is an appropriate measure of exempt
status and to raise the threshold would disproportionately harm small
businesses that may not have a large number of employees. See 1940
Weiss Report at 45-46.
Several commenters question whether the requirement that an
employee direct two or more other ``employees'' includes employees of a
contractor. Several commenters also urge the Department to expand this
requirement to two or more ``individuals'' so as to count the
supervision of volunteers, contractors, and other non-employees. The
Department has evaluated these comments and determined that no changes
should be made. The FLSA itself defines the term ``employee'' as an
``individual employed by an employer,'' and this definition has been
subject to extensive judicial interpretation. See 29 U.S.C. Sec.
203(e)(1). The Department also observes, however, that the
administrative exemption may apply to the employee who supervises
contractors, volunteers or other non-employees if the other
requirements for that exemption are met.
Section 541.105 Particular Weight
Section 541.105 of the final rule contains a new definition of the
phrase ``particular weight'' as follows:
To determine whether an employee's suggestions and recommendations
are given ``particular weight,'' factors to be considered include,
but are not limited to, whether it is part of the employee's job
duties to make such suggestions and recommendations; the frequency
with which such suggestions and recommendations are made or
requested; and the frequency with which the employee's suggestions
and recommendations are relied upon. Generally, an executive's
suggestions and recommendations must pertain to employees whom the
executive customarily and regularly directs. It does not include an
occasional suggestion with regard to the change in status of a co-
worker. An employee's suggestions and recommendations may still be
deemed to have ``particular weight'' even if a higher level
manager's recommendation has more importance and even if the
employee does not have authority to make the ultimate decision as to
the employee's change in status.
This definition has been added in response to comments received
from groups such as the Society for Human Resource Management, Leggett
& Platt, the Food Marketing Institute, the League of Minnesota Cities
and the American Council of Engineering Companies, who indicate that
this phrase is extremely vague and needs clarification. As one of the
Department's goals is to provide clarity to the terms contained in the
regulations, we have defined ``particular weight'' by incorporating
factors relied on by the courts to define this term under the current
regulations. See, e.g., Baldwin v. Trailer Inns, Inc., 266 F.3d 1104,
1116 (9th Cir. 2001); Molina v. Sea Land Services, Inc., 2 F. Supp. 2d
185, 188 (D.P.R. 1998); Wendt v. New York Life Insurance Co., 1998 WL
118168, at *6 (S.D.N.Y. 1998); Passer v. American Chemical Society, 749
F. Supp. 277, 280 (D.D.C. 1990); Wright v. Zenner & Ritter, Inc., 1986
WL 6152, at *2 (W.D.N.Y. 1986); Kuhlmann v. American College of
Cardiology, 1974 WL 1344, at *1 (D.D.C. 1974); Marchant v. Sands Taylor
& Woods Co., 75 F. Supp. 783, 786 (D. Mass. 1948); Anderson v. Federal
Cartridge Corp., 62 F. Supp. 775, 781 (D. Minn. 1945).
As illustrated by these cases, factors such as the frequency of
making recommendations, frequency of an employer's relying on an
employee's recommendations, as well as evidence that the employee's job
duties explicitly include the responsibility to make such
recommendations, are important considerations in determining whether
``particular weight'' is given to the employee's recommendations. Thus,
for example, an employee who provides few recommendations which are
never followed would not meet the ``hire or fire'' requirement in final
section 541.100(a)(4). Evidence that an employee's recommendation are
given ``particular weight'' could include witness testimony that
recommendations were made and considered; the exempt employee's job
description listing responsibilities in this area; the exempt
employee's performance reviews documenting the employee's activities in
this area; and other documents regarding promotions, demotions or other
change of status that reveal the employee's role in this area.
Section 541.106 Concurrent Duties (Proposed Sec. Sec. 541.106 and
541.107)
Proposed section 541.106 entitled ``Working supervisors'' stated:
``Employees, sometimes called `working foremen' or `working
supervisors,' who
[[Page 22136]]
have some supervisory functions, such as directing the work of other
employees, but also perform work unrelated or only remotely related to
the supervisory activities are not exempt executives if, instead of
having management as their primary duty as required in Sec. 541.100,
their primary duty consists of either the same kind of work as that
performed by their subordinates; work that, although not performed by
their own subordinates, consists of ordinary production or sales work;
or routine, recurrent or repetitive tasks.'' Proposed section 541.107
entitled ``Supervisors in retail establishments'' stated: ``Supervisors
in retail establishments often perform work such as serving customers,
cooking food, stocking shelves, cleaning the establishment or other
nonexempt work. Performance of such nonexempt work by a supervisor in a
retail establishment does not disqualify the employee from the
exemption if the requirements of Sec. 541.100 are otherwise met. Thus,
an assistant manager whose primary duty includes such activities as
scheduling employees, assigning work, overseeing product quality,
ordering merchandise, managing inventory, handling customer complaints,
authorizing payment of bills or performing other management functions
may be an exempt executive even though the assistant manager spends the
majority of the time on nonexempt work.''
As the Department explained in the preamble to the proposed rule,
both proposed section 541.106 and proposed section 541.107 were meant
to address the difficult issue of classifying employees who have both
exempt supervisory duties and nonexempt duties. The Department invited
comments on whether these sections have appropriately distinguished
exempt and nonexempt employees. 61 FR 15565.
Based on the comments received, the Department has decided to
combine these two proposed sections into one section entitled
``concurrent duties.'' The Department believes that a unified section
on this topic will better illustrate when an employee satisfies the
requirements of the executive exemption. The final section 541.106
incorporates the general principles and examples from both proposed
section 541.106 and proposed section 541.107. The final section
541.106(a) thus provides: ``Concurrent performance of exempt and
nonexempt work does not disqualify an employee from the executive
exemption if the requirements of Sec. 541.100 are otherwise met.'' To
further distinguish exempt executives from nonexempt workers, the final
subsection 541.106(a) also states: ``Generally, exempt executives make
the decision regarding when to perform nonexempt duties and remain
responsible for the success or failure of business operations under
their management while performing the nonexempt work. In contrast, the
nonexempt employee generally is directed by a supervisor to perform the
exempt work or performs the exempt work for defined time periods. An
employee whose primary duty is ordinary production work or routine,
recurrent or repetitive tasks cannot qualify for exemption as an
executive.'' Final subsections 541.106(b) and (c) contain examples to
further illustrate these general principles.
The final section provides, as in the current regulations, that an
employee with a primary duty of ordinary production work is not exempt
even if the employee also has some supervisory responsibilities. As
explained in the preamble to the proposed rule, this situation often
occurs in a factory setting where an employee who works on a production
line also has some responsibility to direct the work of other
production line workers. Another example is an employee whose primary
duty is to work as an electrician, but who also directs the work of
other employees on the job site, orders parts and materials for the
job, and handles requests from the prime contractor. Nonexempt
employees do not become exempt executives simply because they direct
the work of other employees upon occasion or provide input on
performance issues from time to time because such employees typically
do not meet the other requirements of section 541.100, such as having a
primary duty of management.
The Department decided to combine proposed sections 541.106 and
541.107 into one section on ``concurrent duties'' in response to a
number of comments indicating that the proposed separate sections were
duplicative and not helpful in understanding the distinction between
exempt and nonexempt employees. The National Council of Chain
Restaurants argues that proposed section 541.106 should be eliminated
because of confusion created by having two separate sections. The
Fisher & Phillips law firm and the National Association of Convenience
Stores argue that proposed section 541.106 should be eliminated as no
longer necessary because that section has always related to the
percentage limitations on nonexempt work from the existing long test.
Similar comments were received from the U.S. Chamber of Commerce. The
Workplace Practices Group argues for the elimination of proposed
section 541.106 and suggests that proposed section 541.107 apply to all
supervisors, as both working supervisors and retail supervisors have
the same or very similar responsibilities such as scheduling employees,
assigning work and overseeing product quality. The County of Culpeper,
Virginia, argues that proposed section 541.106 ignored the realities of
small governments where department heads have to perform both exempt
management duties and nonexempt work.
Some commenters, including the New Jersey Business & Industry
Association, the National Retail Federation and the HR Policy
Association, commend the Department for recognizing the special
circumstances of retail supervisors. In contrast, the Society for Human
Resource Management, Senator Orrin G. Hatch and others argue that a
distinction between retail and non-retail supervisors does not exist.
The American Hotel & Lodging Association, the International Franchise
Association, the FLSA Reform Coalition, the National Association of
Chain Drug Stores and the International Mass Retail Association argue
that proposed section 541.107 should be modified to cover both retail
and service establishments.
Other commenters state that the description of ``working
supervisors'' was too broad. Such commenters argue that fast-food
managers who spend the majority of their time on nonexempt work should
not be exempt. The National Employment Law Project states that the
proposed language would make it possible to exempt all line employees,
provided they met the requirements of proposed section 541.100. The
McInroy & Rigby law firm argues that proposed section 541.107 should be
eliminated since there was no policy justification for assistant
managers in fast-food establishments to be exempt from FLSA
requirements. The Communications Workers of America similarly opposes
any diminution of the existing regulatory standards for exempt
executives.
The Department believes that the proposed and final regulations are
consistent with current case law which makes clear that the performance
of both exempt and nonexempt duties concurrently or simultaneously does
not preclude an employee from qualifying for the executive exemption.
Numerous courts have determined that an employee can have a primary
duty of management while concurrently performing nonexempt duties. See,
e.g., Jones v. Virginia Oil Co., 2003 WL 21699882, at *4 (4th Cir.
2003) (assistant manager who spent 75 to 80 percent of
[[Page 22137]]
her time performing basic line-worker tasks held exempt because she
``could simultaneously perform many of her management tasks''); Murray
v. Stuckey's, Inc., 939 F.2d 614, 617-20 (8th Cir. 1991) (store
managers who spend 65 to 90 percent of their time on ``routine non-
management jobs such as pumping gas, mowing the grass, waiting on
customers and stocking shelves'' were exempt executives); Donovan v.
Burger King Corp., 672 F.2d 221, 226 (1st Cir. 1982) (``an employee can
manage while performing other work,'' and ``this other work does not
negate the conclusion that his primary duty is management''); Horne v.
Crown Central Petroleum, Inc., 775 F. Supp. 189, 190 (D.S.C. 1991)
(convenience store manager held exempt even though she performed
management duties ``simultaneously with assisting the store clerks in
waiting on customers''). Moreover, courts have noted that exempt
executives generally remain responsible for the success or failure of
business operations under their management while performing the
nonexempt work. See Jones v. Virginia Oil Co., 2003 WL 21699882, at *4
(``Jones'' managerial functions were critical to the success' of the
business); Donovan v. Burger King Corp., 675 F.2d 516, 521 (2nd Cir.
1982) (the employees' managerial responsibilities were ``most important
or critical to the success of the restaurant''); Horne v. Crown Central
Petroleum, Inc., 775 F. Supp. at 191 (nonexempt tasks were ``not nearly
as crucial to the store's success as were the management functions'').
The Department continues to believe that this case law accurately
reflects the appropriate test of exempt executive status and is a
practical approach that can be realistically applied in the modern
workforce, particularly in restaurant and retail settings. Since all of
the prongs of the executive test need to be met to classify an employee
as an exempt executive, the Department believes the final rule has
sufficient safeguards to protect nonexempt workers.
The Department also received more specific comments on the language
contained in proposed sections 541.106 and 541.107. The National Retail
Federation argues that the time spent ``multi-tasking'' should also be
considered exempt work. A comment from the Food Marketing Institute
argues that it is critically important that proposed section 541.107
state unequivocally that managers shall not be subject to arbitrary
percentage time limits on nonexempt work. The Department believes that
sufficient language already is included in this section to make clear
that, as stated in current case law, an otherwise exempt supervisory
employee does not lose the exemption simply because the employee is
simultaneously performing exempt and nonexempt work. The Department
also believes that the final section 541.700, defining ``primary
duty,'' states clearly that there is no strict percentage limitation on
the performance of nonexempt work.
One commenter suggests that the Department include in the final
rule language from the current interpretive guidelines at 541.119(c)
stating that the short test for highly compensated executives cannot be
applied to the trades. The final rule, however, includes even stronger
language in new section 541.3, which states that none of the section
13(a)(1) exemptions apply to the skilled trades, no matter how highly
compensated they are. Thus, the Department believes that no further
clarification is needed.
The State of Kansas Department of Administration, Division of
Personnel Services, argues that proposed section 541.107 conflicts with
language under the administrative exemption regarding project leaders.
The Department does not believe that there is any conflict because the
executive and administrative exemptions are independently defined and
applied, and whether one or both of the exemptions apply will depend on
the specific job duties the employee performs.
The Information Technology Industry Council, the U.S. Chamber of
Commerce and the Morgan Lewis & Bockius law firm argue that language
regarding performance of production or sales work should be eliminated
from proposed section 541.106, as it continues to emphasize the
production versus staff dichotomy. This language has been removed from
the final rule. The Department has combined and streamlined proposed
sections 541.106 and 541.107, and we do not believe that this phrase
was instructive in clarifying the concept of concurrent duties.
Subpart C, Administrative Employees
Section 541.200 General Rule for Administrative Employees
As in the executive exemption, the proposed regulations streamlined
the current regulations by adopting a single standard duties test in
proposed section 541.200. The proposed standard duties test provided
that an exempt administrative employee must have ``a primary duty of
the performance of office or non-manual work related to the management
or general business operations of the employer or the employer's
customers,'' and hold ``a position of responsibility with the
employer.''
The final rule modifies both of the proposed requirements for the
administrative exemption. First, the final rule provides that an exempt
administrative employee is one ``whose primary duty is the performance
of office or non-manual work directly related to the management or
general business operations of the employer or the employer's
customers.'' Second, the final rule deletes the proposed ``position of
responsibility'' requirement and instead reinserts the current
requirement that an exempt administrative employee's primary duty
include ``the exercise of discretion and independent judgment with
respect to matters of significance.''
In addition to the ``discretion and independent judgment''
requirement discussed more fully below, the final rule makes two
changes to the proposed primary duty test. First, as under the
executive exemption, the AFL-CIO and other commenters state that
changing from ``whose'' primary duty as written in the current
regulations to the proposed language of ``a'' primary duty was a major
weakening of the test because it allows for more than one primary duty.
As the Department did not intend any substantive change, the final rule
uses the existing language ``whose primary duty.'' Second, the final
rule reinserts language from the current regulation that the work must
be ``directly'' related to management or general business operations.
Commenters such as the National Treasury Employees Union, the National
Employment Lawyers Association, the American Federation of Television
and Radio Artists, the Stoll, Stoll, Berne, Lokting & Shlachter law
firm, and the Rudy, Exelrod & Zieff law firm oppose the deletion of the
word ``directly,'' stating that an employee whose duties relate only
indirectly or tangentially to administrative functions should not
qualify for exemption. As the Department did not intend any substantive
change by deletion of the word ``directly,'' we have reinserted this
term to ensure that the administrative primary duty test is not
interpreted as allowing the exemption to apply to employees whose
primary duty is only remotely or tangentially related to exempt work.
The same change has been made in other sections where the term is used.
The final rule, however, retains the proposed primary duty language
that the exempt employee's work must be related to ``management or
general business operations,'' rather than the
[[Page 22138]]
``management policies'' language of the existing regulations. Although
some commenters object to this change, other commenters, such as the
FLSA Reform Coalition, the HR Policy Association, and the Fisher &
Phillips law firm, approve of the proposed deletion of the word
``policies'' as recognizing that while management policies are one
component of management, there are many other administrative functions
that support managing a business. The Department agrees and has
retained the proposed language in the final regulation. As explained in
the 1949 Weiss Report, the administrative operations of the business
include the work of employees ``servicing'' the business, such as, for
example, ``advising the management, planning, negotiating, representing
the company, purchasing, promoting sales, and business research and
control.'' 1949 Weiss Report at 63. Much of this work, but not all,
will relate directly to management policies. As the current regulations
state at section 541.205(c), exempt administrative work includes not
only those who participate in the formulation of management policies or
in the operation of the business as a whole, but it ``also includes a
wide variety of persons who either carry out major assignments in
conducting the operations of the business, or whose work affects
business operations to a substantial degree, even though their
assignments are tasks related to the operation of a particular segment
of the business.'' Therefore, the Department considers the primary duty
test for the administrative exemption to be as protective as the
existing regulations.
In addition to the primary duty test, the proposed general rule for
the administrative exemption also required that an employee hold a
``position of responsibility.'' The proposal at section 541.202 further
defined ``position of responsibility'' as performing ``work of
substantial importance'' or ``work requiring a high level of skill or
training.'' The proposal also eliminated the current requirement that
an exempt administrative employee perform work ``requiring the exercise
of discretion and independent judgment.'' The Department specifically
invited comments on these changes, including whether the ``discretion
and independent judgment'' requirement should be deleted entirely;
retained as a third alternative for meeting the ``position of
responsibility'' requirement; or retained in place of the ``position of
responsibility requirement,'' but modified to provide better guidance
on distinguishing exempt administrative employees.
The Department received numerous, widely divergent comments on
these proposed changes. Commenters such as the FLSA Reform Coalition,
the U.S. Chamber of Commerce, the HR Policy Association, the National
Retail Federation, the Morgan, Lewis & Bockius law firm, and the
National Association of Federal Wage Hour Consultants generally approve
of the ``position of responsibility'' requirement, preferring it to the
mandatory ``discretion and independent judgment'' requirement of the
existing regulations. They support, in particular, the proposal that
employees with a ``high level of skill or training'' can qualify as
exempt administrative employees, even if they use reference manuals to
provide guidance in addressing difficult or novel circumstances. For
example, the Morgan, Lewis & Bockius law firm states that, ``in today's
regulatory climate, few employers can leave highly complex issues
totally to the discretion of even high level employees.'' The HR Policy
Association states that this ``new requirement that an employee have a
`high level of skill or training' distinguishes employees who are
merely looking up information from those who use the information in an
analytical way.''
However, even commenters who generally support the ``position of
responsibility'' structure also express concerns about the vagueness
and subjectivity of the new terms. For example, the National
Association of Manufacturers (NAM) states that it ``is not sure what
`position of responsibility' means and fears that the Department is
substituting one vague term for another.'' NAM also notes that, ``using
the term `skill' in the administrative employee definition can be
problematic. The term is often associated with nonexempt trade
occupations--i.e., people who perform work and are not exempt from the
FLSA's wage and overtime rules.'' NAM states that ``care should be used
when introducing into the white-collar exemption definitions a term
that has been historically associated with nonexempt workers.''
Similarly, the American Bakers Association states that the position of
responsibility standard ``is somewhat vague and subjective'' and that
it ``appears to invite another generation of court litigation to
clarify the meaning of its key terms.'' The FLSA Reform Coalition
expresses concern that the standard would be applied to the
disadvantage of large companies, stating that ``small fish in big
ponds'' might not be found exempt even if they had the same degree of
responsibility as employees working for small companies. Other
commenters object to the implication that some employees do not have
responsibility at work. For example, the Society for Human Resource
Management states that, ``each and every position in an organization is
one of responsibility * * *.'' Similarly, the Workplace Practices Group
recommends eliminating the term ``position of responsibility'' because
a ``basic tenet of modern management philosophy is empowering employees
to see their position in an organization, whatever it might be, as one
of responsibility. This is true whether the position held is
receptionist or customer service agent.'' Finally, the American
Corporate Counsel Association, while approving of the abandonment of
the ``discretion and independent judgment'' requirement, suggests that
the ``position of responsibility'' test has ``the potential to result
in significant uncertainty and continued litigation. Employers often
seek to foster an atmosphere and develop workplace programs emphasizing
that the work of every employee involves a degree of responsibility and
contributes something substantially important to the success of the
enterprise. Thus, it appears to us that both `white collar' and `blue
collar' positions may be positions of responsibility for which work of
substantial importance is being performed.''
Other commenters strongly oppose the new ``position of
responsibility'' requirement as inappropriately weakening the
requirements for exemption. For example, the AFL-CIO states that
neither ``work of substantial importance'' nor ``work requiring a high
level of skill or training'' was an adequate substitute for the
``discretion and independent judgment'' test. Similarly, the Rudy,
Exelrod & Zieff law firm states that the FLSA does not exempt highly
skilled or trained employees, and such a regulatory change would allow
employers to misclassify employees with duties related to the
production of the company's goods and services. In addition, the firm
argues that such a provision effectively and unreasonably broadens the
professional exemption, by eliminating the advanced degree requirement.
Professor David Walsh similarly comments that the proposed language is
not more easily applied than the existing standard and ``seems to
conflate the administrative and professional exemptions.'' Commenters
such as the American Federation of
[[Page 22139]]
State, County and Municipal Employees, the Communications Workers of
America, the National Treasury Employees Union, the American Federation
of Television and Radio Artists, the National Employment Lawyers
Association, and the Goldstein, Demchak, Baller, Borgen & Dardarian law
firm express similar views, stating that the ``position of
responsibility'' test is not an equivalent substitute for the
``discretion and independent judgment requirement.'' These commenters
also state that all workers possess skills and training in one form or
another.
Many commenters view the ``discretion and independent judgment''
standard of the existing regulations as vague, ambiguous and
unworkable. Commenters such as the FLSA Reform Coalition, the Society
for Human Resource Management, the HR Policy Association, the Fisher &
Phillips law firm, the National Retail Federation, the National
Association of Chain Drug Stores, and the National Council of Chain
Restaurants state that the ``discretion and independent judgment''
requirement is the cause of confusion and unnecessary litigation. Such
commenters commend the Department for eliminating ``discretion and
independent judgment'' as a required element of the test for exemption.
The Fisher & Phillips law firm, for example, states that this standard
``has been an unending source of confusion, ambiguity, and dispute.''
Nevertheless, many of these same commenters support inclusion of
the ``discretion and independent judgment'' standard as a third
alternative to satisfy the ``position of responsibility'' test. For
example, the National Association of Manufacturers suggests that the
Department retain ``discretion and independent judgment'' as an
optional independent alternative to the ``position of responsibility''
requirement. These commenters state that decades of court decisions and
opinion letters provide guidance on its interpretation. Retaining the
standard as an alternative would thus provide a level of continuity
between the existing regulations and the new regulations, and avoid re-
litigation of jobs already held to be exempt under the current
``discretion and independent judgment'' test.
Other commenters such as the AFL-CIO, the American Federation of
State, County and Municipal Employees, the Communications Workers of
American, the National Treasury Employees Union, the New York Public
Employees Federation, the National Employment Lawyers Association, the
Rudy, Exelrod & Zieff law firm and Women Employed oppose the deletion
of the ``discretion and independent judgment'' standard as a required
element for exemption. Such commenters view deletion of this test as a
substantial expansion of the exemption. They cite the 1940 Stein Report
and 1949 Weiss Report as stating that the ``discretion and independent
judgment'' requirement was necessary to minimize the opportunity for
employer abuse in categorizing the diverse group of employees who might
be labeled as administrative. Moreover, such commenters generally view
the requirement as considerably more precise than the proposed
``position of responsibility'' replacement, and note that the
``discretion and independent judgment'' concept is also used under the
National Labor Relations Act. Such commenters often state that the need
to address developing case law prohibiting the use of manuals by exempt
employees does not necessitate the entire abandonment of the
``discretion and independent judgment'' standard. Finally, these
commenters also state that decades of jurisprudence would be lost if
the ``discretion and independent judgment'' requirement is eliminated.
Accordingly, the commenters recommend retention of the ``discretion and
independent judgment'' standard as an independent requirement for
exemption.
The commenters' widely divergent views demonstrate the difficult
task of clearly defining and delimiting the administrative exemption.
The GAO Report documented the difficulty of applying the ``discretion
and independent judgment'' standard consistently, causing uncertainty
for good faith employers attempting to classify employees correctly.
Even the 1949 Weiss Report noted that this standard ``is not as precise
and objective as some other terms in the regulations.'' 1949 Weiss
Report at 65. Numerous commenters concur with our observation in the
proposal that this requirement has generated significant confusion and
litigation. However, most commenters generally view both the ``position
of responsibility'' and the ``high level of skill or training''
standards as similarly vague, ambiguous and subjective. Most of the
commenters state that the ``discretion and independent judgment''
standard should be retained in some form, although there was sharp
disagreement on whether the standard should be a mandatory requirement.
Despite sharp criticism of both the current ``discretion and
independent judgment'' requirement and the proposed ``position of
responsibility'' standard, the comments contain very few suggestions
for clear and objective alternative language.
After careful consideration of the public comments submitted, the
Department agrees that the ``position of responsibility'' standard does
little to bring clarity and certainty to the administrative exemption.
In the proposal, the Department attempted to articulate a clear,
simple, common sense test for exemption, but most commenters believe
that we were not fully successful. Further, many commenters believe
that the term ``position of responsibility'' greatly expanded the scope
of the exemption--a result which the Department did not intend. In
addition, the Department agrees with the concerns of the National
Association of Manufacturers and other commenters that the ``high level
of skill or training'' standard is problematic because it is too
closely associated with nonexempt ``blue collar'' skilled trade
occupations.
Accordingly, the final rule deletes the proposed ``position of
responsibility'' requirement and its definition at proposed section
541.202 as ``work of substantial importance'' or ``work requiring a
high level of skill or training.'' Instead, as the second requirement
for the administrative exemption, the final rule requires that exempt
administrative employees exercise ``discretion and independent judgment
with respect to matters of significance.'' Thus, consistent with the
current short test, the final rule contains two independent, yet
related, requirements for the administrative exemption. First, the
employee must have a primary duty of performing office or non-manual
work ``directly related to management or general business operations.''
This first requirement refers to the type of work performed by the
employee, and is further defined at section 541.201. Second, the
employee's primary duty must include ``the exercise of discretion and
independent judgment with respect to matters of significance.'' As
discussed below, the exercise of discretion and independent judgment
``involves the comparison and the evaluation of possible courses of
conduct and acting or making a decision after the various possibilities
have been considered.'' The term ``matters of significance'' refers to
the level of importance or consequence of the work performed. These
terms are further defined at final section 541.202. See, e.g., Bothell
v. Phase Metrics, Inc., 299 F.3d 1120, 1125-26 (9th Cir. 2002) (looking
to both the ``types of activities'' and the importance of the work).
[[Page 22140]]
Section 541.201 Directly Related to Management or General Business
Operations
The proposed section 541.201 defined the phrase ``related to the
management or general business operations'' as referring ``to the type
of work performed by the employee'' and requiring that the exempt
administrative employee ``perform work related to assisting with the
running or servicing of the business, as distinguished, for example,
from working on a manufacturing production line or selling a product.''
The proposal also provided examples of the types of work that generally
relate to management or general business operations, including work in
areas such as tax, finance, accounting, auditing, quality control,
advertising, marketing, research, safety and health, personnel
management, human resources, labor relations, and others. Finally, the
proposal stated that an employee also may qualify for the
administrative exemption if the ``employee performs work related to the
management or general business operations of the employer's
customers,'' such as employees acting as advisers and consultants to
their employer's clients or customers.
The Department made two changes in the final subsection 541.201(a).
First, for the reasons discussed above, the final rule reinserts the
word ``directly'' throughout this section. Some commenters argue that
the deletion of the word ``directly'' from the existing regulations
would allow the exemption for an employee whose duties relate only
indirectly or tangentially to administrative functions. The Department
did not intend any substantive change by deletion of the word
``directly'' in the proposal, and thus has reinserted this term to
ensure that the administrative duties test is not interpreted as
allowing the exemption to apply to employees whose primary duty is only
remotely or tangentially related to exempt work. Second, the words
``retail or service establishment'' have been reinserted from the
current rule in the phrase: ``as distinguished, for example, from
working on a manufacturing production line or selling a product in a
retail or service establishment.'' This addition returns the regulatory
text more closely to the current section 541.205(a): ``as distinguished
from `production' or, in a retail or service establishment, `sales'
work.'' Commenters state that deletion of the words ``retail or service
establishment'' could be interpreted as denying the administrative
exemption to any employee engaged in any sales, advertising, marketing
or promotional activities. Because no such categorical change was
intended, or is supported by current case law, the Department has
restored the language from the current regulations. See, e.g., Reich v.
John Alden Life Insurance Co., 126 F.3d 1, 9-10 (1st Cir. 1997)
(promoting sales in the insurance industry is exempt administrative
work). The Department also notes that this phrase begins with the words
``for example.'' This final phrase in section 541.201(a) provides non-
exclusive examples. Thus, the concern of commenters such as the Rudy,
Exelrod & Zieff law firm that the reference to ``working on a
manufacturing production line'' suggests that ``working on what might
be termed a `white collar production line' is different from working on
a manufacturing production line for purposes of the exemption'' is
unfounded.
The primary focus of most comments on subsection 541.201(a) dealt
with the so-called `production versus staff' dichotomy. The preamble to
the proposal stated that the Department intended ``to reduce the
emphasis on the so-called ``production versus staff'' dichotomy in
distinguishing between exempt and nonexempt workers, while retaining
the concept that an exempt administrative employee must be engaged in
work related to the management or general business operations of the
employer or of the employer's customers.''
Many commenters, including the Society for Human Resource
Management (SHRM), the FLSA Reform Coalition, the National Association
of Manufacturers (NAM), the U.S. Chamber of Commerce (Chamber), the HR
Policy Association, the Morgan, Lewis & Bockius law firm and the Fisher
& Phillips law firm, strongly support the proposal's intended
diminution of the production versus staff dichotomy, which they believe
has little value in today's service-oriented economy. For example, the
Chamber states that the dichotomy ``does not fit in today's workplace''
because the ``decline in manufacturing and the rise in the service and
information industries has rendered the production dichotomy an
artifact of a different age.'' SHRM ``applauds the Department's
elimination of much of the `production v. staff' language'' but also
``recognizes that the production versus staff in some circumstances can
be a helpful aid in determining whether an employee fits under the
administrative exemptions and, therefore, supports the proposed
language. * * * This language strikes a proper balance between
retaining this concept and ensuring that it is not so strictly
construed so as to deny the exemption to an employee who should be
exempt.'' Similarly, NAM supports the proposed rule's attempt to
``reduce the emphasis on the production versus staff dichotomy.''
However, many of these commenters believe that the proposal did not
go far enough, and that the final rule should strive to eliminate the
dichotomy entirely. For example, the FLSA Reform Coalition states that
the dichotomy should be eliminated by allowing an employee to qualify
for the exemption either by performing work related to management or
general business operations, or by doing any work that includes the
exercise of discretion and independent judgment: ``Thus, even if the
employee's work could arguably be characterized as ``production,'' he
or she would nonetheless be an exempt administrative employee if his or
her job is a responsible, non-manual one that includes the exercise of
`discretion and independent judgment.' '' Similarly, the HR Policy
Association recommends that the Department ``eliminate the production
dichotomy from the administrative exemption'' because the confusion it
causes is too great and it is difficult to apply with uniformity. The
Fisher & Phillips law firm also states that the Department should
``eliminate the `dichotomy' altogether.''
The primary focus of these comments was the last sentence in
proposed subsection (a), which states that the administrative exemption
does not apply if an employee is ``working on manufacturing production
line or selling a product.'' Numerous commenters ask for clarification
about the scope and meaning of the statement. For example, the Morgan,
Lewis & Bockius law firm requests clarification that not all sales work
is excluded from exemption, such as advertising, marketing and
promotional activities, and for confirmation that some individuals who
work on a production line, such as a safety and health administrator or
quality control specialist, may still be exempt. The U.S. Chamber of
Commerce also states that the Department should ``revisit its approach,
especially with regard to treatment of employees who may be involved in
some aspect of sales,'' and should clarify that sales work is not
inherently inconsistent with exempt work. The HR Policy Association
recommends that the Department delete the ``working on a manufacturing
production line or selling a product'' phrase, or else clarify its
meaning either in the regulations or this preamble.
[[Page 22141]]
A large number of commenters have the opposite view about the
``production versus staff'' dichotomy, stating that minimizing or
deleting the dichotomy would deprive the administrative exemption of
its meaning. Such commenters, including the AFL-CIO, the National
Treasury Employees Union, the American Federation of State, County and
Municipal Employees, the Rudy, Exelrod & Zieff law firm, the National
Employment Lawyers Association, the American Federation of Television
and Radio Artists, the National Partnership for Women and Families and
the Stoll, Stoll, Berne Lokting & Shlachter law firm, believe that the
courts have found the dichotomy to be a useful and appropriate tool in
analyzing workers in a broad variety of non-manufacturing contexts.
They oppose any indication that the Department is minimizing the
dichotomy.
For example, the AFL-CIO notes that the 1949 Weiss report explained
that the phrase ``directly related to management policies or general
business operations'' describes those activities ``relating to the
administrative as distinguished from the `production' operations of a
business.'' Similarly, the 1940 Stein Report described administrative
exempt employees as ``those who can be described as staff rather than
line employees, or functional rather than departmental heads.'' The
AFL-CIO quotes Reich v. New York, 3 F.3d 581, 588 (2nd Cir. 1993),
cert. denied, 510 U.S. 1163 (1994), stating that the dichotomy ``has
repeatedly proven useful to courts in a variety of non-manufacturing
settings,'' and cites a number of court decisions applying the
dichotomy in a variety of government and service sector contexts. The
National Treasury Employees Union states that the ``distinction which
the Department would so casually discard is a key tool to help identify
the specific class of office workers that Congress intended to exempt:
support staff contributing to business operations and management. It is
imperative to keep this narrow focus rather than blur the distinction
between support staff and line workers * * *.'' The Rudy, Exelrod &
Zieff law firm notes that, prior to 1940, the Department did not
separately define the administrative exemption from the executive
exemption, because the Department recognized that the administrative
exemption ``was intended to cover no more than a small subclass of
`executive' employees.'' The firm states that the 1940 Stein Report
concluded that the employees whom the administrative exemption was
intended to cover had ``functional rather than departmental
authority,'' meaning they did not ``give orders to individuals.'' The
firm argues that nothing in the modern workplace, involving production
of services instead of manufactured goods, makes it improper to
continue to draw the line between employees who help to administer an
employer's general business operations and those employees whose duties
are related to the day-to-day production of the goods or services the
employer sells.
Commenters, thus, have very different perspectives about how the
Department should approach the ``production versus staff'' dichotomy
and apply it to the modern workplace. Except as stated above, we have
not adopted any of the commenters' suggestions for substantial changes
to the primary duty standard in section 541.201(a). The Department
believes that our proposal struck the proper balance on the
``production versus staff'' dichotomy. We do not believe that it is
appropriate to eliminate the concept entirely from the administrative
exemption, but neither do we believe that the dichotomy has ever been
or should be a dispositive test for exemption. The Department believes
that the dichotomy is still a relevant and useful tool in appropriate
cases to identify employees who should be excluded from the exemption.
As the Department recognized in the 1949 Weiss Report at 63, this
exemption is intended to be limited to those employees whose duties
relate ``to the administrative as distinguished from the `production'
operations of a business.'' Thus, it relates to employees whose work
involves servicing the business itself--employees who ``can be
described as staff rather than line employees, or as functional rather
than departmental heads.'' 1940 Stein Report at 27. The 1940 Stein
Report further described the exemption as being limited to employees
who have ``miscellaneous policy-making or policy-executing
responsibilities'' but who do not give orders to other employees. 1940
Stein Report at 4. Based on these principles, the Department provided
in proposed section 541.201(a) that the administrative exemption covers
only employees performing a particular type of work--work related to
assisting with the running or servicing of the business. The examples
the Department provided in proposed section 541.201(b) were intended to
identify departments or subdivisions that generally fit this rule.
The Department's view that the ``production versus staff''
dichotomy has always been illustrative--but not dispositive--of exempt
status is supported by federal case law. In Bothell v. Phase Metrics,
Inc., 299 F.3d 1120 (9th Cir. 2002), for example, the Ninth Circuit
found the dichotomy ``useful only to the extent that it helps clarify
the phrase `work directly related to the management policies or general
business operations.' '' Id. at 1126 (citation omitted). The court
further stated:
The other pertinent cases from our sister circuits similarly
regard the administration/production dichotomy as but one piece of
the larger inquiry, recognizing that a court must `construe the
statutes and applicable regulations as a whole.' Indeed, some cases
analyze the primary duty test without referencing the Sec.
541.205(a) dichotomy at all. This approach is sometimes appropriate
because, as we have said, the dichotomy is but one analytical tool,
to be used only to the extent that it clarifies the analysis. Only
when work falls `squarely on the production side of the line,' has
the administration/production dichotomy been determinative.
* * * * *
Moreover, the distinction should only be employed as a tool
toward answering the ultimate question, whether work is `directly
related to management policies or general business operations,' not
as an end in itself.
Id. at 1127 (citations omitted). See, e.g., Piscione v. Ernst & Young,
L.L.P., 171 F.3d 527, 538-39 (7th Cir. 1999) (even though the employee
``produced'' some reports and filings, and such work might be viewed as
production work, the work was directly related to the management or
general business operations); Spinden v. GS Roofing Products Co., 94
F.3d 421, 428 (8th Cir. 1996) (employee held administratively exempt
despite the fact that he ``produced'' certain specific outputs), cert.
denied, 520 U.S. 1120 (1997).
The final regulation is consistent with the Ninth Circuit's
approach in Phase Metrics: the ``production versus staff'' dichotomy is
``one analytical tool'' that should be used ``toward answering the
ultimate question,'' and is only determinative if the work ``falls
squarely on the production side of the line.''
As noted above, proposed section 541.201(b) provided an
illustrative list of the types of functional areas or departments,
including accounting, auditing, marketing, human resources and public
relations, typically administrative in nature. The commenters generally
found this illustrative list to be accurate and helpful. For example,
the FLSA Reform Coalition states that it supported the Department's
efforts to clarify the administrative exemption by ``focusing on the
function performed by the employee and providing examples of exempt,
administrative functions.'' The AFL-CIO comments that the list includes
areas ``which are clearly
[[Page 22142]]
encompassed within the servicing functions of a business, and which
substantially overlap with the servicing examples set forth in current
section 541.205(b).'' The U.S. Chamber of Commerce also notes that the
list is similar to the examples in the existing regulations and agrees
that all of the areas listed in the proposed regulation ``are proper
illustrations of exempt administrative work.'' Some commenters suggest
a variety of additional areas of work that should be added to the
illustrative list. However, the National Treasury Employees Union
cautions against exempting workers based upon their job area or title.
Other commenters similarly suggest that the Department should include
fewer categories in the list, because employees doing routine work may
be misperceived as exempt simply because they work in an area like
marketing, human resources, or research.
In light of these comments, we have added the language, ``but is
not limited to,'' to emphasize that the list is intended only to be
illustrative. It is not intended as a complete listing of exempt areas.
Nor is it intended as a listing of specific jobs; rather, it is a list
of functional areas or departments that generally relate to management
and general business operations of an employer or an employer's
customers, although each case must be examined individually. Within
such areas or departments, it is still necessary to analyze the level
or nature of the work (i.e., does the employee exercise discretion and
independent judgment as to matters of significance) in order to assess
whether the administrative exemption applies. Commenters recommend the
inclusion of several areas that we think are appropriate as additional
examples of areas that generally relate to management and general
business operations. Therefore, we are adding computer network,
internet and database administration; legal and regulatory compliance;
and budgeting to the illustrative list.
Finally, proposed section 541.201(c) provided that employees who
perform work related to the management or general business operations
of the employer's customers, such as advisers and consultants, also may
qualify for the administrative exemption. The proposed rule included
language from existing sections 541.2(a)(2) and 541.205(d), and no
substantive changes were intended. The commenters express few
substantive concerns with this provision. A small number of commenters
suggest that the regulation should provide that the employer's customer
could be an individual, while commenter Karen Dulaney Smith urges the
Department to insert the word `business' to clarify that the exemption
does not apply to ``individuals, whose ``business'' is purely
personal.'' The Department has not made either change. Nothing in the
existing or final regulations precludes the exemption because the
customer is an individual, rather than a business, as long as the work
relates to management or general business operations. As stated by
commenter Smith, the exemption does not apply when the individual's
`business' is purely personal, but providing expert advice to a small
business owner or a sole proprietor regarding management and general
business operations, for example, is an administrative function. The
1949 Weiss Report stated that the administrative exemption should not
be read to exclude ``employees whose duties relate directly to the
management policies or to the general business operations of their
employers' customers. For example, many bona fide administrative
employees perform important functions as advisors and consultants but
are employed by a concern engaged in furnishing such services for a fee
* * *. Such employees, if they meet the other requirements of the
regulations, should qualify for exemption regardless of whether the
management policies or general business operations to which their work
is directly related are those of the employers' clients or customers,
or those of their employer.'' 1949 Weiss Report at 65. Weiss also noted
that a consultant employed by a firm of consultants is exempt if the
employee's ``work consists primarily of analyzing, and recommending
changes in, the business operations of his employer's client.'' 1949
Weiss Report at 56. This provision is meant to place work done for a
client or customer on the same footing as work done for the employer
directly, regardless of whether the client is a sole proprietor or a
Fortune 500 company, as long as the work relates to ``management or
general business operations.''
Section 541.202 Discretion and Independent Judgment (Proposed
``Position of Responsibility'')
As discussed above, the Department has decided to eliminate the
proposed ``position of responsibility'' requirement. Thus, the final
rule deletes proposed section 541.202 defining ``position of
responsibility,'' proposed section 541.203 defining ``substantial
importance,'' and proposed section 541.204 defining ``high level of
skill or training.'' Instead, the final rule reinserts the ``discretion
and independent judgment'' requirement, and defines that term at final
section 541.202. Some of the language in proposed sections 541.203 and
541.204 was retained from the existing regulations and also appears in
the final regulations as described below. The language from proposed
section 541.204 regarding the use of manuals has been moved to a new
section in Subpart H, Definitions and Miscellaneous Provisions, and is
discussed under that subpart.
The Department continues to believe, as most commenters confirm,
that the current discretion and independent judgment standard has
caused confusion and unnecessary litigation. Even in the 1949 Weiss
Report, the Department recognized that the ``discretion and independent
judgment'' standard was somewhat subjective, and the difficulty of
applying the standard consistently has increased with the passing
decades. As evidenced by the increasing court litigation, it has become
progressively more difficult to apply the standard with the creation of
many new jobs that did not exist 50 years ago. Nonetheless, the vast
majority of commenters express concern that abandoning the ``discretion
and independent judgment'' standard entirely would create even more
uncertainty and litigation. We also recognize the benefit of retaining
the standard in some form so as not to jettison completely decades of
federal court decisions and agency opinion letters.
Accordingly, while retaining this standard from the existing
regulations, final section 541.202 clarifies the definition of
discretion and independent judgment to reflect existing federal case
law and to eliminate outdated and confusing language in the existing
interpretive guidelines. The Department intends the final rule to
clarify the existing standard and to make the standard easier to
understand and apply to the 21st Century workplace.
Final section 541.202(a) thus restates the requirement that the
exempt administrative employee's primary duty must ``include'' the
exercise of discretion and independent judgment and includes the
general definition of this term, taken word-for-word from the existing
interpretive guideline at subsection 541.207(a): ``In general, the
exercise of discretion and independent judgment involves the comparison
and the evaluation of possible courses of conduct and acting or making
a decision after the various possibilities have been considered.'' The
requirement that the primary duty must ``include'' the
[[Page 22143]]
exercise of discretion and independent judgment--rather than
``customarily and regularly'' exercise discretion and independent
judgment--is not a change from current law. Although the Department is
aware that there has been some confusion regarding the appropriate
standard under the existing ``short'' duties test, federal court
decisions have recognized that the current ``short'' duties test does
not require that the exempt employee ``customarily and regularly''
exercise discretion and independent judgment, as does the effectively
dormant ``long'' test. See, e.g., O'Dell v. Alyeska Pipeline Service
Co., 856 F.2d 1452, 1454 (9th Cir. 1988) (district court erred in not
applying more lenient ``includes'' standard under short test which made
a difference in determining whether employee was exempt); Dymond v.
United States Postal Service, 670 F.2d 93, 95 (8th Cir. 1982) (while
the ``long'' duties test for the administrative exemption requires that
the employee ``customarily and regularly'' exercise discretion and
independent judgment, when an employee makes more than $250 a week,
``that requirement is reduced to requiring that the employee's primary
duty simply `includes work requiring the exercise of discretion and
independent judgment''').
Also retained from existing subsection 541.207(a), the final
subsection 541.202(a) provides that discretion and independent judgment
must be exercised ``with respect to matters of significance.'' Final
subsection 541.202(a) states that the term ``matters of significance''
refers to ``the level of importance or consequence of the work
performed.'' This concept of the importance or high level of work
performed does not appear as a regulatory requirement in existing
section 541.2, but is included twice in the existing interpretive
guidance. Existing section 541.205(a), defining the primary duty
requirement, states that the administrative exemption is limited ``to
persons who perform work of substantial importance to the management or
operation of the business.'' This language was the basis of the ``work
of substantial importance'' option in the proposed definition of
``position of responsibility.'' Existing section 541.207(a), defining
the term ``discretion and independent judgment'' provides that an
exempt administrative employee ``has the authority or power to make an
independent choice, free from immediate direction or supervision and
with respect to matters of significance.''
The existing regulations use these two different phrases found in
two different sections to describe the same general concept--that the
work performed by an exempt administrative employee must be
significant, substantial, important, or of consequence. See, e.g.,
Piscione v. Ernst & Young, L.L.P., 171 F.3d 527, 535-43 (7th Cir.
1999). The words ``substantial'' and ``significant'' are synonyms.
Existing section 541.207(d) describes the ``matters of significance''
concept as requiring that ``the discretion and independent judgment
exercised must be real and substantial, that is, they must be exercised
with respect to matters of consequence.'' Further, existing section
541.205 and existing section 541.207 use some of the same examples
(i.e., personnel clerks, inspectors, buyers) to illustrate the meaning
of ``substantial importance'' and the meaning of ``matters of
significance.''
Describing the same concept using two different phrases in two
different sections of the existing interpretive guidelines is
duplicative and confusing. Accordingly, the final rule chooses one
phrase--``matters of significance''--and makes that phrase part of the
regulatory test for the administrative exemption, rather than merely
interpretive guidance. As described below, final subsections 541.202(b)
through (f) combine language from existing section 541.205, existing
section 541.207, and current case law to more clearly define and
delimit this concept.
Final subsection 541.202(b) begins with language from existing
section 541.207(b) stating that the phrase `discretion and independent
judgment' must be applied in the light of all the facts involved in the
particular employment situation in which the question arises.'' Final
subsection 541.202(b) then contains the following non-exclusive list of
factors to consider when determining whether an employee exercises
discretion and independent judgment with respect to matters of
significance:
[W]hether the employee has authority to formulate, affect,
interpret, or implement management policies or operating practices;
whether the employee carries out major assignments in conducting the
operations of the business; whether the employee performs work that
affects business operations to a substantial degree, even if the
employee's assignments are related to operation of a particular
segment of the business; whether the employee has authority to
commit the employer in matters that have significant financial
impact; whether the employee has authority to waive or deviate from
established policies and procedures without prior approval; whether
the employee has authority to negotiate and bind the company on
significant matters; whether the employee provides consultation or
expert advice to management; whether the employee is involved in
planning long- or short-term business objectives; whether the
employee investigates and resolves matters of significance on behalf
of management; and whether the employee represents the company in
handling complaints, arbitrating disputes or resolving grievances.
These factors were taken from the existing regulations, see 541.205(b),
541.205(c) and 541.207(d), or developed from facts which federal courts
have found relevant when determining whether an employee exercises
discretion and independent judgment. Federal courts generally find that
employees who meet at least two or three of these factors are
exercising discretion and independent judgment, although a case-by-case
analysis is required. See, e.g., Bondy v. City of Dallas, 2003 WL
22316855, at *1 (5th Cir. 2003) (making recommendations to management
on policies and procedures); McAllister v. Transamerica Occidental Life
Insurance Co., 325 F.3d 997, 1000-02 (8th Cir. 2003) (independent
investigation and resolution of issues without prior approval;
authority to waive or deviate from established policies and procedures
without prior approval); Cowart v. Ingalls Shipbuilding, Inc., 213 F.3d
261, 267 (5th Cir. 2000) (developing guidebooks, manuals, and other
policies and procedures for employer or the employer's customers);
Piscione, 171 F.3d at 535-43 (making recommendations to management on
policies and procedures); Haywood v. North American Van Lines, Inc.,
121 F.3d 1066, 1071-73 (7th Cir. 1997) (negotiating on behalf of the
employer with some degree of settlement authority; independent
investigation and resolution of issues without prior approval;
authority to waive or deviate from established policies and procedures
without prior approval); O'Neill-Marino v. Omni Hotels Management
Corp., 2001 WL 210360, at *8-9 (S.D.N.Y. 2001) (negotiating on behalf
of the employer with some degree of settlement authority; developing
guidebooks, manuals, and other policies and procedures for employer or
the employer's customers); Stricker v. Eastern Off-Road Equipment,
Inc., 935 F. Supp. 650, 656-59 (D. Md. 1996) (authority to commit
employer in matters that have financial impact); Reich v. Haemonetics
Corp., 907 F. Supp. 512, 517-18 (D. Mass. 1995) (negotiating on behalf
of the employer with some degree of settlement authority; authority to
commit employer in matters that have financial impact); Hippen v. First
National Bank, 1992 WL 73554, at *6 (D. Kan. 1992) (authority to commit
employer in matters that have
[[Page 22144]]
financial impact). Other factors which federal courts have found
relevant in assessing whether an employee exercises discretion and
independent judgment include the employee's freedom from direct
supervision, personnel responsibilities, troubleshooting or problem-
solving activities on behalf of management, use of personalized
communication techniques, authority to handle atypical or unusual
situations, authority to set budgets, responsibility for assessing
customer needs, primary contact to public or customers on behalf of the
employer, the duty to anticipate competitive products or services and
distinguish them from competitor's products or services, advertising or
promotion work, and coordination of departments, requirements, or other
activities for or on behalf of employer or employer's clients or
customers. See, e.g., Hogan v. Allstate Insurance Co., 2004 WL 362378
(11th Cir. 2004); Demos v. City of Indianapolis, 302 F.3d 698 (7th Cir.
2002); Lutz v. Ameritech Corp., 2000 WL 245485 (6th Cir. 2000); Lott v.
Howard Wilson Chrysler-Plymouth, Inc., 203 F.3d 326 (5th Cir. 2001);
Heidtman v. County of El Paso, 171 F.3d 1038 (5th Cir. 1999); Piscione
v. Ernst & Young, L.L.P., 171 F.3d 527 (7th Cir. 1999); Shockley v.
City of Newport News, 997 F.2d 18 (4th Cir. 1993); West v. Anne Arundel
County, Maryland, 137 F.3d 752 (4th Cir.), cert. denied, 525 U.S. 1048
(1998); Reich v. John Alden Life Insurance Co., 126 F.3d 1 (1st Cir.
1997); Wilshin v. Allstate Insurance Co., 212 F. Supp. 2d 1360 (M.D.
Ga. 2002); Roberts v. National Autotech, Inc., 192 F. Supp. 2d 672
(N.D. Tex. 2002); Orphanos v. Charles Industries, Ltd., 1996 WL 437380
(N.D. Ill. 1996).
Most of the remaining subsections in final 541.202 contain language
from the existing regulations. Final subsection 541.202(c) contains
language from existing section 541.207(a) and existing section
541.207(e) providing that ``discretion and independent judgment implies
that the employee has authority to make an independent choice, free
from immediate direction or supervision.'' However, ``employees can
exercise discretion and independent judgment even if their decisions or
recommendations are reviewed at a higher level.'' Final subsection (c)
also retains the credit manager and management consultant examples from
existing section 541.207(e)(2). Final subsection 541.202(d) contains
language from existing section 541.205(c)(6) providing that the ``fact
that many employees perform identical work or work of the same relative
importance does not mean that the work of each such employee does not
involve the exercise of discretion and independent judgment with
respect to matters of significance.'' Final subsection 541.202(e)
contains language from existing sections 541.207(c)(1) and
541.207(c)(2) stating that the exercise of discretion and independent
judgment ``must be more than the use of skill in applying well-
established techniques, procedures or specific standards described in
manuals or other sources.'' As in existing section 541.205(c), final
subsection 541.202(e) provides that the exercise of discretion and
independent judgment ``does not include clerical or secretarial work,
recording or tabulating data, or performing other mechanical,
repetitive, recurrent or routine work.'' Final subsection 541.202(f)
includes language from existing section 541.205(c)(2) that an employee
``does not exercise discretion and independent judgment with respect to
matters of significance merely because the employer will experience
financial losses if the employee fails to perform the job properly.''
In sum, as in the existing regulations, the final administrative
exemption regulations establish a two-part inquiry for determining
whether an employee performs exempt administrative duties. First, what
type of work is performed by the employee? Is the employee's primary
duty the performance of work directly related to management or general
business operations? Second, what is the level or nature of the work
performed? Does the employee's primary duty include the exercise of
discretion and independent judgment with respect to matters of
significance? See, e.g., Bothell v. Phase Metrics, Inc., 299 F.3d 1120,
1125-26 (9th Cir. 2002) (looking to both the type of work and the
importance of the work). By retaining the ``discretion and independent
judgment'' standard from the existing regulations, as clarified to
reflect current case law, and combining the existing concepts of
``substantial importance'' and ``matters of significance,'' the final
rule provides clarity while at the same time maintaining continuity
with the existing regulations.
Section 541.203 Administrative Exemption Examples
The final regulations include a new section 541.203 which includes
illustrations of the application of the administrative duties test to
particular occupations. Many of the examples are from sections 541.201,
541.205 and 541.207 of the existing regulations. Other examples reflect
existing case law.
Final subsection 541.203(a) provides that insurance claims
adjusters ``generally meet the duties requirements for the
administrative exemption, whether they work for an insurance company or
other type of company, if their duties include activities such as
interviewing insureds, witnesses and physicians; inspecting property
damage; reviewing factual information to prepare damage estimates;
evaluating and making recommendations regarding coverage of claims;
determining liability and total value of a claim; negotiating
settlements; and making recommendations regarding litigation.'' This
section was moved from proposed section 541.203(b)(2). Commenters, such
as National Employment Lawyers Association (NELA), the Rudy, Exelrod &
Zieff law firm and the Stoll, Stoll, Berne, Lokting & Shlachter law
firm, state that the Department should not single out insurance claims
adjusters in the regulations. NELA states that this example ``flies in
the face of the basic rule that titles are not dispositive in
determining whether employees are exempt. Many insurance claims
adjusters perform routine production work.'' Such commenters state that
the work of many adjusters involves the day-to-day work of the company,
such as whether to repair or replace a dented fender, rather than work
related to the management or general business operations of the firm
such as the overall methods used to process claims generally. However,
this provision of the proposed rule is consistent with existing section
541.205(c)(5) and an Administrator's opinion letter issued on November
19, 2002, to which the court in Jastremski v. Safeco Insurance Cos.,
243 F. Supp. 2d 743, 753 (N.D. Ohio 2003), deferred because it was a
``thorough, well reasoned, and accurate interpretation of the
regulations.'' See also Palacio v. Progressive Insurance Co., 244 F.
Supp. 2d 1040 (C.D. Cal. 2002). The final subsection 541.203(a)--like
the opinion letter and the case law--does not rely on the ``claims
adjuster'' job title alone. Rather, there must be a case-by-case
assessment to determine whether the employee's duties meet the
requirement for exemption. Thus, the final subsection (a) identifies
the typical duties of an exempt claims adjuster as, among others,
preparing damage estimates, evaluating and making recommendations
regarding coverage of the claim, determining liability and total value
of the claim, negotiating settlements, and making
[[Page 22145]]
recommendations regarding litigation. The courts have evaluated such
factors to assess whether the employee is engaged in servicing the
business itself. Moreover, as the court in Palacio emphasized, claims
adjusters are not production employees because the insurance company is
``in the business of writing and selling automobile insurance,'' rather
than in the business of producing claims. Id. at 1046. Because the vast
majority of customers never make a claim against the policy they
purchase, the court concluded that claims adjusters do ``not produce
the very goods and services'' that the employer offered to the public.
Id. at 1047. Similarly, federal courts have evaluated such factors to
assess whether the employee's exercises discretion and independent
judgment. See, e.g., Palacio, 244 F. Supp. 2d at 1048 (claims agent who
spent half her time negotiating with claimants and attorneys, who had
independent authority to settle claims between $5,000 and $7,500, and
whose recommendations regarding offers for larger claims often were
accepted exercised discretion and independent judgment); Jastremski,
243 F. Supp. 2d at 757 (claims adjuster who planned and carried out
investigations, determined whether the loss was covered by the policy,
negotiated settlements, had independent settlement authority up to
$15,000 and could recommend settlements, which were usually accepted,
above his authority level exercised discretion and independent
judgment).
Consistent with existing case law, final subsection 541.203(b)
provides that employees in the financial services industry ``generally
meet the duties requirements for the administrative exemption if their
duties include work such as collecting and analyzing information
regarding the customer's income, assets, investments or debts;
determining which financial products best meet the customer's needs and
financial circumstances; advising the customer regarding the advantages
and disadvantages of different financial products; and marketing,
servicing or promoting the employer's financial products. However, an
employee whose primary duty is selling financial products does not
qualify for the administrative exemption.'' Several commenters request
a section regarding various occupations in the financial services
industry because of growing litigation in this area.
In cases such as Reich v. John Alden Life Insurance Co., 126 F.3d 1
(1st Cir. 1997), Hogan v. Allstate Insurance Co., 2004 WL 362378 (11th
Cir. 2004), and Wilshin v. Allstate Insurance Co., 212 F. Supp. 2d 1360
(M.D. Ga. 2002), federal courts have found employees who represent the
employer with the public, negotiate on behalf of the company, and
engage in sales promotion to be exempt administrative employees, even
though the employees also engaged in some inside sales activities. In
contrast, the court in Casas v. Conseco Finance Corp., 2002 WL 507059,
at *9 (D. Minn. 2002), held that the administrative exemption was not
available for employees who had a ``primary duty to sell [the
company's] lending products on a day-to-day basis'' directly to
consumers and failed to exercise discretion and independent judgment.
The John Alden case involved the exempt status of marketing
representatives working for a company that designed, created and sold
insurance products, primarily for businesses that were purchasing group
coverage for their employees. The marketing representatives did not
sell through direct contacts with the ultimate customers, but instead
relied upon licensed independent insurance agents to make sales of the
employer's financial products. The marketing representatives were
responsible for maintaining contact with hundreds of such independent
sales agents to keep them apprised of the employer's financial
products, to inform them of changes in prices, and to discuss how the
products might fit their customers' needs. The marketing
representatives also would inform the employer of anything they learned
from the independent sales agents, such as information about a
competitor's products or pricing. The First Circuit ruled that these
activities were directly related to management policies or general
business operations and that the marketing representatives were exempt.
Their activities involved ``servicing'' of the business because their
work was ``in the nature of `representing the company' and `promoting
sales' of John Alden products, two examples of exempt administrative
work provided by Sec. 541.205(b) of the interpretations.'' 126 F.3d at
10. Thus, the court concluded that the marketing representatives'
contact with the independent sales agents involved `something more than
routine selling efforts focused simply on particular sales
transactions.' Rather, their agent contacts are `aimed at promoting
(i.e., increasing, developing, facilitating, and/or maintaining)
customer sales generally,' activity which is deemed administrative
sales promotion work under section 541.205(b).'' Id. (citations
omitted, emphasis in original), quoting Martin v. Cooper Electric
Supply Co., 940 F.2d 896, 905 (3rd Cir. 1991), cert. denied, 503 U.S.
936 (1992).
In Hogan v. Allstate Insurance Co., 2004 WL 362378, at *4 (11th
Cir. 2004), the Eleventh Circuit held that insurance agents who ``spent
the majority of their time servicing existing customers'' and performed
duties including ``promoting sales, advising customers, adapting
policies to customer's needs, deciding on advertising budget and
techniques, hiring and training staff, determining staff's pay, and
delegating routine matters and sales to said staff '' were exempt
administrative employees. The court held the insurance agents exempt
even though they also sold insurance products directly to existing and
new customers.
The court in Wilshin v. Allstate Insurance Co., 212 F. Supp. 2d
1360, 1377-79 (M.D. Ga. 2002), held that a neighborhood insurance agent
met the requirements for the administrative exemption when his
responsibilities included such activities as recommending products and
providing claims help to different customers, as well as using his own
personal sales techniques to promote and close transactions. He also
was required to represent his employer in the market, and be
knowledgeable about the market and the needs of actual and potential
customers. The Wilshin court found that selling financial products to
an individual, ultimate consumer--as opposed to an agent, broker or
company--was not enough of a distinction to negate his exempt status.
In contrast, the district court in Casas v. Conseco Finance Corp.,
2002 WL 507059 (D. Minn. 2002), held that loan originators were not
exempt because they had a ``primary duty to sell [the company's]
lending products on a day-to-day basis'' directly to consumers. 2002 WL
507059, at *9. The employees called potential customers from a list
provided to them by the employer and, using the employer's guidelines
and standard operating procedures, obtained information such as income
level, home ownership history, credit history and property value; ran
credit reports; forwarded the application to an underwriter; and
attempted to match the customer's needs with one of Conseco's loan
products. If the underwriter approved the loan, the originator gathered
documents for the closing, verified the information, and ordered the
title work and appraisals. The court concluded that this was the
ordinary production work of Conseco, which has the business purpose of
designing, creating, and selling home lending
[[Page 22146]]
products, making them nonexempt production employees. The court also
found that the plaintiffs lacked discretion and independent judgment
necessary to qualify for the exemption since they followed strict
guidelines and operating procedures, and had no authority to approve
loans.
The Department agrees that employees whose primary duty is inside
sales cannot qualify as exempt administrative employees. However, as
found by the John Alden, Hogan and Wilshin courts, many financial
services employees qualify as exempt administrative employees, even if
they are involved in some selling to consumers. Servicing existing
customers, promoting the employer's financial products, and advising
customers on the appropriate financial product to fit their financial
needs are duties directly related to the management or general business
operations of their employer or their employer's customers, and which
require the exercise of discretion and independent judgment.
Accordingly, consistent with this case law, the final rule
distinguishes between exempt and nonexempt financial services employees
based on the primary duty they perform. Final section 541.203(b) thus
provides:
Employees in the financial services industry generally meet the
duties requirements for the administrative exemption if their duties
include work such as collecting and analyzing information regarding
the customer's income, assets, investments or debts; determining
which financial products best meet the customer's needs and
financial circumstances; advising the customer regarding the
advantages and disadvantages of different financial products; and
marketing, servicing or promoting the employer's financial products.
However, an employee whose primary duty is selling financial
products does not qualify for the administrative exemption.
The Department believes this approach also is consistent with the
case law and the final rule regarding insurance claims adjusters, which
emphasizes that employees performing duties related to servicing the
company, such as representing the company in evaluating the merits of
claims against it and in negotiating settlements, generally qualify for
exemption. We also believe that this approach is consistent with the
existing and final regulations providing that advisory specialists and
consultants to management, such as tax experts, insurance experts, or
financial consultants, who are employed by a firm that furnishes such
services for a fee, should be treated the same as an in-house adviser
regardless of whether the management policies or general business
operations to which their work is directly related are those of their
employer's clients or customers or those of their employer. See final
rule section 541.201(c); existing sections 541.201(a)(2), 541.205(c)(5)
and 541.205(d); and Piscione v. Ernst & Young, L.L.P., 171 F.3d 527
(7th Cir. 1999). Finally, our approach is consistent with existing
section 541.207(d)(2), which provides that ``a customer's man in a
brokerage house'' exercises discretion and independent judgment ``in
deciding what recommendations to make to customers for the purchase of
securities,'' but reflects the modernization of this existing
subsection for the 21st Century workforce.
Consistent with Hogan, the final rule rejects the view that selling
financial products directly to a consumer automatically precludes a
finding of exempt administrative status. Application of the exemption
should not change based only on whether the employees' activities are
aimed at an end user or an intermediary. The final rule distinguishes
the exempt and nonexempt financial services employees based on the
duties they perform, not the identity of the customer they serve. For
example, a financial services employee whose primary duty is gathering
and analyzing facts and providing consulting advice to assist customers
in choosing among many complex financial products may be an exempt
administrative employee. An employee whose primary duty is inside sales
is not exempt.
Final subsection 541.203(c) provides that an employee ``who leads a
team of other employees assigned to complete major projects for the
employer (such as purchasing, selling or closing all or part of the
business, negotiating a real estate transaction or a collective
bargaining agreement, or designing and implementing productivity
improvements) generally meets the duties requirements for the
administrative exemption, even if the employee does not have direct
supervisory responsibility over the other employees on the team.'' This
modification of proposed section 541.203(b)(3) responds to commenters
who express concern that the executive exemption fails to reflect the
modern practice of a company forming cross-functional or multi-
department teams to complete major projects. Several commenters suggest
that the manager or leader of such teams should be treated as exempt
even if the leader did not have traditional supervisory authority over
the other members of the team. Although, as stated above, the
Department does not believe that the executive exemption applies, an
employee who leads teams to complete major projects may qualify for
exemption under the existing administrative regulations. See current 29
CFR 541.205(c) (exemption applies to employees who ``carry out major
assignments in conducting the operations of the business''). The final
subsection (c) merely updates this concept with a more modern example.
Final subsection 541.203(d) includes the example regarding
executive assistants and administrative assistants derived from
existing sections 541.201(a)(1), 541.207(d)(2) and 541.207(e), and
proposed at section 541.203(b)(4). Final subsection 541.203(e)
distinguishes exempt human resources managers from nonexempt personnel
clerks. The language in this subsection appears in existing sections
541.205(c)(3) and 541.207(c)(5), and was proposed at sections
541.203(b)(4) and 541.203(c). Final subsection 541.203(f) includes the
purchasing agent example from proposed section 541.203(b)(4), which was
derived from existing sections 541.205(c)(4), 541.207(d)(2) and
541.207(e)(2). Final subsection 541.203(g) contains the inspection work
example from existing section 541.207(c)(2) and proposed section
541.204(c). Final section 541.203(h) contains the examples regarding
examiners and graders from existing sections 541.207(c)(3) and (4) and
proposed section 541.204(c). Final subsection 541.203(i) includes the
comparison shopping example from existing section 541.207(c)(6). No
substantive changes from current law are intended in these examples.
The Department received no substantive comments with respect to the
examples of nonexempt work. With respect to administrative or executive
assistants, a number of commenters assert that these employees should
be exempt if they assist a senior executive in a corporation below the
level of proprietor or chief executive of a business. Other commenters
express a countervailing concern that these terms could be applied too
broadly to employees with nonexempt duties, such as secretarial
employees. The final rule makes no changes to current law, and thus
this example should not expand the exemption to include secretaries or
other clerical employees. We do not believe expansion of this example
beyond current law is warranted on the record evidence.
Final subsection 541.203(j) contains a new example providing that
``[p]ublic sector inspectors or investigators of
[[Page 22147]]
various types, such as fire prevention or safety, building or
construction, health or sanitation, environmental or soils specialists
and similar employees, generally do not meet the duties requirements
for the administrative exemption because their work typically does not
involve work directly related to the management or general business
operations of the employer. Such employees also do not qualify for the
administrative exemption because their work involves the use of skills
and technical abilities in gathering factual information, applying
known standards or prescribed procedures, determining which procedure
to follow, or determining whether prescribed standards or criteria are
met.'' This new example responds to comments from public sector
employees and employer groups. The Public Sector FLSA Coalition, for
example, comments that because the existing rules were written with
only the private sector in mind, the proposed revisions offer an
opportunity for the Department to include language addressing issues
unique to public sector concerns. The Public Sector FLSA Coalition
states that, although the discretion and independent judgment
requirement is vague and unworkable, this standard retains the benefit
of being the subject of several court decisions and opinion letters.
These interpretations have provided some guidance for Public Sector
FLSA Coalition members in assessing the exempt status of certain
positions in the public sector. Similarly, the Wisconsin Department of
Employment Relations suggests that the final regulations include
specific examples from the public sector relating to the discretion and
independent judgment standard. Various public sector unions and
employees express concern that employees such as investigators,
inspectors and parole officers would newly qualify for the
administrative exemption under the proposed regulations. Thus, the
final rule has been modified to add examples of various types of
inspection work found in the public sector that typically fail the
requirement for exercising discretion and independent judgment. The
examples are straightforward and drawn from previous Wage and Hour
opinion letters in which, based on the facts presented, the work
involved was considered to be based on the employee's use of skills and
technical abilities, rather than exercising the requisite discretion
and independent judgment specified in the regulations. See, e.g., Wage
and Hour Opinion Letter of 4/17/98, 1998 WL 852783 (investigators);
Wage and Hour Opinion Letter of 3/11/98, 1998 WL 852755 (inspectors);
and Wage and Hour Opinion Letter of 12/21/94, 1994 WL 1004897
(probation officers).
Section 541.204 Educational Establishments (Proposed Sec. 541.205)
The proposed rule established a separate exemption test for
employees whose primary duty is ``performing administrative functions
directly related to academic instruction or training in an educational
establishment or department or subdivision thereof.'' Such employees
are separately identified in section 13(a)(1) of the FLSA and are
separately addressed in the existing regulation. The proposed rule
defined the terms used and gave examples of employees who are engaged
in academic administrative functions and employees who are not so
engaged. Under the proposed rule, the term ``educational institution''
was defined as an ``elementary or secondary school system, an
institution of higher education or other educational institution.''
As discussed below, the Department has added a list of relevant
factors for determining whether post-secondary career programs qualify
as ``other educational institutions'' to final subsection 541.204(b),
and added ``academic counselors'' to the list of examples of exempt
academic administrative employees in final subsection 541.204(c).
Except for adjustment of the salary levels, the Department has made no
other substantive changes to this section.
As the preamble to the proposed rule stated, this provision simply
consolidated into a single section of the regulations a few provisions
in the existing regulation pertaining to the administration of
educational institutions, with no substantive changes intended. The
Department received very few comments on this section.
A few commenters, including the Morgan, Lewis & Bockius law firm,
the Air Force Labor Advisors and the Career College Association,
suggest that the regulations contain some additional guidance regarding
``other educational institutions'' such as schools that provide adult
continuing education or post-secondary technical and vocational
training programs such as aircraft flight schools. Opinion letters
currently provide guidance about such institutions. For example, the
Department has stated that a flight instruction installation approved
by the Federal Aviation Administration under that agency's regulations
would constitute an educational establishment. Wage and Hour Opinion
Letter of April 2, 1970 (1970 WL 26390). See also 2000 WL 33126562.
Factors that are relevant in assessing whether such post-secondary
career programs are educational institutions include whether the school
is licensed by a state agency responsible for the state's educational
system or accredited by a nationally recognized accrediting
organization for career schools. Gonzales v. New England Tractor
Trailer Training School, 932 F. Supp. 697 (D. Md. 1996). Because such
questions must be answered on a case-by-case basis, it would not be
prudent for the Department to list just a few types of schools that
could qualify as educational institutions. However, we have included
the above factors in final subsection 541.204(b).
The American Council of Education suggests that we include
admissions counselors and academic counselors on the list of examples
of exempt academic administrative employees. The Department has
provided guidance on these positions in opinion letters dated February
19, 1998 (1998 WL 852683), and April 20, 1999 (1999 WL 1002391). In
those letters, the Department addressed the exempt status of academic
counselors and enrollment or admissions counselors. Those letters
elaborate on the regulatory requirement that the academic
administrative exemption is limited to employees engaged in work
relating to the academic operations and functions of a school rather
than work relating to the general business operations of the school.
Thus, academic counselors performing the job duties listed in the 1998
opinion letter were found to qualify for the academic administrative
exemption because their primary duty involved work such as
administering the school's testing programs, assisting students with
academic problems, advising students concerning degree requirements,
and performing other functions directly related to the school's
educational functions. In contrast, enrollment counselors who engage in
general outreach and recruitment efforts to encourage students to apply
to the school did not qualify for the academic administrative exemption
because their work was not sufficiently related to the school's
academic operations. However, the 1999 letter noted that, depending
upon the employees' duties, they might qualify for the general
administrative exemption because their work related to the school's
general business operations and involved work in the nature of general
sales promotion work.
[[Page 22148]]
Consistent with these opinion letters, we have added academic
counselors as an example of exempt academic administrative employees in
final subsection 541.204(c), but not admissions counselors.
Subpart D, Professional Employees
Section 541.300 General Rule for Professional Employees
The proposed general rule for the professional exemption also
streamlined the current regulations by adopting a single standard
duties test. The proposed standard duties test provided that an exempt
professional employee must have ``a primary duty of performing office
or non-manual work: (i) Requiring knowledge of an advanced type in a
field of science or learning customarily acquired by a prolonged course
of specialized intellectual instruction, but which also may be acquired
by alternative means such as an equivalent combination of intellectual
instruction and work experience; or (ii) Requiring invention,
imagination, originality or talent in a recognized field of artistic or
creative endeavor.''
The final rule modifies the proposed professional duties test in
three ways, ensuring that the final professional test is as protective
as the existing short duties test under which most employees are tested
for exemption today. First, as under the other exemptions, the final
rule changes the phrase ``a primary duty'' back to the current language
of ``whose primary duty'' in response to commenter concerns that this
change weakened the test for exemption. Second, consistent with the
existing regulations, the final rule deletes the phrase ``office or
non-manual'' work. This revision was made in response to commenter
concerns about the confusion that would result from applying the
``office and non-manual'' requirement to the professional exemption for
the first time. Employer commenters express concerns that occupations
clearly satisfying the requirements of the existing tests for learned
or creative professionals would not be exempt under the proposal
because some aspect of the employee's duties requires ``manual'' work,
such as a surgeon using a scalpel or a portrait artist using a brush.
The Department did not intend this result, and thus has removed the
``office and non-manual'' language from the professional exemption.
Third, the final rule deletes from subsection 541.300(a)(2)(i) the
phrase, ``but which also may be acquired by alternative means such as
an equivalent combination of intellectual instruction and work
experience.'' As discussed more fully under section 541.301 below, some
commenters view the addition of this language as a significant
expansion of the learned professional exemption. No such result was
intended. Rather, this proposed language was merely an attempt to
streamline and summarize the discussion of the word ``customarily'' in
subsection 541.301(d) of the current regulations.
Section 541.301 Learned Professionals
Proposed section 541.301(a) restated the duties tests for the
learned professional exemption and defined ``advanced knowledge'' as
``knowledge that is customarily acquired through a prolonged course of
specialized intellectual instruction, but which also may be acquired by
alternative means such as an equivalent combination of intellectual
instruction and work experience.'' The proposed subsection (a) also
included a list of traditional fields of science or learning such as
law, medicine, theology and teaching ``that have a recognized
professional status based on the acquirement of advanced knowledge and
performance of work that is predominantly intellectual in character as
opposed to routine, mental, manual, mechanical or physical work.'' The
remaining subsections in proposed section 541.301 defined the key terms
in the duties test and provided examples of occupations which generally
meet or do not meet the duties requirements for the learned
professional exemption.
The final section 541.301(a) has been modified to track the
existing learned professional duties test, and then list separately the
three elements of this duties test: ``(1) The employee must perform
work requiring advanced knowledge; (2) The advanced knowledge must be
in a field of science or learning; and (3) The advanced knowledge must
be customarily acquired by a prolonged course of specialized
intellectual instruction.'' Other text from proposed subsection (a) has
been moved as appropriate to final subsection (b) defining the phrase
``advanced knowledge,'' final subsection (c) defining the phrase
``field of science or learning,'' and final subsection (d) defining the
phrase ``customarily acquired by a prolonged course of specialized
intellectual instruction.'' The final subsection (e) contains examples,
consistent with existing case law as detailed below, illustrating how
the learned professional duties test applies to specific occupations.
The language in proposed subsection (f) has been deleted as redundant
with the new section 541.3, and proposed subsection (g) has been
renumbered.
Commenters on the learned professional exemption focus most of
their discussion on the educational requirements for the exemption.
Proposed section 541.301(a) provided that the advanced knowledge
required for exemption is ``customarily acquired through a prolonged
course of specialized intellectual instruction,'' but may also ``be
acquired by alternative means such as an equivalent combination of
intellectual instruction and work experience.'' Similarly, proposed
section 541.301(d) provided: ``However, the word ``customarily'' means
that the exemption is also available to employees in such professions
who have substantially the same knowledge level as the degreed
employees, but who attained such knowledge through a combination of
work experience, training in the armed forces, attending a technical
school, attending a community college or other intellectual
instruction.'' This new ``equivalent combination'' language generated
sharp disagreement among the commenters.
Many commenters, including the FLSA Reform Coalition, the National
Restaurant Association, the Food Marketing Institute, the State of
Oklahoma Office of Personnel Management, the Johnson County Government
Human Resources Department and Henrico County, Virginia, generally
support the proposal as more appropriately focusing on an employee's
knowledge level and application of such knowledge. Such commenters
state that the proposal reflects the realities of the modern workplace
where employees may take an alternative educational path, but perform
the same duties as the degreed professionals. Comments filed by the HR
Policy Association, for example, recognize that the current regulations
allow some non-degreed employees to be classified as exempt learned
professionals by providing that the requisite knowledge is
``customarily'' acquired by a prolonged course of intellectual
instruction. However, the HR Policy Association writes that the
Department has not provided sufficient guidance, under the current or
proposed regulations, on the application of this ``customarily''
language. The HR Policy Association endorses the Department's proposal
as providing a workable and reasonable standard which recognizes that
more workers today perform work requiring professional knowledge
without possessing a formal professional degree. The Society for Human
Resource Management (SHRM)
[[Page 22149]]
expresses concern that the existing test requires an employer to
classify and pay employees differently even if they who perform the
same work and if they acquired their knowledge in different ways. SHRM
supports the proposal because it would allow employers to classify and
pay employees the same when they have the same knowledge level and
perform the same work. The Workplace Practices Group similarly notes
that the existing rule arguably creates difficulties for an employer
who must treat differently two employees who perform the same work but
acquired their knowledge in different manners. The National Association
of Manufacturers (NAM) states that the proposal reflects the realities
of the 21st century workplace while remaining consistent with the
purposes of the FLSA. NAM agrees with the Department's proposal,
stating that the regulations should focus on the employee's knowledge
and application of that knowledge, not on how the employee acquired
such knowledge. Comments filed by the U.S. Chamber of Commerce
(Chamber) supporting the proposal discuss how the professions and
professional education have evolved since the current regulations were
promulgated in 1940. The current focus of the regulations, the Chamber
notes, is inconsistent with this evolution in how knowledge is
acquired.
Other commenters, however, argue that the proposed ``equivalent
combination'' language would greatly and unjustifiably expand the scope
of the professional exemption. The AFL-CIO acknowledges that ``on its
face,'' the proposal ``does not permit occupations that currently do
not meet the test for learned professionals to qualify for the
exemption under the new alternative educational requirement.'' The AFL-
CIO notes that the 1940 Stein Report recognized a need for flexibility
in the professional duties test to allow the exemption for the
occasional employee who did not acquire the requisite knowledge for
exemption through a formal degree program. The AFL-CIO also
acknowledges that the court in Leslie v. Ingalls Shipbuilding, Inc.,
899 F. Supp. 1578 (S.D. Miss. 1995), focused on the knowledge level to
find that an engineer without a formal degree was an exempt
professional. Nonetheless, the AFL-CIO argues that the proposal would
have the practical effect of allowing employers to classify as exempt
any employee who has some post-high school education and job
experience. According to the AFL-CIO, entire occupations such as
medical technicians, licensed practical nurses, engineering technicians
and other technical workers could be classified as exempt employees
under the proposal. The American Federation of State, County and
Municipal Employees claims that the Department's proposed rule would
replace an existing ``bright line'' test with a confusing standard. The
National Treasury Employees Union argues that the proposal creates a
new category of exempt technical professionals, which the Department
lacks the statutory authority to do. The American Federation of
Government Employees (AFGE) describes the proposal as substituting ``a
vague and unworkable ``knowledge'' test'' for an existing ``workable
educational requirement.'' The AFGE also claims that the proposed
professional exemption ``utterly destroys'' the requirement that an
exempt professional be in a recognized profession and eliminates any
requirement for an advanced education degree. The International
Association of Machinists and Aerospace Workers claims the proposal is
an ``unwarranted relaxation of FLSA standards.'' The International
Federation of Professional and Technical Engineers argues that the
proposal opens the door to classifying beauticians, barbers,
radiological technicians and technicians that test or repair mechanical
or electric equipment as exempt learned professionals.
The Department believes the proposal was consistent with current
case law, and that the proposal would not have caused substantial
expansion of the professional exemption. Nonetheless, after careful
consideration of all the comments, the Department has modified sections
541.301(a) and (d) to ensure our intent cannot be so misconstrued. The
Department did not and does not intend to change the long-standing
educational requirements for the learned professional exemption.
Rather, the revisions to these subsections were intended to provide
additional guidance on the existing language, ``customarily acquired''
by a prolonged course of specialized intellectual instruction.
The Department has modified proposed section 541.301(a) in response
to the comments evidencing confusion regarding the different elements
of the primary duty test for the learned professional exemption. As
noted above, some commenters express concern that allowing the
exemption for employees with ``an equivalent combination of
intellectual instruction and work experience'' would result in
significant expansion of the exemption to new occupations never before
considered to be professions, such as licensed practical nursing, the
skilled trades, and various engineering and repair technicians. These
concerns are unfounded because they incorrectly conflate the three
separate elements of the learned professional duties test as described
in the 1940 Stein Report:
The first element in the requirement is that the knowledge be of
an advanced type. Thus, generally speaking, it must be knowledge
which cannot be attained at the high-school level. Second, it must
be knowledge in a field of science or learning. This in itself is
not entirely definitive but will serve to distinguish the
professions from the mechanical arts where in some instances the
knowledge is of a fairly advanced type, but not in a field of
science or learning. * * * The requisite knowledge, in the third
place, must be customarily acquired by a prolonged course of
specialized intellectual instruction and study.
1940 Stein Report at 38-39. All three of these essential elements must
be satisfied before an employee qualifies as an exempt learned
professional under the existing, proposed and final rule. Thus, for
example, a journeyman electrician may acquire advanced knowledge and
skills through a combination of training, formal apprenticeship, and
work experience, but can never qualify as an exempt learned
professional because the electrician occupation is not a ``field of
science or learning'' as required for exemption. A licensed practical
nurse may work in a ``field of science or learning,'' but cannot meet
the requirements for the professional exemption because the occupation
does not require knowledge ``customarily acquired by a prolonged course
of specialized intellectual instruction.''
The proper focus of inquiry is upon whether all three required
elements have been satisfied, not upon any job title or ``status'' the
employee might have. Rather, only occupations that customarily require
an advanced specialized degree are considered professional fields under
the final rule. For example, no amount of military training can turn a
technical field into a profession. Similarly, a veteran who received
substantial training in the armed forces but is working on a
manufacturing production line or as an engineering technician cannot be
considered a learned professional because the employee is not
performing professional duties.
The Department intended, and still intends, that these three
essential elements, as set forth in the 1940 Stein Report, remain
applicable and relevant today. Accordingly, final section 541.301(a)
now separately lists the three elements, thus ensuring that nothing in
[[Page 22150]]
this section can be interpreted as allowing the professional exemption
to be claimed for licensed practical nurses, skilled tradespersons,
engineering technicians and other occupations that cannot meet all
three of the elements.
Although the Department has removed the ``equivalent combination''
language from the final section 541.301(a), the references to the
educational requirements for the professional exemption and the term
``customarily'' are discussed in subsection (d). As the AFL-CIO notes,
the 1940 Stein Report recognized a need for flexibility in the
professional duties test to allow the exemption for the occasional
employee who does not possess the specialized academic degree usually
required for entry into the profession. This flexibility is discussed
in the existing regulations at section 541.301(d) which states, in
part:
Here it should be noted that the word ``customarily'' has been
used to meet a specific problem occurring in many industries. As is
well known, even in the classical profession of law, there are still
a few practitioners who have gained their knowledge by home study
and experience. Characteristically, the members of the profession
are graduates of law schools, but some few of their fellow
professionals whose status is equal to theirs, whose attainments are
the same, and whose word is the same did not enjoy that opportunity.
Such persons are not barred from the exemption.
Thus, the existing section 541.301(d) states, the learned professional
exemption is ``available to the occasional lawyer who has not gone to
law school, or the occasional chemist who is not the possessor of a
degree in chemistry.''
The final section 541.301(d), defining the phrase ``customarily
acquired by a prolonged course of specialized intellectual
instruction,'' retains these general concepts while providing
additional guidance to clarify when an employee working in a ``field of
science or learning,'' but without a formal degree, can qualify as an
exempt learned professional. The final subsection (d) requires two
separate inquiries. First, as in the existing regulations, the
occupation must be in a field of science or learning where specialized
academic training is a standard prerequisite for entrance into the
profession. Thus, the learned professional exemption is available for
lawyers, doctors and engineers, but not for skilled tradespersons,
technicians, beauticians or licensed practical nurses, as none of these
occupations require specialized academic training at the level intended
by the regulations as a standard prerequisite for entrance into the
profession. Second, employees within such a learned profession can then
only qualify for the learned professional exemption if they either
possess the requisite advanced degree or ``have substantially the same
knowledge level and perform substantially the same work as the degreed
employees, but who attained the advanced knowledge through a
combination of work experience and intellectual instruction.''
The final subsection (d) thus recognizes, as evidenced by many
comments and recognized in the existing regulations, that some
employees, occasional though they may be, have the same knowledge level
and perform the same work as degreed employees but obtain that advanced
knowledge by a non-traditional path.'' \9\ An employee with the same
knowledge level and performing the same work in a professional field of
science or learning as the degreed professionals should be classified
and paid in the same manner as those degreed professionals. This
principle does not expand the learned professional exemption to new
quasi-professional fields. Rather, it merely ensures, as in the current
regulations, that employees performing the same work, and who met the
other requirements for exemption, are treated the same--a common theme
in employment law today.
---------------------------------------------------------------------------
\9\ The preamble to the proposal, 68 FR at 15568, invited
comments on whether the regulations should specify equivalencies of
work experience and other intellectual instruction that could
substitute for a specialized advanced degree. A few commenters
supported various specific equivalencies, but most commenters
opposed them because equivalencies might vary by industry or be an
``arbitrary exercise subject to abuse.'' The Department has decided
not to impose inflexible equivalencies in the final regulations.
However, we have added the phrase ``and performs substantially the
same work'' to the final section 541.301(d), which should be a
better guide for the regulated community in determining when a non-
degreed employee working in a recognized professional field of
science or learning can qualify as an exempt learned professional by
focusing the inquiry on the actual work performed by the employee.
See, e.g., Leslie v. Ingalls Shipbuilding, Inc., 899 F. Supp. 1578
(S.D. Miss. 1995).
---------------------------------------------------------------------------
To ensure that the final rule is not interpreted to exempt entire
occupations previously considered nonexempt by the Department, the
final rule deletes the phrase in proposed section 541.301(d) that
equivalent knowledge may be obtained ``through a combination of work
experience, training in the armed forces, attending a technical school,
attending a community college or other intellectual instruction.''
Instead, final section 541.301(d) provides that the word
``customarily'' means ``that the exemption is also available to
employees in such professions who have substantially the same knowledge
level and perform substantially the same work as the degreed employees,
but who attained the advanced knowledge through a combination of work
experience and intellectual instruction.''
Thus, a veteran who is not performing work in a recognized
professional field will not be exempt, regardless of any training
received in the armed forces. The International Federation of
Professional & Technical Engineers, for example, describes its members
as technicians who test and repair electronic or mechanical equipment
using knowledge gained through on-the-job training, military training
and technical or community colleges. This commenter states that such
technicians ``generally do not have specialized college degrees in
engineering or scientific fields, and do not have the detailed and
sophisticated knowledge that scientists or engineers possess.'' Such
technical workers are entitled to overtime under the existing and final
regulations because their work does not require advanced knowledge in a
field of science or learning customarily acquired by a prolonged course
of specialized intellectual instruction.
To further avoid any misunderstanding of our intent, the final rule
adds the following additional language to subsection (d):
Thus, for example, the learned professional exemption is
available to the occasional lawyer who has not gone to law school,
or the occasional chemist who is not the possessor of a degree in
chemistry. However, the learned professional exemption is not
available for occupations that customarily may be performed with the
general knowledge acquired by an academic degree in any field, with
knowledge acquired through an apprenticeship, or with training in
the performance of routine mental, manual, mechanical or physical
processes. The learned professional exemption also does not apply to
occupations in which most employees have acquired their skill by
experience rather than by advanced specialized intellectual
instruction.
Some jobs require only a four-year college degree in any field or a
two-year degree as a standard prerequisite for entrance into the field.
Other jobs require only completion of an apprenticeship program or
other short course of specialized training. The final section
541.301(d), drawn from existing subsection 541.301(d) and proposed
section 541.301(f), makes clear that such occupations do not qualify
for the learned professional exemption.
The decision in Palardy v. Horner, 711 F. Supp. 667 (D. Mass. 1989)
(applying Office of Personnel Management and FLSA regulations), cited
by the AFL-CIO, would not
[[Page 22151]]
change if analyzed under the proposed or final regulations. The
employees in that case were technicians employed by the Navy at the GS-
11 grade level who performed ``technical tasks relating to the proper
design, repair, testing and overhaul of naval ship systems and
equipment, as well as the vessels themselves.'' Id. at 668. The court
described the employees as ``primarily responsible for preparing
drawings and schematics used in installing and reconfiguring equipment
on navy vessels,'' but these tasks were ``accomplished by consulting
standard texts, guides and established formulas.'' Id. The work was
``practical rather than theoretical,'' with the more complex tasks
performed by professional engineers. Id. at 668-69. The only
educational requirement for the positions was a high school diploma,
and the skills needed to perform the work were ``obtained through on
the job training.'' Id. The work did ``not require an advanced course
of academic study.'' Id. Such technicians would be entitled to overtime
pay under the final regulations, because the standard prerequisite for
entry into such jobs is only a high school education, not advanced
specialized academic training. In addition, the technicians would be
entitled to overtime pay under the final regulations because they did
not perform the same work as the professional engineers. In contrast,
the employee in Leslie v. Ingalls Shipbuilding, Inc., 899 F. Supp. 1578
(S.D. Miss. 1995), who had completed three years of engineering study
at a university and had many years of experience in the field of
engineering, would continue to be properly classified as an exempt
learned professional.
The Department also received substantial comments on the proposal
to eliminate the existing ``short'' test requirement that an exempt
professional employee ``consistently exercise * * * discretion and
judgment.'' Many commenters such as the U.S. Chamber of Commerce
(Chamber), the HR Policy Association, the Public Sector FLSA Coalition,
the National Restaurant Association, and the National Association of
Chain Drug Stores support this change. The Chamber, for example, notes
that the ``discretion and judgment'' requirement is inconsistent with
modern workforce practices, citing the case of Hashop v. Rockwell Space
Operations Co., 867 F. Supp. 1287, 1297 (S.D. Tex. 1994) (employees
with degrees in electronic engineering and mathematics who trained
Space Shuttle ground control personnel held not exempt). Difficulties
in articulating and defining this requirement, the HR Policy
Association states, have resulted in confusion in its application and
have spawned numerous lawsuits. The HR Policy Association notes that
professional employees are increasingly guided by operational
parameters or standards because of the increased acceptance of
international standards, especially in fields like engineering and
science. According to the commenter, this evolution in work performed
by professional employees has accelerated confusion with, and
litigation over, the current professional exemption. The HR Policy
Association also cites the Rockwell Space Operations case to illustrate
that the current test can lead to illogical results.
Other commenters, such as the AFL-CIO, the American Federation of
State, County and Municipal Employees, the National Treasury Employees
Union, the American Federation of Government Employees and the
International Federation of Professional and Technical Engineers, urge
the Department to restore ``discretion and judgment'' as a requirement
for the professional exemption. Such commenters argue that the exercise
of discretion and judgment demonstrates the independence and authority
that is an inherent part of professional work. Similarly, the National
Employment Law Project contends that the ``discretion and judgment''
requirement ``is a key limiting factor of the exemption and is intended
to weed out those workers who are not bona fide exempt employees.''
Some of these commenters also believe that the proposal eliminated the
``long'' duties test requirement that exempt professionals perform work
``predominantly intellectual and varied in character.'' Such commenters
object to the perceived deletion of the ``predominantly intellectual''
requirement as further weakening the requirements for exemption.
The Department continues to believe that having a primary duty of
``performing work requiring advanced knowledge in a field of science or
learning customarily acquired by a prolonged course of specialized
intellectual instruction'' includes, by its very nature, exercising
discretion and independent judgment. Indeed, existing section 541.305
defines ``discretion and judgment'' under the professional exemption by
stating only that: ``A prime characteristic of professional work is the
fact that the employee does apply his special knowledge or talents with
discretion and judgment. Purely mechanical or routine work is not
professional.'' See also 1940 Stein Report at 37 (``A prime
characteristic of professional work is the fact that the employee does
apply his special knowledge or talents with discretion and
judgment.''). The Department has been unable to identify any occupation
that would meet the primary duty test for the professional exemption,
but not require the consistent exercise of discretion and judgment.
The Department observes that only a few courts have discussed the
definition of the phrase ``includes work requiring the consistent
exercise of discretion and judgment'' in the existing ``short''
professional duties test, and how this standard differs from the phrase
``includes work requiring the exercise of discretion and independent
judgment'' in the existing ``short'' administrative duties test. See,
e.g., Piscione v. Ernst & Young, L.L.P., 171 F.3d 527, 536 (7th Cir.
1999); Hashop, 867 F. Supp. at 1298 n.6. The Department also notes that
the ``consistent exercise of discretion and judgment'' standard under
the learned professional exemption is less stringent than the
``includes work requiring the exercise of discretion and independent
judgment'' standard of the administrative exemption. See De Jesus
Rentas v. Baxter Pharmacy Services Corp., 286 F. Supp. 2d 235, 241
(D.P.R. 2003) (noting that the discretion required for the professional
exemption is ``a lesser standard'' than the discretion required under
the administrative exemption).
The Department continues to agree that a ``prime characteristic of
professional work is the fact that the employee does apply his special
knowledge or talents with discretion and judgment,'' 29 CFR 541.305(b),
and did not intend to delete this concept entirely from the
professional duties test. Thus, consistent with existing section
541.305(b), the Department has included the ``consistent exercise of
discretion and judgment'' in final subsection 541.301(b) as part of the
definition of ``work requiring advanced knowledge,'' one of three
essential elements of the learned professional primary duty tests:
The phrase ``work requiring advanced knowledge'' means work
which is predominantly intellectual in character, and which includes
work requiring the consistent exercise of discretion and judgment,
as distinguished from performance of routine mental, manual,
mechanical or physical work. An employee who performs work requiring
advanced knowledge generally uses the advanced knowledge to analyze,
interpret or make deductions from varying facts or circumstances.
Advanced knowledge cannot be attained at the high school level.
[[Page 22152]]
This language, consistent with existing section 541.305,
acknowledges that the exercise of ``discretion and judgment'' is a
prime characteristic of professional work, while also providing a more
substantive definition of ``advanced knowledge'' than the definition in
existing section 541.301(b), which merely defines advanced knowledge as
``knowledge which cannot be attained at a high school level.'' These
clarifications in the final rule are based on current law, should make
the professional duties test easier to apply, and will not cause
currently nonexempt employees to be classified as exempt learned
professionals. At the same time, the final rule recognizes that some
learned professionals in the modern workplace are required to comply
with national or international standards or guidelines. Certified
Public Accountants have not under current law, and will not under the
final rule, lose the learned professional exemption because they follow
the Generally Accepted Accounting Principles (GAAP). Similarly, a
lawyer who follows Security and Exchange Commission rules to prepare
corporate filings should still qualify for exemption even though such
rules today allow for little variation. In such cases, the exempt
professional employee applies advanced knowledge to identify and
interpret varying facts and circumstances. As noted by several
commenters, the decision in Hashop v. Rockwell Space Operations Co.,
867 F. Supp. 1287 (S.D. Tex. 1994), demonstrates the absurd result from
too literally applying the current ``discretion and judgment''
requirement to a 21st century job. While this case has not been
followed by any court in the decade since it was decided, the Rockwell
Space Operations decision has caused confusion for employers attempting
to determine the exempt status of employees. The plaintiffs in the
Rockwell Space Operations case were instructors who trained ``Space
Shuttle ground control personnel during simulated missions.'' Id. at
1291. The plaintiffs provided ``instruction on all communications,
data, tracking, and telemetry information that ordinarily flows between
the Space Shuttle and the Johnson Space Center Mission Control
Center.'' Id. The plaintiffs were responsible for assisting in
development of the script for the simulated missions, running the
simulation, and debriefing Mission Control on whether the trainees
handled simulated anomalies correctly. Id. at 1291-92. The plaintiffs
also wrote workbooks and technical guides. Id. The plaintiffs had
college degrees in electrical engineering, mathematics or physics. Id.
at 1296. Nonetheless, the court found the plaintiffs did not
``consistently exercise discretion and judgment,'' and thus were
entitled to overtime pay, because the appropriate responses to
simulated Space Shuttle malfunctions were contained in a manual. Id. at
1297-98. In the Department's view, the reliance by an engineer or
physicist on a manual outlining appropriate responses to a Space
Shuttle emergency (or a problem in a nuclear reactor, as another
example) should not transform an otherwise learned professional
scientist into a nonexempt technician. The clarifications to the
professional duties test are designed to prevent such an absurd result.
The definition of ``advanced knowledge'' also retains the
``predominantly intellectual'' concept from the existing ``long''
duties test. The Department notes that the proposal did not eliminate
the requirement that exempt professional work must be predominantly
intellectual. We agree with the commenters stating that professional
work, by its very nature, must be intellectual. Thus, proposed section
541.301(a) defined learned professions to include those ``occupations
that have a recognized professional status based on the acquirement of
advanced knowledge and performance of work that is predominantly
intellectual in character as opposed to routine mental, manual,
mechanical or physical work.'' Nonetheless, the comments demonstrate
that the proposal did not sufficiently stress this concept, and may
have been unclear as to how the ``predominantly intellectual''
requirement fits into the primary duty test. Moving the ``predominantly
intellectual'' language to final section 541.301(b) should address the
commenter concerns discussed above.
A number of commenters ask the Department to declare various
occupations as qualifying for the learned professional exemption, but
these commenters did not provide sufficient information regarding the
educational requirements of the occupations necessary for us to make
that determination. For example, the Newspaper Association of America
(NAA) suggests that the Department consider including a specific
discussion on the applicability of the learned professional exemption
to journalists, particularly given the guidance in the existing
regulations that the learned professional exemption does not apply to
``quasi-professions'' such as journalism. The NAA cites a 1996 survey
of daily newspaper editors conducted at the Ohio State Newspaper
finding that 86 percent of daily newspaper entry-level hires just out
of college had journalism and mass communication degrees. The
Department, however, has no further supporting information about the
requirements for the profession and, as such, declines to include
journalists in the learned professional exemption at this time. Further
discussion regarding journalists is retained as in the existing
regulations under the creative professional exemption.
The record evidence is sufficient for the Department to provide
additional guidance regarding the following occupations, some of which
are covered by the current regulations but repeated here:
Nurses. The proposal retained the Department's existing
interpretation regarding the exempt status of registered nurses (RNs).
Simply stated, nurses who are registered by an appropriate state
licensing board satisfy the duties requirements for exemption as
learned professional employees. This well-established regulatory
exemption for registered nurses has appeared in the existing
interpretative guidelines for more than 32 years:
Registered nurses have traditionally been recognized as
professional employees by the Division in its enforcement of the
act. Although, in some cases, the course of study has become
shortened (but more concentrated), nurses who are registered by the
appropriate examining board will continue to be recognized as having
met the requirement of Sec. 541.3(a)(1) of the regulations.
29 CFR 541.301(e)(1) (36 FR 22978, December 2, 1971). Final rule
section 541.301(e)(2) continues to provide that RNs satisfy the duties
test for the professional exemption, and clarifies that other nurses,
such as licensed practical nurses (LPNs), would not be exempt from
eligibility for overtime.
The AFL-CIO, the American Federation of Teachers (AFT), the
American Nurses Association, the Maine State Nurses Association, the
Minnesota Nurses Association, the Service Employees International Union
(SEIU) and United Food and Commercial Workers International Union
(UFCW), as well as many individual nurses, express reservations about
the knowledge equivalency language of the proposal. They state that the
proposed formulation of the professional standard duty test would
exempt additional classes of healthcare workers, such as LPNs. For
example, AFT and SEIU note that LPNs have some level of formal
education but do
[[Page 22153]]
not possess the same level to be considered degreed exempt employees,
as are RNs. SEIU also argues that the proposal ignored the differences
in the permitted scope of practice between RNs and LPNs. The UFCW
argues that the difference between RNs and LPNs is that the former
typically enter the nursing profession by attending a specialized
school and obtaining a specialized nursing degree while the latter do
not. The UFCW criticizes the proposal as eliminating this distinction
between RNs and LPNs, and for eliminating overtime for LPNs and other
technical workers who have experience or training but do not have an
advanced degree in a recognized field of science or learning. In
describing the work and qualifications of LPNs, or a licensed
vocational nurse (LVNs) in the state of California, UFCW comments that
they perform patient care tasks pursuant to the direct and close
supervision of RNs or physicians. LPNs and LVNs are not required to
have an advanced degree or undergo a prolonged course of study in a
recognized field of science or learning. ``Typically, all that is
required is a high school education and a year's training in a
vocational school.'' As for their job duties, UFCW states that LPNs and
LVNs have limited discretion and little supervisory or administrative
duties; rather, they perform tasks such as ``routine bedside care,
including bathing, dressing, personal hygiene, feeding, and tending to
patients' comfort and emotional needs.'' Since such nurses are
nonexempt under the current regulatory framework, UFCW calls on the
Department to expressly affirm that such nurses remain nonexempt under
the final regulations. The Minnesota Nurses Association states that the
proposal would detrimentally affect the nursing profession. Other
organizations, such as the National Organization for Women and Women
Employed Institute, also express similar concerns that nurses could be
classified as exempt and no longer entitled to overtime.
Some of these same commenters view the proposal as classifying RNs
as bona fide professionals and thereby exempting them from overtime for
the first time. For example, the American Nurses Association states
that the proposal would add RNs as exempt from overtime. Also, the
Maine State Nurses Association argues that RNs should be treated as
eligible for overtime.
As noted above, the existing regulations have treated RNs as
performing exempt learned professional duties since 1971. The
Department's long-standing position is that RNs satisfy the duties test
for exempt learned professionals, but LPNs do not. See Wage and Hour
Opinion Letters dated April 1, 1999, June 23, 1983, May 16, 1983 and
November 16, 1976. As re-emphasized by the Administrator in an October
19, 1999 Opinion Letter, ``in virtually every case, licensed practical
nurses cannot be considered exempt, bona fide, professionals.''
Similarly, the scant case law in this area is consistent. For example,
in Fazekas v. Cleveland Clinic Foundation Health Care Ventures, Inc.,
204 F.3d 673 (6th Cir. 2000), the parties did not dispute that the
plaintiff RNs who made home health care visits possessed the requisite
knowledge of an advanced type in a field of science to satisfy the
duties test for the professional exemption. There, as in most reported
cases involving claims by nurses for overtime pay, the issue was
whether the nurses were paid on a fee basis that would meet the salary
or fee basis test. See also Elwell v. University Hospitals Home Care
Services, 276 F.3d 832, 835-36 (6th Cir. 2002) (dispute regarding
whether home health care nurse providing ``skilled nursing services''
was paid on a salary or fee basis, but no dispute that nurse met the
duties test); Klem v. County of Santa Clara, California, 208 F.3d 1085,
1088-90 (9th Cir. 2000) (dispute on whether RN was paid on a salary
basis, but no dispute that registered nurse met the duties test for the
learned professional exemption).
The Department did not and does not have any intention of changing
the current law regarding RNs, LPNs or other similar health care
employees, and no language in the proposed regulations suggested
otherwise. Consequently, the final rule reiterates the long-standing
position that RNs satisfy the duties test for bona fide learned
professional employees. The Department further clarifies that LPNs and
other similar health care employees generally do not qualify as exempt
learned professionals, regardless of work experience and training,
because possession of a specialized advanced academic degree is not a
standard prerequisite for entry into such occupations.
Physician Assistants. Proposed section 541.301(e)(4) included an
enforcement policy articulated in section 22d23 of the Wage and Hour
Division Field Operations Handbook (FOH) that physician assistants who
complete three years of pre-professional study (or 2,000 hours of
patient care experience) and not less than one year of professional
course work in a medical school or hospital generally meet the duties
requirements for the learned professional exemption. Although a few
commenters object to this section, the final rule retains this long-
standing recognition of physician assistants as exempt learned
professionals. However, the Department has modified the educational and
certification requirements in final section 541.301(e)(4) in response
to a comment filed by the American Academy of Physician Assistants
(AAPA).
According to the AAPA, the standard prerequisite for practice as a
physician assistant is graduation from a physician assistant program
accredited by the Accreditation Review Commission on Education for the
Physician Assistant and certification by the National Commission on
Certification of Physician Assistants (NCCPA). The AAPA states that the
proposal, and thus section 22d23 of the FOH, describes the educational
background or experience typical of an individual who is admitted into
an accredited physician assistant program and includes an abbreviated
version of the physician assistant educational curriculum--not the
standard an individual must satisfy to practice as a physician
assistant. For entry into an accredited physician assistant educational
program, an individual should have a Bachelor's degree and 45 months of
health care experience, according to the AAPA. Physician assistant
programs are located at schools of medicine or health sciences,
universities and teaching hospitals and typically consist of 111 weeks
of instruction: 400 classroom and laboratory hours in the basic
sciences with at least 70 hours in pharmacology, more than 149 hours in
behavioral sciences and more than 535 hours in clinical medicine. In
the second year of the program, 2,000 hours are spent in clinical
rotations divided between primary care medicine and various
specialties. To practice as a physician assistant, an individual must
pass a national certifying examination jointly developed by the
National Board of Medical Examiners and NCCPA. Physician assistants
also must take continuing medical education credits and a
recertification to maintain certification.
The Department recognizes that the FOH section has not been updated
in many years and thus may be out of date. The information provided by
the AAPA reveals a more lengthy and involved required course of study
than is currently set forth in the FOH. The national testing and
certification requirement also is consistent with exempt learned
professional status. Thus, the Department concludes that physician
assistants who have graduated from a program accredited by
[[Page 22154]]
the Accreditation Review Commission on Education for the Physician
Assistant and who are certified by the National Commission on
Certification of Physician Assistants generally meet the duties
requirements for the learned professional exemption. Final section
541.301(e)(4) has been modified accordingly.
Chefs. Section 541.301(e)(6) of the proposal provided that chefs,
such as executive chefs and sous chefs, ``who have attained a college
degree in a culinary arts program, meet the primary duty requirement
for the learned professional exemption.'' The Department received few
comments addressing this section. The National Restaurant Association
confirms that a four-year college degree in culinary arts is the
standard prerequisite in the industry for executive chefs. The National
Restaurant Association argues, however, that the Department should more
explicitly allow work experience to substitute for a college degree. In
contrast, the AFL-CIO expresses concern that the proposed language
unjustly would expand the ``learned professional'' exemption to cover
employees properly considered nonexempt cooks.
The Department agrees that the proposed language should be
clarified to better distinguish between exempt professional chefs with
four-year culinary arts degrees and nonexempt ordinary cooks who
perform predominantly routine mental, manual, mechanical or physical
work. The Department has no intention of departing from current law
that ordinary cooks are not exempt professionals. See, e.g., Wage and
Hour Opinion Letter of February 18, 1983 (``Cooks and bakers are not
considered to be executive, administrative, or professional employees
within the meaning of the regulations regardless of how highly skilled
or paid such employees may be''). See also Cobb v. Finest Foods, Inc.,
755 F.2d 1148, 1150 (5th Cir. 1985) (employee who directed the work of
two or more employees and whose primary duty was management of hot food
section of cafeteria was exempt executive); Noble v. 93 University
Place Corp., 2003 WL 22722958, at *10 (S.D.N.Y. 2003) (summary judgment
denied because of factual dispute over whether employee was head chef
and kitchen manager with numerous managerial and supervisory
responsibilities or ``simply a chef who spent 75 to 100 percent of his
time cooking'').
Accordingly, to avoid any misinterpretations, the final rule
replaces the proposed language ``a college degree'' with ``a four-year
specialized academic degree'' and states that cooks are not exempt
professionals. The final subsection 541.301(e)(6) thus provides:
``Chefs, such as executive chefs and sous chefs, who have attained a
four-year specialized academic degree in a culinary arts program,
generally meet the duties requirements for the learned professional
exemption. The learned professional exemption is not available to cooks
who perform predominantly routine mental, manual, mechanical or
physical work.'' This language is consistent with industry standard
educational prerequisites as represented by the National Restaurant
Association and distinguishes the exempt learned professional chef from
the nonexempt cook. The Department rejects the National Restaurant
Association's suggestion that the regulations should broadly allow work
experience to substitute for a four-year college degree in the culinary
arts because it would inappropriately expand the scope of the learned
professional exemption.
The National Restaurant Association also argues that certain chefs
qualify as creative professionals. The Department agrees that certain
forms of culinary arts have risen to a recognized field of artistic or
creative endeavor requiring ``invention, imagination, originality or
talent.'' The National Restaurant Association points to the
Department's Occupational Outlook Handbook, 2002-2003, stating at page
306 that ``[d]ue to their skillful preparation of traditional dishes
and refreshing twists in creating new ones, many chefs have earned
fame* * *.'' The National Restaurant Association also references
various publications emphasizing the creative nature of certain
culinary innovation, including the specialization of creating
distinctive, unique dishes. Another commenter, a wage and hour
consultant, also suggests that the Department consider the creative
professional exemption for such chefs, noting the ``national acclaim''
and ``reputation and power in the industry'' enjoyed by certain chefs.
Accordingly, after careful consideration of this issue, the
Department concludes that to the extent a chef has a primary duty of
work requiring invention, imagination, originality or talent, such as
that involved in regularly creating or designing unique dishes and menu
items, such chef may be considered an exempt creative professional.
Recognizing that some chefs may qualify as exempt creative
professionals is consistent with the Department's long-standing
enforcement policy regarding floral designers and other federal case
law. See Wage and Hour Opinion Letter of September 4, 1970, 1970 WL
26442 (``The requirement that work must be original and creative in
character would be, generally speaking, met by a flower designer who is
given a subject matter, theme or occasion for which a floral design or
arrangement is needed and creates the floral design or floral means of
communicating an idea for the occasion. Work of this type is original
and creative and depends primarily on the invention, imagination and
talent of the employee''). See also Freeman v. National Broadcasting
Co., 80 F.3d 78, 82 (2nd Cir. 1996) (employees ``talented'' because
they have a ``native and superior ability in their fields''); Reich v.
Gateway Press, Inc., 13 F.3d 685, 700 (3rd Cir. 1994) (``developing an
entirely fresh angle on a complicated topic''); Shaw v. Prentice Hall,
Inc., 977 F. Supp. 909, 914 (S.D. Ind. 1997) (``employees who have been
found to meet the artistic professional exemption performed work that
was much more inventive and `artistic'''). However, there is a wide
variation in duties of chefs, and the creative professional exemption
must be applied on a case-by-case basis with particular focus on the
creative duties and abilities of the particular chef at issue. The
Department intends that the creative professional exemption extend only
to truly ``original'' chefs, such as those who work at five-star or
gourmet establishments, whose primary duty requires ``invention,
imagination, originality, or talent.''
Paralegals. The Department received a number of comments from
paralegals and legal assistants expressing concern that they would be
classified as exempt under the proposed regulations. Other commenters
urge the Department to declare that paralegals are exempt learned
professionals. However, none of these commenters provided any
information to demonstrate that the educational requirement for
paralegals is greater than a two-year associate degree from a community
college or equivalent institution. Although many paralegals possess a
Bachelor's degree, there is no evidence in the record that a four-year
specialized paralegal degree is a standard prerequisite for entry into
the occupation. Because comments revealed some confusion regarding
paralegals, the final rule contains new language in section
541.301(e)(7) providing that paralegals generally do not qualify as
exempt learned professionals. The final rule, however, also states that
the learned professional exemption is available for paralegals
[[Page 22155]]
who possess advanced specialized degrees in other professional fields
and apply advanced knowledge in that field in the performance of their
duties. For example, if a law firm hires an engineer as a paralegal to
provide expert advice on product liability cases or to assist on patent
matters, that engineer would qualify for exemption.
Athletic Trainers. The Department requested and received a number
of comments on athletic trainers. Commenters describe an athletic
trainer's duties as evaluation of injuries and illnesses of athletes;
designing and administering care, treatment and rehabilitation; keeping
and maintaining records of injuries and progress; directly supervising
student athletic trainers and student team managers; and maintaining
current catalogues and files on research and information related to
sports medicine. Athletic trainers are on call 24 hours a day to assist
coaches and teams with athletic injuries, according to the commenters,
and often travel to away competitions with teams.
In the past, the Department has taken the position that athletic
trainers are not exempt learned professionals. However, the court in
Owsley v. San Antonio Independent School District, 187 F.3d 521 (5th
Cir. 1999), cert. denied, 529 U.S. 1020 (2000), rejected this position
and held that athletic trainers certified by the State of Texas
qualified for the learned professional exemption based upon their
possession of a specialized advanced degree.
Further, the information submitted by commenters indicates that
athletic trainers are nationally certified and that a specialized
academic degree is a standard prerequisite for entry into the field.
Athletic trainers are nationally certified by the Board of
Certification of the National Athletic Trainers Association (NATA) Inc.
In order to qualify for such certification, a candidate must meet
NATA's basic requirements that include a Bachelor's degree in a
curriculum accredited by the Commission on Accreditation of Allied
Health Education Programs (CAAHEP). The CAAHEP-accredited curriculums
are in specialized fields such as athletic training, health, physical
education or exercise training, and require study in six particular
courses--Human Anatomy, Human Physiology, Biometrics, Exercise
Physiology, Athletic Training and Health/Nutrition. Candidates are
strongly encouraged to take additional courses in the areas of Physics,
Pharmacology, Recognition of Medical Conditions, Pathology of Illness
and Injury, and Chemistry. Finally, a candidate must participate in
extensive clinicals under the supervision of NATA licensed trainers. At
least 25 percent of these clinical hours must be obtained on location,
at the practice or game, in one of many eligible sports such as
football, soccer, wrestling, basketball or gymnastics.
In light of the Owsley decision and the comments evidencing the
specialized academic training required for certification, the
Department concludes that athletic trainers certified by NATA, or under
an equivalent state certification procedure, would qualify as exempt
learned professionals. We have modified the regulation accordingly by
adding a section on athletic trainers at final section 541.301(e)(8).
Funeral Directors. Comments from the National Funeral Directors
Association (NFDA) include detailed information on the educational and
licensure requirements in each state for licensed funeral directors and
embalmers. The NFDA comments indicate that the licensing requirements
for funeral directors or embalmers in 16 states require at least two
years of college plus graduation from an accredited college of mortuary
science, which requires two years of study. According to NFDA, the
American Board of Funeral Service Education (ABFSE) is the sole
national academic accreditation agency for college and university
programs in funeral service and mortuary science education, and the
ABFSE is recognized by the U.S. Department of Education and Council on
Higher Education Accreditation. The ABFSE-recommended curriculum is
used in all accredited mortuary colleges in the United States. The
ABFSE stipulates that the minimum educational standard for the funeral
service profession consists of 60 semester hours (equivalent to two
years of college-level credits) in public health and technical studies,
such as chemistry, anatomy and pathology; business management, such as
funeral home management and merchandising and funeral directing; social
sciences, such as grief dynamics and counseling; legal, ethical and
regulatory subjects, such as mortuary law; and electives in general
education or non-technical courses. Thus, licensed funeral directors or
embalmers in 16 states must complete at least the equivalent of four
years of post-secondary education which is sufficient, NFDA argues, to
meet the educational requirements for the learned professional
exemption. The NFDA comments also reveal that one state, Colorado, has
no educational or licensing requirements for funeral directors or
embalmers, and five states require funeral directors or embalmers to
have only a high school education. The other states fall somewhere in
between: some requiring high school and mortuary college, and some
requiring one year of post-secondary education plus completion of the
mortuary college program. Twelve states also require passage of a state
or national exam for licensure.
Other commenters oppose recognizing licensed funeral directors or
embalmers as learned professionals. For example, the International
Brotherhood of Teamsters (Teamsters) contend that the proposed rule
would improperly exempt most licensed funeral directors and embalmers.
The Teamsters argue that the specialized intellectual instruction and
apprenticeship that a licensed funeral director or embalmer attains
does not constitute the requisite knowledge of an exempt professional.
The Teamsters state that a four-year course of study is not a
prerequisite to licensure, and cites a November 23, 1999, Wage and Hour
Opinion letter in support of its position. In this opinion letter, the
Wage and Hour Division wrote that ``[a] prolonged course of specialized
instruction and study generally has been interpreted to require at
least a baccalaureate degree or its equivalent which includes an
intellectual discipline in a particular course of study as opposed to a
general academic course otherwise required for a baccalaureate
degree.'' 1999 WL 33210905. The Teamsters also express concern that,
under the proposal, more licensed funeral directors and embalmers could
be classified as exempt professional employees because they could
obtain the requisite knowledge through a combination of educational
requirements, apprenticeships and on-the-job training.
The issue of the exempt status of funeral directors and embalmers
presents precisely the situation long contemplated by the existing
regulations at section 541.301(e)(2) that the ``areas in which
professional exemptions may be available are expanding. As knowledge is
developed, academic training is broadened, degrees are offered in new
and diverse fields, specialties are created and the true specialist, so
trained, who is given new and greater responsibilities, comes closer to
meeting the tests.'' See also discussion of final section 541.301(f),
infra. In the past, the Department has taken the position that licensed
funeral directors and embalmers are not exempt learned professionals.
The Department took this position as amicus curiae in support of a
funeral director's argument that he was not an exempt learned
professional in the case of Rutlin v. Prime Succession, Inc., 220 F.3d
737 (6th Cir.
[[Page 22156]]
2000). However, the court in Rutlin did not agree with the Department's
position and held that funeral directors certified by the State of
Michigan qualified for the learned professional exemption. In Rutlin,
the district court found that the plaintiff funeral director's work
``required knowledge of an advance type in a field of science or
learning customarily acquired by a prolonged course of specialized
intellectual instruction and study * * *.'' 220 F.3d at 742. Quoting
from the lower court's decision, the appellate court agreed:
As a funeral director and embalmer, plaintiff had to be licensed
by the state. In order to become licensed, plaintiff had to complete
a year of mortuary science school and two years of college,
including classes such as chemistry and psychology, take national
board tests covering embalming, pathology, anatomy, and cosmetology,
practice as an apprentice for one year, and pass an examination
given by the state.
Id. The appellate court characterized plaintiff's educational
requirement as ``a specialized course of instruction directly relating
to his primary duty of embalming human remains,'' notwithstanding the
fact that plaintiff ``was not required to obtain a bachelor's degree.''
Id. The court noted that ``[t]he FLSA regulations do not require that
an exempt professional hold a bachelor's degree; rather, the
regulations require that the duties of a professional entail advanced,
specialized knowledge'' and concluded ``that a licensed funeral
director and embalmer must have advanced, specialized knowledge in
order to perform his duties.'' Id. See also Szarnych v. Theis-Gorski
Funeral Home Inc., 1998 WL 382891 (7th Cir. 1998) (licensed funeral
director/embalmer in Illinois was exempt learned professional).
After carefully weighing the comments and case law, the Department
concludes that some licensed funeral directors and embalmers may meet
the duties requirements for the learned professional exemption. The
Teamsters state that a four-year course of study is not a prerequisite
for licensure as a funeral director or embalmer. However, the detailed,
state-by-state analysis submitted by NFDA evidences that four years of
post-secondary education, including two years of specialized
intellectual instruction in an accredited mortuary college, is a
prerequisite for licensure in many states. In such states, a prolonged
course of specialized intellectual instruction has become a standard
prerequisite for entrance into the profession. See, e.g., Reich v.
State of Wyoming, 993 F.2d 739, 742 (10th Cir. 1993) (the Department's
argument that game wardens were not exempt professionals because
``there is a lack of uniformity among states as to the requirement and
duties of game wardens'' was rejected by the court, which stated that
``Wyoming may rightfully require more duties of its game wardens than
other states''). Further, the only federal appellate courts to address
this issue--the Sixth Circuit in Rutlin and the Seventh Circuit in
Szarnych--have held the licensed funeral directors and embalmers are
exempt learned professionals. Indeed, the educational and licensing
requirements for funeral directors or embalmers in the 16 states that
require two years of post-secondary education and completion of a two-
year program at an accredited mortuary college are comparable to the
educational requirements for certified medical technologists, who have
long been recognized in the existing regulations as exempt
professionals. Accordingly, consistent with the case law and the
existing rule on medical technologists, a new subsection 541.301(e)(9)
in the final rule provides:
Licensed funeral directors and embalmers who are licensed by and
working in a state that requires successful completion of four
academic years of pre-professional and professional study, including
graduation from a college of mortuary science accredited by the
American Board of Funeral Service Education, generally meet the
duties requirements for the learned professional exemption.
The Department recognizes, however, that some employees with the
job title of ``funeral director'' or ``embalmer'' have not completed
the four years of post-secondary education required in final subsection
541.301(d)(9). In fact, the NFDA comments reveal that the state of
Colorado has no educational requirements for funeral directors and
embalmers, and five other states require only a high school education.
Such employees, of course, cannot qualify as exempt learned
professionals.
Pilots. Most pilots are exempt from the FLSA overtime requirements
under section 13(b)(3) of the Act, which exempts ``any employee of a
carrier by air subject to the provisions of title II of the Railway
Labor Act.'' Thus, pilots who are employed by commercial airlines are
exempt from overtime under section 13(b)(3). However, the exempt status
of other pilots, such as pilots of corporate jets, is determined under
section 13(a)(1), and has been the subject of recent litigation.
The Department has taken the position that pilots are not exempt
professionals. We have maintained that aviation is not a ``field of
science or learning,'' and that the knowledge required to be a pilot is
not ``customarily acquired by a prolonged course of specialized
intellectual instruction.'' See Wage and Hour Opinion Letter dated
January 20, 1975; In re U.S. Postal Service ANET and WNET Contracts,
2000 WL 1100166, at *7 (DOL Admin. Rev. Bd.).
A contrary result was reached in Paul v. Petroleum Equipment Tools
Co., 708 F.2d 168 (5th Cir. 1983). In Paul, the Fifth Circuit allowed
the learned professional exemption for a company airline pilot who held
an airline transport pilot (ATP) certificate, a flight instructor
certificate, a commercial pilot certificate, an instrument flight rules
(IFR) rating, and was authorized to fly both single and multiengine
airplanes. The court examined the Federal Aviation Authority
regulations setting forth the requirements for the licenses and
ratings, finding the combination of instruction and flight tests
sufficient to satisfy the requirement of a prolonged course of
specialized instruction, ``despite its distance from campus.'' Id. at
173.
Despite Paul, the Department continued to assert that pilots are
not exempt in Kitty Hawk Air Cargo, Inc. v. Chao, 2004 WL 305603 (N.D.
Tex. 2004) (Service Contract Act case), supported by the decision in
Ragnone v. Belo Corp., 131 F. Supp. 2d 1189, 1193-94 (D. Ore. 2001),
holding that a helicopter pilot was not exempt under section 13(a)(1).
However, the district court in Kitty Hawk, relying on Paul, ruled
on January 26, 2004, that the pilots at issue did in fact meet the
requirements of the professional exemption. In addition, a number of
commenters argue that the Department should reconsider its position on
pilots. Such commenters note that aviation degrees are now available
from a few institutions of higher education. Further, pilots must
complete classroom training, hours of flying with an instructor, pass
tests and meet other requirements to obtain FAA licenses. Because of
the conflict in the courts, and the insufficient record evidence on the
standard educational requirements for the various pilot licenses, the
Department has decided not to modify its position on pilots at this
time.
Other Professions. The final rule adopts without change subsection
541.301(e)(1) on medical technologists, subsection 541.301(e)(3) on
dental hygienists and subsection 541.301(e)(5) on accountants. These
subsections are consistent with the existing regulations and long-
standing policies of the Wage and Hour Division. None of the
[[Page 22157]]
comments received provided information justifying departure from the
current law.
Finally, consistent with the existing regulations and the proposal,
final section 541.301(f) recognizes that the areas in which the
professional exemption may be available are expanding. Final section
541.301(f) also now provides:
Accrediting and certifying organizations similar to those listed
in subsections (e)(1), (3), (4), (8) and (9) of this section also
may be created in the future. Such organizations may develop similar
specialized curriculums and certification programs which, if a
standard requirement for a particular occupation, may indicate that
the occupation has acquired the characteristics of a learned
profession.
This new language is adopted to ensure that final subsections
541.301(e)(1), (3), (4), (8) and (9) do not become outdated if the
accrediting and certifying organizations change or if new organizations
are created. Accredited curriculums and certification programs are
relevant to determining exempt learned professional status to the
extent they provide evidence that a prolonged course of specialized
intellectual instruction has become a standard prerequisite for
entrance into the occupation as required under section 541.301. Neither
the identity of the certifying organization nor the mere fact that
certification is required is determinative, if certification does not
involve a prolonged course of specialized intellectual instruction. For
example, certified physician assistants meet the duties requirements
for the learned professional exemption because certification requires
four years of specialized post-secondary school instruction; employees
with cosmetology licenses are not exempt because the licenses do not
require a prolonged course of specialized intellectual instruction.
Section 541.302 Creative Professionals
Proposed section 541.302 provided further guidance on the primary
duties test for creative professionals. In the proposal, subsection (a)
set forth the general rule that creative professionals must have ``a
primary duty of performing office or non-manual work requiring
invention, imagination, originality or talent in a recognized field of
artistic or creative endeavor as opposed to routine mental, manual,
mechanical or physical work. The exemption does not apply to work which
can be produced by a person with general manual ability and training.''
Proposed subsection (b) set forth some general examples of fields of
``artistic or creative endeavor.'' Proposed subsection (c) set forth
more specific examples of creative professionals, and proposed
subsection (d) provided guidance on journalists.
The final rule deletes the ``office or non-manual work'' language
in subsection 541.302(a) for the reasons discussed above under section
541.300. In addition, the words ``or intellectual'' have been
reinserted from the existing regulations into subsection (a) because
its deletion in the proposal was unintentional. To add further clarity
to the requirement of ``invention, imagination, originality or
talent,'' final subsection (c) adds: ``The duties of employees vary
widely, and exemption as a creative professional depends on the extent
of the invention, imagination, originality or talent exercised by the
employee. Determination of exempt creative professional status,
therefore, must be made on a case-by-case basis.'' As described in more
detail below, the final rule also makes substantial changes to
subsection (d) regarding journalists.
Because the proposal adopted the primary duty test of the existing
regulations with few changes, the Department received few substantive
comments on this section except for comments regarding journalists. The
American Federation of Television and Radio Artists expresses concern
that the proposed regulations would lead to an across-the-board
exemption of all journalists, including employees of smaller news
organizations, whom the organization believes should not be exempt. In
an opposing view, the Newspaper Association of America and the National
Newspaper Association, an organization of smaller newspapers,\10\
support the proposed regulations relating to journalists and would seek
to have all reporters of community newspapers classified as exempt.
---------------------------------------------------------------------------
\10\ Employees of small newspapers and small radio and
television stations are statutorily exempt from the overtime pay
requirement under sections 13(a)(8) and 13(b)(9) of the Act,
respectively. 29 U.S.C. 213(a)(8); 29 U.S.C. 213(b)(9).
---------------------------------------------------------------------------
Proposed subsection (d) was intended to reflect current federal
case law regarding the status of journalists as creative professionals.
Reich v. Gateway Press, Inc., 13 F.3d 685, 689 (3rd Cir. 1994), for
example, involved the exempt status of reporters who worked for weekly
newspapers either rewriting press releases under various topics such as
``what's happening,'' ``church news,'' ``school lunch menus,'' and
``military news,'' or writing standard recounts of public information
by gathering facts on routine community events. In affirming the lower
court's decision that the plaintiffs were not exempt, the appellate
court evaluated the duties of reporters in light of the Department's
interpretive guidelines, current section 541.302(d), which states:
``The majority of reporters do work which depends primarily on
intelligence, diligence, and accuracy. It is the minority whose work
depends primarily on `invention, imaging [sic], or talent.''' The court
concluded that the duties of the weekly newspaper reporters did not
require invention, imagination, or talent:
This work does not require any special imagination or skill at
making a complicated thing seem simple, or at developing an entirely
fresh angle on a complicated topic. Nor does it require invention or
even some unique talent in finding informants or sources that may
give access to difficult-to-obtain information.
13 F.3d at 700. However, the appellate court did recognize that not all
fact-gathering duties are necessarily nonexempt work. While some fact-
gathering would entail the skill or expertise of an investigative
reporter or bureau chief, the court found that the fact gathering
performed by the reporters in the Gateway case did not rise to such
level.
The First Circuit reached a similar conclusion in Reich v.
Newspapers of New England, Inc., 44 F.3d 1060 (1st Cir. 1995). In
Newspapers of New England, the reporters had duties similar to those in
the Gateway case. In finding such reporters nonexempt, the court
observed that ``the day-to-day duties of these three reporters
consisted primarily of `general assignment' work,'' and the reporters
``[r]arely'' were ``asked to editorialize about or interpret the events
they covered.'' Rather, the focus of their writing was ``to tell
someone who wanted to know what happened * * * in a quick and
informative and understandable way.'' Id. at 1075. Like the Third
Circuit in Gateway, the First Circuit concluded that the reporters
``were not performing duties which would place them in that minority of
reporters `whose work depends primarily on invention, imaging [sic], or
talent.''' Id. (citation omitted). See also Bohn v. Park City Group
Inc., 94 F.3d 1457 (10th Cir. 1996) (employee employed as a technical
writer or documenter in software and training departments did not
perform work requiring artistic invention, imagination, or talent to
qualify as an exempt artistic professional); Shaw v. Prentice Hall,
Inc., 977 F. Supp. 909, 914 (S.D. Ind. 1997), aff'd, 151 F.3d 640 (7th
Cir. 1998) (district court found that production editor in book
publishing industry did not qualify as exempt
[[Page 22158]]
creative professional because the ``duty * * * to manage a book project
through the editing and publishing process'' did not entail
``invention, imagination, or talent in an artistic field of
endeavor.'').
In addition to examining the nature of the journalists' duties to
determine exempt creative professional status, courts have looked to
whether an employee's work is subject to substantial control from
management. For example, in Dalheim v. KDFW-TV, 918 F. 2d 1220, 1229
(5th Cir. 1990), the court found that while general-assignment
reporters could be exempt creative professionals, the reporters in this
case were nonexempt because ``their day-to-day work is in large part
dictated by management.'' In addition, the court held that news
producers were not exempt creative professionals because they performed
work pursuant to ``a well-defined framework of management policies and
editorial convention.''
In contrast, other courts have recognized that some journalists
perform work requiring invention, imagination and talent, and thus
qualify as exempt creative professionals. For example, in Freeman v.
National Broadcasting Co., 80 F.3d 78 (2nd Cir. 1996), the appellate
court found that the duties of a domestic news writer, domestic
producer, and field producer for television news shows involved a
sufficient amount of creativity to qualify them as exempt ``employees
whose primary duty consists of the performance of work requiring
invention, imagination, or talent in a recognized field of artistic
endeavor.'' Id. at 82. The court noted that technological changes and
the more sophisticated demands of the current news consumer have caused
changes in the news industry, and stated that the lower court erred in
finding the plaintiffs were nonexempt because it relied on a
nonbinding, outdated, and inapplicable interpretation by the U.S.
Department of Labor of the artistic professional exemption, section
541.302(a). One of the reasons the appellate court gave scant weight to
the Department's interpretation was the Department's failure to reflect
the vast changes in the industry. The court described the transition
that modern news organizations had experienced as follows:
Dizzying technological advances and the sophisticated demands of
the news consumer have resulted in changes in the news industry over
the past half-century. This is particularly true of television news
where the same news may be communicated by a variety of combined
audio and visual presentations in which creativity is at a premium.
Yet, over this period, the DOL has failed to update the journalism
interpretations.
Id. at 85. Citing Sherwood v. Washington Post, 871 F. Supp. 1471, 1482
(D.D.C. 1994), the NBC court acknowledged that there is a fundamental
difference between a journalist working for a major news organization
and a journalist working as a small press reporter. It would be
``anachronistic, even irrational,'' the court wrote, ``to continue to
impose these guidelines on many journalists in major news
organizations.'' 80 F.3d at 85. The court in Truex v. Hearst
Communications, Inc., 96 F. Supp. 2d 652, 661 (S.D. Tex. 2000), denying
the employer's summary judgment motion regarding a sportswriter, also
acknowledged the continuum that, on one end, consists of nonexempt
reporters who gather and ``regurgitate'' facts and, on the other end,
consists of exempt creative professionals who generate and develop
ideas for stories in print or broadcast, with little editorial input.
In proposed subsection (d), the Department intended to modify the
existing regulations to reflect this federal case law. The Department
did not intend to create an across the board exemption for journalists.
As stated in the case law, the duties of employees referred to as
journalists vary along a spectrum from the exempt to the nonexempt,
regardless of the size of the news organization by which they are
employed. The less creativity and originality involved in their
efforts, and the more control exercised by the employer, the less
likely are employees classified as journalists to qualify as exempt.
The determination of whether a journalist is exempt must be made on a
case-by-case basis. The majority of journalists, who simply collect and
organize information that is already public, or do not contribute a
unique or creative interpretation or analysis to a news product, are
not likely to be exempt.
In order to reflect this case law more accurately, the Department
has modified section 541.302(d) to state as follows:
Journalists may satisfy the duties requirements for the creative
professional exemption if their primary duty is work requiring
invention, imagination, originality or talent, as opposed to work
which depends primarily on intelligence, diligence and accuracy.
Employees of newspapers, magazines, television and other media are
not exempt creative professionals if they only collect, organize and
record information that is routine or already public, or if they do
not contribute a unique interpretation or analysis to a news
product. Thus, for example, newspaper reporters who merely rewrite
press releases or who write standard recounts of public information
by gathering facts on routine community events are not exempt
creative professionals. Reporters also do not qualify as exempt
creative professionals if their work product is subject to
substantial control by the employer. However, journalists may
qualify as exempt creative professionals if their primary duty is
performing on the air in radio, television or other electronic
media; conducting investigative interviews; analyzing or
interpreting public events; writing editorials, opinion columns or
other commentary; or acting as a narrator or commentator.
Section 541.303 Teachers
The Department received few comments on this provision and does not
believe any substantive changes to this section are necessary in light
of those comments.
Section 541.304 Practice of Law or Medicine
The Department received few comments on this provision and does not
believe any substantive changes to this section are necessary in light
of those comments.
Subpart E, Computer Employees
Sections 541.400-402
The proposed regulations consolidated all of the regulatory
guidance on the computer occupations exemption into a new regulatory
Subpart E, by combining provisions of the current regulations found at
sections 541.3(a)(4), 541.205(c)(7), and 541.303. Proposed Subpart E
collected into one place the substance of the original 1990 statutory
enactment, the 1992 final regulations, and the 1996 statutory enactment
(section 13(a)(17) of the FLSA). Because the key regulatory language
that resulted from the 1990 enactment is now substantially codified in
section 13(a)(17) of the FLSA, no substantive changes were proposed to
that language comprising the primary duty test for the computer
exemption. However, the proposal removed the additional regulatory
requirement, not contained in section 13(a)(17) of the FLSA, that an
exempt computer employee must consistently exercise discretion and
judgment. Because of the tremendously rapid pace of significant changes
occurring in the information technology industry, the proposal did not
cite specific job titles as examples of exempt computer employees, as
job titles tend to quickly become outdated.
Based on the comments received and for reasons discussed below,
several changes have been made in the final rule to further align the
regulatory text with the specific standards adopted by the Congress for
the computer employee
[[Page 22159]]
exemption in section 13(a)(17) of the FLSA. Section 541.401 of the
proposed rule, which discussed the high level of skill and expertise in
``theoretical and practical application'' of specialized computer
systems knowledge as a prerequisite for exemption (a carry-over from
the rules in effect prior to the 1996 statutory amendment), has been
deleted from the final rule, as it goes beyond the scope of the
specific standards adopted by Congress in section 13(a)(17).
As described in the preamble to the proposed rule, the exemption
for employees in computer occupations has a unique legislative and
regulatory history. In November 1990, Congress enacted legislation
directing the Department of Labor to issue regulations permitting
computer systems analysts, computer programmers, software engineers,
and other similarly-skilled professional workers to qualify as exempt
executive, administrative, or professional employees under FLSA section
13(a)(1). This enactment also extended the exemption to employees in
such computer occupations if paid on an hourly basis at a rate at least
6\1/2\ times the minimum wage. Final implementing regulations were
issued in 1992. See 29 CFR 541.3(a)(4), 541.303; 57 FR 46744 (Oct. 9,
1992); 57 FR 47163 (Oct. 14, 1992). However, when Congress increased
the minimum wage in 1996, Congress enacted, almost verbatim, most--but
not all--of the Department's regulatory language comprising the
computer employee ``primary duty test'' as a separate statutory
exemption, under a new FLSA section 13(a)(17). Section 13(a)(17)
exempts ``any employee who is a computer systems analyst, computer
programmer, software engineer, or other similarly skilled worker, whose
primary duty is (A) the application of systems analysis techniques and
procedures, including consulting with users, to determine hardware,
software or system functional specifications; (B) the design,
development, documentation, analysis, creation, testing or modification
of computer systems or programs, including prototypes, based on and
related to user or system design specifications; (C) the design,
documentation, testing, creation or modification of computer programs
related to machine operating systems; or (D) a combination of [the
aforementioned duties], the performance of which requires the same
level of skills * * *.'' The 1996 enactment also froze the hourly
compensation test at $27.63 (which equaled 6\1/2\ times the former
$4.25 minimum wage). The 1996 enactment included no delegation of
rulemaking authority to the Department of Labor to further interpret or
define the scope of the exemption; however, the original 1990 statute
was not repealed by the 1996 amendment.
A number of employers and business groups commenting on the
proposal believe that the Department should update the computer
exemption regulations to reflect the status of the many new job
classifications that have arisen since the computer exemption
regulations were first promulgated in the early 1990s. They suggest
that the Department expand the computer employee exemption beyond the
specific terms used in section 13(a)(17), to include additional job
titles like network managers, LAN/WAN administrators, database
administrators, web site design and maintenance specialists, and
systems support specialists performing similar duties with hardware,
software and communications networks.
The Wisconsin Department of Employment Relations notes that most
computer professionals now work within a personal computer, network-
based environment and recommends adding language to the duties test
that addresses hardware, software, and network-based duties, to make
the test more relevant and applicable to current computer environments.
The HR Policy Association comments that the computer professionals
exemption was written 11 years ago, and considerable confusion exists
over which jobs are covered. The commenter suggests that the Department
provide additional guidance in the preamble through illustrative
examples analyzing exempt computer jobs. The HR Policy Association also
recommends clarifying the duties for computer employees who do not
program yet have highly sophisticated roles in maintaining computer
software and systems, such as network managers, systems integration
professionals, programmers, certain help desk professionals, and those
who provide end-user support. The U.S. Chamber of Commerce asks the
Department to recognize that the computer exemption applies not only to
analysts, programmers, and engineers, but also to those with similar
skills, and suggested amendments to the regulations to include network,
LAN, and database analysts and developers, Internet administrators,
individuals responsible for troubleshooting, those who train new
employees, and those who install hardware and software. The Financial
Services Roundtable comments that the specialized education necessary
to acquire the complex knowledge associated with software languages,
relational database applications, and/or communication or operating
system software should correlate with the exemption for computer
employees. The Information Technology Industry Council and Organization
Resources Counselors suggest the Department clarify that computer
networks and the Internet are included in the phrase ``computer
systems,'' and that high-level work on a computer's database or on the
Internet is covered by the reference to programming or analysis.
The Workplace Practices Group notes that past distinctions between
software and hardware positions have long converged. Today, according
to this commenter, enterprise applications run on sophisticated
networks administered by highly skilled and highly compensated LAN/WAN
professionals who typically understand both networking and
telecommunications theory and practice, some of whom are required to
have a college degree in computer science, management information
systems, or the equivalent, often with an additional preference that
the individual have server or system-level engineer certification.
The National Association of Computer Consultant Businesses (NACCB)
notes that the computer employee exemption is unique in that it has a
dual statutory basis--section 13(a)(1) (from the 1990 law) and section
13(a)(17) (from 1996). NACCB urges that the Department explore how the
exemption applies under the 1990 law to workers beyond those covered by
section 13(a)(17) in 1996, and address what other duties, apart from
those listed in the proposed regulations, should be included in the
computer employee exemption in accordance with the 1990 enactment. This
commenter suggests an illustrative list of ``similarly skilled
workers'' covered by the exemption, to include database administrators,
network or system administrators, computer support specialists
including help desk technicians, and technical writers. This commenter
also suggests definitions for ``system functional specifications,''
``computer systems,'' and ``machine operating systems.''
Other commenters, in contrast, question the Department's authority
to expand the computer employee exemption beyond the express terms used
by the Congress in 1996 under section 13(a)(17). The McInroy & Rigby
law firm states that the Department should not expand the computer
exemption, and that there is no justification for any such expansion.
The Fisher & Phillips law firm states
[[Page 22160]]
that, unlike in section 13(a)(1), in section 13(a)(17) Congress granted
no authority to the Secretary of Labor to define or delimit the
computer employee exemption. This commenter suggests that the final
regulations clarify that references to section 13(a)(17) are
illustrative only and are not to be taken as affecting the scope or
application of that exemption in any respect.
The Workplace Practices Group also traces the evolution of the
statutory exemption for computer employees noting that, while the
Department has authority to define and delimit the section 13(a)(1)
exemptions by regulation, the Department has no such authority under
the computer exemption in section 13(a)(17). If additional positions
are to be found exempt under the computer exemption, that status must
be found clearly within the provisions specified by Congress under
section 13(a)(17), according to this commenter.
While the Department recognizes that the computer employee
exemption has been particularly confusing given its history, and that
comments were invited on whether any further clarifications were
possible under the terms of the statute, the Department believes that
creating two different definitions for computer employees exempt under
sections 13(a)(1) and 13(a)(17) of the FLSA would be inappropriate
given that Congress recently spoke directly on this issue in 1996 under
section 13(a)(17). Moreover, adopting such inconsistent definitions
would be confusing and unwieldy for the regulated community.
Section 13(a)(17) exempts computer positions that are ``similarly
skilled'' to a systems analyst, programmer, or software engineer, but
only if the primary duty of the position in question includes the
specified ``systems analysis techniques * * * to determine hardware,
software, or system functional specifications'' or a combination of
duties prescribed in section 13(a)(17), ``the performance of which
requires the same level of skills.'' Depending on the particular facts,
some of the computer occupations mentioned in the comments could in
fact meet this statutory primary duty test for the computer exemption
without having to specifically cite job titles in the regulations to
qualify for exemption. Where the prescribed duties tests are met, the
exemption may be applied regardless of the job title given to the
particular position. Since an employee's job duties, not job title,
determine whether the exemption applies, we do not believe it is
appropriate, given the history of the computer employee exemption, to
cite additional job titles as exempt beyond those cited in the primary
duty test of the statute itself. In each instance, regardless of the
job title involved, the exempt status of any employee under the
computer exemption must be determined from an examination of the actual
job duties performed under the criteria in section 13(a)(17) of the
Act. In addition, the Department notes that certain jobs cited in the
comments could in fact meet the duties test for the administrative
employee exemption and be exempt on that basis where all those tests
are met, as the proposed regulations pointed out (see proposed section
541.403) and some commenters observe.
Several commenters question whether it was an oversight for the
Department not to include the computer employee exemption within the
proposed special exemption for highly compensated employees. As
originally proposed in section 541.601, an employee performing office
or non-manual work who is guaranteed total annual compensation of at
least $65,000 and who performs any one or more of the exempt duties or
responsibilities of an executive, administrative, or professional
employee could be found exempt. Because Congress included a detailed
primary duty test in the computer exemption, the Department did not
apply the highly compensated exemption to computer employees. We
continue to believe that decision was sound, and follows the statutory
primary duty standards adopted by the Congress in section 13(a)(17) of
the Act. It should also be noted that, for the same reason, the
Department in its proposal removed the limitation contained in section
541.303 of the current rule (adopted prior to 1996) that limited the
exemption to employees who work in software functions, as no such
limitation exists in the statutory exemption enacted in 1996.
Similarly, the Department rejects, as inconsistent with the 1996
enactment, comments suggesting that we reinsert the requirement that an
exempt computer employee must ``consistently exercise discretion and
judgment.'' Minor editorial revisions have been made to further conform
the regulatory language to the statute, but no other suggested
revisions have been adopted.
Subpart F, Outside Sales Employees
Section 541.500 General Rule for Outside Sales Employees
Section 13(a)(1) of the FLSA contains a separate exemption for any
employee employed ``in the capacity of outside salesman.'' Proposed
section 541.500 set forth the general rule for exemption of such
``outside sales'' employees.\11\ Under proposed subsection 541.500(a),
the outside sales exemption applied to any employee ``with a primary
duty of (i) making sales within the meaning of section 3(k) of the Act,
or (ii) obtaining orders or contracts for services or for the use of
facilities for which a consideration will be paid by the client or
customer.'' In addition, to qualify for exemption the outside sales
employee must be ``customarily and regularly engaged away from the
employer's place or places of business in performing such primary
duty.'' Finally, proposed subsection 541.500(b) stated that in
determining the primary duty of an outside sales employee, ``work
performed incidental to and in conjunction with the employee's own
outside sales or solicitations, including incidental deliveries and
collections, shall be regarded as exempt outside sales work.'' Under
this subsection, other work that furthers the employee's sales effort,
including ``writing sales reports, updating or revising the employee's
sales or display catalogue, planning itineraries and attending sales
conferences,'' is also considered exempt work.
---------------------------------------------------------------------------
\11\ Although the statute refers to ``salesman,'' the final
rule, without objection from commenters, replaces this gender-
specific term with ``outside sales employees.''
---------------------------------------------------------------------------
The Department has retained this general rule as proposed.
The only modification intended in the proposed regulations was
removing the restriction that exempt outside sales employees could not
perform work unrelated to outside sales for more than 20-percent of the
hours worked in a workweek by nonexempt employees of the employer. This
revision was proposed for consistency with the ``primary duty''
approach adopted for the other section 13(a)(1) exemptions. In
addition, the current outside sales 20-percent restriction is
particularly complicated and confusing since it relies on the work
hours of nonexempt employees and requires tracking the time of
employees who, by definition, spend much of their time away from the
employer's place of business.
A large majority of the comments that address the outside sales
exemption express support for the adoption of the ``primary duty'' test
in lieu of the 20-percent rule. For example, the Society for Human
Resource Management (SHRM) and Grocery Manufacturers of America (GMA)
state that this revision would provide a more practical method for
employers to determine whether an employee qualifies as an exempt
outside sales employee. According to SHRM, in
[[Page 22161]]
order to keep an account of the percentage of time that outside sales
employees spend on exempt versus nonexempt tasks, as required under the
20-percent rule, employers essentially have to track the hours of their
outside sales employees. SHRM notes that it is very difficult for
employers to meet this responsibility given that outside sales
employees spend large amounts of time away from their employers'
regular places of business. GMA shares these concerns, stating that
keeping track of an outside sales employee's individual activities to
determine whether they are exempt, nonexempt or incidental to exempt
sales activity is administratively difficult, if not impossible. The
National Small Business Association comments that moving away from a
percentage basis to the new definition of ``primary duty'' will
alleviate much of the administrative burden on small business owners.
Two law firms commenting on the outside sales exemption (Goldstein
Demchak Baller Borgen & Dardarian and McInroy & Rigby) ask the
Department to retain the current 20-percent limit on nonexempt work.
Both firms express concern that the outside sales exemption would be
subject to abuse by employers without a ``bright-line'' 20-percent
test. In other words, employers might misclassify sales personnel as
exempt under the outside sales exemption by merely requiring that they
perform only minor amounts of outside sales work. A few commenters,
such as the AFL-CIO, generally oppose removing the 20-percent
limitation on nonexempt work for the same reasons discussed above in
connection with the executive, administrative and professional
exemptions.
After review of the relevant comments, the Department continues to
believe that the application of the primary duty test to the outside
sales exemption is preferable to the 20-percent tolerance test. As
noted in several comments, the primary duty test is relatively simple,
understandable and eliminates much of the confusion and uncertainty
that are present under the existing rule. Cf. Ackerman v. Coca-Cola
Enterprises, Inc., 179 F.3d 1260, 1267 (10th Cir. 1999) (citing
existing Sec. 541.505(a) to the effect that `` `[a] determination of
an employee's chief duty or primary function must be made in terms of
the basic character of the job as a whole' and that ``the time devoted
to the various duties is an important, but not necessarily controlling,
element' ''), cert. denied, 528 U.S. 1145 (2000). It also avoids the
necessity that employers track the hours of its outside sales
employees, which is consistent with the underlying rationale for
exempting outside salespersons. Utilization of the primary duty concept
also provides a consistent approach between the outside sales exemption
and the exemptions for executive, administrative and professional
employees. Finally, the Department is of the view that concerns
relating to potential abuse under the new rule are addressed by the
objective criteria and factors for determining an employee's primary
duty that are contained in section 541.700.
Section 541.501 Making Sales or Obtaining Orders
Proposed section 541.501 defined the term ``sales'' consistent with
section 3(k) of the FLSA, to include ``any sale, exchange, contract to
sell, consignment for sale, shipment for sale, or other disposition.''
Proposed subsection (b) also stated that ``sales'' includes the
transfer of title to tangible property and transfer of tangible and
valuable evidences of intangible property. Proposed subsections (c) and
(d) defined the phrase ``obtaining orders or contracts for services or
for the use of facilities'' to include such activities as selling of
time on radio or television; soliciting of advertising for newspapers
and other periodicals; soliciting of freight for railroads and other
transportation agencies; and taking orders for a service which may be
performed for the customer by someone other than the person taking the
order.
The Department's proposal removed outdated examples and unnecessary
language from current section 541.501, but did not intend any
substantive changes. The Department has retained the proposed changes
to section 541.501 in the final rule.
The Department received few comments on this section. However, one
commenter expresses concern regarding the Department's decision to
remove current section 541.501(e), which states that the outside sales
exemption does not apply to ``servicemen even though they may sell the
service which they themselves perform.'' The commenter claims that,
because of the removal of subsection (e), service technicians would be
classified as exempt outside sales employees. The Department believes
that subsection (e) is an unnecessary example, and its removal is not a
substantive change. The Department agrees with the commenter that an
employee whose primary duty is to repair or service products (e.g.,
refrigerator repair) does not qualify as an exempt outside sales
employee. However, we continue to believe that this conclusion is
obvious from the regulations and this example is unnecessary.
Section 541.502 Away From Employer's Place of Business
An outside sales employee must be customarily and regularly engaged
``away from the employer's place or places of business.'' This phrase
was defined in proposed section 541.502, which began in subsection (a)
by stating: ``The Administrator does not have authority to define this
exemption for `outside' sales under section 13(a)(1) of the Act as
including inside sales work. Section 13(a)(1) does not exempt inside
sales and other inside work (except work performed incidental to and in
conjunction with outside sales and solicitations). However, section
7(i) of the Act exempts commissioned inside sales employees of
qualifying retail or service establishments if those employees meet the
compensation requirements of section 7(i).'' The actual definition of
``away from the employer's place of business'' was contained in
proposed subsection (b) which requires that an exempt outside sales
employee make sales ``at the customer's place of business or, if
selling door-to-door, at the customer's home.'' Proposed subsection (b)
also stated that: ``Outside sales does not include sales made by mail,
telephone or the Internet unless such contact is used merely as an
adjunct to personal calls. Thus, any fixed site, whether home or
office, used by a salesperson as a headquarters or for telephonic
solicitation of sales is considered one of the employer's places of
business, even though the employer is not in any formal sense the owner
or tenant of the property.''
Numerous commenters request that the Department delete the language
in proposed section 541.502(a) regarding the Administrator's lack of
authority to expand the outside sales exemption to include inside sales
work. For example, the U.S. Chamber of Commerce urges the Department
not to use expansive language that could be read to render all inside
sales employees nonexempt, even if they meet the requirements of the
executive, administrative or professional exemptions.
The Department has decided to make the changes requested by these
commenters, not due to any inaccuracy in the sentence, but because we
agree that this language might imply that sales employees, inside or
outside, can only have exempt status by meeting the requirements for
the section 13(a)(1) ``outside sales'' exemption. Thus, the final rule
eliminates most of the regulatory text in proposed section 541.502(a),
including the language
[[Page 22162]]
regarding the Administrator's lack of authority to define the
``outside'' sales exemption to include ``inside'' sales work and the
language regarding the section 7(i) exemption. The Department is
deleting this language to avoid any misunderstanding that the outside
sales exemption is the only exemption available for sales employees.
Other exemptions in the statute, including the section 7(i) exemption
for commissioned employees of retail and service establishments, and
the executive, administrative and professional exemptions, are also
available for sales employees who can meet all the requirements for any
of those exemptions.
The Department emphasizes, however, that notwithstanding these
deletions to the proposed language of section 541.502(a), the
Administrator does not have statutory authority to exempt inside sales
employees from the FLSA minimum wage and overtime requirements under
the outside sales exemption. Those comments that ask the Department to
revise the regulatory definition of an outside sales employee to
include inside sales employees, on the basis that they perform much the
same functions as outside sales employees, must be rejected as beyond
the statutory authority of the Administrator. For example, the National
Association of Manufacturers (NAM) states that, because of
technological advances, inside sales employees perform the same
functions as outside sales employees, with the only distinction being
an on-site visit by the outside sales employee. According to NAM, fax
machines, voice-mail, teleconferencing, cellular phones, computers, and
videoconferencing all enable office-based sales personnel to emulate
the customer contact formerly within the exclusive province of outside
salespersons.
Finally, the National Automobile Dealers Association asks that the
definition of ``away from the employer's place of business'' be
expanded to encompass trade shows. The Department believes that, if
sales occur, trade shows are similar to the ``hotel sample room''
example in the current and proposed regulations. In trade shows, as in
the hotel sample room, a sales employee displays the employer's product
over a short time period and for the purpose of promoting or making
sales in a room not owned by the employer. Accordingly, we have added
language to clarify that an outside sales employee does not lose the
exemption by displaying the employer's products at a trade show. If
selling actually occurs, rather than just sales promotion, trade shows
of short duration (i.e., one or two weeks) should not be considered as
the employer's places of business.
Section 541.503 Promotion Work
Under proposed section 541.503, ``promotional work'' is exempt
outside sales work if it ``is actually performed incidental to and in
conjunction with an employee's own outside sales or solicitations.''
However, ``promotional work that is incidental to sales made, or to be
made, by someone else is not exempt outside sales work.'' Proposed
subsections 541.503(b) and 541.503(c) include examples to illustrate
when promotional activities are exempt versus nonexempt work. To
address commenter concerns discussed below, the Department has made
minor changes to section 541.503(c).
Several commenters, including the Grocery Manufacturers Association
(GMA), ask the Department to eliminate the emphasis upon an employee's
``own'' sales in the proposed regulations. According to GMA, because of
team selling, customer control of order processing, and increasing
computerization of sales and purchasing activities, many of its members
do not analyze performance of their salespersons by looking at their
``own'' sales. In other words, they do not evaluate their sales
personnel based on their ``sales numbers,'' but rather their ``sales
efforts.'' GMA urges the Department to modify the outside sales
regulations to exempt promotion work when it is performed incidental to
and in connection with an employee's ``sales efforts'' and to delete
the requirement that such work be incidental to the employee's ``own''
sales. GMA states this change is necessary to maintain the exemption
where customers enter orders into a computer system, rather than by
submitting a paper order to the outside sales employee whose
promotional efforts helped facilitate the sale.
The U.S. Chamber of Commerce (Chamber) expresses similar concerns,
stating that due to advances in computerized tracking of inventory and
product shipment, the sales of manufactured goods are increasingly
driven by computerized recognition of decreases in customer's
inventory, rather than specific face-to-face solicitations by outside
sales employees. The Chamber states that, under these circumstances,
the role of the outside sales employee has, in many instances, changed
to one of facilitation of sales. The Chamber maintains that promotional
activities, even when they do not culminate in an individual sale, are
nonetheless an integral part of the sales process.
The National Association of Manufacturers (NAM) also expresses
concern that the proposal does not take into account the extent to
which modern technology affects the outside sales exemption. NAM
states, for example, that outside sales employees might lose their
exempt status where products stored in centralized warehouses are
ordered through the customer's internal computerized purchasing system.
In other words, such employees might not be viewed as having
``consummated the sale'' or ``directed efforts toward the consummation
of the sale.'' NAM comments that employees who have long functioned as
outside sales employees may no longer be exempt under the proposed
regulations because they no longer execute contracts or write orders
due to technological advances in the retail business.
After reviewing the comments and current case law, the Department
has made minor changes to section 541.503(c) to address commenter
concerns that technological changes in how orders are taken and
processed should not preclude the exemption for employees whose primary
duty is making sales. As indicated in the proposal, the Department does
not intend to change any of the essential elements required for the
outside sales exemption, including the requirement that the outside
sales employee's primary duty must be to make sales or to obtain orders
or contracts for services. An employer cannot meet this requirement
unless it demonstrates objectively that the employee, in some sense,
has made sales. See 1940 Stein Report at 46 (outside sales exemption
does not apply to an employee ``who does not in some sense make a
sale'') (emphasis added). Extending the outside sales exemption to
include all promotion work, whether or not connected to an employee's
own sales, would contradict this primary duty test. See 1940 Stein
Report at 46 (outside sales exemption does not extend to employees
``engaged in paving the way for salesmen, assisting retailers, and
establishing sales displays, and so forth'').
Nonetheless, the Department agrees that technological changes in
how orders are taken and processed should not preclude the exemption
for employees who in some sense make the sales. Employees have a
primary duty of making sales if they ``obtain a commitment to buy''
from the customer and are credited with the sale. See 1949 Weiss Report
at 83 (``In borderline cases
[[Page 22163]]
the test is whether the person is actually engaged in activities
directed toward the consummation of his own sales, at least to the
extent of obtaining a commitment to buy from the person to whom he is
selling. If his efforts are directed toward stimulating the sales of
his company generally rather than the consummation of his own specific
sales his activities are not exempt''). See also Ackerman v. Coca-Cola
Enterprises, Inc., 179 F.3d 1260, 1266-67 (10th Cir. 1999) (substantial
merchandising responsibilities, including restocking of store shelves
and setting up product displays, did not defeat outside sales exemption
for soft drink advance sales reps and account managers where such
responsibilities were ``incidental to and in conjunction with'' sales
they consummated at stores they visited), cert. denied, 528 U.S. 1145
(2000); Wirtz v. Keystone Readers Service, Inc., 418 F.2d 249, 261 (5th
Cir. 1969) (``student salesmen'' not exempt where engaged in
promotional activities incidental to sales thereafter made by others).
Exempt status should not depend on whether it is the sales employee
or the customer who types the order into a computer system and hits the
return button. The changes to proposed section 541.503(c) are intended
to avoid such a result. Finally, the Department notes that outside
sales employees may also qualify as exempt executive, administrative or
professional employees if they meet the requirements for those
exemptions. For example, an employee whose primary duty is promotion
work such as advertising or marketing--not selling--may not meet the
requirements for the ``outside sales'' exemption, but could be an
exempt administrative employee.
Section 541.504 Drivers Who Sell
Under proposed section 541.504(a), drivers ``who deliver products
and also sell such products may qualify as exempt outside sales
employees only if the employee has a primary duty of making sales.''
Proposed subsection (b) provided factors that should be considered when
determining whether the driver's primary duty is making sales: ``A
comparison of the driver's duties with those of other employees engaged
as truck drivers and as salespersons; possession of a selling or
solicitor's license when such license is required by law or ordinances;
presence or absence of customary or contractual arrangements concerning
amounts of products to be delivered; description of the employee's
occupation in collective bargaining agreements; the employer's
specifications as to qualifications for hiring; sales training;
attendance at sales conferences; method of payment; and proportion of
earnings directly attributable to sales.''
The Department has made no substantive changes to proposed section
541.504, although editorial changes have been made to final subsections
541.504(a) and 541.504(c)(4) as described below.
The Grocery Manufacturers Association (GMA) has several concerns
regarding proposed section 541.504. In its comments, for example, GMA
sees a possible inconsistency between the language of proposed section
541.500(b) and proposed section 541.504(a). Proposed section 541.500(b)
states that ``[i]n determining the primary duty of an outside sales
employee, work performed incidental to and in conjunction with an
employee's own outside sales or solicitations, including incidental
deliveries and collections, shall be regarded as exempt outside sales
work.'' Proposed section 541.504(a) states with respect to drivers who
sell that ``[i]f the employee has a primary duty of making sales, all
work performed incidental to and in conjunction with the employee's own
sales efforts * * * is exempt work.'' GMA believes that it is
inconsistent with section 541.500(b) to make the inclusion of driver/
salesperson's incidental work within the outside sales exemption
conditional upon the employee having a primary duty of making sales.
GMA therefore urges the Department to delete the conditional phrase
``[i]f the employee has a primary duty,'' from the second sentence of
proposed section 541.504(a).
The Department had no intention of creating a different standard
regarding incidental work for drivers who sell as opposed to other
outside sales employees. The two subsections at issue used different
language to describe the same concept, which could lead to confusion.
Accordingly, we have modified final section 541.504(a) to track the
language from section 541.500(b).
GMA also requests that the Department clarify section
541.504(c)(1), to the extent it describes a driver who may qualify for
the outside sales exemption as one ``who receives compensation
commensurate with the volume of products sold.'' GMA does not believe
that commissions alone should be used to determine exempt status. GMA
therefore suggests that this regulation be broadened to recognize
compensation systems which, while not commission-based, provide
``compensation at least partially based on the volume of products
sold,'' such as bonuses or other forms of recognition based on
individual, group or corporate goals and volumes.
The Department believes that the phrase in question, ``[a] driver *
* * who receives compensation commensurate with the volume of products
sold,'' helps provide an accurate example of an employee who has a
primary duty of making sales. This phrase generally describes an
employee paid on a commission basis, which is a commonly and frequently
utilized method for compensating sales personnel. Since section
541.504(c)(1) is intended to provide guidance by presenting an example
of a driver who may qualify as an exempt outside sales employee and, as
such, does not foreclose the exemption for employees who receive other
types of compensation, we have not made the requested change.
GMA also suggests that the Department delete the phrase ``and
carrying an assortment of the employer's products'' from proposed
section 541.504(c)(4), because it should not matter whether the driver/
salesperson is carrying one product or an assortment of them. The
Department agrees with the comment that it is not necessary for a
driver to carry ``an assortment'' of products in order to qualify as
exempt under the outside sales exemption. The availability of this
exemption does not depend on either the volume or variety of products
carried by the driver/salesperson in question. Accordingly, we have
made the suggested change.
Another commenter asks that the Department clarify that
``Professional Drivers'' are nonexempt. This exemption covers drivers
who have a primary duty of making sales. The primary duty test offers
an alternative to job titles that may not accurately reflect job duties
and actual performance. Therefore, the Department believes that a
blanket statement that ``Professional Drivers'' are not exempt
employees would not serve the interest of a more accurate rule.
Finally, a commenter asks for more examples of outside sales
employees, including drivers who sell. Proposed subsection 541.504(c)
and 541.504(d) already contain a number of examples of drivers who
would or would not qualify as exempt employees. The Department does not
believe that there will be any value added to the regulation through
additional examples.
Subpart G, Salary Requirements
Section 541.600 Amount of Salary Required
Salary level tests have been included as part of the exemption
criteria since
[[Page 22164]]
the original regulations of 1938. With a few exceptions, executive,
administrative and professional employees must earn a minimum salary
level to qualify for the exemption.\12\ Employees paid below the
minimum salary level are not exempt, irrespective of their job duties
and responsibilities. Employees paid a salary at or above the minimum
level in the regulations are only exempt if they also meet the salary
basis and job duties tests. To qualify for exemption under the existing
regulations, an employee must earn a minimum salary of $155 per week
($8,060/year) for the executive and administrative exemptions, and $170
per week ($8,840/year) for the professional exemption. Employees paid
above these minimum salary levels must meet a ``long'' duties test to
qualify for the exemption. The existing regulations also provide, under
special provisions for ``high salaried'' employees (see 29 CFR 541.119,
541.214 and 541.315), that employees paid above a higher salary rate of
$250 per week ($13,000/year) are exempt if they meet a ``short'' duties
test. As the name implies, the short tests contain fewer duties
requirements. Because the salary levels have not been increased since
1975, the existing salary levels are outdated and no longer useful in
distinguishing between exempt and nonexempt employees. A full-time
minimum wage worker, in comparison, earns $206 per week ($5.15/hour x
40 hours)--an amount above the existing ``long'' test levels and
closely approaching the existing ``short'' test level. As a result,
under the existing regulations, most employees are now tested for
exemption under the ``short'' duties tests.
---------------------------------------------------------------------------
\12\ For many years, the regulations have contained no salary
level test for outside sales employees and some professional
employees (teachers, doctors, lawyers). Such employees are exempt
regardless of their salary. The final rule makes no changes in this
area. Also, in 1990, Congress amended the FLSA to exempt certain
hourly-paid computer professionals paid at least 6\1/2\ times the
minimum wage (which then totaled $27.63 per hour; $57,470 per year,
assuming 40 hours per week). Congress froze this compensation test
at $27.63 per hour in 1996.
---------------------------------------------------------------------------
The Department proposed that the minimum salary level required for
exemption as an executive, administrative, or professional employee be
increased from $155 per week ($8,060/year) to $425 per week ($22,100/
year). Thus, under proposed section 541.600(a), all employees earning
less than $425 per week, either on an hourly or salary basis, would be
guaranteed overtime protection, irrespective of their job duties and
responsibilities. Employees earning $425 or more on a salary basis
would only qualify for exemption if they met a new ``standard'' test of
duties.
The final rule adopts the new structure of the proposal to include
a ``standard'' test of duties tied to a minimum salary level. However,
the proposed rule used the Bureau of Labor Statistics' (BLS) year 2000
Current Population Survey Outgoing Rotation Group data set, the most
recent data available from BLS when the Preliminary Regulatory Impact
Analysis was completed. When the Regulatory Impact Analysis for this
final rule was completed, the most recent data available was the 2002
CPS data set. Based on the more recent data, and taking into account
numerous comments about the salary levels in the proposal, the
Department has raised the minimum weekly salary level required for
exemption in the final rule from $425 per week to $455 per week, an
increase of $30 from the proposed regulations and an increase of $300
per week from the existing minimum salary level. As a result of this
increase, 6.7 million salaried workers who earn between $155 and $455
per week will be guaranteed overtime protection, regardless of their
duties.
The remaining subsections of 541.600 retained, without substantive
change from the existing regulations, certain special provisions
regarding the salary requirements: Subsection (b) set forth the minimum
salary levels required if the employee is paid on a biweekly,
semimonthly or monthly basis; subsection (c) discussed the salary
required for academic administrative employees; subsection (d) set
forth the salary required for computer employees; and subsection (e)
provided that the salary requirements do not apply to teachers, lawyers
and doctors. The Department did not receive significant comments on
these subsections, and thus no other changes have been made to section
541.600.
Most commenters agree that the minimum salary level needed to be
increased, but disagreed sharply regarding the size of the increase.
Some commenters state that the proposed $425 minimum salary level is
too high, other commenters say it is too low, and some say it is just
right.
Some employer commenters, such as the U.S. Small Business
Administration's Office of Advocacy, the American Health Care
Association, and the Securities Industry Association's Human Resources
Management Committee, strongly oppose the $425 per week minimum salary
as too high. The Associated Builders and Contractors state that $425
per week ``may be particularly high for rural areas of the country.''
Similarly, the National Grocers Association (NGA) comments that the
$425 level ``could prove problematic for some retail grocers operating
in differing geographic regions, such as rural areas and the South
where economic conditions vary and pay scales are less.'' Based on
their 2003 compensation survey, NGA suggests that the Department lower
the minimum salary level to $400 per week. Some owners of small retail
and restaurant businesses also filed comments asserting that $425 per
week is too high. An owner of four Dairy Queen stores in Austin, Texas,
for example, asks the Department to lower the minimum salary level to
$400 per week because supervisor salaries in the area start at $21,000
per year. A comment from Wesfam Restaurants requests that the
Department lower the minimum salary level to $350 per week because the
Department's proposed $425 level will cost the company at least
$100,000 each year.
Other organizations representing employer interests generally
support the $425 salary level, but object to any further increase in
this proposed minimum. For example, the U.S. Chamber of Commerce
(Chamber) does not oppose the minimum salary level, but states that a
significant minority of its members oppose the proposed compensation
level as too high. Nevertheless, the Chamber opposes an increase to
$425 per week if ``unaccompanied by significant changes in the duties
and salary basis tests,'' and would oppose any compensation level
higher than $425. The FLSA Reform Coalition, the Public Sector FLSA
Coalition, the American Corporate Counsel Association and the HR Policy
Association believe that the $425 per week minimum is reasonable. The
National Restaurant Association recognizes that the salary levels have
not been changed for many years, but states: ``Under no circumstance
should the threshold be increased to a higher salary level [than $425
per week]. In fact, the Association urges DOL to review the methodology
used to establish the proposed minimum salary threshold of $425/wk. and
reevaluate the impact of this threshold on specific industry sectors,
including restaurants and retail establishments. Strong consideration
should be given to adjusting the threshold downward to reflect the
realities of variations in industry and regional compensation levels.''
Similarly, the National Council of Chain Restaurants asks the
Department to ``resist any pressure to raise the salary threshold to an
even
[[Page 22165]]
higher level, which would wreak havoc on the chain restaurant industry,
and retailers generally.'' The Food Marketing Institute also opposes
increasing the minimum salary level above $425, noting that this salary
level will already particularly affect independent, family-owned
grocery stores.
On the other hand, organizations representing employee interests
oppose the standard salary level as being too low. Such organizations
advocate salary levels ranging from $530 per week to $1,000 per week.
The AFL-CIO and the International Association of Machinists and
Aerospace Workers, for example, purporting to apply the approach set
forth in the 1958 Kantor Report to the current ``long'' and ``short''
duties test structure, suggest salary levels of at least $610 per week
for the long test and $980 for the short test. The United Food and
Commercial Workers International Union would adjust the current salary
levels for inflation using the Consumer Price Index (CPI), resulting in
a ``minimum of $530/week for the first level ($580 for professionals),
and $855 for the second level.'' The American Federation of State,
County and Municipal Employees similarly comments that adjusting the
current salary levels to reflect changes in the CPI would increase the
salary level under the ``long'' test for executive and administrative
employees to $530 per week ($580 for professional employees) and to
$855 per week for the ``short'' test.
The Department has long recognized that the salary paid to an
employee is the ``best single test'' of exempt status (1940 Stein
Report at 19), which has ``simplified enforcement by providing a ready
method of screening out the obviously nonexempt employees'' and
furnished a ``completely objective and precise measure which is not
subject to differences of opinion or variations in judgment.'' As the
Department stated in 1949:
[T]he 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. In the years of experience in administering the
regulations, the Divisions have found no satisfactory substitute for
the salary test.
* * * * *
Regulations of general applicability such as these must be drawn
in general terms to apply to many thousands of different situations
throughout the country. In view of the wide variation in their
applicability the regulations cannot have the precision of a
mathematical formula. The addition to the regulations of a salary
requirement furnishes a completely objective and precise measure
which is not subject to differences of opinion or variations in
judgment. The usefulness of such a precise measure as an aid in
drawing the line between exempt and nonexempt employees,
particularly in borderline cases, seems to me to be established
beyond doubt.
1949 Weiss Report at 8-9. See also 1940 Stein Report at 42
(``salary paid the employee is the best single test''); 1958 Kantor
Report at 2-3 (salary levels ``furnish a practical guide to the
investigator as well as to employers and employees in borderline cases,
and simplify enforcement by providing a ready method of screening out
the obviously nonexempt employees'').
While the purpose of the FLSA is to provide for the establishment
of fair labor standards, the law does not give the Department authority
to set minimum wages for executive, administrative and professional
employees. These employees are exempt from any minimum wage
requirements. The salary level test is intended to help distinguish
bona fide executive, administrative, and professional employees from
those who were not intended by the Congress to come within these exempt
categories. Any increase in the salary levels from those contained in
the existing regulation, therefore, has to have as its primary
objective the drawing of a line separating exempt from nonexempt
employees. Moreover, it has long been recognized that ``such a dividing
line cannot be drawn with great precision but can at best be only
approximate.'' 1949 Weiss Report at 11.
Some of the comments opposed to the proposed $425 minimum salary
level question the Department's methodology for setting the appropriate
salary levels. The Department determined the appropriate methodology
for adjusting the salary levels after a thorough review of the
regulatory history of previous increases. The initial minimum salary
level requirement for exemption, adopted in the 1938 regulations, was
$30 a week for executive and administrative employees. The 1938
regulations did not include a salary requirement for professional
employees, or a ``short test'' salary level. We could find no
regulatory history from 1938 regarding the rationale for setting the
salary level at $30 a week. But see 1940 Stein Report at 20-21 ($30
salary level adopted from the National Industrial Recovery Act and
State law). Since 1938, and as shown in Table 1, the Department has
increased the salary levels on six occasions--in 1940, 1949, 1958,
1963, 1970 and 1975. Until 1975, the Department increased salary levels
every five to nine years, and the largest increase was only $50 per
week.
Table 1.--Weekly Salary Levels for Exemption
----------------------------------------------------------------------------------------------------------------
Executive Administrative Professional Short test
----------------------------------------------------------------------------------------------------------------
1938.................................... $30 $30 None None
1940.................................... 30 50 50 None
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
----------------------------------------------------------------------------------------------------------------
The regulatory history of these six increases reveals that, in
determining appropriate salary levels, the Department has examined data
on actual salaries and wages paid to exempt and nonexempt employees. In
1940, the Department considered salary surveys by government agencies,
experience under the National Industrial Recovery Act, and federal
government salaries. 1940 Stein Report at 9, 20, 31-32. The Department
then
[[Page 22166]]
used these salary data to determine the average salary that was the
``dividing line'' between exempt and nonexempt employees, and to find
the percentage of employees earning below various salary levels. The
Department set the minimum required salary at levels below the average
salary dividing exempt from nonexempt employees: ``Furthermore, these
figures are averages, and the act applies to low-wage areas and
industries as well as to high-wage groups. Caution therefore dictates
the adoption of a figure that is somewhat lower, though of the same
general magnitude.'' 1940 Stein Report at 32.
In 1949, the Department looked at 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 and starting salaries for college graduates. 1949 Weiss
Report at 10, 14-17, 19. The Department compared weekly earnings in
1940 with weekly earnings in 1949 to determine the average percentage
increase in earnings. As in 1940, the Department then set a salary
level at a ``figure slightly lower than might be indicated by the
data'' because of concerns regarding the impact of the salary level
increases on small businesses: ``The salary test for bona fide
executives must not be so high as to exclude large numbers of the
executives of small establishments from the exemption.'' 1949 Weiss
Report at 15.
In 1958, the Department considered data collected during 1955 Wage
and Hour Division investigations on ``the actual salaries paid'' to
employees who ``qualified for exemption'' (i.e., met the applicable
salary and duties tests), grouped by geographic region, broad industry
groups, number of employees and size of city. 1958 Kantor Report at 6.
The Department then set the salary tests 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.'' 1958 Kantor Report at
6-7.
The Department followed this same methodology when determining the
appropriate salary level increase in 1963. The Department examined data
on salaries paid to exempt workers collected in a special survey
conducted by the Wage and Hour Division in 1961. 28 FR 7002 (July 9,
1963). The salary level for executive and administrative employees was
increased to $100 per week, for example, when the 1961 survey data
showed that 13 percent of establishments paid one or more exempt
executives less than $100 per week; and 4 percent of establishments
paid one or more exempt administrative employees less than $100 a week.
28 FR 7004 (July 9, 1963). 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. 28 FR 7004. The Department noted that these salary
levels approximated the same percentages used in 1958:
Salary tests set at this level would bear approximately the same
relationship to the minimum salaries reflected in the 1961 survey
data as the tests adopted in 1958, on the occasion of the last
previous adjustment, bore to the minimum salaries reflected in a
comparable survey, adjusted by trend data to early 1958. At that
time, 10 percent of the establishments employing executive employees
paid one or more executive employees less than the minimum salary
adopted for executive employees and 15 percent of the establishments
employing administrative or professional employees paid one or more
employees employed in such capacities less than the minimum salary
adopted for administrative and professional employees. (28 FR 7004).
The Department continued to use this methodology when adopting
salary level increases in 1970. In 1970, the Department examined data
from 1968 Wage and Hour Division investigations and 1969 BLS wage data.
The Department increased the salary level for executive employees to
$140 per week when the salary data showed that 20 percent of executive
employees from all regions and 12 percent of executive employees in the
West earned less than $130 a week. 35 FR 884 (January 22, 1970).
The last increase to the salary levels was in 1975. Instead of
following the prior approaches, in 1975 the Department set the salary
levels based on increases in the Consumer Price Index, although it
adjusted the salary level downward to eliminate any potential
inflationary impact. 40 FR 7091 (February 19, 1975) (``However, in
order to eliminate any inflationary impact, the interim rates
hereinafter specified are set at a level slightly below the rates based
on the CPI''). More to the point, the salary levels adopted were
intended as interim levels ``pending the completion and analysis of a
study by the Bureau of Labor Statistics covering a six month period in
1975.'' Id. Thus, the Department again intended to increase the salary
levels based on actual salaries paid to employees. However, the
intended process was never completed, and the so-called ``interim''
salary levels have remained untouched for 29 years.
In summary, the regulatory history reveals a common methodology
used, with some variations, to determine appropriate salary levels. In
almost every case, the Department examined data on actual wages paid to
employees and then set the salary level at an amount slightly lower
than might be indicated by the data. In 1940 and 1949, the Department
looked to the average salary paid to the lowest level of exempt
employee. Beginning in 1958, however, the Department set salary levels
to exclude approximately the lowest-paid 10 percent of exempt salaried
employees. Perhaps the best summary of this methodology appears in the
1958 Kantor Report at pages 5-7:
The salary tests have thus been set for the country as a whole *
* * with appropriate consideration given to the fact that the same
salary cannot operate with equal effect as a test in high-wage and
low-wage industries and regions, and in metropolitan and rural
areas, in an economy as complex and diversified as that of the
United States. Despite the variation in effect, however, it is clear
that the objectives of the salary tests will be accomplished if the
levels selected are set at points near the lower end of the current
range of salaries for each of the categories. Such levels will
assist in demarcating the ``bona fide'' executive, administrative
and professional employees without disqualifying any substantial
number of such employees.
* * * * *
It is my conclusion, from all the evidence, that the lower
portion of the range of prevailing salaries will be most nearly
approximated if the tests are set 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. Although this may result in loss of
exemption for a few employees who might otherwise qualify for
exemption * * * in the light of the objectives discussed above, this
is a reasonable exercise of the Administrator's authority to
``delimit'' as well as define.
Using this regulatory history as guidance, the Department reached
the proposed minimum salary level of $425 per week after considering
available data on actual salary levels currently being paid in the
economy, broken out by broad industry categories and geographic areas.
We reviewed a preliminary report on actual salary levels based on the
BLS year 2000 Current Population Survey (CPS) Outgoing Rotations Group
data set. These data included all full-time (defined as 35 hours or
more per week),
[[Page 22167]]
salaried workers aged 16 and above, but excluded the self-employed,
agricultural workers, volunteers and federal employees (who are all not
subject to the salary level tests in the Part 541 regulations). We
considered the data in Table 2 below showing the salary levels of the
bottom 10 percent, 15 percent and 20 percent of all salaried employees,
and salaried employees in the lower-wage South and retail sectors:
Table 2.--Wages of Full-Time Salaried Employees (2000 CPS)
------------------------------------------------------------------------
All South Retail
------------------------------------------------------------------------
10%....................................... $18,195 $15,955 $15,600
15%....................................... 21,050 19,950 19,400
20%....................................... 24,455 22,200 21,800
------------------------------------------------------------------------
As in the 1958 Kantor Report analysis, the Department's proposal
looked to ``points near the lower end of the current range of
salaries'' to determine an appropriate salary level for the standard
test--although we relied on the lowest 20 percent of salaried employees
in the South, rather than the lowest 10 percent, because of the
proposed change from the ``short'' and ``long'' test structure and
because the data included nonexempt salaried employees. Applying this
analysis, the Department proposed a standard salary level of $425 per
week, an increase of $270 per week over the existing rule's salary
level of $155 per week.\13\ Using this level, approximately the bottom
20 percent of all salaried employees covered by the FLSA would fall
below the minimum salary requirement and be automatically entitled to
overtime.
---------------------------------------------------------------------------
\13\ The Department's proposal to eliminate the different salary
level associated with the professional ``long'' duties test is
adopted in the final regulations as most commenters supported this
as simplifying the existing regulations.
---------------------------------------------------------------------------
Many commenters find this methodology appropriate and reasonable.
Comments filed by the U.S. House of Representatives Committee on
Education and the Workforce, for example, ``commend the Department for
its thoughtful analysis of the prior revisions to the salary level
test,'' and ``endorse the Department's review of and adherence to
regulatory precedent.''
However, some commenters who oppose the proposed $425 minimum
salary level as too low argue that the Department should adjust the
existing salary levels for inflation by applying the Consumer Price
Index. This methodology would result in salary levels of $530 per week
($580 for professionals) for the ``long'' duties test and $855 per week
for the ``short'' duties tests, according to the commenters.
Other commenters, including the AFL-CIO, agree with the Department
that the 1958 Kantor Report methodology of looking to the ``range of
salaries actually paid'' to employees is the ``most accurate approach
to set the salary levels,'' but assert that the Department
``misrepresented and misused the Kantor Report.'' Thus, comments filed
by the AFL-CIO, and adopted by many of their affiliated unions, state:
The Department has taken several approaches in the past to
decide how to increase the salary levels used in the regulations.
The most accurate approach to set salary levels for exempt
executive, administrative, and professional employees is first to
determine the range of salaries actually paid to employees who
qualify for the exemption in each of the three categories. The
Department took this approach when it set new salary levels
effective in 1959, based on the Kantor Report. The Kantor Report
also noted, as the Department mentions in its preamble, that: ``the
objectives of the salary tests will be accomplished if the levels
selected are set at points near the lower end of the current range
of salaries for each of the categories. Such levels will assist in
demarcating the bona fide executive, administrative, and
professional employees without disqualifying any substantial number
of such employees.'' 68 Fed. Reg. at 15570, quoting Kantor Report at
5. The Department's present proposal purports to use the approach of
the Kantor Report. However * * * the Department has completely
misrepresented and misused the Kantor Report. The actual methodology
used in the Kantor Report would result today not in a ``standard
salary'' of $425 as proposed by the Department, but instead in a
``long test'' salary of $610 per week and a ``short test'' salary of
$980 per week. (Emphasis in comment.)
The AFL-CIO claims that the Department ``misused'' the Kantor
methodology by relying on year 2000 BLS data regarding salary levels of
all salaried employees: ``Kantor's salary survey was limited to those
executive, administrative and professional employees who were found to
be exempt--that is, employees who were paid on a salary basis, and met
the applicable salary and duties tests. * * * Instead, the DOL survey
encompasses the broadest possible group--all salaried employees in
every occupation, even those who could not be regarded by any stretch
of the imagination as executive, administrative, or professional
employees.'' The AFL-CIO thus suggests that the Department use more
current salary data and look only at salaries of exempt employees.
The National Association of Convenience Stores (NACS) also believes
the Department misapplied the Kantor methodology, but resulting in a
salary level that is too high, rather than too low as the AFL-CIO
contends: ``Instead of setting the threshold at the lowest 10% of the
salaries reviewed as was done in 1958, the proposed cutoff has been set
at 20%. * * * NACS submits that, to remain faithful to the wise
principles of the Kantor Report, the Labor Department should use the
10% guideline and should apply it to the salaries in the lowest
geographical or industry sector (whichever of the two data sets is
lower), rather than to composite figures which represent a combination
of high-wage and low-wage geographical and/or industry sectors.''
The Department recognizes the strong views in this area, and has
carefully considered the comments addressing the amount of the proposed
minimum salary level. The Department continues to believe that its
methodology is consistent with the regulatory history and, most
importantly, is a reasonable approach to updating the salary level
tests. For example, instead of investigating the lowest 10% of exempt
salaried employees, an approach that depends on uncertain assumptions
regarding which employees are actually exempt, the Department decided
to set the minimum salary level based on the lowest 20% of all salaried
employees. The Department felt this adjustment achieved much the same
purpose as restricting the analysis to a lower percentage of exempt
employees. Assuming that employees earning a lower salary are more
likely non-exempt, both approaches are capable of reaching exactly the
same endpoint, as discussed more fully below. The Department, in order
to address the many comments regarding this assumption, decided for
this final rule to directly test whether our method for setting the
salary threshold was robust to different analytical approaches. In
fact, the Department found that our proposed approach to setting salary
levels was very consistent with past approaches. Therefore we disagree
with the AFL-CIO's contention that the proposed analysis was flawed and
not consistent with the Kantor approach.
The final rule reflects the Department's long-standing tradition of
avoiding the use of inflation indicators for automatic adjustments to
these salary requirements. The 1949 Weiss Report, for example,
considered and rejected proposals to increase salary levels based upon
the change in the cost of living from the 1940 levels:
Actual data showing the increases in the prevailing minimum
salary levels of bona fide executive, administrative and
professional employees since October 1940 would be the best evidence
of the appropriate
[[Page 22168]]
salary increases for the revised regulations. * * * The change in
the cost of living which was urged by several witnesses as a basis
for determining the appropriate levels is, in my opinion, not a
measure of the rise in prevailing minimum salary levels.
1949 Weiss Report at 12. The Department continues to believe that such
a mechanical adjustment for inflation could have an inflationary impact
or cause job losses. We are particularly concerned about, and required
to consider, the impact that an inflation adjustment could have on
lower-wage sectors such as businesses in rural areas, businesses in the
retail and restaurant industry, and small businesses.
Thus, as in the proposal, the Department determined the minimum
salary level in the final rule by examining available data on actual
salary levels currently being paid in the economy as suggested by the
1958 Kantor Report. In the proposed rule, we relied on year 2000 salary
data because it was the most current data available at that time.
However, the Department should rely on the most current salary data
available. Thus, for the final rule, we carefully reviewed a report on
actual salary levels based on the 2002 Current Population Survey (CPS)
Outgoing Rotation public use data set, the most current data available
at the time the analysis was conducted.\14\ As explained in more detail
under section VI of this preamble, the CPS data is the best available
data source because of its size (more than 474,000 observations) and
its breadth of detail (e.g., occupation classifications, salary, hours
worked and industry). Consistent with the proposal, the Department
examined a subset of the 2002 CPS data, broken out by broad industry
categories and geographic areas, that included full-time (working 35 or
more hours per week) employed workers age 16 years and older who are
both covered by the Fair Labor Standards Act and subject to the Part
541 salary tests. Thus, the Department relied on a data set that
excluded: (1) The self-employed, unpaid volunteers and religious
workers who are not covered by the FLSA; (2) agricultural workers,
certain transportation workers, and certain automobile dealerships
employees who are exempt from overtime under other provisions of the
Act; (3) teachers, academic administrative personnel, certain medical
professionals, outside sales employees, lawyers and judges who are not
subject to the Part 541 salary tests; and (4) federal employees who are
not subject to the Part 541 regulations.
---------------------------------------------------------------------------
\14\ The 2003 CPS data was made available after much of the
economic analysis was completed. The Department reviewed the 2003
data in order to ensure that it had considered the most current
salary information available. As explained in detail in Appendix B,
an analysis of the 2003 data demonstrates that using this data would
not alter the determination of the minimum salary level because the
results are consistent under both data sets.
---------------------------------------------------------------------------
Using this subset of the 2002 CPS data, the final rule again
follows the 1958 Kantor Report analysis and looks to ``points near the
lower end of the current range of salaries'' to determine an
appropriate salary level. The Department acknowledges that the 1958
Kantor Report used data regarding the wages of exempt employees, and
set the salary level so that ``no more than about 10 percent'' of such
exempt employees ``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.'' 1958 Kantor Report at pages 5-7. The Department's proposal
used a different data set--all salaried employees covered by the FLSA,
rather than just exempt employees. However, the proposal accounted for
these differences in data by setting a salary level excluding from the
exemptions approximately the lowest 20 percent of all salaried
employees, rather than the Kantor Report's 10 percent of exempt
employees.
In developing the salary level for the final rule, the Department
first looked at the proposed salary level of $425 per week to determine
what percentage of salaried employees would fail to meet the test. As
shown in Table 3, approximately 18 percent of full-time salaried
employees in the South region and in the retail industry would fail to
meet the $425 salary level. Because the Department was concerned by
this drop from the 20 percent level used in the proposal, we assessed
the salary level that would be necessary in order to exclude 20 percent
of all salaried employees in the South region and in the retail
industry.
As shown in Table 3, applying the 2002 CPS data, the lowest 20
percent of full-time salaried employees in the South region earn
approximately $450 per week. The lowest 20 percent of full-time
salaried employees in the retail industry earn approximately $455 per
week. The lowest 20 percent of all salaried employees earn somewhere
between $475 and $500 per week.
The Department maintains that this slight departure from the Kantor
Report analysis was appropriate and within its discretion. As the AFL-
CIO itself noted, the ``Department has taken several approaches in the
past to decide how to increase the salary levels used in the
regulations.'' The regulatory history described above reveals that
these various approaches have three things in common: (1) Relying on
actual wages earned by employees; (2) setting the salary level slightly
lower than indicated by the data because of the impact on lower-wage
industries and regions; and (3) rejecting suggestions to mechanically
adjust the salary levels based on an inflationary measure.
Historically, however, the Department has looked at different wage
surveys in an effort to find the best data available.
Nonetheless, to address concerns of the AFL-CIO, the National
Association of Convenience Stores and other commenters regarding the
Department's methodology, we also examined salary ranges for employees
in the subset of 2002 CPS data who, applying a methodology modified
from the GAO Report,\15\ likely qualify as exempt employees under
Section 13(a)(1) of the FLSA and the existing Part 541 regulations.
Section VI of this preamble includes a detailed description of the
Department's methodology for estimating the number and salary levels of
exempt employees. The result of this analysis is Table 4, showing
salary ranges for likely exempt workers. As shown in Table 4, the
lowest 10 percent of all likely exempt salaried employees earn
approximately $500 per week. The lowest 10 percent of likely exempt
salaried employees in the South earn just over $475 per week. The
lowest 10 percent of likely exempt salaried employees in the retail
industry earn approximately $450 per week.
---------------------------------------------------------------------------
\15\ Fair Labor Standards Act: White Collar Exemptions in the
Modern Work Place, GAO/HEHS-99-164, September 30, 1999.
[[Page 22169]]
Table 3.--Full-Time Salaried Employees
----------------------------------------------------------------------------------------------------------------
Earnings Percentile
----------------------------------------------------------------------------------------------------------------
Weekly Annual All South Retail
----------------------------------------------------------------------------------------------------------------
$155........................................ $8,060 1.6 1.6 1.8
255......................................... 13,260 4.6 5.3 5.4
355......................................... 18,460 10.0 11.8 12.0
380......................................... 19,760 11.1 13.3 13.3
405......................................... 21,060 14.1 16.9 17.1
425......................................... 22,100 15.2 18.3 18.1
450......................................... 23,400 16.7 20.2 19.9
455......................................... 23,660 16.8 20.2 20.0
460......................................... 23,920 16.9 20.4 20.1
465......................................... 24,180 18.3 21.9 21.9
470......................................... 24,440 18.4 21.9 21.9
475......................................... 24,700 18.7 22.3 22.3
500......................................... 26,000 22.7 26.9 27.4
550......................................... 28,600 25.8 30.6 30.7
600......................................... 31,200 32.4 37.9 38.3
650......................................... 33,800 36.0 41.7 42.5
700......................................... 36,400 41.9 47.9 49.6
750......................................... 39,000 45.8 51.6 53.6
800......................................... 41,600 50.8 56.8 58.9
850......................................... 44,200 54.2 59.9 61.8
900......................................... 46,800 57.9 63.6 64.9
950......................................... 49,400 60.7 66.6 67.9
1,000....................................... 52,000 66.6 72.1 73.5
1,100....................................... 57,200 70.8 75.9 76.9
1,200....................................... 62,400 76.0 80.8 80.8
1,300....................................... 67,600 79.2 83.5 83.3
1,400....................................... 72,800 82.8 86.6 85.9
1,500....................................... 78,000 85.8 89.2 88.7
1,600....................................... 83,200 88.0 90.9 90.3
1,700....................................... 88,400 89.6 92.2 91.4
1,800....................................... 93,600 91.1 93.3 93.0
1,900....................................... 98,800 92.0 94.0 93.7
1,925....................................... 100,100 93.7 95.3 95.1
1,950....................................... 101,400 93.7 95.4 95.1
1,975....................................... 102,700 93.9 95.5 95.2
2,000....................................... 104,000 94.2 95.6 95.4
2,100....................................... 109,200 94.6 96.1 95.9
2,200....................................... 114,400 95.2 96.5 96.2
2,300....................................... 119,600 95.4 96.6 96.5
2,400....................................... 124,800 96.2 97.1 97.1
2,500....................................... 130,000 97.0 97.6 97.8
----------------------------------------------------------------------------------------------------------------
Table 4.--Likely Exempt Employees
----------------------------------------------------------------------------------------------------------------
Earnings Percentile
----------------------------------------------------------------------------------------------------------------
Weekly Annual All South Retail
----------------------------------------------------------------------------------------------------------------
$155........................................ $8,060 0.0 0.0 0.0
255......................................... 13,260 1.3 1.6 1.6
355......................................... 18,460 3.6 4.2 5.3
380......................................... 19,760 4.0 4.9 6.2
405......................................... 21,060 5.4 6.5 8.4
425......................................... 22,100 5.9 7.2 9.0
450......................................... 23,400 6.6 8.1 10.2
455......................................... 23,660 6.7 8.2 10.2
460......................................... 23,920 6.7 8.2 10.3
465......................................... 24,180 7.7 9.2 11.7
470......................................... 24,440 7.8 9.3 11.8
475......................................... 24,700 7.9 9.5 12.0
500......................................... 26,000 10.3 12.3 15.3
550......................................... 28,600 12.3 14.9 18.1
600......................................... 31,200 17.2 20.5 24.6
650......................................... 33,800 20.0 23.9 29.3
700......................................... 36,400 25.2 29.9 36.3
750......................................... 39,000 28.9 33.7 40.7
800......................................... 41,600 33.7 39.0 46.0
850......................................... 44,200 37.3 42.4 49.4
900......................................... 46,800 41.2 46.7 53.0
950......................................... 49,400 44.5 50.4 56.9
[[Page 22170]]
1,000....................................... 52,000 51.3 57.2 63.5
1,100....................................... 57,200 56.7 62.2 67.6
1,200....................................... 62,400 63.5 69.3 72.9
1,300....................................... 67,600 67.9 73.3 76.4
1,400....................................... 72,800 73.1 77.9 80.4
1,500....................................... 78,000 77.5 81.9 83.7
1,600....................................... 83,200 80.8 84.7 85.9
1,700....................................... 88,400 83.3 86.8 87.7
1,800....................................... 93,600 85.7 88.6 90.0
1,900....................................... 98,800 87.2 89.8 90.8
1,925....................................... 100,100 89.8 92.0 92.7
1,950....................................... 101,400 89.9 92.1 92.8
1,975....................................... 102,700 90.1 92.3 92.9
2,000....................................... 104,000 90.6 92.6 93.1
2,100....................................... 109,200 91.3 93.3 93.6
2,200....................................... 114,400 92.2 93.9 94.1
2,300....................................... 119,600 92.6 94.2 94.4
2,400....................................... 124,800 93.9 95.0 95.4
2,500....................................... 130,000 95.2 95.9 96.4
----------------------------------------------------------------------------------------------------------------
Table 5.--Full-Time Hourly Workers
----------------------------------------------------------------------------------------------------------------
Earnings Percentile
----------------------------------------------------------------------------------------------------------------
Weekly Annual All South Retail
----------------------------------------------------------------------------------------------------------------
$155........................................ $8,060 1.2 1.3 2.0
255......................................... 13,260 7.6 9.5 13.7
355......................................... 18,460 25.8 30.4 41.4
380......................................... 19,760 31.4 36.6 47.9
405......................................... 21,060 38.5 44.4 55.9
425......................................... 22,100 41.3 47.5 59.1
450......................................... 23,400 46.1 52.4 64.1
455......................................... 23,660 46.4 52.8 64.5
460......................................... 23,920 47.3 53.6 65.4
465......................................... 24,180 47.9 54.3 65.9
470......................................... 24,440 48.3 54.8 66.4
475......................................... 24,700 48.7 55.2 66.9
500......................................... 26,000 54.8 61.5 71.9
550......................................... 28,600 60.6 67.0 76.7
600......................................... 31,200 68.2 73.9 82.6
650......................................... 33,800 72.2 77.5 85.8
700......................................... 36,400 76.3 81.1 88.7
750......................................... 39,000 79.6 83.9 90.9
800......................................... 41,600 83.6 87.1 93.2
850......................................... 44,200 85.9 88.9 94.1
900......................................... 46,800 88.0 90.7 95.1
950......................................... 49,400 89.6 92.0 95.7
1,000....................................... 52,000 91.9 93.9 96.7
1,100....................................... 57,200 94.0 95.5 97.4
1,200....................................... 62,400 95.8 96.9 98.0
1,300....................................... 67,600 96.7 97.6 98.3
1,400....................................... 72,800 97.6 98.2 98.8
1,500....................................... 78,000 98.2 98.6 99.1
1,600....................................... 83,200 98.7 99.0 99.4
1,700....................................... 88,400 99.0 99.2 99.5
1,800....................................... 93,600 99.2 99.4 99.6
1,900....................................... 98,800 99.3 99.4 99.6
1,925....................................... 100,100 99.4 99.5 99.7
1,950....................................... 101,400 99.4 99.5 99.7
1,975....................................... 102,700 99.4 99.5 99.7
2,000....................................... 104,000 99.5 99.6 99.7
2,100....................................... 109,200 99.6 99.6 99.7
2,200....................................... 114,400 99.6 99.6 99.7
2,300....................................... 119,600 99.7 99.7 99.8
2,400....................................... 124,800 99.7 99.7 99.8
2,500....................................... 130,000 99.8 99.8 99.8
----------------------------------------------------------------------------------------------------------------
[[Page 22171]]
Under the final rule, the minimum salary level for an employee to
be exempt is increased from $155 per week ($8,060/year) to $455 per
week ($23,660/year), a large increase by almost any yardstick. The $455
minimum salary level, as shown in Table 6, is an unprecedented increase
in both absolute dollar amount and percentage terms. The $455 minimum
salary level is a $10.34 annual dollar increase from 1975 to 2004, the
highest annual dollar increase in the 65-year history of the FLSA.
Table 6.--Comparison of Salary Level Increases
--------------------------------------------------------------------------------------------------------------------------------------------------------
Executive long
Years since test salary Dollar change Percent change Average annual
last increase level dollar change
--------------------------------------------------------------------------------------------------------------------------------------------------------
1949............................................................... ............... $55 ............... ............... ...............
1958............................................................... 9 80 25 45.5 2.78
1963............................................................... 5 100 20 25.0 4.00
1970............................................................... 7 125 25 25.0 3.57
1975............................................................... 5 155 30 24.0 6.00
2004............................................................... 29 455 300 193.5 10.34
--------------------------------------------------------------------------------------------------------------------------------------------------------
The Department believes that a $455 minimum salary level for
exemption is consistent with the Department's historical practice of
looking to ``points near the lower end of the current range of
salaries'' to determine an appropriate salary level. A minimum salary
level of $455 per week represents the lowest 10.2 percent of likely
exempt employees in the lower-wage retail industry; the lowest 8.2
percent of likely exempt employees in the South; and the lowest 6.7
percent of all likely exempt employees. The $455 level also represents
the lowest 20.0 percent of salaried employees in the retail industry;
the lowest 20.2 percent of salaried employees in the South; and the
lowest 16.8 percent of all salaried employees. As shown in Table 5, the
$455 minimum salary level also automatically excludes 46.4 percent of
hourly workers from the exemptions. In addition, based on the comments
from the business community, the Department believes this increase is
clearly at the upper boundary of what is capable of being absorbed by
employers without major disruptions to local labor markets.
Accordingly, the Department concludes that a minimum salary level of
$455 per week ``will assist in demarcating the `bona fide' executive,
administrative and professional employees without disqualifying any
substantial number of such employees.'' Kantor Report at 5.
Concerns by employer groups that a $455 per week salary level will
disproportionately impact small businesses, businesses in rural areas,
and retail businesses are misplaced. The Department examined the 2002
CPS data broken out by industry and geographic area, and as in the
Kantor Report, selected a salary level ``near the lower end of the
current range of salaries'' to ensure the minimum salary level is
practicable over the broadest possible range of industries, business
sizes and geographic regions. Kantor Report at 5.
Similarly, the AFL-CIO's attempt to apply the Kantor Report
analysis, yielding a result of $610 per week, is also flawed. Rather
than starting with the 2002 CPS data, the AFL-CIO began its analysis by
identifying the salary level for the lowest 10 percent of likely exempt
employees from the 1998 data in the GAO Report. Then, the AFL-CIO
adjusted that salary level for inflation by applying the Employment
Cost Index. The problem with this approach is that the GAO Report
methodology, as discussed in Section VI, inappropriately excludes from
the analysis exempt employees in lower-wage regions and industries. The
AFL-CIO then exacerbates the GAO's biased result by using the ECI to
adjust the 1998 data, rather than using the available 2002 data. Table
4 contains more accurate data on current salary ranges of likely exempt
employees. Applying these data, the AFL-CIO suggestion of a $610 salary
level represents approximately the lowest 17 percent of all likely
exempt salaried employees, the lowest 21 percent of such employees in
the South, and the lowest 25 percent of such employees in retail--not
the lowest 10 percent used by Kantor.
Finally, the comments raise a number of additional issues which the
Department considered but did not find persuasive. First, several
commenters urge the Department to adopt different salary levels for
different areas of the country (or urban and rural areas) or for
different kinds or sizes of businesses. The Department does not believe
that this approach is administratively feasible because of the large
number of different salary levels this would require. In addition, we
believe that the traditional methodology addresses the concerns of such
commenters by looking toward the lower end of the salary levels and
considering salaries in the South and in the retail industry. We also
considered but rejected comments requesting a special rule for part-
time employees. The regulations have never included a different salary
level for part-time employees, and such a rule appears unnecessary.
Second, some commenters ask the Department to provide for future
automatic increases of the salary levels tied to some inflationary
measure, the minimum wage or prevailing wages. Other commenters suggest
that the Department provide some mechanism for regular review or
updates at a fixed interval, such as every five years. Commenters who
made these suggestions are concerned that the Department will let
another 29 years pass before the salary levels are again increased. The
Department intends in the future to update the salary levels on a more
regular basis, as it did prior to 1975, and believes that a 29-year
delay is unlikely to reoccur. The salary levels should be adjusted when
wage survey data and other policy concerns support such a change.
Further, the Department finds nothing in the legislative or regulatory
history that would support indexing or automatic increases. Although an
automatic indexing mechanism has been adopted under some other
statutes, Congress has not adopted indexing for the Fair Labor
Standards Act. In 1990, Congress modified the FLSA to exempt certain
computer employees paid an hourly wage of at least 6\1/2\ times the
minimum wage, but this standard lasted only until the next minimum wage
increase six years later. In 1996, Congress froze the minimum hourly
wage for the computer exemption at $27.63 (6\1/2\ times the 1990
minimum wage of $4.25 an hour). In addition, as noted above, the
Department has repeatedly rejected requests to mechanically rely on
inflationary measures when setting the salary levels in the past
because of
[[Page 22172]]
concerns regarding the impact on lower-wage geographic regions and
industries. This reasoning applies equally when considering automatic
increases to the salary levels. The Department believes that adopting
such approaches in this rulemaking is both contrary to congressional
intent and inappropriate.
Third, the Puerto Rico Chamber of Commerce recommends a special
salary test for Puerto Rico of $360 per week (the same as the proposed
salary level test for American Samoa). The Department considered this
comment and concluded that such a differential in Puerto Rico would be
inconsistent with the FLSA Amendments of 1989 (Pub. L. 101-157), which
deleted Puerto Rico and the Virgin Islands from the special industry
wage order proceedings under section 6(a)(1) of the FLSA allowing
industry minimum wage rates that are lower than the U.S. mainland
minimum wage. Before 1989, Puerto Rico, the Virgin Islands, and
American Samoa all had minimum wages below the U.S. mainland and
consequently lower salary level tests traditionally were established
for employees in these jurisdictions. However, since Puerto Rico is now
subject to the same minimum wage as the U.S. mainland, there is no
longer a basis for a special salary level test. The final rule
maintains the special minimum salary level for employees in American
Samoa at approximately the same ratio to the mainland test (84 percent)
used under the existing rule--which computes to $380 per week.
Fourth, the National Association of Chain Drug Stores (NACDS)
comments that the exception to a minimum salary test for physicians
should apply to pharmacists. The NACDS states that the educational
requirements and professional standards for pharmacists have increased
substantially since these regulations were last revised. For example,
pharmacists graduating today complete a doctoral program before they
are licensed to practice. In the Department's view, pharmacists can
qualify, along with doctors, teachers, lawyers, etc., as professionals
under the FLSA exemption. However, the fact that the standards for the
profession are rising does not mean that the minimum salary requirement
to be exempt should be removed. The Department also considered but
rejected suggestions from commenters that we remove the salary
requirements for registered nurses and others. The Department does not
think it is appropriate to expand the original, limited number of
professions that were not subject to the salary test.
Fifth, several commenters favor a final rule that would eliminate
the salary tests entirely. These commenters point out that this
approach would eliminate concerns about how the salary levels might
affect lower wage regions and industries. They argue that the duties
tests have been the only active tests for some time, given the erosion
of the value of the salary levels in the prior existing rule. Fairfax
County states that the salary test should be eliminated because of the
wide variation across the country in living costs and labor market
viability. The National Automobile Dealers Association and others
comment that the salary tests were simply unnecessary. The Central Iowa
Society for Human Resource Management comments that job content should
be the deciding factor, not salary level. On the other hand, many
commenters oppose this approach. The Department has carefully
considered the comments in this area and has not adopted this
alternative, among other reasons, because this approach would be
inconsistent with the Department's long-standing recognition that the
amount of salary paid to an employee is the ``best single test'' of
exempt status. 1940 Stein Report at 19. Moreover, this alternative
would require a significant restructuring of the regulations and
probably the use of more rigid duties tests. Thus, this alternative
conflicts with a key purpose of this rulemaking, namely, to simplify
and streamline these regulations.
Section 541.601 Highly Compensated Employees
Proposed section 541.601 set forth a new rule for highly
compensated employees. Under the proposed rule, an employee who had a
guaranteed total annual compensation of at least $65,000 was deemed
exempt under section 13(a)(1) of the Act if the employee performed an
identifiable executive, administrative or professional function as
described in the standard duties tests. Subsection (b) of the proposed
rule defined ``total annual compensation'' to include ``base salary,
commissions, non-discretionary bonuses and other non-discretionary
compensation'' as long as that compensation was ``paid out to the
employee as due on at least a monthly basis.'' Proposed subsection (b)
also provided for prorating the $65,000 annual compensation for
employees who work only part of the year, and allowed an employer to
make a lump-sum payment sufficient to bring the employee to the $65,000
level by the next pay period after the end of the year. Proposed
subsection (c) stated that a ``high level of compensation is a strong
indicator of an employee's exempt status, thus eliminating the need for
a detailed analysis of the employee's job duties,'' and provided an
example to illustrate the duties requirement applicable to highly
compensated employees under this rule: ``an employee may qualify as a
highly compensated executive employee, for example, if the employee
directs the work of two or more other employees, even though the
employee does not have authority to hire and fire.'' Proposed
subsection (d) provided that the highly compensated rule applied only
to employees performing office or non-manual work, and was not
applicable to ``carpenters, electricians, mechanics, plumbers, iron
workers, craftsmen, operating engineers, longshoremen, construction
workers, teamsters and other employees who perform manual work * * * no
matter how highly paid they might be.''\16\
---------------------------------------------------------------------------
\16\ Even if the requirements of section 541.601 are not met, an
employee may still be tested for exemption under the standard tests
for the executive, administrative or professional exemption.
---------------------------------------------------------------------------
The final section 541.601 raises the total annual compensation
required for exemption as a highly compensated employee to $100,000, an
increase of $35,000 from the proposal. The final rule also makes a
number of additional changes, including: Requiring that the total
annual compensation must include at least $455 per week paid on a
salary or fee basis; modifying the definition of ``total annual
compensation'' to include commissions, nondiscretionary bonuses and
other nondiscretionary compensation even if they are not paid to the
employee on a monthly basis; allowing the make-up payment to be paid
within one month after the end of the year and clarifying that such a
payment counts toward the prior year's compensation; allowing a similar
make-up payment to employees who terminate employment before the end of
the year; and deleting the word ``guaranteed'' to clarify that
compliance with this provision does not create an employment contract.
In addition, the final rule modifies the duties requirement to provide
that the employee must ``customarily and regularly'' perform one or
more exempt duties. Finally, subsection (d) in the final rule has been
modified to better reflect the language of new subsection 541.3(a) and
now provides:
This section applies only to employees performing office or non-
manual work. Thus, for example, non-management production-line
workers and non-management employees in maintenance, construction
and similar occupations such as carpenters, electricians, mechanics,
plumbers, iron workers, craftsmen, operating engineers,
[[Page 22173]]
longshoremen, construction workers, laborers and other employees who
perform work involving repetitive operations with their hands,
physical skill and energy are not exempt under this section no
matter how highly paid they might be.
Comments on proposed section 541.601 disagree sharply. The AFL-CIO
and other affiliated unions object entirely to section 541.601,
claiming the section is beyond the scope of the Department's authority.
The unions characterize this section as a ``salary-only'' test that
will exempt every employee earning above the highly compensated salary
level. The unions argue that Congress did not intend to exempt all
employees who are paid over a certain level. If Congress intended to
exempt employees who are paid over a certain level, the unions argue,
it could easily have done so. Comments submitted by unions and other
employee advocates also argue that the highly compensated test should
be deleted entirely because proposed section 541.601 will allow the
exemption for employees traditionally entitled to overtime pay. Such
commenters also argue that the proposed $65,000 level is too low and
the proposed duties requirements too lax.
In contrast, organizations representing employer interests
generally support the new provision, although a number of these
commenters ask for technical modifications. However, some employer
commenters argue that the total annual compensation requirement of
$65,000 per year is too high. In addition, a significant number of
employer commenters find a duties requirement in proposed section
541.601 unnecessary, and ask the Department to eliminate it. The
Morgan, Lewis & Bockius law firm, for example, argues that the duties
test for highly compensated employees can be eliminated because
employees paid more than 80 percent of all full-time salaried workers
are not the persons Congress sought to protect from exploitation when
it passed the FLSA. The U.S. Chamber of Commerce comments that a
``bright line'' (i.e., salary only) test for highly compensated
employees would add significant clarity to the regulations and is
consistent with the historical approach of guaranteeing overtime
protections to workers earning below the minimum salary level,
regardless of duties performed. The Society for Human Resource
Management adds that high compensation is indicative of likely exempt
status and a bright line rule for highly compensated employees based on
earnings alone would eliminate the need for an expensive and
potentially confusing legal inquiry into whether the employee's duties
truly are exempt.
The Department agrees with the AFL-CIO that the Secretary does not
have authority under the FLSA to adopt a ``salary only'' test for
exemption, and rejects suggestions from employer groups to do so.
Section 13(a)(1) of the FLSA requires that the Secretary ``define and
delimit'' the terms executive, administrative and professional
employee. The Department has always maintained that the use of the
phrase ``bona fide executive, administrative or professional capacity''
in the statute requires the performance of specific duties. For
example, the 1940 Stein report stated: ``Surely if Congress had meant
to exempt all white collar workers, it would have adopted far more
general terms than those actually found in section 13(a)(1) of the
act.'' 1940 Stein Report at 6-7. In fact, as the AFL-CIO and other
unions note, Congress rejected several statutory amendments during the
FLSA's early history which would have established ``salary only''
tests. In 1940, for example, Congress rejected an amendment which would
have provided the exemption to all employees earning more than $200 per
week. H.R. 8624, 76th Cong. (1940). See also Deborah Malamud,
Engineering the Middle Class: Class Line-Drawing in New Deal Hours
Legislation, 96 Mich. L. Rev. 2212, 2299-2303 (August 1998) (discussing
four separate proposals to exempt all highly paid employees between
1939 and 1940). Finally, as the unions also correctly note, in Jewell
Ridge Coal Corp. v. United Mine Workers of America, Local No. 6167, 325
U.S. 161, 167 (1949), the Supreme Court stated that ``employees are not
to be deprived of the benefits of the Act simply because they are well
paid.'' See also Overnite Motor Transportation Co. v. Missel, 316 U.S.
572, 578 (1942) (the primary purposes of the overtime provisions were
to ``spread employment'' and assure workers additional pay ``to
compensate them for the burden of a workweek beyond the hours fixed in
the Act'').
However, the Department rejects the view that section 541.601 does
not contain a duties test. As noted above, the proposed section did
require that an exempt highly compensated employee perform ``any one or
more exempt duties or responsibilities of an executive, administrative
or professional employee identified in subparts B, C or D of this
part.'' Some commenters find this language insufficient and confusing,
arguing that it would allow employees to qualify for exemption under
section 541.601 even if they performed only a single exempt duty once a
year. The Department never intended to exempt as ``highly compensated''
employees those who perform exempt duties only on an occasional or
sporadic basis. Accordingly, to clarify this duties requirement for
highly compensated employees and ensure exempt duties remain a
meaningful aspect of this test, the final rule adds to section
541.601(a) that an employee must ``customarily and regularly'' perform
work that satisfies one or more of the elements of the standard duties
test for an executive, administrative or professional employee.
The Department has the authority to adopt a more streamlined duties
test for employees paid at a higher salary level. Indeed, no commenter
challenges this authority. The Part 541 regulations have contained
special provisions for ``high salaried'' employees since 1949. Although
commonly referred to as the ``short'' duties tests today, the existing
regulations actually refer to these tests as the ``special proviso for
high salaried executives'' (29 CFR 541.119), the ``special proviso for
high salaried administrative employees'' (29 CFR 541.214), and the
``special proviso for high salaried professional employees'' (29 CFR
541.315). Perhaps the courts appropriately refer to these special
provisions as the ``short'' tests today because the associated salary
level is only $250 per week ($13,000 annually)--hardly ``high
salaried'' in today's economy.
In any case, these special provisions applying more lenient duties
standards to employees earning higher salaries have been in the Part
541 regulations for 52 years. The rationale for a highly compensated
test was set forth in the 1949 Weiss Report and is still valid today:
The experience of the Divisions has shown that in the categories
of employees under consideration the higher the salaries paid the
more likely the employees are to meet all the requirements for
exemption, and the less productive are the hours of inspection time
spent in analysis of the duties performed. At the higher salary
levels in such classes of employment, the employees have almost
invariably been found to meet all the other requirements of the
regulations for exemption. In the rare instances when these
employees do not meet all the 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. The evidence supported
the experience of the Divisions, and indicated that a short-cut test
of exemption along the lines suggested above would facilitate the
administration of the regulations without defeating the purposes of
section 13(a)(1). A number of management representatives stated that
such a provision
[[Page 22174]]
would facilitate the classification of employees and would result in
a considerable saving of time for the employer.
The definition of bona fide ``executive,'' ``administrative,''
or ``professional'' in terms of a high salary alone is not
consistent with the intent of Congress as expressed in section
13(a)(1) and would be of doubtful legality since many persons who
obviously do not fall into these categories may earn large salaries.
The Administrator would undoubtedly be exceeding his authority if he
included within the definition of these terms craftsmen, such as
mechanics, carpenters, or linotype operators, no matter how highly
paid they might be. A special proviso for high salaried employees
cannot be based on salary alone but must be drawn in terms which
will actually exclude craftsmen while including only bona fide
executive, administrative, or professional employees. The evidence
indicates that this objective can best be achieved by combining the
high salary requirements with certain qualitative requirements
relating to the work performed by bona fide executive,
administrative or professional employees, as the case may be. Such
requirements will exclude craftsmen and others of the type not
intended to come within the exemption.
1949 Weiss Report at 22-23.
Section 541.601 is merely a reformulation of such a test. Although
final section 541.601 strikes a slightly different balance than the
existing regulations `` a much higher salary level associated with a
more flexible duties standard `` that balance, in the experience of the
Department, still meets the goals of the 1949 Weiss Report of providing
a ``short-cut test'' that combines ``high salary requirements with
certain qualitative requirements relating to the work performed by bona
fide executive, administrative or professional employees,'' while
excluding ``craftsmen and others of the type not intended to come
within the exemption.'' Thus, the final section 541.601 provides that
an exempt highly compensated employee must earn $100,000 per year and
``customarily and regularly'' perform exempt duties, and that
``carpenters, electricians, mechanics, plumbers, iron workers,
craftsmen, operating engineers, longshoremen, construction workers,
laborers and other employees who perform work involving repetitive
operations with their hands, physical skill and energy are not exempt
under this section no matter how highly paid they might be.''
The Department also received a substantial number of comments on
the proposed $65,000 earnings level. Some commenters such as the
National Association of Manufacturers, the American Corporate Counsel
Association, the Society for Human Resource Management and the FLSA
Reform Coalition endorse the proposed $65,000 level as appropriately
serving the purposes of the FLSA. However, other employer groups state
that the salary level is too high. The U.S. Chamber of Commerce asks
the Department to lower the earnings level to $50,000 per year. The
National Retail Federation also suggests a $50,000 level, arguing that
the $65,000 standard is prohibitively high for most retailers. The
National Grocers Association and the International Mass Retail
Association similarly state that $65,000 is far too high a level,
particularly in the retail industry. The National Association of
Convenience Stores suggests that the Department should set the salary
level for highly compensated employees at $36,000 per year or, in the
alternative, at a level related to the minimum salary level for
exemption, such as $44,200 per year, twice the proposed minimum.
Other commenters, including labor unions, argue that $65,000 is too
low. The National Employment Lawyers Association argues that the
$65,000 proposed level is not much higher than the annualized level of
$57,470 per year for computer employees exempt under section 13(a)(17)
of the FLSA, which retains substantial duties tests. The National
Association of Wage Hour Consultants notes that, although the top 20
percent of salaried employees earn $65,000 in base wages, that number
does not include other types of compensation (e.g., commissions) that
the proposal includes within the definition of ``total annual
compensation.'' Accordingly, this commenter argues, the Department
either should raise the salary level to $80,000 per year or modify the
provision to exclude non-salary compensation. The American Federation
of Government Employees suggests that the salary level should be fixed
at the rate for a federal GS-15/step 1 employee ($85,140 per year, at
the time the comment was submitted, without the locality pay
differentials that can raise the total to in excess of $100,000). Two
employers suggest that the section 541.601 salary level should conform
to the Internal Revenue Service pay threshold for highly compensated
employees, which is currently $90,000 per year.
The Department continues to find that employees at higher salary
levels are more likely to satisfy the requirements for exemption as an
executive, administrative or professional employee. The purpose of
section 541.601 is to provide a ``short-cut test'' for such highly
compensated employees who ``have almost invariably been found to meet
all the other requirements of the regulations for exemption.'' 1949
Weiss Report at 22. Thus, the highly compensated earnings level should
be set high enough to avoid the unintended exemption of large numbers
of employees--such as secretaries in New York City or Los Angeles--who
clearly are outside the scope of the exemptions and are entitled to the
FLSA's minimum wage and overtime pay protections.
Accordingly, the Department rejects the comments from employer
groups that the highly compensated salary level should be reduced to as
low as $36,000 per year, and instead sets the highly compensated test
at $100,000 per year. In the Department's experience, employees earning
annual salaries of $36,000 often fail the duties tests for exemption,
while virtually every salaried ``white collar'' employee with a total
annual compensation of $100,000 per year would satisfy any duties test.
Employees earning $100,000 or more per year are at the very top of
today's economic ladder, and setting the highly compensated test at
this salary level provides the Department with the confidence that, in
the words of the Weiss report: ``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.'' 1949 Weiss Report at 22-
23.
Only roughly 10 percent of likely exempt employees who are subject
to the salary tests earn $100,000 or more per year (Table 4). This is
broadly symmetrical with the Kantor approach of setting the minimum
salary level for exemption at the lowest 10 percent of likely exempt
employees. In contrast, approximately 35 percent of likely exempt
employees subject to the salary tests exceed the proposed $65,000
salary threshold. In addition, less than 1 percent of full-time hourly
workers (0.6 percent) earn $100,000 or more (Table 5). Thus, at the
$100,000 or more per year salary level, the highly compensated
provision will not be available to the vast majority of both salaried
and hourly employees. Unlike the $65,000 or more per year salary level,
setting the highly compensated test at the $100,000 avoids the
potential of unintended exemptions of large numbers of employees who
are not bona fide executive, administrative or professional employees.
At the same time, because the Department believes that many employees
who earn between $65,000 and $100,000 per year also satisfy the
standard duties tests, the section 13(a)(1) exemptions will still be
available for such employees. The
[[Page 22175]]
Department believes this $100,000 level is also necessary to address
commenters' concerns regarding the associated duties test, the
possibility that workers in high-wage regions and industries could
inappropriately lose overtime protection, and the effect of future
inflation. The Department recognizes that the duties test for highly
compensated employees in final section 541.601 is less stringent than
the existing ``short'' duties tests associated with the existing
special provisions for ``high salaried'' employees (29 CFR 541.119,
541.214, 541.315). But this change is more than sufficiently off-set by
the $87,000 per year increase in the highly compensated level. Under
the existing regulations, a ``high salaried executive'' earns only
$13,000 annually, which is approximately 60 percent higher than the
minimum salary level of $8,060. Under the final rule, a highly
compensated employee must earn $100,000 per year, which is more than
400 percent higher than the final minimum salary level of $23,660
annually.\17\
---------------------------------------------------------------------------
\17\ In addition, the final compensation level of $100,000 for
highly compensated employees is almost twice the highest salary
level that the AFL-CIO advocates as necessary to update the salary
level associated with the existing ``short'' duties tests. The AFL-
CIO did not suggest an alternative salary level for section 541.601,
likely because of its strong objections to this section as a whole.
However, the AFL-CIO suggests that the salary level associated with
the existing ``short'' duties test should be increased either to
$855 per week ($44,460 annually) if based on inflation or to $980
per week ($50,960 annually) if based on the Kantor Report.
---------------------------------------------------------------------------
A number of commenters question the definition of ``total annual
compensation'' and the mechanics of applying the highly compensated
test. First, a number of commenters are concerned that the requirement
that an employee must be ``guaranteed'' the total annual compensation
amount would be interpreted as creating an employment contract for an
employee who otherwise would be an at-will employee. Because the
Department did not intend this result, we have deleted the word
``guaranteed.''
Second, several commenters, including the Morgan, Lewis & Bockius
law firm, the Securities Industry Association and the HR Policy
Association, suggest that employers should be permitted to prorate the
total annual compensation amount if an employee uses leave without pay,
such as under the Family and Medical Leave Act. The Department does not
believe that such deductions are appropriate. The test for highly
compensated employees is intended to provide an alternative, simplified
method of testing a select group of employees for exemption. We believe
that the test for highly compensated employees should remain
straightforward and easy to administer by maintaining a single, overall
compensation figure applicable to every employee. Determining the
variety of reasons that might qualify for deduction, such as for a
medical leave of absence, a military leave of absence, or an
educational leave of absence, and establishing rules about the lengths
of time such absences must cover before deductions could be made, would
unnecessarily complicate this rule.
Third, because the final rule increases the compensation level
significantly, from $65,000 to $100,000, the Department agrees with
comments that the definition of ``total annual compensation'' should
include commissions, nondiscretionary bonuses and other
nondiscretionary compensation earned during a 52-week period, even if
such compensation is not ``paid out to the employee as due on at least
a monthly basis'' as proposed in subsection 541.601(b)(1). Numerous
commenters state that such payments often are paid on a quarterly or
less frequent basis. Accordingly, we have deleted this requirement from
the final rule. However, we have not adopted comments suggesting that
discretionary bonuses should be included in ``total annual
compensation'' because there is not enough information in the record on
the frequency, size and types of such payments. The Department also
does not agree with comments that the costs of employee benefits, such
as payments for medical insurance and matching 401(k) pension plan
payments, should be included in computing total annual compensation.
The inclusion of such costs in the calculations for testing highly
compensated employees would make the test administratively unwieldy.
Fourth, final subsection 541.601(b)(1) contains a new safeguard
against possible abuses that are of concern to some commenters,
including the AFL-CIO: the ``total annual compensation'' must include
at least $455 per week paid on a salary or fee basis. This change will
ensure that highly compensated employees will receive at least the same
base salary throughout the year as required for exempt employees under
the standard tests, while still allowing highly compensated employees
to receive additional income in the form of commissions and
nondiscretionary bonuses. As explained below, the salary basis
requirement is a valuable and easily applied criterion that is a
hallmark of exempt status. Accordingly, the Department has modified the
final subsection 541.601(b)(1) to provide:
``Total annual compensation'' must include at least $455 per
week paid on a salary or fee basis. Total annual compensation may
also include commissions, nondiscretionary bonuses and other
nondiscretionary compensation earned during a 52-week period. Total
annual compensation does not include board, lodging and other
facilities as defined in Sec. 541.606, and does not include
payments for medical insurance, payments for life insurance,
contributions to retirement plans and the cost of other fringe
benefits.
Fifth, the final rule also continues to permit a catch-up payment
at the end of the year. Such a catch-up payment is necessary because,
according to some commenters, many highly compensated employees receive
commissions, profit sharing and other incentive pay that may not be
calculated or paid by the end of the year. However, some commenters
state that it would be difficult to compute the amount of any such
payment due by the first pay period following the end of the year, as
required by proposed section 541.601(b)(2). They emphasize that it
takes some time after the close of the year to compute the amounts of
any commissions or bonuses that are due, such as those based on total
sales or profits. Thus, for example, the Mortgage Bankers Association,
the Consumer Bankers Association and the Consumer Mortgage Coalition
suggest that employers be allowed one month to make the catch-up
payment. The Department recognizes that an employer may need some time
after the close of the year to make calculations and determine the
amount of any catch-up payment that is due. Accordingly, we have
clarified that such a payment may be made during the last pay period of
the year or within one month after the close of the year. The final
rule also provides that a similar, but prorated, catch-up payment may
be made within one month after termination of employment for employees
whose employment ends before the end of the 52-week period. Finally,
the final rule clarifies that any such payments made after the end of
the year may only be counted once, toward the ``total annual
compensation'' for the preceding year. To ensure appropriate evidence
is maintained of such catch-up payments, employers may want to document
and advise the employee of the purpose of the payment, although this is
not a requirement of the final rule.
Finally, some commenters suggest applying the highly compensated
test to outside sales and computer employees. Outside sales employees
have never been subject to a salary level or a salary
[[Page 22176]]
basis test as a requirement for exemption, and the Department did not
propose to add these requirements. Since outside sales employees are
not subject to the standard salary level test, it would not be
appropriate to apply the highly compensated test to these employees. We
have not applied the highly compensated test to computer employees
because, as explained under subpart E, Congress has already created
special compensation provisions for this industry in section 13(a)(17)
of the Act.
Section 541.602 Salary Basis
In its proposal, the Department retained the requirement that, to
qualify for the executive, administrative or professional exemption, an
employee must be paid on a ``salary basis.'' Proposed section
541.602(a) set forth the general rules for determining whether an
employee is paid on a salary basis, which were retained virtually
unchanged from the existing regulation. Under this subsection (a), an
employee must regularly receive a ``predetermined amount'' of salary,
on a weekly or less frequent basis, that is ``not subject to reduction
because of variations in the quality or quantity of the work
performed.'' With a few identified exceptions, the employee ``must
receive the full salary for any week in which the employee performs any
work without regard to the number of days or hours worked.'' Subsection
(a) also provides that an ``employee is not paid on a salary basis if
deductions from the employee's predetermined compensation are made for
absences occasioned by the employer or by the operating requirements of
the business. If the employee is ready, willing and able to work,
deductions may not be made for time when work is not available.''
Exempt employees, however, ``need not be paid for any workweek in which
they perform no work.''
Proposed subsection (b) included several exceptions to the salary
basis rules that are in the existing regulations. An employer may make
deductions from the guaranteed pay: when the employee is ``absent from
work for a full day for personal reasons, other than sickness or
disability''; for absences of a full day or more due to sickness or
disability, if taken in accordance with a bona fide plan, policy or
practice providing wage replacement benefits; for any hours not worked
in the initial and final weeks of employment; for hours taken as unpaid
FMLA leave; as offsets for amounts received by an employee for jury or
witness fees or military pay; or for penalties imposed in good faith
for ``infractions of safety rules of major significance.'' The proposed
subsection (b) also added a new exception to the salary basis rule for
deductions for ``unpaid disciplinary suspensions of a full day or more
imposed in good faith for infractions of workplace conduct rules,''
such as rules prohibiting sexual harassment or workplace violence. Such
suspensions must be imposed ``pursuant to a written policy applied
uniformly to all workers.''
The Department's final rule retains both the requirement that an
exempt employee must be paid on a ``salary basis'' and the exceptions
to this rule specified in the proposal, with only a few minor
modifications. We have changed the phrase ``a full day or more'' to
read ``one or more full days'' throughout section 541.602 to clarify
that certain deductions can only be made for full day increments. In
addition, the final rule modifies the text of the new disciplinary
deduction exception to indicate more clearly that the disciplinary
policy must be applicable to all employees.
A number of commenters, such as the Fisher & Phillips law firm, the
National Association of Convenience Stores and the American Bakers
Association, urge the Department to abandon the salary basis test
entirely, arguing that this requirement serves as a barrier to the
appropriate classification of exempt employees. These comments note
that the explanation in the proposal that payment on a salary basis is
the quid pro quo for an exempt employee not receiving overtime pay
reflects an inappropriate regulation of the compensation of an
otherwise exempt employee.
In contrast, commenters such as the AFL-CIO and the Goldstein,
Demchak, Baller, Borgen & Dardarian law firm view the salary basis
requirement as a hallmark of exempt status. In fact, many commenters
such as the New York State Public Employees Federation, the National
Employment Lawyers Association, and the National Employment Law
Project, request that the salary basis test be tightened.
After considering the salary basis test in light of its historical
context and judicial acceptance, the Department has decided that it
should be retained. As early as 1940, the Department noted that there
was ``surprisingly wide agreement'' among employers and employees
``that a salary qualification in the definition of the term `executive'
is a valuable and easily applied index to the `bona fide' character of
the employment. * * * '' 1940 Stein Report at 19. The basis of that
agreement was that ``[t]he term `executive' implies a certain prestige,
status, and importance'' that is captured by a salary test. Id. Also,
because ``executive'' employees are denied the protection of the Act,
``[i]t must be assumed that they enjoy compensatory privileges,''
including a salary ``substantially higher'' than the minimum wages
guaranteed under the Act. Id. The 1940 Stein Report recommended a
salary test for executives that would be satisfied if the ``employee is
guaranteed a net compensation of not less than $30 a week `free and
clear.' '' Id. at 23 (emphasis added). The Report concluded that the
inclusion of a salary test was vital in defining administrative and
professional employees as well. Id. at 26 (``[A] salary criterion
constitutes the best and most easily applied test of the employer's
good faith in claiming that the person whose exemption is desired is
actually of such importance to the firm that he is properly describable
as an employee employed in a bona fide administrative capacity''); id.
at 36 ([I]n order to avoid disputes, to assist in the effective
enforcement of the act and to prevent abuse, it appears essential * * *
to include a salary test in the definition [of professional]'').
Based on the 1940 Stein Report's recommendation, the Department
promulgated regulations providing that an exempt executive must be
``compensated for his services on a salary basis at not less than $30
per week.'' 29 CFR 541(e) (1940 Supp.). The regulations required that
exempt administrative and professional employees (except physicians and
attorneys) must be paid ``on a salary or fee basis at a rate of not
less than $200 per month.'' 29 CFR 541.2(a) (administrative), 541.3(b)
(professional) (emphasis added).
In 1944, the Wage and Hour Division issued Release No. A-9, which
addressed the meaning of ``salary basis.'' The Release stated that an
employee will be considered to be paid on a salary basis if ``under his
employment agreement he regularly receives each pay period, on a
weekly, biweekly, semi-monthly, monthly or annual basis, a
predetermined amount constituting all or part of his compensation,
which amount is not subject to reduction because of variations in the
number of hours worked or in the quantity or quality of the work
performed during the pay period.'' Release No. A-9 (Aug. 24, 1944),
reprinted in Wage & Hour Manual (BNA) 719 (cum. ed. 1944-1945). The
Release further explained that because ``bona fide executive,
administrative, and professional employees are normally allowed some
latitude with respect to the time spent at work,'' such employees
should
[[Page 22177]]
generally be free to go home early or occasionally take a day off
without reduction in pay. Id.
After hearings conducted in 1947, the Wage and Hour Division
recommended retention of the salary basis test in the 1949 Weiss
Report, stating:
The evidence at the hearing showed clearly that bona fide
executive, administrative, and professional employees are almost
universally paid on a salary or fee basis. Compensation on a salary
basis appears to have been almost universally recognized as the only
method of payment consistent with the status implied by the term
``bona fide'' executive. Similarly, payment on a salary (or fee)
basis is one of the recognized attributes of administrative and
professional employment.
1949 Weiss Report at 24. Based on the Weiss Report recommendations,
the Department issued revised Part 541 regulations in 1949 that
retained the salary basis test. 29 CFR 541.1(f), 541.2(e), 541.3(e)
(1949 Supp.). Shortly thereafter, the Department published the first
version of 29 CFR 541.118 (1949 Supp.) in a new Subpart B, entitled
``Interpretations.'' Section 541.118(a) provided as follows:
An employee will be considered to be paid on a salary basis
within the meaning of the regulations in Subpart A of this part, if
under his employment agreement he regularly receives each pay period
on a weekly, or less frequent basis, a predetermined amount
constituting all or part of his compensation, which amount is not
subject to reduction because of variations in the number of hours
worked in the workweek or in the quality or quantity of the work
performed. The employee must receive his full salary for any week in
which he performs any work without regard to the number of days or
hours worked.
In 1954, the Administrator issued a revised section 541.118(a) that
retained the salary basis test, but added a number of exceptions to the
rule. In 1958, the Wage and Hour Division again conducted hearings for
the purpose of determining whether the salary levels should be changed.
Although the resulting 1958 Kantor Report related primarily to the
salary levels, it reiterated that salary is a ``mark of [the] status''
of an exempt employee, and reaffirmed the criterion's importance as an
enforcement tool, noting that the Department had ``found no
satisfactory substitute for the salary tests.'' 1958 Kantor Report at
2-3. Since 1954, the salary basis test has remained unchanged.
The Department thus has determined over the course of many years
that executive, administrative and professional employees are nearly
universally paid on a salary basis. This practice reflects the widely-
held understanding that employees with the requisite status to be bona
fide executives, administrators or professionals have discretion to
manage their time. Such employees are not paid by the hour or task, but
for the general value of services performed. See Kinney v. District of
Columbia, 994 F.2d 6, 11 (D.C. Cir. 1993); Brock v. Claridge Hotel &
Casino, 846 F.2d 180, 184 (3d Cir.), cert. denied, 488 U.S. 925 (1988).
There is nothing in this rulemaking record that contradicts the
Department's long-standing view. The comments accusing the Department
of improperly regulating the wages of exempt employees miss the mark.
The quid pro quo referenced in the proposal was simply a way to explain
that payment on a salary basis reflects an employee's discretion to
manage his or her time and to receive compensatory privileges
commensurate with exempt status.
Many commenters, including the FLSA Reform Coalition, the Fisher &
Phillips law firm, the U.S. Chamber of Commerce, the HR Policy
Association and the Oklahoma Office of Personnel Management, support
the proposed new exception to the salary basis rule for ``unpaid
disciplinary suspensions of a full day or more imposed in good faith
for infractions of workplace conduct rules.'' These commenters note
that this additional exception will permit employers to apply the same
progressive disciplinary rules to both exempt and nonexempt employees,
and is needed in light of federal and state laws requiring employers to
take appropriate remedial action to address employee misconduct. A
number of commenters ask the Department to construe the term
``workplace misconduct'' more broadly to include off-site, off-duty
conduct. The National Association of Manufacturers suggests that the
term should be clarified, at a minimum, to refer to the standards of
conduct imposed by state and federal anti-discrimination laws.
In contrast, commenters such as the AFL-CIO, the Communications
Workers of America, the New York State Public Employees Federation and
the National Employment Law Project oppose the new exception, arguing
that the current rule properly recognizes that receiving a salary
includes not being subject to disciplinary deductions of less than a
week. These commenters argue that employers have other ways to
discipline exempt employees without violating the salary basis test.
The final rule includes the exception to the salary basis
requirement for deductions from pay due to suspensions for infractions
of workplace conduct rules. The Department believes that this is a
common-sense change that will permit employers to hold exempt employees
to the same standards of conduct as that required of their nonexempt
workforce. At the same time, as one commenter notes, it will avoid
harsh treatment of exempt employees--in the form of a full-week
suspension--when a shorter suspension would be appropriate. It also
takes into account, as the comments of Representative Norwood,
Representative Ballenger and the American Bakers Association recognize,
that a growing number of laws governing the workplace have placed
increased responsibility and risk of liability on employers for their
exempt employees' conduct. See Burlington Industries, Inc. v. Ellerth,
524 U.S. 742 (1998); Faragher v. City of Boca Raton, 524 U.S. 775
(1998) (liability for sexual harassment by supervisory employees may be
imputed to the employer where employer fails to take prompt and
effective remedial action). At the same time, the Department does not
intend that the term ``workplace conduct'' be construed expansively. As
the term indicates, it refers to conduct, not performance or
attendance, issues. Moreover, consistent with the examples included in
the regulatory provision, it refers to serious workplace misconduct
like sexual harassment, violence, drug or alcohol violations, or
violations of state or federal laws. Although we believe that this
additional exception to the general no-deduction rule is warranted (as
was the exception added in 1954 for infractions of safety rules of
major significance), it should be construed narrowly so as not to
undermine the essential guarantees of the salary basis test. See
Mueller v. Reich, 54 F.3d 438 (7th Cir. 1995). However, the fact that
the employee misconduct occurred off the employer's property should not
preclude an employer from imposing a disciplinary suspension, as long
as the employer has a bona fide workplace conduct rule that covers such
off-site conduct.
Commenters such as the FLSA Reform Coalition, the Fisher & Phillips
law firm and the National Association of Chain Drug Stores urge the
Department to delete the proposed requirement that any pay deductions
for workplace conduct violations must be imposed pursuant to a
``written policy applied uniformly to all workers.'' These commenters
question the need for the policy to be in writing, and are concerned
that the uniform application requirement would breed litigation and
diminish employer flexibility to take individual circumstances into
account. The American Corporate Counsel
[[Page 22178]]
Association notes that it ``would not object if the present draft were
further modified to condition full-day docking on the employer either
adopting a written policy notifying employees of the potential for a
suspension without pay as a disciplinary measure or providing the
employee with written notice of a finding of job-related misconduct.''
The Department has decided to retain the requirement that the policy be
in writing, on the assumption that most employers would put (or already
have) significant conduct rules in writing, and to deter misuse of this
exception. This provision is a new exception to the salary basis test,
and the Department does not believe restricting this new exception to
written disciplinary policies will lead to changes in current employer
practices regarding such policies. However, the written policy need not
include an exhaustive list of specific violations that could result in
a suspension, or a definitive declaration of when a suspension will be
imposed. The written policy should be sufficient to put employees on
notice that they could be subject to an unpaid disciplinary suspension.
We have clarified the regulatory language to provide that the written
policy must be ``applicable to all employees,'' which should not
preclude an employer from making case-by-case disciplinary
determinations. Thus, for example, the ``written policy'' requirement
for this exception would be satisfied by a sexual harassment policy,
distributed generally to employees, that warns employees that
violations of the policy will result in disciplinary action up to and
including suspension or termination.
Commenters raise a number of other issues related to deductions
from salary. First, in response to comments from the National
Association of Convenience Stores and the Fisher & Phillips law firm,
we have changed the phrase ``of a full day or more'' to ``one or more
full days'' in sections 541.602(b)(1), (2) and (5), to clarify that a
deduction of one and one-half days, for example, is impermissible.
Second, commenters, such as the National Association of Chain Drug
Stores, the U.S. Chamber of Commerce, the HR Policy Association and the
National Retail Federation, suggest that partial day deductions be
permitted for any leave requested by an employee, including for
sickness or rehabilitation, or for disciplinary suspensions. We believe
that partial day deductions generally are inconsistent with the salary
basis requirement, and should continue to be permitted only for
infractions of safety rules of major significance, for leave under the
Family and Medical Leave Act, or in the first and last weeks of
employment.
Third, several commenters, such as the Morgan, Lewis & Bockius law
firm, suggest an additional exception to the general no-docking rule:
payments in the nature of restitution, fines, settlements or judgments
an employer must make based on the misconduct of an employee. Such an
additional exception, in our view, would be inappropriate and
unwarranted because it would grant employers unfettered discretion to
dock large amounts from the salaries of exempt employees in
questionable circumstances (judgments against employers because of
discriminatory employment actions taken by an exempt employee, for
example). The new disciplinary deduction exception only allows
deductions for unpaid suspensions of one or more days--not fines,
settlements or judgments which could arguably be blamed on an exempt
employee.
Fourth, the U.S. Chamber of Commerce and a few other commenters
request that the Department expand proposed section 541.602 (b)(7) to
include employee absences under an employer's family or medical leave
policy. Subsection (b)(7) provides an exception from the no-deduction
rule for weeks in which an exempt employee takes unpaid leave under the
Family and Medical Leave Act (FMLA). This exception was mandated by
Congress when it passed the FMLA in 1993. 29 U.S.C. 2612(c) (``Where an
employee is otherwise exempt under regulations issued by the Secretary
pursuant to section 13(a)(1) of the Fair Labor Standards Act of 1938, *
* * the compliance of an employer with this title by providing unpaid
leave shall not affect the exempt status of the employee. * * * '').
There is no basis to enlarge the statutory exception. We also would
note that deductions may be made for absences of one or more full days
occasioned by sickness under section 541.602(b)(2).
Fifth, several commenters, including the National Association of
Manufacturers and the American Corporate Counsel Association, urge the
Department expressly to recognize that compensation shortages resulting
from payroll system errors may not constitute impermissible
``dockings.'' We do not believe it is appropriate to provide such a
general rule in the context of this rulemaking. Whether payroll system
errors constitute impermissible ``dockings'' depends on the facts of
the particular case, including the frequency of the errors, whether the
errors are caused by employee data entry or the computer system,
whether the employer promptly corrects the errors, and the feasibility
of correcting the payroll system programming to eliminate the errors.
Sixth, a few commenters, such as the National Association of Chain
Drug Stores and the National Council of Chain Restaurants, suggest that
employers should be able to recover leave and salary advances from an
employee's final pay. Recovery of salary advances would not affect an
employee's exempt status, because it is not a deduction based on
variations in the quality or quantity of the work performed. Recovery
of partial-day leave advances, however, essentially are deductions for
personal absences and would constitute an impermissible deduction.
Whether recovery for a full-day leave is permissible depends on whether
such a leave is covered by one of the section 541.602(b) exceptions.
Seventh, the New York State Public Employees Federation requests
that if the Department retains the disciplinary deduction provision, it
should eliminate the current pay-docking rule applicable to public
employers. The public accountability rationale for the public employer
pay-docking rule (section 541.709) continues to be valid, however, and
is not affected by the new exception for disciplinary suspensions.
Finally, a number of commenters, including the Society for Human
Resource Management, the National Association of Chain Drug Stores, the
National Council of Chain Restaurants and the National Retail
Federation, ask the Department to confirm that certain payroll and
record keeping practices continue to be permissible under the new
rules. We agree that employers, without affecting their employees'
exempt status, may take deductions from accrued leave accounts; may
require exempt employees to record and track hours; may require exempt
employees to work a specified schedule; and may implement across-the-
board changes in schedule under certain circumstances. See, e.g.,
Webster v. Public School Employees of Washington, Inc., 247 F.3d 910
(9th Cir. 2001) (accrued leave accounts); Douglas v. Argo-Tech Corp.,
113 F.3d 67 (6th Cir. 1997) (record and track hours); Aaron v. City of
Wichita, Kansas, 54 F.3d 652 (10th Cir.) (accrued leave accounts,
record and track hours), cert. denied, 516 U.S. 965 (1995); Graziano v.
The Society of the New York Hospital, 1997 WL 639026 (S.D.N.Y. 1997)
(accrued leave accounts); Wage and Hour Opinion Letter of 2/23/98, 1998
WL 852696 (across-the-board changes in schedule); Wage and Hour Opinion
[[Page 22179]]
Letter of 4/15/95 (accrued leave accounts); Wage and Hour Opinion
Letter of 3/30/94, 1994 WL 1004763 (accrued leave accounts); and Wage
and Hour Opinion Letter of 4/14/92, 1992 WL 845095 (accrued leave
accounts).
Section 541.603 Effect of Improper Deductions From Salary
Proposed section 541.603 discussed the effect of improper
deductions from salary and established a new ``safe harbor'' rule.
Subsection (a) of the proposal set forth the general rule that: ``An
employer who makes improper deductions from salary shall lose the
exemption if the facts demonstrate that the employer has a pattern and
practice of not paying employees on a salary basis. A pattern and
practice of making improper deductions demonstrates that the employer
did not intend to pay employees in the job classification on a salary
basis.'' Factors for determining whether an employer had such a
``pattern and practice'' listed in this subsection included: The
``number of improper deductions; the time period during which the
employer made improper deductions; the number and geographic location
of employees whose salary was improperly reduced; the number and
geographic location of managers responsible for taking the improper
deductions; the size of the employer; whether the employer has a
written policy prohibiting improper deductions; and whether the
employer corrected the improper pay deductions.'' Proposed subsection
(a) also provided that ``isolated or inadvertent'' deductions would not
result in loss of the exemption. Proposed section 541.603(b) further
provided: ``If the facts demonstrate that the employer has a policy of
not paying on a salary basis, the exemption is lost during the time
period in which improper deductions were made for employees in the same
job classification working for the same managers responsible for the
improper deductions. Employees in different job classifications who
work for different managers do not lose their status as exempt
employees.'' Finally, proposed section 541.603(c) included a new ``safe
harbor'' provision: ``If an employer has a written policy prohibiting
improper pay deductions as provided in Sec. 541.602, notifies
employees of that policy and reimburses employees for any improper
deductions, such employer would not lose the exemption for any
employees unless the employer repeatedly and willfully violates that
policy or continues to make improper deductions after receiving
employee complaints.''
The final rule makes a number of substantive changes to the
proposed section 541.603. We have modified the first two sentences of
subsection (a) to better clarify that the effect of improper deductions
depends upon whether the facts demonstrate that the employer intended
to pay employees on a salary basis, and to substitute the phrase
``actual practice'' of making improper deductions for the ``pattern and
practice'' language in proposed subsection (a). The final subsection
(a) makes four changes in the factors to consider when determining
whether an employer has an actual practice of making improper
deductions: (1) Adding consideration of ``the number of employee
infractions warranting discipline'' as compared to the number of
deductions made; (2) modifying the written policy factor to state,
``whether the employer has a clearly communicated policy permitting or
prohibiting improper deductions'' (3) deleting the ``size of employer''
factor; and (4) deleting the ``whether the employer corrected the
improper deductions'' factor. The final rule moves the language
regarding isolated or inadvertent improper deductions to subsection
(c), and inserts language, developed from the existing regulations,
requiring an employer to reimburse employees for isolated or
inadvertent improper deductions. The ``safe harbor'' provision, found
in final section 541.603(d), substitutes ``clearly communicated
policy'' for the proposed ``written policy''; adds that the policy must
include a complaint mechanism; deletes the term ``repeatedly'';
clarifies that the safe harbor is not available if the employer
``willfully violates the policy by continuing to make improper
deductions after receiving employee complaints''; and clarifies that if
an employer fails to reimburse employees for any improper deductions or
continues to make improper deductions after receiving employee
complaints, the exemption is lost during the time period in which the
improper deductions were made for employees in the same job
classification working for the same manager responsible for the actual
improper deductions.
Proposed subsection 541.603(a) contained the general rule regarding
the effect of improper deductions from salary on the exempt status of
employees: ``An employer who makes improper deductions from salary
shall lose the exemption if the facts demonstrate that the employer has
a pattern and practice of not paying employees on a salary basis.''
Many commenters, including the FLSA Reform Coalition, the National
Association of Manufacturers, the U.S. Chamber of Commerce and the AFL-
CIO, express concern that the phrase ``pattern and practice of not
paying employees on a salary basis'' in proposed subsection 541.603(a)
was ambiguous and would engender litigation and perhaps result in
unintended consequences. The final rule clarifies that the central
inquiry to determine whether an employer who makes improper deductions
will lose the exemption is whether ``the facts demonstrate that the
employer did not intend to pay employees on a salary basis.'' The final
subsection (a) replaces the proposed ``pattern and practice'' language
with the phrase ``actual practice,'' and also states that an ``actual
practice of making improper deductions demonstrates that the employer
did not intend to pay employees on a salary basis.'' The phrase
``pattern and practice'' is a legal term of art in other employment law
contexts which we had no intent to incorporate into these regulations.
These changes should provide better guidance to the regulated
community.
Most commenters support the listed factors in subsection (a) for
determining when an employer has an actual practice of making improper
deductions. Responding to comments submitted by the Fisher & Phillips
law firm and the National Association of Convenience Stores, the final
rule states that the number of improper deductions should be considered
``particularly as compared to the number of employee infractions
warranting discipline.'' The Second Circuit in Yourman v. Giuliani, 229
F.3d 124, 130 (2nd Cir. 2000), cert. denied, 532 U.S. 923 (2001),
provided the following useful comparison: an employer that regularly
docks the pay of managers who come to work five hours late has more of
an ``actual practice'' of improper deduction than does an employer that
only sporadically docks the pay of managers who come to work five
minutes late, even though the penalties imposed by this second employer
could far outnumber the penalties imposed by the first. Thus, it is the
ratio of deductions to infractions that is most informative, rather
than simply the number of deductions, because the total number of
deductions is significantly influenced by the size of the employer. In
light of this change, we have also deleted the size of the employer as
a relevant factor in final subsection (a), as we did not intend that
this section be applied differently depending on the size of the
employer, and have deleted ``whether the employer
[[Page 22180]]
has corrected the improper pay deductions'' as a relevant factor in
determining whether an employer has an actual practice of improper pay
deductions. We have modified the written policy factor to state:
``Whether the employer has a clearly communicated policy permitting or
prohibiting improper deductions'' because, as discussed below under
subsection 541.603(d), the U.S. Small Business Administration Office of
Advocacy and other commenters state that the written policy factor may
be prejudicial to small businesses.
Final subsection 541.603(b), as in the proposal, addresses which
employees will lose the exemption, and for what time period, if an
employer has an actual practice of making improper deductions. The
proposal provided that the exemption would be lost ``during the time
period in which improper deductions were made for employees in the same
job classification working for the same managers responsible for the
improper deductions.'' The comments express strongly contrasting views
on whether proposed section 541.603(b) should be retained or modified
either to mitigate the impact on employers or to expand the
circumstances in which employees would lose their exempt status.
Commenters such as the Federal Wage Hour Consultants, the Society for
Human Resource Management and the National Association of Chain Drug
Stores support the proposal as resolving many of the misunderstandings
that exist under the existing regulations and current case law. Other
commenters, however, including the FLSA Reform Coalition, the U.S.
Chamber of Commerce, the National Council of Chain Restaurants, the
National Retail Federation, the HR Policy Association, and the County
of Culpeper, Virginia, suggest that improper deductions should affect
only the exempt status of the individual employees actually subjected
to the impermissible pay deductions. These commenters argue that the
possibility that employees who have never experienced a salary
reduction could also lose their exempt status was first raised by the
decision in Abshire v. County of Kern, California, 908 F.2d 483 (9th
Cir. 1990), cert. denied, 498 U.S. 1068 (1991), and has led to
extensive litigation thereafter. The HR Policy Association states that
the Supreme Court in Auer v. Robbins, 519 U.S. 452 (1997), ``did not
rectify the central flaw in the current interpretation: that a few
deductions made against a couple of employees arguably converts whole
classes of employees to nonexempt.''
In contrast, commenters such as the AFL-CIO, the McInroy & Rigby
law firm, the National Employment Law Project, the Goldstein, Demchak,
Baller, Borgen & Dardarian law firm and the National Employment Lawyers
Association urge the Department to modify the proposed provision to
state that employees will lose their exempt status if they are subject
to an employment policy permitting impermissible deductions, even
absent any actual deductions. These comments note that the Supreme
Court in Auer deferred to the Department's view, as expressed in its
legal briefs to the Court, that employees should lose their exempt
status if there is either an actual practice of making impermissible
deductions or an employment policy that creates a significant
likelihood of such deductions.
After giving this complex issue careful consideration, the
Department has decided to retain in final subsection 541.603(b) the
proposed approach that an employer who has an actual practice of making
improper deductions will lose the exemption during the time period in
which the improper deductions were made for employees in the same job
classification working for the same managers responsible for the actual
improper deductions. The final regulation also retains the language
that employees in different job classifications or who work for
different managers do not lose their status as exempt employees. Any
other approach, on the one hand, would provide a windfall to employees
who have not even arguably been harmed by a ``policy'' that a manager
has never applied and may never intend to apply, but on the other hand,
would fail to recognize that some employees may reasonably believe that
they would be subject to the same types of impermissible deductions
made from the pay of similarly situated employees.
The final rule represents a departure from the Department's
position in Auer v. Robbins, 519 U.S. 452 (1997). In Auer, the Supreme
Court, deferring to arguments made in an amicus brief filed by the
Department, found that the existing salary basis test operated to deny
exempt status when ``there is either an actual practice of making such
deductions or an employment policy that creates a `significant
likelihood' of such deductions.'' Id. at 461. In deferring to the
Department, the Supreme Court stated:
Because the salary-basis test is a creature of the Secretary's
own regulations, his interpretation of it is, under our
jurisprudence, controlling unless ``plainly erroneous or
inconsistent with the regulation.''
* * * * *
Petitioners complain that the Secretary's interpretation comes
to us in the form of a legal brief; but that does not, in the
circumstances of this case, make it unworthy of deference.
Id. at 461-62 (citations omitted). Thus, in Auer, the Supreme Court
relied on arguments made in the Department's amicus brief interpreting
ambiguous regulations existing at the time of the decision. The
``significant likelihood'' test is not found in the FLSA itself or
anywhere in the existing Part 541 regulations. Moreover, nothing in
Auer prohibits the Department from making changes to the salary basis
regulations after appropriate notice and comment rulemaking. See Keys
v. Barnhart, 347 F.3d 990, 993 (7th Cir. 2003).
We are concerned with those employees who actually suffer harm as a
result of salary basis violations and want to ensure that those
employees receive sufficient back pay awards and other appropriate
relief. We disagree, however, with those comments arguing that only
employees who suffered an actual deduction should lose their exempt
status. An exempt employee who has not suffered an actual deduction
nonetheless may be harmed by an employer docking the pay of a similarly
situated co-worker. An exempt employee in the same job classification
working for the same manager responsible for making improper
deductions, for example, may choose not to leave work early for a
parent-teacher conference for fear that her pay will be reduced, and
thus is also suffering harm as a result of the manager's improper
practices. Because exempt employees in the same job classification
working for the same managers responsible for the actual improper
deductions may reasonably believe that their salary will also be
docked, such employees have also suffered harm and therefore should
also lose their exempt status. The Department's construction best
furthers the purposes of the section 13(a)(1) exemptions because it
realistically assesses whether an employer intends to pay employees on
a salary basis. For the same reasons, final subsection (a) provides
that ``whether the employer has a clearly communicated policy
permitting or prohibiting improper deductions'' is one factor to
consider when determining whether the employer has an actual practice
of not paying employees on a salary basis.
A number of commenters, such as the FLSA Reform Coalition, the U.S.
Chamber of Commerce and the National
[[Page 22181]]
Employment Lawyers Association, ask the Department to clarify how
section 541.603(b) would apply if deductions result from a corporate-
wide policy or the advice a manager receives from the human resources
department. We believe that final section 541.603 calls for a case-by-
case factual inquiry. Thus, for example, under final subsection
541.603(a), a corporate-wide policy permitting improper deductions is
some evidence that an employer has an actual practice of not paying
employees on a salary basis, but not sufficient evidence by itself to
cause the exemption to be lost if a manager has never used that policy
to make any actual deductions from the pay of other employees.
Moreover, in such a circumstance, the existence of a clearly
communicated policy prohibiting such improper deductions would weigh
against the conclusion that an actual practice exists.
Final subsection (c) contains language taken from proposed
subsection 541.603(a) and the existing ``window of correction'' in
current subsection 541.118(a)(6) regarding the effect of ``isolated''
or ``inadvertent'' improper deductions. Some commenters request
additional clarification regarding the meaning of these terms.
Inadvertent deductions are those taken unintentionally, for example, as
a result of a clerical or time-keeping error. See, e.g., Jones v.
Northwest Telemarketing, Inc., 2000 WL 568352, at *3 (D. Or. 2000);
Reeves v. Alliant Techsystems, Inc., 77 F. Supp. 2d 242, 251 (D.R.I.
1999). See also Furlong v. Johnson Controls World Services, Inc., 97 F.
Supp. 2d 1312, 1317 (S.D. Fla. 2000) (partial day deductions, made
pursuant to the employer's mistaken belief that the employee's absences
were covered by the Family and Medical Leave Act's statutory exemption
to the salary basis test due to the employee's representations and
actions, are considered inadvertent). Whether deductions are
``isolated'' is determined by reference to the factors set forth in
final subsection 541.603(a). Other commenters object to the proposed
``isolated or inadvertent'' language because the proposal did not
require employees to be reimbursed for the improper deductions that are
isolated or inadvertent.
The AFL-CIO, for example, states that the ``underlying purpose of
the window of correction is not simply to ensure that an employer does
not lose the FLSA exemption because of inadvertent or isolated
incidents of improper pay deductions, but rather to provide a means for
an employer who has demonstrated an objective intention to pay its
employees on a salary basis to remedy improper deductions and avoid
further liability.'' We agree with commenters who state that employees
whose salary has been improperly docked should be reimbursed, even if
the improper deductions were isolated or inadvertent. Thus, final
subsection (c) provides: ``Improper deductions that are either isolated
or inadvertent will not result in loss of the exemption for any
employees subject to such improper deductions, if the employer
reimburses the employees for such improper deductions.'' The Department
continues to adhere to current law that reimbursement does not have to
be made immediately upon the discovery that an improper deduction was
made. See, e.g., Moore v. Hannon Food Service, Inc., 317 F.3d 489, 498
(5th Cir.), cert. denied, 124 S. Ct. 76 (2003) (reimbursement made five
days before trial held sufficient because reimbursement ``may be made
at any time'').
The existing ``window of correction'' is not a model of clarity. It
has been difficult for the Department to administer, been the source of
considerable litigation, and produced divergent interpretations in the
courts of appeals. Most notably, federal courts have reached different
conclusions regarding the interpretation and application of existing
section 541.118(a)(6), ``or is made for reasons other than lack of
work.'' Compare Moore v. Hannon Food Service, Inc., 317 F.3d 489 (5th
Cir.), cert. denied, 124 S. Ct. 76 (2003), with Takacs v. Hahn
Automotive Corp., 246 F.3d 776 (6th Cir.), cert. denied, 534 U.S. 889
(2001), Whetsel v. Network Property Services, L.L.C., 246 F.3d 897 (7th
Cir. 2001), Yourman v. Giuliani, 229 F.3d 124 (2nd Cir. 2000), cert.
denied, 532 U.S. 923 (2001), and Klem v. County of Santa Clara, 208
F.3d 1085 (9th Cir. 2000).
There is no need to resolve the conflict between these cases for
purposes of the final rule because of the changes made in this
subsection (c) and the new safe harbor provision in final subsection
(d). Under final subsection (c), isolated and inadvertent improper
deductions do not result in loss of the exemption if the employer
reimburses the employee for such improper deductions. Further, as
discussed below, for other actual improper deductions, employers can
preserve the exemption by taking advantage of the safe harbor
provision. The safe harbor provision applies regardless of the reason
for the improper deduction--whether improper deductions were made for
lack of work or for reasons other than lack of work. For the reasons
discussed below, the Department believes that the new ``safe harbor''
is the best approach going forward. However, we recognize that some
cases, based on events arising before the effective date of these
revisions, will be governed by the prior version of the ``window of
correction.'' This final rule is not intended to govern those cases in
any way, or to express a view regarding the correct interpretation of
the prior version of the ``window of correction.'' Instead, we intend
only to adopt a different approach going forward for the reasons stated
herein.
Many commenters, including the National Association of
Manufacturers, the Society for Human Resource Management, the Federal
Wage Hour Consultants, the American Health Care Association and the
American Bakers Association, generally support the proposed safe harbor
provision, moved to subsection (d) in the final rule. These commenters
state that the proposal was an ``excellent common sense approach'' that
promoted proactive steps by employers to protect employees without
risking liability and resolved a conflict in the case law. Other
commenters, however, while supporting the goal of the proposed safe
harbor, believe it to be confusing and suggest modifications. The
American Corporate Counsel Association, for example, notes that the
interplay between sections 541.603(a), (b) and (c) ``is not immediately
obvious to trained professionals responsible for securing compliance.''
The U.S. Chamber of Commerce (Chamber) comments that the phrase
``repeatedly and willfully'' in the proposed provision was vague, and
the Chamber supports the construction of the ``window of correction''
in Moore v. Hannon Food Service, Inc., 317 F.3d 489 (5th Cir.), cert.
denied, 124 S. Ct. 76 (2003). The Chamber also argues that the proposal
only provides an incentive for employers to adopt policies prohibiting
improper deductions, but not to take corrective action; believes that
the requirement for a written policy was impractical; and suggests
eliminating the provision denying use of the safe harbor to employers
that make improper deductions after receiving employee complaints. The
U.S. Small Business Administration Office of Advocacy also objects to
the written policy requirement as excluding some small businesses. The
National Association of Manufacturers objects to the elimination of the
phrase ``for reasons other than lack of work'' in the existing
regulations.
Commenters such as the AFL-CIO, the National Employment Lawyers
Association, the National Employment Law Project and the Public Justice
[[Page 22182]]
Center oppose the proposed safe harbor provision, arguing that it
eviscerated the salary basis requirement by permitting an employer to
avoid overtime liability even after making numerous impermissible
deductions.
After careful consideration of the comments and case law, the
Department continues to believe that the proposed safe harbor provision
is an appropriate mechanism to encourage employers to adopt and
communicate employment policies prohibiting improper pay deductions,
while continuing to ensure that employees whose pay is reduced in
violation of the salary basis test are made whole. Thus, the final rule
retains the proposed language with several changes. In our view, this
provision achieves the goals, supported by many comments, of both
encouraging employers to adopt ``proactive management practices'' that
demonstrate the employers' intent to pay on a salary basis, and
correcting violative payroll practices. Cf. Kolstad v. American Dental
Ass'n, 527 U.S. 526, 545 (1999) (Title VII of the Civil Rights Act is
intended to promote prevention and remediation). In addition, employees
will benefit from this additional notification of their rights under
the FLSA and the complaint procedures. We intend this safe harbor
provision to apply, for example, where an employer has a clearly
communicated policy prohibiting improper deductions, but a manager
engages in an actual practice (neither isolated nor inadvertent) of
making improper deductions. In this situation, regardless of the
reasons for the deductions, the exemption would not be lost for any
employees if, after receiving and investigating an employee complaint,
the employer reimburses the employees for the improper deductions and
makes a good faith commitment to comply in the future. We believe it
furthers the purposes of the FLSA to permit the employer who has a
clearly communicated policy prohibiting improper pay deductions and a
mechanism for employee complaints, to reimburse the affected employees
for the impermissible deductions and take good faith measures to
prevent improper deductions in the future. This is generally consistent
with trends in employment law. An employer, for example, that has
promulgated a policy against sexual harassment and takes corrective
action upon receipt of a complaint of harassment may avoid liability.
See Faragher v. City of Boca Raton, 524 U.S. 775 (1998), and Burlington
Industries, Inc. v. Ellerth, 524 U.S. 742 (1998). Consistent with final
subsection 541.603(b), final subsection (c) also provides that, if an
employer fails to reimburse employees for any improper deductions or
continues to make improper deductions after receiving employee
complaints, ``the exemption is lost during the time period in which the
improper deductions were made for employees in the same job
classification working for the same managers responsible for the actual
improper deductions.''
The comments raise several additional issues. First, as previously
noted, some commenters object to the requirement that an employer have
a written policy in order to utilize the safe harbor. The U.S. Small
Business Administration Office of Advocacy, for example, notes that
small business representatives express concern that the safe harbor's
requirement for a pre-existing written policy ``may exclude some small
businesses which do not produce written compliance materials in the
ordinary course of business.'' The U.S. Chamber of Commerce similarly
heard concerns from its small business members that the requirement for
a written policy would be impractical. It suggests that ``[w]hile
employers seek to comply with the law, the safe harbor seems geared to
those already sufficiently versed in the law and is likely to be of
little effect to less sophisticated employers.'' Other commenters, such
as the American Health Care Association, the American Corporate Counsel
Association, and the National Association of Manufacturers, believe
that adopting a written policy is an essential part of the employer's
responsibility. We intend the safe harbor to be available to employers
of all sizes. Thus, although a written policy is the best evidence of
the employer's good faith efforts to comply with the Part 541
regulations, we have concluded, consistent with an employer's
obligation under Farragher and Ellerth, that a written policy is not
essential. However, the policy must have been communicated to employees
prior to the actual impermissible deduction. Thus, final subsection (d)
provides that the safe harbor is available to employers with a
``clearly communicated policy'' prohibiting improper pay deductions. To
protect against possible abuses, final subsection (d) adds the
requirement that the clearly communicated policy must include a
``complaint mechanism.'' Final subsection (d) also states that the
``clearly communicated'' standard may be met, for example, by
``providing a copy of the policy to employees at the time of hire,
publishing the policy in an employee handbook or publishing the policy
on the employer's Intranet.'' For small businesses, the ``clearly
communicated policy'' could be a statement to employees that the
employer intends to pay the employees on a salary basis and will not
make deductions from salary that are prohibited under the Fair Labor
Standards Act; such a statement would also need to include information
regarding how the employees could complain about improper deductions,
such as reporting the improper deduction to a manager or to an employee
responsible for payroll. To further assist small businesses, the
Department intends to publish a model safe harbor policy that would
comply with final subsection 541.603(d).
Second, some commenters, such as the HR Policy Association and the
National Employment Lawyers Association, support a requirement in the
subsection (d) safe harbor provision that the employer must ``promise
to comply'' in the future. Although other commenters oppose such a
requirement, we believe that this promise is inherent in adopting the
required employment policy and the duty to cease making improper
deductions after receiving employee complaints. Thus, the Department
has included as an explicit requirement for the safe harbor rule in
final subsection (d) that the employer make a good faith commitment to
comply in the future. There may be many ways that an employer could
make and evidence its ``good faith commitment'' to comply in the future
including, but not limited to: adopting or re-publishing to employees
its policy prohibiting improper pay deductions; posting a notice
including such a commitment on an employee bulletin board or employer
Intranet; providing training to managers and supervisors; reprimanding
or training the manager who has taken the improper deduction; or
establishing a telephone number for employee complaints.
Third, to avoid confusion that some commenters noted with the
``actual practice'' determination under final subsection (a), we have
changed the phrase ``repeatedly and willfully'' to ``willfully,'' and
defined ``willfully'' as continuing to make improper deductions after
receiving employee complaints. This definition of ``willfully'' is
consistent with McLaughlin v. Richland Shoe, 486 U.S. 128, 133-35
(1988) (``willfulness'' means that ``the employer either knew or showed
reckless disregard for the matter of whether its conduct was prohibited
by the statute''). Thus, as stated above, an employer with a clearly
[[Page 22183]]
communicated policy that prohibits improper pay deductions and includes
a complaint mechanism will not lose the exemption for any employee if
the employer reimburses employees for the improper deductions after
receiving employee complaints and makes a good faith commitment to
comply in the future. This rule applies, moreover, regardless of the
reasons for the improper pay deductions. The safe harbor is available
both for improper deductions made because there is no work available
and for improper deductions made for reasons other than lack of work.
If the employer fails to reimburse the employees for improper
deductions or continues to make improper deductions after receiving
employee complaints, final subsection (d) clarifies that ``the
exemption is lost during the time period in which the improper
deductions were made for employees in the same job classification
working for the same managers responsible for the actual improper
deductions.''
Fourth, the HR Policy Association, the U.S. Chamber of Commerce,
the National Association of Chain Drug Stores and others ask the
Department to allow employers a reasonable amount of time to
investigate after receiving an employee complaint to determine whether
the deductions were improper, to take action to halt any improper
deductions, and to correct any improper deductions. We have not changed
the text of the regulation in response to this suggestion because the
Department views it as self-evident that, before reimbursing the
employee or taking other corrective action, an employer will need a
reasonable amount of time to investigate an employee's complaint that
an improper deduction was made. The amount of time it will take to
complete the investigation will depend upon the particular
circumstances, but employers should begin such investigations promptly.
The mere fact that other employee complaints are received by the
employer before timely completion of the investigation should not, by
itself, defeat the safe harbor.
Finally, a number of commenters, such as the Food Marketing
Institute, ask the Department to clarify the burdens of proof. We do
not intend to modify the burdens that courts currently apply. See
Schaefer v. Indiana Michigan Power Co., 358 F.3d 394 (6th Cir. 2004)
(employer has the burden to show employee was paid on a salary basis);
Yourman v. Giuliani, 229 F.3d 124 (2nd Cir. 2000) (employee has the
burden to show actual practice of impermissible deductions), cert.
denied, 532 U.S. 923 (2001).
Section 541.604 Minimum Guarantee Plus Extras
Under proposed section 541.604, an exempt employee may receive
additional compensation beyond the minimum amount that is paid as a
guaranteed salary. For example, an employee may receive, in addition to
the guaranteed minimum paid on a salary basis, extra compensation from
commissions on sales or a percentage of the profits. An exempt employee
may also receive additional compensation for extra hours worked beyond
the regular workweek, such as half-time pay, straight time pay, or a
flat sum. Proposed section 541.604(b) provided that an exempt
employee's salary may be computed on an hourly, daily or shift basis,
if the employee is given 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 requirement is satisfied where the weekly
guarantee is ``roughly equivalent'' to the employee's actual usual
earnings. Thus, for example, the proposal stated that where an employee
is guaranteed at least $500 per week, and the employee normally works
four or five shifts per week and is paid $150 per shift, the reasonable
relationship requirement is satisfied.
The final rule does not make any substantive changes to the
proposed rule, but does make a number of clarifying changes. The
reasonable relationship requirement incorporates in the regulation Wage
and Hour's long-standing interpretation of the existing salary basis
regulation, which is set forth in the agency's Field Operations
Handbook and in opinion letters. The courts also have upheld the
reasonable relationship requirement. See, e.g., Brock v. Claridge Hotel
& Casino, 846 F.2d 180, 182-83 (3rd Cir.) (salary basis requirement not
met where employees are paid by the hour and the guarantee is ``nothing
more than an illusion''), cert. denied, 488 U.S. 925 (1988). Some
commenters, although not a significant number, object to the reasonable
relationship requirement or question the clarity of the regulatory
text, while others ask for additional specificity about the various
types of additional compensation that may be paid above and beyond the
guaranteed salary. The Department has made minor wording changes in
response to the comments to clarify this provision.
The National Association of Manufacturers (NAM) suggests that the
Department list the range of compensation options, such as cash
overtime in any increment, compensatory time off, and shift or holiday
differentials, that employers may provide in addition to the guaranteed
salary without violating the salary basis requirement. NAM gave the
specific example of an employer who allows an exempt worker to take a
day off as a reward for hours worked on a weekend outside the
employee's normal schedule. The proposed regulation provided some
examples and stated that additional compensation ``may be paid on any
basis.'' We agree that the examples described above would not violate
the salary basis test. However, we have not and could not include in
the regulations every method employers might use to provide employees
with extra compensation for work beyond their regular workweek. Thus,
we have added only one of the examples NAM suggests regarding
compensatory time off.
The National Technical Services Association states that it was
unclear whether the reasonable relationship requirement applies in all
cases to employees who receive a salary and additional compensation. We
have clarified that this requirement applies only when an employee's
actual pay is computed on an hourly, daily or shift basis. Thus, for
example, if an employee receives a guaranteed salary plus a commission
on each sale or a percentage of the employer's profits, the reasonable
relationship requirement does not apply. Such an employee's pay will
understandably vary widely from one week to the next, and the
employee's actual compensation is not computed based upon the
employee's hours, days or shifts of work.
A few commenters, including the National Association of Convenience
Stores, the Fisher & Phillips law firm and the American Council of
Engineering Companies, advocate the elimination of the reasonable
relationship test. They question whether it was appropriate for the
Department to require a reasonable relationship between the guaranteed
salary and the employee's actual usual compensation when the payments
are based on the employee's quantity of work, when the Department does
not have such a requirement for salaries plus commissions or other
similar compensation. They state that, so long as the employee also is
guaranteed compensation of not less than the minimum required amount,
it ought to be irrelevant how an employee's pay is computed. Moreover,
they state that the terms ``reasonable relationship'' and
[[Page 22184]]
``roughly equivalent'' are uncertain and will be subject to litigation.
Fisher & Phillips also states that the first sentence of proposed
section 541.604(a) is ambiguous because it suggests that the extra
compensation must somehow be paid consistent with the salary basis
requirements. The Department does not agree with the comments
suggesting the elimination of the reasonable relationship requirement.
If it were eliminated, an employer could establish a pay system that
calculated exempt employees' pay based directly upon the number of
hours they work multiplied by a set hourly rate of pay; employees could
routinely receive weekly pay of $1,500 or more and yet be guaranteed
only the minimum required $455 (thus effectively allowing the employer
to dock the employees for partial day absences). Such a pay system
would be inconsistent with the salary basis concept and the salary
guarantee would be nothing more than an illusion. We believe that the
proposed regulation provided clear guidance about the reasonable
relationship requirement. The Department has never suggested a
particular percentage requirement in prior opinion letters, and this
issue has rarely arisen in litigation over the years. The proposed rule
clarified these terms by stating that an employee who is guaranteed
compensation of ``at least $500 for any week in which the employee
performs any work, and who normally works four or five shifts each
week, may be paid $150 per shift consistent with the salary basis
requirement.'' Therefore, we have not made any changes to the proposal
in this regard. However, we have modified the introductory sentence to
clarify that the extra compensation does not have to be paid on a
salary basis.
One commenter states that the ``minimum guarantee plus extras''
concept allows too much flexibility and essentially allows an employer
to circumvent the prohibition against docking for absences due to a
lack of work. The commenter gives the example of registered nurses
whose average pay is $30 per hour, who would earn the guaranteed
minimum in two shifts. The commenter believes that the entire balance
of the workweek could be compensated as ``extra compensation.'' Thus,
the commenter expresses concern that a nurse could be paid for all
additional shifts on a straight time basis, with no overtime, and if
the hospital had a lack of work, the nurse might not receive more than
the two shifts required to earn the minimum guarantee. This commenter
views such a system as effectively converting a nurse into an hourly
employee not paid overtime, or a salaried employee whose pay was
reduced due to variations in the quantity of work performed. However,
under the final rule, if an employee is compensated on an hourly basis,
or on a shift basis, there must be a reasonable relationship between
the amount guaranteed per week and the amount the employee typically
earns per week. Thus, if a nurse whose actual compensation is
determined on a shift or hourly basis usually earns $1,200 per week,
the amount guaranteed must be roughly equivalent to $1,200; the
employer could not guarantee such an employee only the minimum salary
required by the regulation.
Another commenter states that allowing an exempt employee to be
paid based on an hourly computation is inconsistent with the general
requirement that exempt employees must be paid on a salary basis. This
comment does not take account of the fact that the employees affected
by the reasonable relationship requirement must receive a salary
guarantee that applies in any week in which they perform any work. The
tolerance for computing their actual pay on an hourly, shift or daily
basis is for computation purposes only; it does not negate the fact
that such employees must receive a salary guarantee that will be in
effect any time the employer does not provide sufficient hours or
shifts for them to reach the guarantee. We believe that the reasonable
relationship requirement, which has been a Wage and Hour Division
policy for at least 30 years (see FOH Sec. 22b03), ensures that the
salary guarantee for such employees is a meaningful guarantee rather
than a mere illusion.
Section 541.605 Fee Basis
Proposed section 541.605 simplified the fee basis provision in the
current rule, but made no substantive change. Thus, the proposed rule
provided that administrative and professional employees may be paid on
a fee basis, rather than a salary basis: ``An employee may be paid on a
`fee basis' within the meaning of these regulations if the employee is
paid an agreed sum for a single job regardless of the time required for
its completion.'' Generally, a ``fee'' is paid for a unique job.
``Payments based on the number of hours or days worked and not on the
accomplishment of a given single task are not considered payments on a
fee basis.''
The final rule does not make any changes to the proposed rule. Very
few comments were submitted on this provision. The Fisher & Phillips
law firm notes that the Sixth Circuit in Elwell v. University Hospitals
Home Care Services, 276 F.3d 832 (6th Cir. 2002), held that a
compensation plan that combines fee payments and hourly pay does not
qualify as a fee basis because it ties compensation, at least in part,
to the number of hours or days worked and not on the accomplishment of
a given single task. It asks the Department to amend the rule to permit
combining the payment of a fee with additional, non-fee-based
compensation. The Department has decided not to change the long-
standing fee basis rule because the only appellate decision that
addresses this issue accepted the ``fee-only'' requirement, and Fisher
& Phillips conceded that this is an ``arcane and rarely-used''
provision. We continue to believe that payment of a fee is best
understood to preclude payment of additional sums based on the number
of days or hours worked. Another commenter asks the Department to
revise the rule to eliminate the necessity for ``employers to track
hours on a project or assignment in order to determine the exempt
status of employees.'' However, as in the current rule, the final rule
reasonably prescribes that in determining the adequacy of a fee
payment, reference should be made to a standard workweek of 40 hours.
Thus, ``[t]o determine whether the fee payment meets the minimum amount
of salary required for exemption under these regulations, the amount
paid to the employee will be tested by determining the time worked on
the job and whether the fee payment is at a rate that would amount to
at least $455 per week if the employee worked 40 hours.''
Section 541.606 Board, Lodging or Other Facilities
Proposed section 541.606 defined the terms, ``board, lodging or
other facilities.'' The Department did not receive substantive comments
on this section, and has made no changes in the final rule.
Subpart H, Definitions and Miscellaneous Provisions
Section 541.700 Primary Duty
Proposed section 541.700 defined the term ``primary duty'' as ``the
principal, main, major or most important duty that the employee
performs.'' The proposed rule stated that a determination of an
employee's primary duty ``must be based on all the facts in a
particular case,'' and set forth four nonexclusive factors to consider:
``the relative importance of the exempt duties as compared with other
types of duties; the amount of time spent performing exempt work; the
employee's relative freedom from direct
[[Page 22185]]
supervision; and the relationship between the employee's salary and the
wages paid to other employees for the same kind of nonexempt work.''
The proposed rule also provided that exempt employees are not required
to spend over 50 percent of their time performing exempt work. However,
because the amount of time spent performing exempt work ``can be a
useful guide,'' employees who spend over 50 percent of their time
performing exempt work ``will be considered to have a primary duty of
performing exempt work.'' The section contained an example illustrating
the circumstances in which employees spending less than 50 percent of
their time performing exempt work can meet the primary duty test, and
stated that the fact an employer has ``well-defined operating policies
or procedures should not by itself defeat an employee's exempt
status.''
Section 541.700 of the final rule retains essentially the same
principles as the proposed rule, but has been reorganized and
supplemented with additional language and a second example to clarify
the ``primary duty'' concept. Section 541.700(a) now sets forth the
general principles regarding the ``primary duty'' requirement. The
basic definition of ``primary duty,'' as the ``principal, main, major
or most important duty that the employee performs,'' is unchanged.
However, the final rule reinserts language from existing section
541.304 that the words ``primary duty'' places the ``major emphasis on
the character of the employee's job as a whole.'' The final section
541.700(b) discusses in more detail the factor of the amount of time an
employee spends performing exempt work. With only minor changes from
the proposed rule, subsection (b) states that the ``amount of time
spent performing exempt work can be a useful guide in determining
whether exempt work is the primary duty of an employee. Thus, employees
who spend more than 50 percent of their time performing exempt work
will generally satisfy the primary duty requirement.'' In addition,
subsection (b) now includes language reinserted from existing section
541.103 with some editorial changes that: ``Time alone, however, is not
the sole test, and nothing in this section requires that exempt
employees spend more than 50 percent of their time performing exempt
work. Employees who do not spend more than 50 percent of their time
performing exempt duties may nonetheless meet the primary duty
requirement if the other factors support such a conclusion.'' The final
section 541.700(c) contains two examples applying the factors listed in
subsection (a). The first example is modified from the proposed rule by
deleting the proposed language ``handling customer complaints'' and
substituting the phrase ``managing the budget.'' As explained elsewhere
in this preamble, handling customer complaints may be exempt or
nonexempt work depending on the facts of a particular case. Thus,
``managing the budget'' is used as a better example of clearly exempt
work. The second, new example states: ``However, if such assistant
managers are closely supervised and earn little more than the nonexempt
employees, the assistant managers generally would not satisfy the
primary duty requirement.'' Finally, the sentence in the proposed rule
regarding operating policies or procedures has been deleted here
because it seems relevant only to the administrative exemption and is
addressed in that subpart of the final regulations.
Most of the commenters support the clarifying changes to the
definition of ``primary duty'' in section 541.700. For example, the HR
Policy Association, the U.S. Chamber of Commerce, the National
Restaurant Association, and the National Association of Manufacturers
welcome clarification of the primary duty concept, particularly with
respect to the amount of time spent performing exempt work, and found
section 541.700 simpler to apply and more reflective of the current
workplace. The National Association of Federal Wage Hour Consultants
states that: `` `Primary Duty' is currently one of the most
misunderstood sections of the regulations. Too often enforcement
personnel, the business community and its representatives confuse
`primary' with a `mechanical' percentage test, i.e., 50-plus percent.''
Some commenters object to the definition of ``primary duty'' in
section 541.700 as the ``principal, main, major or most important duty
that the employee performs.'' Commenters such as the National
Employment Lawyers Association, for example, argue that terms such as
``most important'' are vague, expand the primary duty analysis ``far
beyond its current bounds,'' and would lead to increased litigation.
This language is the first time the Department has attempted to
include a short, general statement defining the term ``primary'' in the
regulations, but it is not a change in current law. Numerous federal
courts, relying primarily on dictionary definitions, have defined the
term ``primary'' to mean ``most important,'' ``principal'' or
``chief.'' See, e.g., Mellas v. City of Puyallup, 1999 WL 841240, at *2
(9th Cir. 1999) (``most important'' duty); Dalheim v. KDFW-TV, 918 F.2d
1220, 1227 (5th Cir. 1990) (``[T]he essence of the test is to determine
the employee's chief or principal duty * * * [T]he employee's primary
duty will usually be what she does that is of principal value to the
employer''); Donovan v. Burger King Corp., 675 F.2d 516, 521 (2nd Cir.
1982) (primary duty defined as the employee's ``principal
responsibilities'' that are ``most important or critical to the
success'' of the employer); Donovan v. Burger King Corp., 672 F.2d 221,
226 (1st Cir. 1982) (primary duty defined as the ``principal'' or
``chief'' duty, rather than ``over one-half'') (internal quotation
marks omitted). Because the Department relied on these cases, the
existing regulations, and dictionary definitions to formulate the
general definition of ``primary,'' the commenters' concerns are without
merit.
The major comments expressing opposition to proposed section
541.700 view the primary duty definition to be a major departure from a
purported existing ``bright-line'' test in the current regulations
requiring exempt employees to spend more than 50 percent of their time
performing exempt work. The American Federation of Government Employees
(AFGE), for example, states that proposed section 541.700 was
``essentially, the destruction of the most crucial test in the entire
FLSA exemption area.'' The AFGE, like other commenters objecting to
this section, believes that the current primary duty test ``provides an
absolutely essential `bright line' for exemption analysis: 50% of an
employee's actual job performance must be engaged in exempt
activities.'' Abandonment of this ``bright-line test,'' such commenters
assert, will result in increased confusion and litigation. The National
Employment Lawyers Association similarly states: ``If the definition of
`primary duty' is to have meaning as a limit on the exemptions, it must
contain a time component that has more effect than being one of five
enumerated factors to consider.''
After careful consideration, the Department must reject these
objections. These comments fail to take account of the existing
regulations and federal case law. Comments objecting to section 541.700
are simply wrong in asserting that the current law defines ``primary
duty'' by a bright-line 50 percent test. The existing section 541.103
has for decades provided that ``it may be taken as a good rule of thumb
that primary duty means the major part, or over 50 percent, of the
employee's time'' but that ``[t]ime alone, however, is not the sole
test.'' Thus, section 22c02 of the
[[Page 22186]]
Wage and Hour Field Operations Handbook states that ``the 50% test is
not a hard-and-fast rule but rather a flexible rule of thumb. In many
cases, an exempt employee may spend less than 50% of his time in
managerial duties but still have management as his primary duty.''
Federal courts also recognize that the current regulations establish a
50 percent ``rule of thumb''--not a ``bright-line'' test. Federal
courts have found many employees exempt who spent less than 50 percent
of their time performing exempt work. See, e.g., Jones v. Virginia Oil
Co., 2003 WL 21699882, at *4 (4th Cir. 2003) (management found to be
the ``primary duty'' of employee who spent 75 to 80 percent of her time
on basic line-worker tasks); Murray v. Stuckey's, Inc., 939 F.2d 614,
618-20 (8th Cir. 1991) (manager met the ``primary duty'' test despite
spending 65 to 90 percent of his time in non-management duties), cert.
denied, 502 U.S. 1073 (1992); Glefke v. K.F.C. Take Home Food Co., 1993
WL 521993, at *4-5 (E.D. Mich. 1993) (employee found exempt despite
assertion that she spent less than 20 percent of time on managerial
duties because ``the percentage of time is not determinative of the
primary duty question, rather, it is the collective weight of the four
factors''); Stein v. J.C. Penney Co., 557 F. Supp. 398, 404-05 (W.D.
Tenn. 1983) (employee spending 70 to 80 percent of his time on non-
managerial work held exempt because the ``overall nature of the job''
is determinative, not ``the precise percentage of time involved in a
particular type of work'').
Adopting a strict 50-percent rule for the first time would not be
appropriate, as evidenced by the comments discussed in the Structure
and Organization section above, because of the difficulties of tracking
the amount of time spent on exempt tasks. An inflexible 50-percent rule
has the same flaws as an inflexible 20-percent rule. Such a rule would
require employers to perform a moment-by-moment examination of an
exempt employee's specific daily and weekly tasks, thus imposing
significant new monitoring requirements (and, indirectly, new
recordkeeping burdens).
Other commenters objecting to section 541.700, such as the
International Federation of Professional & Technical Engineers, assert
that section 541.700 adopts an ``Alice in Wonderland'' approach. They
assert that this section creates an ``outcome-oriented double
standard'' because it provides that employees who spend more than 50
percent of their time performing exempt work generally satisfy the
primary duty test, while employees spending less than 50 percent do not
necessarily fail the test.
But what the commenters call an ``Alice in Wonderland'' double
standard actually appears in the current Part 541 regulations. For
decades, current section 541.103 has created a presumption of exempt
status for employees crossing the 50-percent threshold while
recognizing no presumption of nonexempt status for those who do not
cross the threshold. The existing section 541.103 states:
Thus, an employee who spends over 50 percent of his time in
management would have management as his primary duty. Time alone,
however, is not the sole test, and in situations where the employee
does not spend over 50 percent of his time in managerial duties, he
might nevertheless have management as his primary duty if the other
pertinent factors support such a conclusion.
See also Auer v. Robbins, 65 F.3d 702, 712 (8th Cir. 1995) (``if an
employee spends less than 50% of his time on managerial duties, he is
not presumed to have a primary duty of nonmanagement''), aff'd on
another issue, 519 U.S. 452 (1997). The final rule retains this current
language with only minor editorial changes.
The final rule lists the same four non-exclusive factors as the
proposal for determining the primary duty of an employee: (1) The
relative importance of the exempt duties as compared with other types
of duties; (2) the amount of time spent performing exempt work; (3) the
employee's relative freedom from direct supervision; and (4) the
relationship between the employee's salary and the wages paid to other
employees for the same kind of nonexempt work. The time spent
performing exempt work has always been, and will continue to be, just
one factor for determining primary duty. Spending more than 50 percent
of the time performing exempt work has been, and will continue to be,
indicative of exempt status. Spending less than 50 percent of the time
performing exempt work has never been, and will not be, dispositive of
nonexempt status.
Several commenters request clarification as to whether the
determination of an employee's primary duty is made by looking to a
single duty or many duties. The Morgan, Lewis & Bockius law firm, for
example, suggests that the Department change ``primary duty'' to
``primary duties,'' in order to reduce the perception that any single
task, rather than the aggregate of job tasks, defines an employee's
primary duty. In contrast, the AFL-CIO asserts that the term is
properly considered in the singular.
The current law is actually somewhere in the middle of these two
viewpoints. Although ``primary duty'' is generally singular, an
employee's primary duty can encompass multiple tasks. Thus, for
example, an employee would have ``management'' as his primary duty if
he performed tasks such as preparing budgets, negotiating contracts,
planning the work, and reporting on performance. As stated in the 1949
Weiss Report at 61, the search for an employee's primary duty is a
search for the ``character of the employee's job as a whole.'' Thus,
both the current and final regulations ``call for a holistic approach
to determining an employee's primary duty,'' not ``day-by-day scrutiny
of the tasks of managerial or administrative employees.'' Counts v.
South Carolina Electric & Gas Co., 317 F.3d 453, 456 (4th Cir. 2003)
(``Nothing in the FLSA compels any particular time frame for
determining an employee's primary duty''). To clarify this ``holistic
approach,'' the Department has reinserted in subsection (a) the
language from current 541.304 that the determination of an employee's
primary duty must be based on all the facts in a particular case ``with
the major emphasis on the character of the employee's job as a whole.''
The Department considered but has not incorporated in the final
rule other various proposals to add, delete or modify section 541.700.
For example, because the Department does not intend to eliminate the
amount of time spent on exempt tasks as a factor for determining
primary duty, we reject the suggestion of the Morgan, Lewis & Bockius
law firm and others to remove the language stating that time is a
``useful guide.'' The Smith Currie law firm proposes adding ``in the
discretion of the employer'' to the definition of primary duty.
However, the primary duty determination is based on all the facts and
circumstances of each case, not upon the ``discretion'' of the
employer. Similarly, the National Association of Chain Drug Stores
(NACDS) proposes allowing employers the opportunity, as they have under
the Americans with Disabilities Act, to create a ``rebuttable
presumption'' regarding an employee's primary duty by identifying the
principal duties of the employee in a job description. NACDS suggests
adding ``as determined or expressed by the employer in any agreement,
job status form, job offer, job description or other document created
by the employer in good faith and acknowledged by the employee verbally
[[Page 22187]]
or in writing.'' The Department recognizes that such documents or
agreements may be of some evidentiary value. However, the work actually
performed by an employee--not any description or agreement--controls
the determination of the employee's primary duty. See 1949 Weiss Report
at 86 (rejecting proposal to permit employer and employee to reach
agreement as to whether exemptions apply); 1940 Stein Report at 25 (``a
title alone is of little or no assistance in determining the true
importance of an employee to the employer. Titles can be had cheaply
and are of no determinative value''). The Food Marketing Institute
comments that the definition should explicitly state that employees,
such as managers in retail establishments, ``should not be subject to
arbitrary calculations of the time they spend performing manual labor.
* * *'' As set forth in the cases cited above, and in the examples in
the final rule, the Department has made clear that managers may perform
exempt work less than 50 percent of the time and nevertheless have a
primary duty of management, depending upon the collective weight of the
factors. Final section 541.106 also provides that an employee's
managerial duties can be performed concurrently with nonexempt tasks.
No further clarification of this point is necessary. Finally, the
Fisher & Phillips law firm seeks modification of the wage comparison
factor to reflect that exempt employees are frequently eligible for
other forms of compensation not widely available to nonexempt
employees. Because final section 541.700(a) already provides that all
the facts and circumstances of each case are relevant, such facts may
be taken into account in determining primary duty without further
changes in this section.
Section 541.701 Customarily and Regularly
Proposed section 541.701 defined the phrase ``customarily and
regularly'' to mean ``a frequency that must be greater than occasional
but which, of course, may be less than constant. Tasks or work
performed `customarily and regularly' includes work normally and
recurrently performed every workweek; it does not include isolated or
one-time tasks.''
The final section 541.701 retains the proposed language without
change.
The Department received a few comments on section 541.701 that the
``every workweek'' requirement in section 541.701 does not reflect that
some exempt tasks may not be performed every week or only once each
week. The Grocery Manufacturers of America (GMA), for example, states
that this language is ambiguous and does not take into account that
certain activities, such as lengthy preparation and presentation time
that often goes into significant sales efforts, may not take place
``recurrently'' within a given week. GMA proposes that the term
``customarily and regularly'' should mean ``duties performed at least
once in each workweek.'' Similarly, the McInroy & Rigby law firm and
the Miller Canfield law firm seek clarification of the ``workweek-by-
workweek'' timeframe and its application in determining exempt
activities.
The Department does not believe any changes to section 541.701 are
necessary. A similar definition of the term ``customarily and
regularly'' has appeared for decades in section 541.107(b) of the
existing regulations, and case law does not indicate significant
difficulties with applying the definition. The term ``customarily and
regularly'' requires a case-by-case determination, based on all the
facts and circumstances, over a time period of sufficient duration to
exclude anomalies. See, e.g., Wage and Hour Opinion of August 20, 1992,
1992 WL 845098 (analysis should be ``over a significant time span,
especially in smaller organizations * * * to eliminate the possibility
of significant cycles in work requirements and to support that there
are sufficient exempt duties on a week-in-week-out basis to support the
exemption claimed''); Wage and Hour Field Operations Handbook, section
22c00(d) (``The determination as to whether an employee customarily and
regularly supervises other employees * * * depends on all the facts and
circumstances''). Nothing in this section requires that, to meet the
definition of ``customarily and regularly,'' a task be performed more
than once a week or that a task be performed each and every workweek.
Section 541.702 Exempt and Nonexempt Work
Proposed section 541.702 stated, ``The term `exempt work' means all
work described in Sec. Sec. 541.100, 541.101, 541.102, 541.200,
541.206, 541.300, 541.301, 541.302, 541.303, 541.304, 541.400 and
541.500, and the activities directly and closely related to such work.
All other work is considered `nonexempt.' '' The final rule deletes the
inadvertent reference to a non-existent section 541.206 and the
reference to the now-deleted ``sole charge'' exemption in proposed
section 541.102. The Department received no significant comments on
this section, and thus has made no other changes.
Section 541.703 Directly and Closely Related
Proposed section 541.703 defined the phrase ``directly and closely
related'' to mean ``tasks that are related to exempt duties and that
contribute to or facilitate performance of exempt work.'' Subsection
(a) further explains that ``directly and closely related'' work ``may
include physical tasks and menial tasks that arise out of exempt
duties, and the routine work without which the exempt employee's more
important work cannot be performed properly. Work `directly and closely
related' to the performance of exempt duties may also include
recordkeeping; monitoring and adjusting machinery; taking notes; using
the computer to create documents or presentations; opening the mail for
the purpose of reading it and making decisions; and using a photocopier
or fax machine. Work is not `directly and closely related' if the work
is remotely related or completely unrelated to exempt duties.''
Proposed section 541.703(b) set forth 10 examples to illustrate the
type of work that is and is not normally considered as directly and
closely related to exempt work.
The final section 541.703 retains the proposed language without
change.
The AFL-CIO comments that under the proposed section, ``it is hard
to imagine any type of nonexempt work failing to qualify as `directly
and closely related.' ''
The Department notes that the explanation of the phrase ``directly
and closely related'' in final section 541.703(a) is taken from the
current sections 541.108 and 541.202, including the specific language
concerning what is not ``directly and closely related'' to which the
AFL-CIO objected. See current 29 CFR 541.202(d) (``These `directly and
closely related' duties are distinguishable from * * * those which are
remotely related or completely unrelated to the more important tasks'')
(emphasis added). Similarly, the notion that ``directly and closely
related'' work contributes to or facilitates the performance of exempt
work is a long-standing and common sense concept reflected in the
current rule. See current 29 CFR 541.202(c). The Department did not
intend any substantive change to the meaning of the phrase ``directly
and closely related'' and intends that the term be interpreted in
accordance with the long-standing meaning under the current rule. See
Harrison v. Preston Trucking Co., 201 F. Supp. 654, 658-59 (D. Md.
1962) (``[T]he test is not whether the work is essential to the proper
[[Page 22188]]
performance of the more important work, but whether it is related'').
The International Association of Fire Fighters comments, without
offering any specific suggestions, that the Department should add
examples to the section concerning what is not ``directly and closely
related'' to exempt work. Other commenters make specific suggestions
for additional tasks and examples including, among others, computer
employees performing software debugging and other tasks (Contract
Services Association), therapists or counselors participating in
outdoor activities with patients as part of a treatment program (FLSA
Reform Coalition) and financial consultants engaging in activities
related to acquiring customers (Securities Industry Association).
The Department has retained the proposed rule without any
additions. The question of whether work is ``directly and closely
related'' to the performance of exempt work is ``one of fact depending
upon the particular situation involved.'' See 1949 Weiss Report at 30.
The final rule provides 10 representative examples to assist in
illustrating the ``directly and closely related'' concept. Each of the
examples is taken directly from the current rule. In the interest of
streamlining the regulations, the proposed and final rule consolidated
the most salient examples. Given the fact-intensive nature of the
inquiry, the Department believes that, similar to the approach taken in
the current rule, providing guiding principles and these specific
illustrative examples best enables a determination of what is and is
not ``directly and closely related.'' The Department believes final
section 541.703 is straightforward and amply offers guiding principles
that readily can be applied.
Section 541.704 Use of Manuals
Subpart H of the final regulations moves regulatory language on the
use of manuals from proposed section 541.204, regarding the
administrative exemption, to a new section 541.704 because the section
is equally applicable to the other section 13(a)(1) exemptions. Final
section 541.704 makes a number of minor editorial changes to the
proposed language, none of which are intended as substantive. Final
section 541.704 states:
The use of manuals, guidelines or other established procedures
containing or relating to highly technical, scientific, legal,
financial or other similarly complex matters that can be understood
or interpreted only by those with advanced or specialized knowledge
or skills does not preclude exemption under section 13(a)(1) of the
Act or the regulations in this part. Such manuals and procedures
provide guidance in addressing difficult or novel circumstances and
thus use of such reference material would not affect an employee's
exempt status. The section 13(a)(1) exemptions are not available,
however, for employees who simply apply well-established techniques
or procedures described in manuals or other sources within closely
prescribed limits to determine the correct response to an inquiry or
set of circumstances.
Some commenters object to the language in proposed subsections
541.204(b) and (c) regarding the use of manuals, although most
commenters are supportive of the proposed language. One commenter
suggests that the Department eliminate the phrase ``very difficult or
novel circumstances'' so as not to exclude from the exemptions a highly
skilled employee who must rely on or comply with manuals in other
routine circumstances. Other commenters suggest that the regulations
should distinguish manuals used to apply prescribed skills and
knowledge in recurring and routine situations from manuals that simply
set forth the bounds within which discretion and independent judgment
are to be exercised with substantial leeway. These commenters state
that the regulations should reinforce the idea that sharply-constrained
authority to make day-to-day decisions within a narrow range of options
will not satisfy the tests for exemption.
The Department has retained the provision on manuals in final
section 541.704, with only minor wording changes. The proposal
appropriately differentiated between manuals that dictate how an
employee must apply prescribed skills in recurring and routine
situations, and manuals that provide guidance involving highly complex
information pertinent to difficult or novel circumstances. The
provision adopted by the Department is consistent with existing case
law. The employee in McAllister v. Transamerica Occidental Life
Insurance Co., 325 F.3d 997 (8th Cir. 2003), for example, was a claims
coordinator responsible for handling the most complex death and
disability insurance claims independently, including the complex and
large dollar cases involving contestable claims, fraud and
disappearances. The employee oversaw the investigation of claims,
reviewed investigation files and determined if further investigation
was necessary. The court found the employee to be an exempt
administrator even though she relied upon a claims manual. The court
quoted a statement made in the introduction to the manual itself,
stating that the manual could not be written in sufficient detail to
cover all facets of claims handling and that a large percentage of the
work could not be guided by the manual. The court held the employee was
exempt because the manual gave her authority to decide whether to
pursue a fraudulent claim investigation and she had significant
settlement authority. She did not merely apply specific, well-
established guidance or constraining standards. See also Haywood v.
North American Van Lines, Inc., 121 F.3d 1066, 1073 (7th Cir. 1997)
(employee administratively exempt even though she followed established
procedures because the guidelines gave employees latitude in
negotiating a settlement, including advising employees to use ``common
sense''); Dymond v. United States Postal Service, 670 F.2d 93 (8th Cir.
1982) (finding postal inspectors exempt even though some of their
duties required them to follow a field manual that contained detailed
procedures and standards). Compare Brock v. National Health Corp., 667
F. Supp. 557, 566 (M.D. Tenn. 1987) (``staff accountants'' utilizing
two major reference manuals not exempt as administrative employees
where they simply ``tabulated numbers by merely following the
prescribed steps set out in a manual''). See also Ale v. Tennessee
Valley Authority, 269 F.3d 680, 686 (6th Cir. 2001) (training officer
not exempt administrative employee where employee simply applied
knowledge in following prescribed procedures and determining whether
specified standards were met under Administrative Orders); Cooke v.
General Dynamics Corp., 993 F. Supp. 56, 65 (D. Conn. 1997) (citing
section 541.207(c)(2)'s preclusion of administrative exemption to ``an
inspector who must follow `well-established techniques and procedures
which may have been cataloged and described in manuals or other
sources' '').
Final section 541.704 is intended to avoid the absurd result, noted
by several commenters, reached in Hashop v. Rockwell Space Operations
Co., 867 F. Supp. 1287 (S.D. Tex. 1994). The plaintiffs in the Rockwell
Space Operations case were instructors who trained ``Space Shuttle
ground control personnel during simulated missions.'' Id. at 1291. The
plaintiffs were responsible for assisting in development of the script
for the simulated missions, running the simulation, and debriefing
Mission Control on whether the trainees handled simulated anomalies
correctly. Id. at 1292. The plaintiffs had college degrees in
electrical engineering,
[[Page 22189]]
mathematics or physics. Id. at 1296. Nonetheless, the court found the
plaintiffs were not exempt professionals because the appropriate
responses to simulated Space Shuttle malfunctions were contained in a
manual. Id. at 1298. In the Department's view, the reliance by an
engineer or physicist on a manual outlining appropriate responses to a
Space Shuttle emergency (or a problem in a nuclear reactor, as another
example) should not transform a learned professional scientist into a
nonexempt technician.
The Department believes that the discussion of company manuals in
the final rule is consistent with the weight of existing case law. The
Rockwell Space Operations case appears to be an anomaly which has not
been followed by other courts. In addition, final section 541.704
properly distinguishes between manuals that provide specific directions
on routine and recurring circumstances and those that provide general
guidance on addressing open-ended or novel circumstances.
Section 541.705 Trainees (Proposed Sec. 541.704)
Proposed section 541.704 stated that the exemptions are not
available to ``employees training for employment in an executive,
administrative, professional, outside sales or computer employee
capacity who are not actually performing the duties of an executive,
administrative, professional, outside sales or computer employee.''
Proposed section 541.704 has been renumbered to 541.705 in the
final regulation, but the proposed language is adopted without change.
The U.S. Chamber of Commerce (Chamber) suggests that this section
should be modified to allow employees in bona fide executive training
programs to qualify under the exemptions. The Chamber argues that the
``principal'' duty of those in such training programs is not the varied
nonexempt tasks they may perform, but rather, it is receiving the
skills and knowledge necessary to assume managerial and/or executive
roles. Furthermore, the Chamber states, the ``primary duty'' of such
trainees is substantially different from nonexempt employees.
The Department has no statutory authority to provide exemptions for
management trainees who do not perform exempt duties and therefore must
reject the Chamber's request to expand proposed section 541.704. See
Wage and Hour Opinion of August 26, 1976, 1976 WL 41748; 1949 Weiss
Report at 47-48. Employees, including trainees, who do not ``actually
perform'' the duties of an exempt executive, administrative,
professional, outside sales or computer employee cannot be considered
exempt. See Wage and Hour Opinion of March 7, 1994, 1994 WL 1004555;
Dole v. Papa Gino's of America, Inc., 712 F. Supp. 1038, 1042 (D. Mass.
1989) (associate managers performing ``crew member'' work to ``learn by
doing'' were nonexempt trainees).
Other comments request additional clarification of the definition
of ``trainee,'' ask whether trainees who would become exempt upon
completion of their training should be exempt while in training, and
ask whether ``interns'' are trainees.
The Department does not believe further clarification is necessary
because section 541.705 is relatively straightforward. The inquiry in
all cases simply involves determining whether or not the employee is
``actually performing the duties of'' an executive, administrative,
professional, outside sales or computer employee. The Department
recognizes that there may be formalized, bona fide executive or
management training programs that involve employees ``actually
performing'' exempt work, but other training programs can involve
performance of significant nonexempt work. For example, an employee in
a management training program of a restaurant who spends the first
month of the program washing dishes and the second month of the program
cooking does not have a primary duty of management. Accordingly, it is
not appropriate to adopt a blanket exemption for all ``trainees.''
Section 541.706 Emergencies (Proposed Sec. 541.705)
Proposed section 541.705(a) provided that an ``exempt employee will
not lose the exemption by performing work of a normally nonexempt
nature because of the existence of an emergency. Thus, when emergencies
arise that threaten the safety of employees, a cessation of operations
or serious damage to the employer's property, any work performed in an
effort to prevent such results is considered exempt work.'' Proposed
section 541.705(b) stated that an `` `emergency' does not include
occurrences that are not beyond control or for which the employer can
reasonably provide in the normal course of business. Emergencies
generally occur only rarely, and are events that the employer cannot
reasonably anticipate.'' Proposed section 541.705(c) set forth four
illustrative examples to assist in distinguishing exempt emergency work
from routine work that would not be considered exempt.
Proposed section 541.705 has been renumbered as 541.706, but the
final rule retains the proposed language without change.
Comments from the Printing Industries of America and the Kullman
Firm ask that the Department specifically include labor strikes and
lockouts in this provision. Other comments, including those from the
Miller Canfield law firm, suggest additional examples involving
emergencies that endanger the public safety.
In light of the clear guiding principles set forth in proposed
section 541.705, the Department sees no reason to change the language
of the final provision. The Department agrees with Miller Canfield that
emergencies arising out of an employer's business and affecting the
public health or welfare can qualify as emergencies under this section,
applying the same standards as emergencies that affect the safety of
employees or customers. The main purpose of this provision is to
provide a measure of common sense and flexibility in the regulations to
allow for real emergencies ``of the kind for which no provision can
practicably be made by the employer in advance of their occurrence.''
See 1949 Weiss Report at 42. The Department also recognizes that,
depending upon the circumstances, a labor strike may qualify as an
emergency for some short time period, although all the facts must be
considered in order to determine the length of the ``emergency''
situation. See Dunlop v. Western Union Telegraph Co., 22 Wage & Hour
Cas. (BNA) 859 (D.N.J. 1976).
The list of situations in which exempt employees could perform
nonexempt work without loss of the exemption is not meant to be
exhaustive. Other such instances of exempt employees performing
nonexempt work under unanticipated circumstances without loss of the
exemption could arise on a case-by-case basis. In addition, it
continues to be the Department's position that nonexempt work cannot
routinely be assigned to exempt employees solely for the convenience of
an employer without calling into question the application of the
exemption to that employee.
Section 541.707 Occasional Tasks (Proposed Sec. 541.706)
Proposed section 541.706 provided that occasional, infrequently
recurring tasks, ``that cannot practicably be performed by nonexempt
employees, but are the means for an exempt employee to properly carry
out exempt functions and responsibilities, are
[[Page 22190]]
considered exempt work.'' To determine whether such work is exempt
work, proposed section 541.706 set forth the following factors:
``whether the same work is performed by any of the executive's
subordinates; practicability of delegating the work to a nonexempt
employee; whether the executive performs the task frequently or
occasionally; and existence of an industry practice for the executive
to perform the task.''
Proposed section 541.706 has been renumbered to 541.707. Since this
section is equally applicable to all the exemptions, the final section
541.707 deletes the inadvertent references to ``executives'' throughout
and instead refers to ``exempt employees.''
Various commenters state that the regulations should take into
account that exempt employees may choose, consistent with the nature of
the employer's establishment and its operational requirements at a
particular time, to perform nonexempt work necessary to accomplish the
employee's primary duty. The Department believes that this issue has
been adequately addressed in final section 541.106 (concurrent duties),
and no changes are necessary here.
Section 541.708 Combination Exemptions (Proposed Sec. 541.707)
Proposed section 541.707 provided that employees ``who perform a
combination of exempt duties as set forth in these regulations for
executive, administrative, professional, outside sales and computer
employees may qualify for exemption. Thus, for example, an employee who
works 40 percent of the time performing exempt administrative duties
and another 40 percent of the time performing exempt executive duties
may qualify for exemption. In other words, work that is exempt under
one section of this part will not defeat the exemption under any other
section.''
Proposed section 541.707 has been renumbered as section 541.708.
The final rule modifies the second sentence of section 541.708 to read:
``Thus, for example, an employee whose primary duty involves a
combination of exempt administrative and exempt executive work may
qualify for exemption.''
The final rule retains the allowance for ``tacking,'' or combining
exempt work which may fall under different subparts of Part 541, while
responding to comments raising concerns about the interplay of
``primary duty'' with the example set forth in proposed section
541.707. The FLSA Reform Coalition and the American Insurance
Association, for example, point out that the example in the proposed
section suggests that an employee who works 40 percent of the time
performing exempt administrative duties would be nonexempt absent the
additional time spent on executive duties. The Department agrees with
these concerns, and also agrees that such a suggestion in the proposal
is contrary to the definition of ``primary duty'' in section 541.700.
Under section 541.700, such an employee would be an exempt
administrator, even without the executive duties, if his or her
administrative tasks constituted the employee's primary duty,
regardless of the amount of time spent on them. Accordingly, the
Department has changed the second sentence of the proposed section as
follows, to clarify the intent and interplay of final section 541.708
with the primary duty concept of section 541.700: ``Thus, for example,
an employee whose primary duty involves a combination of exempt
administrative and exempt executive work may qualify for exemption.''
The Department's clarification responds to similar comments by the HR
Policy Association, the Society for Human Resource Management, the Food
Marketing Institute, the National Council of Agricultural Employers and
the Public Sector FLSA Coalition.
Section 541.709 Motion Picture Producing Industry (Proposed Sec.
541.708)
Proposed section 541.708 provided an exception to the salary basis
requirements for otherwise exempt executive, administrative, and
professional employees in the motion picture producing industry.
Generally, so long as such employees are earning a base rate of at
least $650 a week based on a six-day workweek, employers may classify
them as exempt even though they work partial workweeks and are paid a
daily rate, rather than a weekly salary.
Proposed section 541.708 has been renumbered as section 541.709.
The final section 541.709 retains the proposed language, except for a
single clarifying correction in grammar (changing ``under subparts B, C
and D of this part'' to ``under subparts B, C or D of this part''). The
final rule also adjusts the $650 figure to $695, consistent with the
increased minimum salary level for exemption.
The Department received only a few comments on this section.
However, the Akin, Gump, Strauss, Hauer & Feld law firm argues, on
behalf of a number of entertainment technology companies, that the
rationale for section 541.709 is the project-based nature of the motion
picture industry, one in which otherwise exempt employees are hired for
finite periods of time and often work partial workweeks. Since the same
``peculiar employment circumstances'' existing in the motion picture
producing industry also exist throughout much of the entertainment
industry, the firm states, section 541.709 should be expanded to cover
the ``entertainment industry'' generally. The commenter suggests that
the definition of the entertainment industry in the Employee Retirement
Income Security Act (ERISA) could be adopted for purposes of section
541.709.
In adopting the exception for the motion picture producing industry
in 1953, the Department agreed with the Association of Motion Picture
Producers that given the ``peculiar employment conditions'' of the
industry, the producers are not able to economically employ needed
specialists on a constant basis, but must frequently employ such
employees for partial workweeks. Accordingly, the industry developed
over the years ``methods of compensation which reflect this pattern of
operations.'' See 18 FR 2881 (May 19, 1953); 18 FR 3930 (July 7, 1953).
Without further information and consideration of particular
employment circumstances, the Department cannot extend the exception to
the entire entertainment industry as suggested. The Department is not
unaware, however, that technological advances in the past half century
make it more likely that, on a case-by-case basis, the rationale
underlying section 541.709 might be applied more broadly depending upon
the specific facts. In that regard, the Department issued an opinion
letter in 1963 extending the exception to employees of producers of
television films and videotapes, noting, ``the production of T.V. films
and videotapes encompasses the same employment practices and conditions
which characterize the production of motion pictures.'' Wage and Hour
Opinion of October 29, 1963; see also Wage and Hour Field Operations
Handbook, section 22b09 (adopting this extension to television and
videotapes).
An additional commenter argues for the elimination of the
``exemption'' for production assistants and post-production assistants.
This commenter misunderstands that section 541.709 relates only to an
exception from the salary basis requirements for otherwise exempt
employees in the industry.
Section 541.710 Employees of Public Agencies (Proposed Sec. 541.709)
Proposed section 541.709(a) provided that an ``employee of a public
agency
[[Page 22191]]
who otherwise meets the salary basis requirements of Sec. 541.602
shall not be disqualified from exemption under Sec. Sec. 541.100,
541.200, 541.300 or 541.400 on the basis that such employee is paid
according to a pay system established by statute, ordinance or
regulation, or by a policy or practice established pursuant to
principles of public accountability, under which the employee accrues
personal leave and sick leave and which requires the public agency
employee's pay to be reduced or such employee to be placed on leave
without pay for absences for personal reasons or because of illness or
injury of less than one work-day when accrued leave is not used by an
employee because: (1) Permission for its use has not been sought or has
been sought and denied; (2) Accrued leave has been exhausted; or (3)
The employee chooses to use leave without pay.'' Proposed section
541.709(b) stated that ``deductions from the pay of an employee of a
public agency for absences due to a budget-required furlough shall not
disqualify the employee from being paid on a salary basis except in the
workweek in which the furlough occurs and for which the employee's pay
is accordingly reduced.''
Proposed section 541.709 has been renumbered as final section
541.710, and retains the proposed language without change.
The language in section 541.710 is from the current section
541.5(d), and the reasons for its promulgation were explained in 57 FR
37677 (August 19, 1992) and continue to be valid. The Department
received comments from public employers and employees during the
current rulemaking addressing many of the provisions of the entire
proposal, including the salary basis of payment. None of their
comments, however, addressed the constitutional or statutory public
accountability requirements in the funding of state and local
governments that was the original rationale for this particular
provision. The Department continues to believe this is a necessary
exception to the salary basis requirement for public employees, and it
is included in the final regulations.
V. Paperwork Reduction Act
This rule contains no new information collection requirements
subject to review and approval by the Office of Management and Budget
under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501, et seq.).
The information collection requirements for employers who claim
exemption under 29 CFR Part 541 are contained in the general FLSA
recordkeeping requirements codified at 29 CFR Part 516, which were
approved by the Office of Management and Budget under OMB Control
number 1215-0017. See 29 CFR 516.0 and 516.3.
VI. Executive Order 12866 and the Small Business Regulatory Enforcement
Fairness Act
This rule has been drafted and reviewed in accordance with
Executive Order 12866, section 1(b), Principles of Regulation. The
Department has determined that this rule is an ``economically
significant'' regulatory action under section 3(f)(1) of Executive
Order 12866. Based on the analysis presented below, the Department has
determined that the final rule will have an annual effect on the
economy of $100 million or more. For similar reasons, the Department
has concluded that this rule also is a major rule under the Small
Business Regulatory Enforcement Fairness Act of 1996 (5 U.S.C. 801 et
seq.). As a result, the Department has prepared a Regulatory Impact
Analysis (RIA) in connection with this rule as required under Section
6(a)(3) of the Order and the Office of Management and Budget has
reviewed the rule. The RIA in its entirety is presented below.
Regulatory Impact Analysis
Chapter 1: Executive Summary
The final rule will restore overtime protection for lower-wage
workers, strengthen overtime protection for middle-income workers
including first responders, and reduce costly and lengthy litigation.
Both workers and employers will benefit from having clearer rules that
are easier to understand and enforce. More workers will know their
rights and if they are being paid correctly, more employers will
understand exactly what their obligations are for paying overtime, and
clearer more up-to-date rules will help the Wage and Hour Division more
vigorously enforce the law, ensuring that workers are being paid fairly
and accurately.
Specifically:
Raising the salary level test to $455 will
strengthen overtime protection for more than 6.7 million salaried
workers who earn $155 or more and less than $455 per week regardless of
their duties or exempt status.
There are 5.4 million currently nonexempt
salaried workers whose overtime protection will be strengthened because
their protection, which is based on the duties tests under the current
regulation, will be automatic under the final rule. This includes 2.6
million nonexempt salaried white collar employees who are at particular
risk of being misclassified.
There are 1.3 million currently exempt white
collar salaried workers who will gain overtime protection.
The final rule is as protective as the current
regulation for the 57.0 million paid hourly and salaried workers who
earn between $23,660 and $100,000 per year.
An estimated 107,000 workers who earn $100,000
or more per year could lose their overtime protection from the new
highly compensated test.
The total first-year implementation costs to
employers are estimated to be $738.5 million, of which $627.1 is
related to reviewing the regulation and revising overtime policies and
$111.4 million is related to conducting job reviews.
Transfers from employers to employees, in the
form of greater overtime pay or higher base salaries, are estimated to
be $375 million per year. Therefore, the total cost to employers is
estimated to be $1.1 billion in year-one and $375 million per year
thereafter.
Updating and clarifying the rule will reduce
Part 541 violations and are likely to save businesses at least $252.2
million per year.
There is not likely to be a substantial impact
on small businesses or state and local governments.
Due to data limitations, a variety of benefits from the final rule
can only be discussed qualitatively. For example:
It will be more difficult to exempt workers from
overtime as executive employees.
Raising the salary level test to $455 per week
will strengthen overtime protection for 2.8 million salaried workers in
blue-collar occupations, because their protection, which is based on
the duties tests under the current regulation, will be automatic under
the new rules. The Department concluded that most of these workers are
nonexempt under the current regulation, however, making their nonexempt
status certain will unambiguously increase their overtime protection.
Updating and clarifying the rule will reduce the
human resource and legal costs for classifying workers (particularly
for small businesses), and reduced litigation could improve job
opportunities.
Updating the rule is an action forcing event and
a catalyst for compliance. Employers who may not have undertaken an
audit of the classification of their workforce will be more likely to
do so after the promulgation of the final rule, resulting
[[Page 22192]]
in greater levels of compliance with the law.
Chapter 2: Summary of the Updates to Part 541 That Affect the Economic
Analysis
The first step in analyzing the costs and benefits associated with
this rulemaking is to compare the existing Part 541 regulations with
the final rule and determine the likely impact it will have on the
exempt or nonexempt status of workers. After analyzing the impact of
the salary level increase, updating the duties tests, and the highly
compensated test, the Department reached the following conclusions:
Employees earning less than $155 per week will
not be affected.
Increasing the salary level test will strengthen
overtime protection for salaried workers who earn $155 or more and less
than $455 per week regardless of their duties or current exempt status.
Hourly workers in this income range will continue to be guaranteed
overtime protection.
Exempt employees earning less than $455 per week
will gain overtime protection, thus resulting in additional payroll
costs to employers.
The final rule is as protective as the current
regulation for workers who earn between $23,660 and $100,000 per year.
On the whole, employees will gain overtime protection because some
revisions are more protective than the existing short duties tests.
However, this number is too small to estimate quantitatively.
An estimated 107,000 employees earning $100,000
per year or more could lose overtime protection under the highly
compensated test.
The final rule is more protective for police
officers, fire fighters, paramedics, emergency medical technicians, and
other first responders, and the highly compensated test does not apply
to those who are not performing office or non-manual duties.
The Part 541 exemptions also do not apply to
manual laborers or other non-management blue-collar workers such as
carpenters, electricians, mechanics, plumbers, iron workers, craftsmen,
operating engineers, longshoremen, construction workers and laborers.
2.1 The Impact of Streamlining the Duties Tests and Raising the Salary
Level Test
Under the existing regulations, the minimum salary level for
exemption is only $155 per week ($8,060 annually). Employees earning at
least $155 per week and less than $250 per week are tested for
exemption under the existing ``long'' duties tests. Employees earning
at least $250 per week ($13,000 annually) are considered ``higher
salaried'' employees under the existing regulations, and are tested for
exemption under the ``short'' duties tests. The final rule increases
the minimum salary level for exemption to $455 per week, a $300 per
week increase.
As discussed in the preamble, the Department disagrees with the
commenters who argue that the Department's proposal to move away from
the ``long'' and ``short'' duties test structure of the existing
regulations will result in employees losing overtime protection. This
assertion fails to account for the impact of the increased minimum
salary level in the final rule. The final rule guarantees overtime
protection for all workers earning less than $455 per week ($23,660
annually), the new minimum salary level for exemption. Thus, all
employees earning at least $155 per week and less than $250 per week--
the workers currently tested for exemption under the ``long'' duties
tests--will be guaranteed overtime protection, regardless of their job
duties, under the final regulations. Overtime protection is also
guaranteed under the final rule for employees earning at least $250 per
week and less than $455 per week who are currently tested for exemption
under the existing ``short'' duties tests.
Comparisons between the existing ``long'' duties tests and the
standard tests in the final regulation to describe the impacts on
workers are thus misleading and inappropriate. The ``long'' duties
tests, under which some employees are exempt and others nonexempt, have
been replaced in the final rule by guaranteed overtime protection.
Accordingly, the Department concludes that no worker who earns less
than $455 per week will lose their overtime protection under the final
regulations. Most employees earning less than $455 per week ($23,660
annually) who are exempt under the existing regulations will be
entitled to overtime pay under the final regulations (there are some
workers, such as teachers, doctors, lawyers, and clergy, who are
statutorily exempt or whose exempt status is not affected by the
increased salary requirement in the final rule).
The additional overtime protections for employees currently earning
less than $455 per week and tested for exemption under the ``long'' and
``short'' duties tests are illustrated in Table 2-1:
Table 2-1.--Comparison of Salary Levels
------------------------------------------------------------------------
Existing
Earnings regulations Final regulations
------------------------------------------------------------------------
Less than $155/week............. Guaranteed Guaranteed
Overtime. Overtime.
$155 to $249.99/week............ Long Duties Test.. Guaranteed
Overtime.
$250 to $454.99/week............ Short Duties Test. Guaranteed
Overtime.
$455/week to $100,000/year...... Short Duties Test. Standard Duties
Test.
$100,000/year or more........... Short Duties Test. Highly Compensated
Test.
------------------------------------------------------------------------
In the sections that follow, the Department presents its assessment
of the impact the standard tests will have on the exempt status of
workers compared to the current short duties tests. In several cases,
the Department determined that the impact of the final rule will be too
small to assess quantitatively because of the methodology used to
estimate the number of exempt workers (presented below in Chapter 3).
The methodology used to estimate the number of currently exempt
workers is based upon the broad WHD exemption probability categories
presented in Table 3-2 that were designed to produce national estimates
of the number of exempt and nonexempt workers. The WHD exemption
probability categories were not designed to estimate the number of
exempt workers for each Part 541 exemption (executive, administrative,
or professional) because there is significant overlap in the exemptions
with some workers in a number of occupations being potentially exempt
under more than one duties test. Moreover, some occupations include
both supervisory and production workers. Given the lack of data on the
duties being performed by specific workers in the Current Population
Survey, the Department concludes that it is impossible to
quantitatively estimate the number of exempt workers
[[Page 22193]]
resulting from the deminimis differences in the standard duties tests
compared to the current short duties tests (see the discussions
presented below).
2.2 Impact of the Final Duties Test for Executive Employees
Although some commenters asserted the proposed duties test for
executive employees would reduce overtime protection for workers, as
discussed in the preamble above and shown in Table 2-2, the final
standard duties test for executives, like the proposed duties test, is
stronger than the current short duties test because it incorporates an
additional requirement taken from the current long duties test: An
exempt executive must have authority to hire or fire other employees,
or the exempt executive's suggestions and recommendations as to the
hiring, firing, advancement, promotion or any other change of status of
other employees must be given particular weight. The final rule also
returns to the language in the current rule ``whose primary duty'' is
management, instead of the proposed rule's ``with a primary duty'' of
management.
Because of these changes, the Department concludes the standard
duties test for executive employees in the proposed and final
regulations is more protective than the current short test and some
workers may gain overtime protection. However, this number is too small
to estimate quantitatively given the data limitations presented below
in Chapter 3.
Table 2-2.--Comparing the Duties Test for Executive Employees
----------------------------------------------------------------------------------------------------------------
Salary level Current short test $250 per week Final standard test $455 per week
----------------------------------------------------------------------------------------------------------------
Duties........................... Whose primary duty consists of the Whose primary duty is management of
management of the enterprise in which the enterprise in which the employee
he is employed or of a customarily is employed or of a customarily
recognized department or subdivision recognized department or subdivision
thereof; and thereof;
Who customarily and regularly directs Who customarily and regularly directs
the work of two or more other the work of two or more other
employees. employees; and
Who has the authority to hire or fire
other employees or whose suggestions
and recommendations as to the
hiring, firing, advancement,
promotion or any other change of
status of other employees are given
particular weight.
----------------------------------------------------------------------------------------------------------------
2.3 Impact of the Final Duties Tests for Administrative Employees
The proposed duties tests for administrative employees generated a
significant number of comments. As discussed in the preamble above, the
final rule's duties test for administrative employees is significantly
different than the test contained in the proposed rule. In drafting the
final language, the Department sought to avoid introducing new terms
(such as ``position of responsibility'') that generated confusion in
the comments on the proposal and to retain terms (such as ``primary
duty,'' ``discretion and independent judgment'' and ``general business
operations'') that are used in the current rule and have been clarified
by court decisions and opinion letters. The final regulatory text also
requires that the discretion and independent judgment must be exercised
``with respect to matters of significance,'' language that appears only
in the current interpretive guidelines and not the existing regulatory
text.
As Table 2-3 indicates, the standard duties test for administrative
employees in the final rule is very similar, if not functionally
identical, to the current short duties test when the current
interpretive guidelines are taken into account as would be appropriate.
Based on the significant changes the Department made in the final rule
to return the administrative duties test to the structure in the
current rule, the Department has concluded that the standard duties
test for administrative employees in the final rule is as protective as
the current short test. Therefore, the Department has determined that
very few, if any, workers will lose their right to overtime as a result
of updating the current short test with the final standard duties test.
However, this number is too small to estimate quantitatively given the
data limitations presented below in Chapter 3.
Table 2-3.--Comparing the Duties Test for Administrative Employees
----------------------------------------------------------------------------------------------------------------
Salary level Current short test $250 per week Final standard test $455 per week
----------------------------------------------------------------------------------------------------------------
Duties........................... Whose primary duty consists of the Whose primary duty is the performance
performance of office or non-manual of office or non-manual work
work directly related to management directly related to the management
policies or general business or general business operations of
operations of his employer or his the employer or the employer's
employer's customers; and customers; and
Which includes work requiring the Whose primary duty includes the
exercise of discretion and exercise of discretion and
independent judgment. independent judgment with respect to
matters of significance.
----------------------------------------------------------------------------------------------------------------
2.4 The Impact of the Final Duties Tests for Learned Professional
Employees
For reasons discussed in the preamble above, the final standard
duties test for the learned professional exemption was modified from
the proposed test to track the current rule's primary duty test and to
restructure the proposed rule's reference to acquiring advanced
knowledge through other means such as an equivalent combination of
intellectual instruction and work experience so that it is consistent
with the current regulation. As the preamble explains, the Department
did not intend to depart from the current rule's educational
requirements for the
[[Page 22194]]
learned professional exemption. Accordingly, the final rule clarifies
that, just as under the current primary duty test, an employee must
meet all three requirements of the test in order to be exempt--the
primary duty must be performing work that requires advanced knowledge;
the knowledge must be in a field of science or learning; and the
knowledge must be customarily acquired by a prolonged course of
specialized intellectual instruction. The final rule also expands on
each of those three components, using language from the current rule.
For example, an employee's ``work requiring advanced knowledge'' must
include work requiring the consistent exercise of discretion and
judgment (see Table 2-4). The final standard duties test for learned
professionals also adds language from the current long test in section
541.301(b) by defining work requiring advanced knowledge as work that
is ``predominantly intellectual in character'' as distinguished from
the ``performance of routine mental, manual, mechanical or physical
work.'' These revisions clarify that the final rule is at least as
protective as current rule.
Table 2-4.--Comparing the Duties Test for Professional Employees
----------------------------------------------------------------------------------------------------------------
Salary level Current short test $250 per week Final standard test $455 per week
----------------------------------------------------------------------------------------------------------------
Duties........................... Whose primary duty consists of the Whose primary duty is the performance
performance of work requiring of work requiring knowledge of an
knowledge of an advanced type in a advanced type (defined as work which
field of science or learning is predominantly intellectual in
customarily acquired by a prolonged character, and which includes work
course of specialized intellectual requiring the consistent exercise of
instruction and study; and discretion and judgment) in a field
Which includes work requiring the of science or learning customarily
consistent exercise of discretion and acquired by a prolonged course of
judgment; or specialized intellectual
Whose primary duty consists of the instruction; or
performance of work requiring Whose primary duty is the performance
invention, imagination, or talent in of work requiring invention,
a recognized field of artistic imagination, originality or talent
endeavor. in a recognized field of artistic or
creative endeavor.
----------------------------------------------------------------------------------------------------------------
Other commenters expressed concern the proposed duties test for
learned professionals would result in many workers in some occupations
(e.g., Licensed Practical Nurses, dental assistants, and cooks) losing
overtime protection. Although most of the specific concerns raised by
these comments were addressed by the Department's modifications to the
proposed rule's professional duties test, discussed above, the
Department notes the final rule clarifies a number of occupations. For
example, Licensed Practical Nurses could not be classified as learned
professionals because, unlike Registered Nurses, the possession of a
specialized advanced academic degree is not a standard prerequisite for
entry into that occupation. Therefore, the Department has determined
very few, if any, workers will lose overtime protection as a result of
updating the current short duties tests with the final standard duties
test for learned professionals. However, this number is too small to
estimate quantitatively given the data limitations presented below in
Chapter 3.
2.5 The Impact of the Final Duties Test for Creative Professional
Employees
As discussed in the preamble above, the comments stating the
proposed revisions weakened the current duties tests illustrate the
confusion and misunderstanding that surrounds the current short duties
test for artistic professionals. The Department considers the language
in the final rule to be a restatement of the artistic primary duty test
in the current short test (see Table 2-4). Further, the final rule
reflects current case law regarding the creative professional exemption
for journalists while recognizing, as the current regulations do, that
the duties of employees referred to as journalists vary along a wide
spectrum from the nonexempt to the exempt (29 CFR 541.302(f)).
Therefore, the Department considers the language in the final rule for
creative professionals to be as protective as the current short test
and that few, if any, creative professionals will lose overtime
protection as the result of the revisions. However, this number is too
small to estimate quantitatively given the data limitations presented
below in Chapter 3.
2.6 The Impact of the Final Duties Tests for Teachers and the Practice
of Law or Medicine
As discussed above in the preamble, contrary to the assertions made
by some commenters, the proposed and final rule merely restate the
current exclusions from the salary requirements and do not change the
existing exemption criteria for teachers in educational establishments
and licensed practitioners of law and medicine. The Department
concludes these provisions in the final rule are not likely to result
in any additional teachers in educational establishments, or licensed
practitioners of law or medicine losing overtime protections compared
to the current regulations.
2.7 The Impact of the Final Duties Tests for Computer Employees
Based on the comments received and for reasons discussed in the
preamble above, several revisions were made in the final rule to align
the current regulatory text with the specific standards adopted by
Congress in 1996 for the computer employee exemption in section
13(a)(17) of the Act. As shown in Table 2-5, the Department considers
the duties tests in the final regulations for computer employees to be
functionally identical to those in the current regulations (section
541.303(b)) and statute (29 U.S.C. 213(a)(17)). Therefore, the
Department concludes that it is unlikely that any additional employees
will lose overtime protection as a result of the final duties tests for
computer employees as compared to current law.
[[Page 22195]]
Table 2-5.--The Duties Tests for Computer Employees in the Current and Final Regulations
----------------------------------------------------------------------------------------------------------------
Final standard test
Salary Current short test $250 Section 13(a)(17) $27.63 $455 per week or $27.63
per week an hour an hour
----------------------------------------------------------------------------------------------------------------
Duties........................ Employed as a computer Employee who is a computer The exemptions apply
systems analyst, computer systems analyst, computer only to a computer
programmer, software programmer, software employee whose primary
engineer, or other engineer, or other duty consists of:
similarly skilled worker similarly skilled worker, (1) The application of
in the computer software whose primary duty is systems analysis
field (as provided in (A) application of systems techniques and
541.303). analysis techniques and procedures, including
Primary duty of performing procedures, including consulting with users,
work requiring consulting with users, to to determine hardware,
theoretical and practical determine hardware, software or system
application of highly- software or system functional
specialized knowledge in functional applications; specifications;
computer systems (B) design, development, (2) The design,
analysis, programming, documentation, analysis, development,
and software engineering; creation, testing, or documentation,
and modification of computer analysis, creation,
Whose work requires the systems or programs, testing or modification
consistent exercise of including prototypes, of computer systems or
discretion and judgment. based on and related to programs, including
user or system design prototypes, based on
specifications; and related to user or
(C) design, documentation, system design
testing, creation or specifications;
modification of computer (3) The design,
programs related to documentation, testing,
machine operating creation or
systems; or modification of
(D) a combination of computer programs
duties described in (A), related to machine
(B) and (C), the operating systems; or
performance of which (4) A combination of the
requires the same level aforementioned duties,
of skills. the performance of
which requires the same
level of skills.
----------------------------------------------------------------------------------------------------------------
2.8 The Impact of the Final Duties Tests for Outside Sales Employees
As discussed in the preamble above, the Department has determined
that the application of the proposed primary duty test to the outside
sales exemption is preferable to the 20 percent tolerance test.
Utilization of the explicit primary duty concept also provides a
consistent approach between the structure of the outside sales
exemption and the exemptions for executive, administrative, and
professional employees. Moreover, any potential issues under the final
rule are addressed by the objective criteria and factors for
determining an employee's primary duty that are contained in section
541.700. Therefore, the Department concludes that few, if any,
employees would lose overtime protection as a result of the final
revisions to the duties tests for outside sales employees. However,
this number is too small to estimate quantitatively given the data
limitations presented below in Chapter 3.
2.9 The Impact of the Final Rule on Police Officers, Fire Fighters,
Paramedics, and Other First Responders
As discussed in the preamble above, the final rule expressly
provides that the section 13(a)(1) exemptions do not apply to police
officers, fire fighters, paramedics, emergency medical technicians
(EMTs), and other first responders ``regardless of rank or pay level,
who perform work such as preventing, controlling or extinguishing fires
of any type; rescuing fire, crime or accident victims; preventing or
detecting crimes; conducting investigations or inspections for
violations of law; performing surveillance; pursuing, restraining and
apprehending suspects; detaining or supervising suspected and convicted
criminals, including those on probation or parole; interviewing
witnesses; interrogating and fingerprinting suspects; preparing
investigative reports; or other similar work.'' Most courts have held
that such workers generally are non-exempt because they typically do
not perform the duties that are required for the executive or
administrative exemption. Similarly, federal courts have held that
police officers, paramedics, EMTs, and similar employees are not exempt
professionals because they do not perform work requiring knowledge of
an advanced type in a ``field of science or learning'' requiring
knowledge ``customarily acquired by a prolonged course of specialized
intellectual instruction'' as required under the current and final
rules. The Department has no intention of departing from this
established case law. Moreover, some police officers, firefighters,
paramedics and EMTs treated as exempt executives under the current
regulations may be entitled to overtime under the final rule because of
the additional requirement in the standard duties test not found in the
current short test that an exempt executive must have the authority to
``hire or fire'' other employees or make recommendations given
particular weight on hiring, firing, advancement, promotion or other
change of status. Therefore, the Department concludes that the
executive duties tests for police officers, fire fighters, paramedics,
EMTs, or other first responders in the final rule is more stringent
than the current short tests and some such workers may actually gain
overtime protection. However, this number is too small to estimate
quantitatively given the data limitations presented below in Chapter 3.
2.10 The Impact of the Final Highly Compensated Test
Some employees earning $100,000 or more per year could lose
overtime protection because of the less stringent duties test
applicable to these employees under the highly compensated test adopted
in the final regulations. However, the number of highly compensated
employees earning $100,000 or more per year who could lose protection
is relatively small--approximately 107,000 (see Chapter 4). Taking into
account the differences in regional wage levels, the highly compensated
test has been set high enough to avoid exempting employees who are
likely to be otherwise entitled to overtime protection. Adopting a
$100,000 salary level for the highly compensated test, increased from
the proposed $65,000 level, will result in far fewer workers being
reclassified as exempt compared to the proposed rule. Moreover, in the
Department's enforcement experience, most salaried
[[Page 22196]]
white collar workers earning $100,000 or more per year would satisfy
the existing short test and the final standard test. As shown below in
Chapter 4, most salaried white-collar workers earning $100,000 or more
per year are already exempt and there are very few hourly workers
earning $100,000 or more per year in the white-collar occupations (only
47,000) likely to be affected. The Department also notes that the
highly compensated test will not affect police, fire fighters,
paramedics, EMT's and other first responders who are not performing
office or non-manual work, nor will it affect manual laborers or other
blue-collar workers who perform work involving repetitive operations
with their hands, physical skill and energy.
2.11 The Impact of the Final Safe Harbor Provision
As explained in the preamble above, the Department has decided to
retain in final subsection 541.603(c) the proposed approach that an
employer who has an actual practice of making improper deductions will
lose the exemption during the time period in which the improper
deductions were made for employees in the same job classification
working for the same managers responsible for the improper deductions.
However, if an employer has a clearly communicated policy prohibiting
improper deductions and includes a complaint mechanism, reimburses
employees for any improper deductions and makes a good faith commitment
to comply in the future, the employer will not lose the exemption
unless the employer willfully violates the policy by continuing to make
improper deductions after receiving employee complaints. The Department
believes that the safe harbor provision is an appropriate mechanism to
encourage employers to adopt and communicate employment policies
prohibiting improper pay deductions, while continuing to ensure that
employees whose pay is reduced in violation of the salary basis test
are made whole without providing a windfall to workers who have not
been harmed. The final rule encourages employers to adopt proactive
management practices that demonstrate the employers' intent to pay on a
salary basis and correct violative payroll practices. In addition,
employees will benefit from the additional notification of their rights
under the FLSA. The updated safe harbor provision in the final rule
will reduce costly and lengthy litigation while ensuring that workers
whose pay is decreased in violation of the salary basis test receive
their back wages. Reducing litigation costs will free up resources and
stimulate economic growth.
2.12 The Impact of a Clearer and Easier to Understand Rule
Although there are a variety of benefits from the final rule that
accrue to both workers and employers, data limitations enable the
Department to discuss many benefits only qualitatively. One of the
largest benefits to workers comes from having clearer rules that are
easier to understand and enforce. More workers will know their rights
and if they are being paid correctly (instead of going years without
knowing they should be paid overtime). Fewer workers will be
unintentionally misclassified, therefore they won't have to go to court
and wait years for their back pay. Clearer more up-to-date rules will
also help the Wage and Hour Division more vigorously enforce the law,
ensuring that workers are being paid fairly and accurately.
Salaried workers will also benefit from more equitable disciplinary
actions (i.e., under the current rule an employer would have to suspend
an exempt manager for a full week for a Title VII violation in order to
preserve the employee's exempt status even if the company's policy
called for just a three day suspension without pay. Under the final
rule salaried employees would lose only three days of pay).
Like workers, employers will also benefit from having clearer rules
that are easier to understand. More employers will understand exactly
what their obligations are for paying overtime. Fewer workers will be
unintentionally misclassified, and the potential legal liability that
employers have under the current regulation will be reduced.
As explained elsewhere in the preamble, the Department recognizes
the benefit of retaining relevant portions of the current standard so
as not to completely jettison decades of federal court decisions and
agency opinion letters and has made significant changes to the final
rule that are intended to clarify the existing regulation, to make the
rule easier to understand and apply to the 21st Century workplace, and
to better reflect existing federal case law without substantially
changing the current law. The Department believes that the final rule
accomplishes these objectives and will result in some reduction in
litigation, particularly in the long term.
Chapter 3: Estimating the Number of Workers Impacted by the Final Rule
In this chapter, the Department presents its estimates of the
number of workers covered by the FLSA, subject to the salary level or
salary basis tests, and who are currently Part 541-exempt or nonexempt.
An estimated 35.2 million hourly paid workers
and 7.6 million nonhourly workers are in occupations with no measurable
probability of meeting the current duties tests (e.g., blue-collar
occupations).
An estimated 32.7 million hourly workers and
31.7 million nonhourly workers are in occupations with some possibility
of meeting the duties tests (e.g., white-collar occupations).
Of the estimated 31.7 million nonhourly workers
in occupations with some possibility of meeting the duties tests, an
estimated 19.4 million are exempt under the current rule.
As discussed below, the Department's approach is similar to that
used by previous researchers, with the primary difference being that
the Department used a nonlinear model to estimate the relationship
between income and the exemption probability among current workers.
3.1 Estimating the Number of Workers Covered by the FLSA
Based on the previous work in this area by the U.S. General
Accounting Office (GAO), the University of Tennessee, CONSAD Research
Corporation (CONSAD), and the Economic Policy Institute (EPI), the
Department started with the latest available data from the U.S.
Department of Labor, Bureau of Labor Statistics (BLS), 2002 Current
Population Survey (CPS) Outgoing Rotation Group public use data set to
estimate the number of workers that would be affected by changes in the
Part 541 regulations. The primary reason the Department used this
particular data source is its size (more than 474,000 observations) and
breadth of detail (e.g., occupation and industry classifications,
salary, and hours worked). As the previous researchers found, no other
data source provides the necessary detail for this type of analysis.
The GAO used the CPS because after reviewing ``several Bureau of
Labor Statistics (BLS) and DOL reports to determine whether any data
sources could be used for [GAO's] purposes [and] discussions with DOL
and experts, [the GAO] decided that the CPS Outgoing Rotations was the
best available data source to estimate both the proportion of the labor
force that is
[[Page 22197]]
covered by the white-collar exemptions and the demographic
characteristics of this population.'' (GAO/HEHS-99-164, pg. 40)
As discussed below, in order to provide transparency and the means
for others to replicate our results, the Department chose to use the
2002 CPS Outgoing Rotation Group public use data set even though the
employment weights for the observations are based on the 1990 Census
and not the 2000 Census.
The Department created a subset of the entire survey that only
included employed workers 16 years of age and older (Item PREMPNOT =
1--This is the name of the variable and its value in the BLS dataset
used to create this subset. Similar variable names and values are
provided below to assist researchers in replicating the Department's
results). The number of employed workers in 2002 was estimated by
summing the CPS outgoing rotation weight (PWORWGT; note this weight
must be divided by 120,000 to provide annual averages and to account
for the 4 implied decimal points in the data) for each of the remaining
observations in the dataset. This resulted in a total employment
estimate of 134.3 million, which does not match BLS's published 2002
total household employment of 136.5 million.
The 1.6 percent discrepancy is due to different weights being used
to estimate the published employment totals. The weights in the public
use file utilized by the Department in this analysis are based on the
1990 Census. In January 2003, the BLS revised the weights using the
2000 Census. Although BLS changed its published employment totals back
to January 2000, the weights in the public use files were not updated.
The 134.3 million total for 2002 employment matches the published BLS
2002 employment estimate before the weights were changed. As noted
below in Chapter 4, several commenters criticized the estimates in the
Preliminary Regulatory Impact Analysis (PRIA) for being difficult to
reproduce. Therefore, the Department chose not to use an internally
available dataset with updated weights and instead used the publicly
available dataset with 1990 Census weights to make its estimates easier
to reproduce.
Using weights based on the 1990 Census does not significantly
affect the accuracy or quality of the results. The difference between
the employment totals (136.5 - 134.3 = 2.2 million) based on the two
sets of weights is distributed across all occupations, in all
industries in all regions of the country, and is thus unlikely to bias
the estimates. For the final regulatory impact analysis, the Department
has endeavored to ensure maximum transparency even though the estimates
differ slightly from the most recent BLS-published estimates.
Next, the Department excluded the 14.9 million workers not covered
by the FLSA, such as the self-employed and unpaid volunteers (item
PEIO1COW = 6, 7, or 8), and the clergy and religious workers (item
PTIO1OCD = 176 and 177). An additional 3.1 million workers were
excluded because they are in occupations specifically exempted from the
FLSA's overtime provisions (see Table 3-1), which reduced the total to
116.3 million workers. Another group, 1.5 million federal employees,
were excluded from the total (item PEIO1COW = 1) because they are not
subject to the regulations promulgated by the Department (they are
covered by U.S. Office of Personnel Management regulations). However,
federal workers (PEIO1COW = 1) in Postal Offices (PEIO1ICD= 412), the
Tennessee Valley Authority (PEIO1ICD = 450 and in Kentucky, Tennessee,
Mississippi, Alabama, Georgia, North Carolina, and Virginia), and the
Library of Congress (PEIO1ICD = 852 in the Washington D.C. MSA) were
included in the analysis, as they are covered by final rule. The
remaining 114.8 million workers represent the Department's best
estimate from available data of the total number of employees who are
covered by the FLSA's overtime provisions (see Chart 1). They are
comprised of 69.0 million hourly paid workers and 45.8 million salaried
workers (item PEERNHRY = 1 and 2, respectively). For the purposes of
this RIA, the Department, like the GAO, assumed that workers paid on a
nonhourly basis (CPS variable, PEERNHRY = 2) were paid on a salary or
fee basis, and henceforth uses the term ``salaried workers'' to refer
to workers classified as nonhourly in the CPS.
Table 3-1.--Occupations Exempt From the FLSA's Overtime Provisions
------------------------------------------------------------------------
Number of
CPS occupation code workers
------------------------------------------------------------------------
Self-Employed and Unpaid Family: ..............
29 U.S.C. 203(e).................................... 14,288,000
Clergy and Religious Workers: ..............
WHD Field Operations Handbook, Section 10b03........ 569,000
Federal Workers covered by OPM regulations: ..............
29 U.S.C. 204(f).................................... 1,546,000
Certain Employees of Carriers Over Highways, Rail, Air, ..............
and Sea:
29 U.S.C. 213(b)(1), (b)(2), (b)(3), and (b)(6) 1,562,000
(PTIO1OCD = 823-826 in PEIO1ICD 400, PTIO1OCD =
505, 507 & 804 in PEIO1ICD 410, PTIO1OCD = 828, 829
& 833 in PEIO1ICD 420, and PTIO1OCD = 226, 508 &
515 in PEIO1ICD 421)...............................
Certain Agricultural Workers: ..............
29 U.S.C. 213(b)(12) (PEIO1ICD = 10, 11 & 30)....... 995,000
Certain Partsmen, Salesmen, and Mechanics at Auto ..............
Dealers:
29 U.S.C. 213(b)(10) (PTIO1OCD = 263, 269, 505, 506, 543,000
507 & 514 in PEIO1ICD 612).........................
------------------------------------------------------------------------
Source: CONSAD and the U.S. Department of Labor.
[[Page 22198]]
[GRAPHIC] [TIFF OMITTED] TR23AP04.000
3.2 Estimating the Number of Workers Who Are Currently Exempt and
Nonexempt
Since the CPS does not contain a variable that can be used to
determine whether workers are Part 541-exempt or nonexempt under the
current, proposed, or final rules, the Department relied on a
methodology that has been used in previous research and supported by
the record. As noted by the GAO in its report, in order to estimate the
number of workers covered by the white-collar exemptions using the CPS
data, a determination must be made on the basis of the worker's primary
occupational classification (GAO/HEHS-99-164, pg. 40). Although there
are many variables in the CPS dataset, including earnings, occupation,
industry, paid hourly, and hours worked, none of these variables either
individually or in combination permit a precise mapping of a worker's
exempt or nonexempt status under Part 541 because there is no
information on the actual duties performed by a worker. As found in
previous research, in order to develop estimates of Part 541-exempt
workers under the current regulations, it is necessary to use some
measure of expert judgment. The use of expert judgment in cases where
it is necessary to make informed decisions or lower uncertainty is also
consistent with OMB's regulatory analysis guidance.
In response to a specific request from the GAO, the Wage and Hour
Division (WHD) in 1998 assembled a group of experienced WHD employees
to develop estimates of the probability that FLSA covered salaried
workers in various CPS occupational categories would be Part 541-exempt
under the current regulations (U.S. General Accounting Office, ``Fair
Labor Standards Act: White-Collar Exemptions in the Modern Work
Place,'' GAO/HEHS-99-164, September 30, 1999). Based upon their
collective experience in FLSA enforcement, the WHD staff classified
each of the 499 Occupational Classification Codes (OCC) used in the CPS
(Item PEIO1COCD) according to an estimated probability that some
workers in a particular OCC would be Part 541-exempt. The GAO, the
University of Tennessee (U.S. Department of Labor, ``The `New Economy'
and Its Impact on Executive, Administrative and Professional Exemptions
to the Fair Labor Standards Act (FLSA),'' January 2001), CONSAD
(``Economic Analysis of the Proposed and Alternative Rules for the Fair
Labor Standards Act (FLSA) Regulations at 29 CFR 541,'' January 14,
2003), and the EPI (``Eliminating the Right to Overtime Pay,'' June 26,
2003), all based their estimates of the number of workers who are
exempt under the current rule on these judgments or probabilities. The
EPI report was submitted for the record as part of the AFL-CIO's
comments.
The GAO explained this methodology in the following manner: ``In
determining which of the workers would likely be exempt and therefore
included in our estimate, we applied the percentage ranges provided by
the officials at DOL.'' However, ``Rather than counting the number of
employees actually classified as exempt by employers, we estimated how
many employees are likely to be classified as exempt, based on the
occupational classifications and income reported in the CPS sample.''
(GAO/HEHS-99-164, pg. 41 and 42) The Department, as did the GAO, used
the CPS variable for a worker's occupation (Item PTIO1OCD) as a proxy
for the person's job classification (there are a variety of jobs in
each CPS occupation code).
The GAO also noted that there are data limitations and some
uncertainty associated with their methodology that reduces the ability
to precisely estimate the number of currently exempt workers (GAO/HEHS-
99-164, pg. 42). The Department notes that these same limitations and
uncertainties, combined with the broad probability classifications
provided by DOL to GAO
[[Page 22199]]
and used in this RIA and other research, make it impossible to
accurately estimate the number of exempt workers by detailed industry
or by state. Moreover, because of this uncertainty, the Department did
not rely on its estimates of the number of exempt workers to set the
salary levels and instead used these estimates as just one of several
methods to confirm the reasonableness of the $455/week and $100,000/
year salary levels.
Both the 1999 GAO report and the PRIA discussed the probability
classifications in terms of Standard Occupational Classifications
(SOCs). This resulted in some confusion among researchers attempting to
replicate the estimates. For example, the AFL-CIO stated, ``the study's
methodology is confusing, and because CONSAD does a poor job of
explanation, it is not capable of replication * * * CONSAD relies upon
both the Current Population Survey (CPS) and the 1998 Standard
Occupational Classification (SOC) system. Conflicts between these two
data sets make the study opaque.''
In order to develop the probability estimates, the WHD staff
utilized Appendix B in the CPS documentation to obtain the list of
occupational titles. The CPS Appendix specifies the occupational title
and the associated SOC codes used by the CPS for each OCC code. The CPS
Appendix is available on the U.S. Census Bureau Web site (http://www.census.gov/apsd/techdoc/cps/sep97/det-occ.html). According to the
BLS, the OCC ``classification is developed from the 1980 Standard
Occupational Classification.'' The WHD staff used the documentation on
the SOC codes in assessing the exempt probability range for the
associated OCC codes. This analysis was first used by GAO, and then
followed by the University of Tennessee and by CONSAD Research
Corporation in the Part 541 PRIA.
In addition, for the PRIA, CONSAD also made its own assessments
based upon O*NET data (O*NET, the Occupational Information Network, is
a comprehensive database of worker attributes and job characteristics
available at http://www.onetcenter.org/whatsnew.html).
For the final RIA, however, the Department has reverted to the
original estimates developed in 1998 by its WHD experts for the GAO.
This adjustment from the proposed rule does not materially affect the
total number of workers impacted, and ensures transparency and enables
the public to replicate and evaluate the final RIA. Although newer and
more detailed than the occupation descriptions available to the WHD
staff in 1998, O*NET is still under development. Also, the O*NET
categories do not directly correspond to the occupation categories used
in the CPS making it difficult for the public to replicate the results.
Some O*NET descriptions apply to more than one CPS occupation and some
CPS occupations apply to more than one O*NET description.
Of the 499 occupation codes in the CPS, one is not related to
employment (code 905 is assigned to unemployed persons whose last job
was in the Armed Forces), two are assigned to clergy and religious
workers (codes 176 and 177) who are not covered by the FLSA, one had no
observations (code 149 for home economics teachers), and five had no
observations after the removal of various industry exemptions (code 474
for horticultural specialty farmers, code 499 for hunters and trappers,
code 826 for rail vehicle operators, code 639 for machinist
apprentices, and code 655 for miscellaneous precision metal workers).
3.3 Estimated Number of Nonexempt Workers in the Blue-Collar
Occupations
In 1998, the WHD experts estimated that 239 of the remaining 490
categories would be entirely comprised of nonexempt workers in ``blue-
collar'' occupations. The estimated number of hourly and salaried
workers in each of the 239 occupations is presented in Table A-1 of
Appendix A at the end of this preamble. Although the Department has
consistently held (and continues to hold) the view that job titles and
job descriptions cannot be used to determine the exempt status of any
particular employee, for the purpose of this economic analysis only,
the Department, with the expertise of the WHD, has determined that the
CPS occupational groups in Table A-1 most likely contain jobs with
nonexempt duties. This assumption was also made by the GAO and other
researchers.
There are 35.2 million hourly paid workers and 7.6 million salaried
workers in these ``nonexempt'' blue-collar occupations (see Chart 2).
[[Page 22200]]
[GRAPHIC] [TIFF OMITTED] TR23AP04.001
For purposes of this economic analysis, the Department has assumed
that no workers within the 239 blue-collar occupations are Part 541-
exempt. However, it is important to note that the final rule will
strengthen overtime protection for 2.8 million blue-collar salaried
workers in these occupations who earn at least $155 and less than $455
per week regardless of their duties or whatever occupational group in
which they may be classified. Although the Department has determined
that most, if not all, of these workers are currently nonexempt, they
are currently subject to the long and short duties tests; therefore,
their exempt status is fundamentally less certain than under the bright
line salary test in the final rule.
3.4 Estimated Number of Workers in the White-Collar Occupations
To determine the number of exempt workers that could be affected by
the final rule, the Department, like the GAO, concentrated on the 251
occupations likely to include exempt workers. As the GAO stated, ``To
develop our estimate, we analyzed each of the 257 job titles likely to
include exempt workers.'' (GAO/HEHS-99-164, pg. 41) After accounting
for the six occupations with no observations (noted above), this
corresponds with the 257 titles used by the GAO in 1999.
Each of the remaining 251 ``white-collar'' occupations was then
classified into one of four exemption probability ranges, or
categories, presented below in Table 3-2. The GAO did the same in its
1999 report when ``DOL officials provided [them] with one of four
ranges of likelihood of exemption for each occupation.'' (GAO/HEHS-99-
164, pg. 42)
Table 3-2.--Part 541 Exemption Probability Categories for Salaried
Workers Under the Current Short Duties Tests
------------------------------------------------------------------------
Lower bound Upper bound
Classification estimate estimate
------------------------------------------------------------------------
1. High Probability of Exemption........ 90% 100%
2. Probably Exempt...................... 50% 90%
3. Probably Not Exempt.................. 10% 50%
4. Low or No Probability of Exemption... 0% 10%
------------------------------------------------------------------------
Source: U.S. Department of Labor.
Note: Many occupations were classified as having a ``Low or No
Probability of Exemption'' because the CPS data may include some
supervisory employees who could potentially be exempt under the
executive duties test, although the occupations would generally be
nonexempt. (See GAO/HEHS-99-164, data limitations, pg. 42)
Next, the Department excluded workers who are exempt under the
current and final rules because they are in occupations that are not
subject to the salary level or salary basis tests and will not be
affected by the final rule (see Table 3-3). As noted by the GAO in its
1999 report ``The exemption for physicians, lawyers, and teachers does
[[Page 22201]]
not depend on the income of the employee.'' (GAO/HEHS-99-164, pg. 41)
These occupational groups consist of: outside sales employees (CPS item
PTIO1OCD = 277); teachers and academic administrative personnel (item
PTIO1OCD = 14, 113-159, and 163) in educational establishments (item
PEIO1ICD = 842 and 850); certain medical professions (item PTIO1OCD =
84, 85, 87, 88, and 89); and lawyers and judges (item PTIO1OCD = 178).
Table 3-3.--Number of Workers in CPS Occupations That Are Not Subject to
the Part 541 Salary Level Test
------------------------------------------------------------------------
Number of
Occupational title workers
------------------------------------------------------------------------
Teachers & Academic Administrative Personnel in Industry 6,106,083
842 and 850............................................
Physicians.............................................. 550,748
Dentists................................................ 48,565
Optometrists............................................ 20,288
Podiatrists............................................. 3,999
Health Diagnosing Practitioners, n.e.c. (1)............. 17,020
Lawyers and Judges...................................... 622,549
Street and Door-to-Door Sales Workers................... 184,998
---------------
Total............................................... 7,554,250
------------------------------------------------------------------------
(1) Not elsewhere classified.
Source: CONSAD and the U.S. Department of Labor
Note: These occupations are identified separately here since they differ
from those in Table 3-1: they are covered by FLSA's overtime
provisions but are not subject to the Part 541 salary level tests.
After excluding from the analysis most of the observations for
teachers and academic administrative personnel, and all of the
observations for outside sales employees, certain medical professions,
lawyers and judges, there remained 64.4 million workers in potentially
exempt ``white-collar'' occupations who are both covered by the FLSA
and subject to the Part 541 salary level tests and thus could be
affected by the final rule.
As noted above, for purposes of estimating the number of exempt
workers, the Department, like the GAO, assumed that workers paid on a
nonhourly basis (CPS variable, PEERNHRY=2) were paid on a salary or fee
basis. There are 32.7 million hourly workers and 31.7 million salaried
workers in potentially exempt ``white-collar'' occupations (see Chart
3).
[GRAPHIC] [TIFF OMITTED] TR23AP04.002
The estimated number of hourly and salaried workers in each of the
251 white-collar occupations is presented in Table A-2 of Appendix A.
Table A-2 also presents the Exempt Status Codes developed by WHD in
1998 for each CPS occupation code.
3.5 Methodology Used To Estimate the Number of Exempt Salaried Workers
In order to develop a baseline estimate of the number of currently
exempt white-collar salaried workers, the Department reviewed several
approaches. The first approach was used by the GAO, which ``made the
following assumption: duties that make an employee more likely to be
covered by the white-collar exemptions are duties that, generally
speaking, elicit a higher salary. Under this assumption, as workers
have more exempt duties and responsibilities, their incomes increase--
as does the likelihood of
[[Page 22202]]
being exempt.'' (GAO/HEHS-99-164, pg. 41) The GAO sorted the
observations in each occupational code by earnings from highest to
lowest. Then, beginning at the highest earnings, the GAO kept all of
the observations until the number of workers represented by the
observations as a percent of total employment in the occupation equaled
the target estimated probability of being exempt for that occupation.
The remaining observations (lower income workers) were assumed to be
nonexempt. For example, the method used to estimate the upper bound
coverage estimates for the Probably Not Exempt Classification (which
has a 10 to 50 percent probability range of exemption) was developed by
including the observations representing the highest 50 percent of
earnings. The lower bound coverage estimates, on the other hand, were
developed including the observations representing only the highest 10
percent of earnings.
Although this was the methodology used by the GAO, the Department
decided not to follow it for the final RIA because the compensation
within each occupation varies not only because of exempt status and
duties, as the GAO assumed, but also because of the industry and
geographic location where the worker is employed. The Department
determined the GAO approach creates biased estimates for low-wage
industries and localities because the GAO methodology excludes, as
nonexempt, most of the observations for intermediate and low-wage
workers who could be exempt in comparatively low-wage industries and
occupations. In other words, while it is true that, all other things
being equal, exempt employees generally receive higher salaries than
nonexempt employees, it is also true that employees in certain
industries and localities generally receive higher salaries than
employees in the same occupation in other industries and localities.
Further, in order to develop more accurate estimates based upon the
GAO's methodology of completely excluding the lower-wage workers, the
data would have to be stratified by both industry and locality. As the
AFL-CIO stated in its comments, this analysis would have to be done at
the 3-digit industry level because ``Generalizing to a 2-digit code
loses important distinctions within industry sectors, and this causes a
corresponding loss of precision.'' Similarly, the analysis may also
have to be done at the county level, because generalizing to the state
level could also cause the loss of too much precision. Multiplying the
nearly 1,000 3-digit industry codes by the more than 3,000 counties
would result in some 3 million industry and county combinations. As
large as the CPS is, however, it will not accurately support this level
of detailed analysis. GAO, in fact, did not even present (much less
develop) its estimates at the state or 2-digit industry level of
detail.
The second approach was to give all observations in an occupation
the same probability regardless of income. Under this approach,
estimates are generated by multiplying the CPS weight (item PWORWGT)
for each observation (worker) by the average of the upper and lower
bound exemption probability associated with the occupation code.
Although this approach corrects for the bias against the low-wage
industries and localities, the Department determined it was
unsatisfactory because it does not account for the fact that higher
income workers are more likely to be exempt. For example, someone in
real estate sales (OCC 254) earning $405 per week would be given the
same 30 percent probability of being exempt (i.e., average of 10
percent and 50 percent for ``probably not exempt classification'') as
one earning $2,155 per week. Even considering the existence of regional
and industry salary differentials, this approach did not seem
reasonable.
The Department employed two basic approaches to address these
issues, which are discussed below. First, the Department used a linear
model to combine aspects from both of the first two approaches. The
Department excluded the 803,000 salaried workers with weekly earnings
(item PTERNWA) below $155, because these workers are nonexempt under
both the current and final rules. The GAO used a similar approach by
considering workers earning less than $250 per week as nonexempt and
eliminating them from the calculations. (GAO/HEHS-99-164, pg. 41) The
Department used the lower figure primarily to account for
nontraditional work arrangements. For example, under a job sharing
arrangement, two workers sharing an exempt position could each work
part-time earning only a portion of the total salary allocated to the
position, when one of these workers is out, the other covers. At such
times, the exempt worker would not be eligible for overtime even if the
weekly hours exceed 40. There are only 670,000 salaried workers in the
251 occupations earning at least $155 but less than $250 per week. As
the analysis presented below demonstrates, only a small percentage of
these were estimated to be exempt.
The Department then modified the observation's weight for each OCC
by multiplying the CPS weight (item PWORWGT) by the probability that an
individual with that salary in that OCC is exempt. The specific
probability of exemption for each salaried worker in a particular
occupation code was estimated using linear interpolation according to
the following equation:
[GRAPHIC] [TIFF OMITTED] TR23AP04.003
Where:
Prob--Exempt = Probability of individual in the occupational
classification (OCC) being exempt
LB = WHD lower bound probability from Table 3-2
PTERNWA = CPS weekly earnings amount
UB = WHD upper bound probability from Table 3-2
The equation above specifies that the probability of a worker with
a weekly salary of $155 being exempt is equal to the lower bound
probability specified by the WHD experts for a given white-collar
occupation, while the probability of an individual with the highest
weekly salary in the occupation (often the top coded value of $2,885)
being exempt is equal to the upper bound probability specified for a
given white-collar occupation. The probability of exemption for weekly
salaries between $155 and $2,885 is derived using the above linear
interpolation equation. Figure 3-1 presents a graphical illustration
for the ``Probably Not Exempt'' classification (see Table 3-2). Similar
graphs could be developed for the other three classifications but were
not included in the RIA.
[[Page 22203]]
[GRAPHIC] [TIFF OMITTED] TR23AP04.004
Although the linear model was designed to more accurately include
lower-wage industries and regions while accounting for the
determination by WHD that higher earnings are associated with a higher
probability of exemption, the model appears to underestimate the total
number of currently exempt workers compared to using the midpoint of
the WHD probability range (e.g., averaging the WHD upper and lower
bound estimates) at the national level. Table 3-4 shows this effect.
Table 3-4.--Comparison of Part 541-Exempt Worker Estimates Mid-point Versus Linear Model
----------------------------------------------------------------------------------------------------------------
Estimated number exempt
Number of white- Midpoint of -------------------------------------
WHD category collar salaried the WHD Number of workers
workers earning probability times midpoint Linear model
$155 or more* range probability
----------------------------------------------------------------------------------------------------------------
High Probability of Exemption............. 14,053,817 95% 13,351,126 13,170,751
Probably Exempt........................... 6,102,827 70% 4,271,979 3,812,164
Probably Not Exempt....................... 4,904,421 30% 1,471,326 1,076,901
Low or No Probability of Exemption........ 5,822,134 5% 291,107 130,662
--------------------
Total................................. 30,883,199 ........... 19,385,538 18,190,479
----------------------------------------------------------------------------------------------------------------
*Excludes workers not subject to salary test.
Source: CONSAD and the U.S. Department of Labor.
This occurs because the underlying earnings distribution is not
symmetric. Rather, it is skewed toward low earnings levels. When the
linear model of exemption probabilities is applied to that earnings
distribution, it produces estimates that are skewed toward low earnings
levels. Figure 3-2 presents the histogram and cumulative distribution
for the ``Probably Not Exempt'' category. The higher bar in Figure 3-2
at $2,800 in weekly earnings level is a result of the top coding of the
CPS data that includes all of the workers with weekly earnings of
$2,800 or more into one group. Similar graphs were developed for the
other three classifications but were not included in the RIA.
[[Page 22204]]
[GRAPHIC] [TIFF OMITTED] TR23AP04.005
Because the linear model results in more observations being
assigned a probability lower than the midpoint than a probability
higher than the midpoint, it tends to underestimate the number of
exempt workers compared to multiplying the number of workers by the
midpoint probability. The Department considers the midpoint estimate to
be a valid benchmark since it has been used by other researchers (such
as EPI) and is equivalent to averaging the GAO estimates using updated
data. Although this is not a classic statistical bias, the linear model
implies that the average probability of being exempt within each
category range is slightly lower than implied by the midpoint of the
range, which was not the intent of the original probability
determinations made by the WHD study. Since the overall estimate of the
number of currently exempt workers using the linear model is 1.2
million workers less than this benchmark, the Department decided to
explore if a nonlinear model that is consistent with the assumptions
about the likelihood of exemption would produce national level
estimates that more closely match the midpoint benchmark.
The Department applied a series of nonlinear models to try and
compensate for the nonsymmetrical income distributions in the four
exemption categories. First, the observations with weekly earnings less
than $155 were excluded because these workers are nonexempt under the
current and final rules. Next, the observations that were top coded for
weekly earnings (Item PTWK =1) were excluded from the distribution to
smooth out the right-hand tail (i.e., all of these observations were
assigned the upper bound probability and keeping them in the
distribution would only have distorted the curves). Finally, the
cumulative probability distributions of three nonlinear functions
(i.e., normal, lognormal, and gamma) were fitted to the cumulative
income distributions for the remaining observations in each of the four
exemption categories.
Each of the functions was calibrated to the empirical data by using
the mean and standard error of the empirical distributions. For the
normal distribution the mean was set to the sample mean and the
standard deviation was set to the standard error. For the gamma
distribution, alpha was set to the square of the quotient of the sample
mean divided by the standard error, and beta was set to the standard
error squared divided by the sample mean. The lognormal distribution
was developed by taking the logs of the sample data and then using a
normal distribution with the mean set to the mean of the logs of the
sample data and the standard deviation set to the standard error of the
logs of the sample data (see Table 3-5).
Table 3-5.--Parameters of Empirical Income Distributions
------------------------------------------------------------------------
Standard
Mean of error of
WHD category Sample Standard logged logged
mean error sample sample
data data
------------------------------------------------------------------------
High Probability of 1,107 538 6.9 0.5
Exemption..................
[[Page 22205]]
Probably Exempt............. 928 512 6.7 0.8
Probably Not Exempt......... 886 502 6.6 0.9
Low or No Probability of 630 375 6.2 0.8
Exemption..................
------------------------------------------------------------------------
Source: CONSAD and the U.S. Department of Labor.
Figure 3-3 presents plots depicting the goodness of fit of the
three nonlinear functions that were estimated for the ``Probably Not
Exempt'' category. Similar plots were developed for the other three
classifications but were not included in the RIA. As one can see in
figure 3-3, all three distributions had the same general shape as the
empirical data; however, the function estimated for the gamma
distribution appears to fit the actual data better than the functions
estimated for the other two distributions. The Department, however, did
not use a formal goodness of fit test to choose a distribution for the
principal estimates of this final rule; rather, the Department measured
how well each of the distributions matched up against the estimate as a
function of the midpoint probabilities, since calibrating the totals to
the midpoint probabilities was the primary reason for examining the
non-linear models.
[GRAPHIC] [TIFF OMITTED] TR23AP04.006
Before determining the distribution that would be used to develop
the baseline for the RIA, the Department estimated the number of exempt
workers using each of the three distributions and compared the
estimates to the benchmark developed using the midpoint probability.
For each of the four exemption categories (EC), the probability that an
individual with a specific salary in each category is exempt was
estimated using nonlinear interpolation according to the following
equation:
Prob--Exempt = LB + Function--EC(PTERNWA) x (UB-LB)
Where:
Prob--Exempt = Probability of an individual in the exemption
classification being exempt
LB = Lower bound probability from Table 3-2 for the exemption category
PTERNWA = CPS weekly earnings amount
UB = Upper bound probability from Table 3-2 for the exemption category
Function--EC(PTERNWA) = the cumulative probability of the distribution
function for the
[[Page 22206]]
exemption category (i.e., calibrated as discussed above) at that
earnings
The total number of exempt salaried workers for each white-collar
occupation was estimated by multiplying the estimated probability of
being exempt (based upon the earnings and exemption category) by the
CPS weight for each worker and then summing the modified weights for
each occupation. Observations with earnings less than $155 per week
were assigned a probability of zero and observations with top coded
earnings were assigned the upper bound probability for the category. As
shown in Table 3-6, the gamma distribution resulted in estimates that
most closely approximated the number of exempt workers estimated using
the midpoint probability. The symmetrical normal distribution
underestimated the midpoint total by approximately 104,000 workers
(0.5%) while the lognormal distribution overestimated the midpoint
total by 3.2 million (16.5%). The gamma distribution resulted in
essentially the same estimated number of exempt workers as using the
midpoint probability. The two methods differ by approximately 0.2
percent, or less than 60,000 workers.
Table 3-6.--Comparison of Part 541-Exempt Worker Estimates
----------------------------------------------------------------------------------------------------------------
Midpoint Normal Lognormal Gamma
WHD category probability distribution distribution distribution
estimate model estimate model estimate model estimate
----------------------------------------------------------------------------------------------------------------
High Probability of Exemption................... 13,351,126 13,341,039 14,053,814 13,370,021
Probably Exempt................................. 4,271,979 4,232,533 5,492,548 4,294,132
Probably Not Exempt............................. 1,471,326 1,432,806 2,452,211 1,482,972
Low or No Probability of Exemption.............. 291,107 274,707 582,213 292,266
-----------------
Total....................................... 19,385,538 19,281,085 22,580,786 19,439,391
----------------------------------------------------------------------------------------------------------------
Source: CONSAD and the U.S. Department of Labor.
Although the Department did not conduct formal goodness of fit
tests, Figures 3-4 through 3-7 indicate that the gamma distribution
preserves the shape of the empirical cumulative distribution for the
four exemption categories. Thus, for the RIA the Department developed
its baseline estimates of exempt workers using a gamma distribution
model. Although some other distribution could exist that improves upon
the gamma distribution, the Department has determined that it would not
significantly alter the RIA results given how well the gamma
distribution approximates the empirical data. In addition, as
demonstrated above in Table 3-6, the estimated number of workers
impacted by the final rule does not depend critically on any particular
nonlinear model; in fact, the estimated number of workers impacted even
under the linear model is not substantially different than under the
gamma distribution model, proving that the Department's estimates are
relatively robust to estimation procedure choices.
[GRAPHIC] [TIFF OMITTED] TR23AP04.007
[[Page 22207]]
[GRAPHIC] [TIFF OMITTED] TR23AP04.008
[[Page 22208]]
[GRAPHIC] [TIFF OMITTED] TR23AP04.009
Like the linear model, this methodology accounts for the existence
of lower-wage industries and regions while remaining consistent with
the GAO's assumption that ``duties that make an employee more likely to
be covered by the white-collar exemptions are duties that, generally
speaking, elicit a higher salary.'' The non-linear model also accounts
for the different marginal effect on exemption probabilities that lower
wage and higher wage workers are likely to have. For example, the
change in the exemption probability for social workers as their income
rises is likely to be relatively small for social workers earning
between $155 and $455 per week compared to a relatively constant change
in the exemption probability for social workers earning between $455
and $1,250 per week. However, once workers earn a relatively high pay
level, the rate of change in their exemption probability is likely to
decrease as their income increases and they approach the maximum
exemption probability and maximum income reported for their job. The
Department also feels that this methodology is consistent with recent
findings in the economic literature. For example, Bell and Hart
(``Unpaid Work,'' Economica, 66: 271-290, 1999) and Bell, Hart, Hubler,
and Schwerdt (``Paid and Unpaid Overtime Working in Germany and the
UK,'' IZA Discussion Paper Number 133, Bonn, Germany: The Institute for
the Study of Labor, March 2000) found that unpaid overtime is more
often worked by employees with managerial status and with comparatively
high wage rates; whereas paid overtime is more often worked by
employees with lower wage rates.
Due to data limitations, this analysis was conducted on a national
level and was intended to produce national estimates. For a specific
occupation, individuals in low-wage industries or localities will
likely have slightly higher probabilities than estimated using the
gamma distribution model, while individuals in high-wage industries and
localities will likely have slightly lower probabilities. However, the
Department believes the overall estimates using this approach are
reasonable because these factors tend to balance each other at the
national level.
Clearly, this approach cannot be used by an employer to determine
the exempt status of individual employees. The approach was designed to
estimate the number of exempt employees in entire occupations for
statistical purposes only, not to determine the specific status of a
particular individual in a specific occupation. The latter requires
consideration of the individual's specific duties, which must be done
on a case-by-case basis.
3.6 Estimated Number of Exempt Salaried Workers
The total number of exempt salaried workers for each white-collar
occupation was estimated by multiplying the estimated probability of
being exempt by the CPS weight for each worker to produce a modified
weight, and then summing the modified weights for each occupation.
Based on this analysis, the Department estimates that 19.4 million of
the 30.9 million white-collar workers who earn $155 or more per week
and are subject to the Part 541 salary tests are currently exempt.
Table 3-7 presents the number of exempt workers in each WHD category by
weekly earnings. Table A-3 in Appendix A presents the number of exempt
workers in each white-collar occupation. Also presented in Table A-3 is
the number of nonexempt salaried workers in each of the 251 white-
collar occupations earning at least $155 per week.
[[Page 22209]]
Table 3-7.--Number of Exempt Workers by Earnings and WHD Exemption Probability Category
----------------------------------------------------------------------------------------------------------------
Weekly earnings
WHD exemption probability category ---------------------------------------------------------------
$155 to $455 $455 to $1,923 $1,923 + Total
----------------------------------------------------------------------------------------------------------------
High Probability of Exemption................... 815,600 11,105,374 1,449,047 13,370,021
Probably Exempt................................. 364,607 3,540,717 388,809 4,294,132
Probably Not Exempt............................. 88,111 1,257,050 137,811 1,482,972
Low or No Probability of Exemption.............. 29,535 253,597 9,134 292,266
-----------------
Total....................................... 1,297,852 16,156,738 1,984,801 19,439,391
----------------------------------------------------------------------------------------------------------------
Source: CONSAD and the U.S. Department of Labor.
Chart 4 shows the distribution of the currently exempt and
nonexempt workers by weekly earnings.
[GRAPHIC] [TIFF OMITTED] TR23AP04.010
Chapter 4: Estimating the Change in Overtime Protection
In this chapter, the Department presents the estimated changes in
exempt status of workers that are likely to occur as a result of the
final rule. The estimates presented below are based on the assessment
of the final rule presented in Chapter 2 and elsewhere in the preamble
and on the coverage estimates presented in Chapter 3. The methodology
detailed below differs from the PRIA because of modifications made to
the proposed rule to address the comments. In addition to changes
resulting from the revised methodology, the estimates are different
from the PRIA because the data sources have been updated.
The major findings in this chapter are as follows:
Workers earning less than $155 per week will
remain nonexempt under the final rule.
An estimated 6.7 million workers earning $155 or
more but less than $455 per week will be guaranteed overtime protection
under the revisions regardless of their duties.
There are an estimated 5.4 million currently
nonexempt salaried workers whose overtime protection will be
strengthened because their protection, which is based on the duties
tests under the current rules, will be automatic under the new rules.
[[Page 22210]]
There are an estimated 1.3 million white-collar
salaried workers earning at least $155 but less than $455 per week
currently exempt under the long and short duties tests who will gain
overtime protection.
Workers earning at least $455 per week will
benefit from the clarification of the duties test requirements. This
clarification is expected to reduce the uncertainty surrounding the
application of the current outdated regulations. Both workers and
employers will benefit from reduced litigation and from having greater
confidence in the exemption status of employees. Workers will better
understand their rights, employers will know their obligations, and WHD
investigators will be better able to enforce the law.
The Department has determined that the
differences in the number of workers earning $455 or more to $1,923 per
week who will be exempt under the standard tests as compared to the
number currently exempt are too small to estimate quantitatively. In
addition, the very few, if any, workers that might be converted from
nonexempt status to exempt status as a result of the updated
administrative and professional tests are likely to be offset by
workers gaining overtime protection as the result of the tightened
executive test.
The Department estimates that approximately
107,000 workers (47,000 hourly and 60,000 salaried) could be converted
to exempt salaried status as a result of the new test for highly
compensated workers. As explained more fully below, the primary reason
for the low estimate is the small number of workers earning $100,000 or
more per year, combined with the Department's assessment that most
white-collar workers earning $100,000 or more per year are very likely
currently Part 541-exempt.
4.1 Comments to the Proposed Rule on the Number of Exempt Workers
The Department received comments in response to the estimated
number of workers whose exempt status could change, contained in the
PRIA and the CONSAD report upon which the PRIA was partially based. For
example, the AFL-CIO stated, ``The Department asserts that its proposal
will cause 644,000 employees to lose their right to overtime, 68 Fed.
Reg. at 15580, and that roughly 1.3 million workers will become
automatically nonexempt * * * [F]laws in the study's approach and
methodology, as well as its lack of transparency, call into serious
question the reliability of these estimates.''
The Building and Construction Trades Department of the AFL-CIO
stated, ``As the Economic Policy Institute points out in a report it
recently issued, DOL seems to assume, without any factual support, that
all of these highly compensated employees are already exempt under the
current white-collar regulations. * * * However, as the Economic Policy
Institute Briefing Paper observed, it is not at all clear that all of
these highly compensated employees are already exempt under current
law.''
Several labor unions, citing the EPI analysis, asserted the
Department's preliminary analysis greatly underestimated the effect of
changing the overtime regulations. For example, the AFL-CIO stated,
``Based on its analysis of 78 occupations, EPI concluded that more than
8 million workers will lose overtime protection under the proposed
regulatory changes * * * This includes 2.5 million salaried workers and
5.5 million hourly employees who meet the duties test under the
proposed rule and who are at risk of being converted to salaried
status, thus eliminating their overtime protections. There are 1.3
million workers [who] would lose overtime protection because of the new
`''Highly Compensated Employee' category.'' In response to these
comments and in the interest of transparency, the Department has chosen
to set forth a detailed presentation of the methodology used to compute
the estimates regarding the impact of the final rule.
4.2 Critique of the EPI Report
Before explaining how the Department estimated the impact of the
final rule, it is important to discuss the EPI report because it has
received considerable publicity and was the only detailed alternative
impact analysis of the proposed rule that was submitted to the record.
The Department has concluded that the EPI report is unsound because its
conclusions are based on a substantial number of errors, particularly
regarding whether the proposal represented a change from the tests in
the current regulation. Because those errors led EPI to overstate
significantly the number of employees losing overtime protection as a
result of the Department's proposal, it is important to present an
overview of the most serious errors in the EPI report.
First, the basis for the EPI estimate that millions of workers
would lose their right to overtime was the contention that the proposed
standard duties tests that applied to workers earning $425 or more per
week were weaker than the current long and short duties tests. Many
other commenters adopted this contention. For example, the National
Treasury Employees Union stated, ``Millions of workers with salaries
between $22,101 and $65,000 who now receive overtime pay could be
reclassified as exempt under the broadened definitions of executive,
administrative, and professional employees.'' The Public Justice Center
added, ``If exemptions are easy to obtain, a large middle segment of
the work force will be exempted. Employers will give this exempted
portion of the workforce extra work, since they are essentially `free
labor.' And employers will be discouraged from both hiring more entry
level employees to do the extra work and from paying lower paid
employees at the time and one-half rate, thereby undermining the very
purposes of the hours-of-work standard and harming the classes of
persons who need protection the most, the low-wage employee and
unemployed worker.''
Most of the adverse comments resulted from mistakenly comparing the
new standard duties tests to the old long duties tests. As explained
above, this comparison is not valid because the current long duties
test is only applicable to workers earning less than $250 per week and
the few workers that are subject to the long test under the current
rule will be guaranteed overtime protection under the final rule.
The EPI report erroneously claims that ``Changes in the primary
duty test and the redefinition of `executive' will allow employers to
deny overtime pay to workers who do a very low level of supervising and
a great deal of manual or routine work, including employees who do set-
up work in factories and industrial plants. Employees who can only
recommend--but not carry out--the hiring or firing of the two employees
they supervise will be exempted as executives.'' In fact, both the
Department's proposed and final rules will make it more difficult to
qualify as an exempt executive. The final rule contains the same two
requirements as the current regulation's short duties test, and it adds
a third requirement from the existing, but essentially inoperative,
long duties test. The ``only recommend'' hiring or firing language that
EPI finds objectionable is the same language currently in section
541.1(c), which has been in the regulations since 1949. Moreover, that
requirement now appears only in the long test and thus is applicable
only to employees earning less than $250 per week. The Department's
proposed and final rules make this authority to recommend hiring or
firing the third prong of the standard test, thus strengthening the
executive duties test for workers earning $455 or more to $1,923 per
week. Similarly, the reference to set-up work
[[Page 22211]]
that EPI finds objectionable also is taken substantially word-for-word
from the current regulation at section 541.108(d), which describes work
that may be treated as exempt work if it is directly and closely
related to exempt work. Thus, EPI simply misses the mark in claiming
the Department's proposed rule would exempt more workers as executives
than under the current regulations. This claim is equally invalid under
the final rule.
EPI also claims the ``exemption for professional employees has been
dramatically expanded to include occupations that not only do not
require an advanced degree or postgraduate study, but also those that
do not require even an associate's degree or any prolonged course of
academic training or intellectual instruction (emphasis added).'' In
fact, the Department's proposed and final rules do not change the
current regulation's educational requirements for exemption as a
learned professional. The Department retains the current regulatory
requirement limiting the professional exemption to employees whose
primary duty is work that requires advanced knowledge in a field of
science or learning that is customarily acquired by a prolonged course
of specialized intellectual instruction. The Department also
recognizes, as the current regulation has recognized since 1949 at
section 541.301(d), that an advanced, specialized degree is
``customarily'' required but that an employee with equal status and
knowledge--``the occasional chemist who is not the possessor of a
degree in chemistry''--is not ``barred from the exemption.'' But, as
the final regulation continues to recognize (section 541.301(d)), in
all cases the exemption is restricted to professions where an advanced,
specialized academic degree is a ``standard prerequisite for entrance
into the profession.'' Because the professional exemption only applies
to workers whose primary duty consists of performing work requiring
knowledge of an advanced type in a field of science or learning
customarily acquired by a prolonged course of specialized intellectual
instruction and study, it is simply impossible for the changes proposed
or finalized here to extend that exemption to occupations that do not
meet this test, as EPI claims.
Like many other commenters, EPI has confused the occupations
specifically covered by proposed section 541.301(e). Based upon its
misperception that the Department had changed the regulatory standard,
the EPI report stated that under the proposed rule, ``no minimum level
even of on-the-job training will be required'' for the professional
exemption. In fact, the proposed and final rules clearly state that
professional occupations do not include those whose duties may be
performed with general knowledge acquired by an academic degree in any
field or with knowledge acquired through an apprenticeship or from
training in routine mental, manual, mechanical, or physical processes.
Similarly, the EPI report claims that licensed practical nurses
(LPNs) and an additional 40 percent of other technologists and
technicians in the health care field will become newly exempt as
learned professionals. In fact, there are no such changes regarding
nurses and others in the health care field. The Department's current
regulation, at section 541.301(e)(1), has long recognized that
registered nurses perform exempt duties (and whether they are, in fact,
exempt turns on whether they are paid on a salary basis). The proposed
and final regulatory exemptions are similarly limited to registered
nurses, not LPNs. Moreover, the final rule specifically states that
``licensed practical nurses and other similar health care employees * *
* generally do not qualify as exempt learned professionals because
possession of a specialized advanced academic degree is not a standard
prerequisite for entry into such occupations.'' The current regulation
also recognizes that certified medical technologists would satisfy the
duties test if they complete ``3 academic years of pre-professional
study in an accredited college or university plus a fourth year of
professional course work in a school of medical technology approved by
the Council of Medical Education of the American Medical Association.''
This exact language appeared in the proposed rule and is in the final
rule. Thus, EPI's claim that 40 percent of health technologists will
lose the right to overtime pay because they would be considered learned
professionals simply is incorrect.
EPI's claim that ``the great majority of dental hygienists will be
exempt professionals'' also is similarly wrong. The proposed and final
rules provide that dental hygienists would qualify for exemption only
if they have successfully completed four years of pre-professional and
professional study in an accredited college or university approved by
the Commission on Accreditation of Dental and Dental Auxiliary
Educational Programs of the American Dental Association. The regulation
simply restates what has long been in the Wage and Hour Division's
Field Operations Handbook and its opinion letters (e.g., 1975 WL 40986,
WHD Opinion Letter, WH-363, November 10, 1975) regarding dental
hygienists, and thus there is no change from current law.
Section 541.301(f) of the final rule also notes that accrediting
and certifying organizations may be created in the future. Such
organizations may develop similar specialized curriculums and
certification programs which, if a standard requirement for a
particular occupation, may indicate that the occupation has acquired
the characteristics of a learned profession.
EPI's report also is similarly flawed regarding the administrative
exemption, which it claimed ``is vastly expanded by * * * eliminating
the requirement that the employee's primary duty must be staff work
rather than production work.'' In fact, the proposal expressly stated
that it would ``reduce but not eliminate the emphasis on the so-called
production versus staff dichotomy in distinguishing between exempt and
non-exempt workers.'' Thus, the EPI's report simply misstates the
impact of the proposal in this area. Moreover, the final rule retains
the current regulatory requirement that an exempt employee's primary
duty must be work directly related to the management or general
business operations of the employer or the employer's customers, and
includes a provision found only in the interpretive portion of the
current rule (section 541.205(a)) clarifying that this phrase refers to
activities relating to the running or servicing of a business as
distinguished from working on a manufacturing production line or
selling a product in a retail or service establishment.
In addition to the workers that EPI estimated would lose the right
to overtime protection under the proposed standard duties tests, EPI
also estimated that millions of workers would lose their right to
overtime protection as the result of the proposed duties tests for
highly compensated employees: ``In FLSA-covered industries and
occupations, there were 8.3 million white-collar employees who earned
at least $65,000 in 2000. Approximately 7.4 million were paid a salary,
and about 843,000 were paid hourly. Like the Department of Labor, we
assume that hourly workers who would be exempt under the new rules if
they were paid a salary will be converted to a salary basis by their
employers and will therefore be exempt * * * We also assume that every
employee paid $65,000 or more will be able to meet at least one prong
of the many duties tests. There is no minimum educational attainment or
job experience to qualify for this exemption.''
[[Page 22212]]
The Department determined that EPI's estimate of 8.3 million is
incorrect. First, this inflated figure includes a significant number of
workers who are already exempt under the current short test, which
double-counts millions of workers. More importantly, EPI erroneously
described the impact of the highly compensated test, stating it would
``deny overtime pay to white-collar employees who earn $65,000 or more
a year, even if they do not meet the definition of executive,
administrative or professional employees.'' In fact, the proposal would
have exempted employees only if they earned at least $65,000 and
performed ``office or non-manual work'' and performed ``one or more of
the exempt duties and responsibilities of an executive, administrative,
or professional employee.'' EPI similarly erred when it claimed that,
``every employee paid $65,000 or more will be able to meet at least one
prong of the many duties tests.'' This claim ignored the fact that only
employees performing office or non-manual work could meet the test,
thus ensuring that highly paid blue-collar workers such as plumbers,
electricians, steelworkers, autoworkers and longshoremen would never
qualify for exemption. Further, the highly compensated test in the
final rule has been increased to $100,000 or more per year.
These errors by EPI and other commenters are a good example of why
the current regulation needs to be updated and clarified. If the group
of ``experts in employment law and in the application of the FLSA
exemptions'' that was consulted by EPI made these errors, it is
probably similarly difficult for most small businesses to accurately
understand their overtime obligations under the current rule.
The Department also concluded the EPI analysis is flawed because it
erroneously assumes that employers completely control the terms of
employment and can at their sole discretion and without consequence
convert millions of workers to exempt status to avoid paying overtime.
In fact, the economic laws of supply and demand usually dictate the
terms of employment; therefore, if employers offer too little
compensation for the hours of work they demand they will not be able to
attract a sufficient number of qualified workers to meet their needs.
If employers could completely dictate the terms of employment, in the
absence of a state or local ordinance, hourly workers covered by the
FLSA would only receive the federally-mandated minimum wage. Similarly,
salaried workers would be paid no more than $250 per week, the minimum
required to meet the current short duties test. These workers would
then be required by their employers to work extremely long hours with
no overtime. Since this is clearly not the situation in today's labor
market, it is a mistake to assume that employers are in complete
control of the terms of employment.
Consider the example of registered nurses. The Department received
many comments alleging the proposal would cause registered nurses to
lose overtime. For example, the American Nurses Association stated,
``the proposed income test for white-collar employees, who are paid
$65,000 or more annually, will exclude some of the most experienced
registered nurses from overtime protections and will undermine efforts
to retain these valuable members in the nursing workforce.'' The
Massachusetts Nurses Association stated, ``according to a recent
national survey conducted by Advance For Nurses (a nursing
publication), 32 percent of all nurses are salaried, which, given the
long-established status of RNs as `professionals' under the FLSA, means
that 32 percent of nurses are subject to possible automatic exclusion
from the FLSA simply based upon income if the proposed rule were
adopted * * * Thus, the proposed regulation would likely render a great
many rank-and-file RNs per se exempt from the FLSA.''
These comments fail to recognize that RNs already satisfy the
duties test for exemption under the current regulations, and have since
1971. Section 541.301(e)(1) of the current rule specifically states
``Registered nurses have traditionally been recognized as professional
employees by the Division in the enforcement of the act * * * [N]urses
who are registered by the appropriate State examining board will
continue to be recognized as having met the requirement of 541.3(a)(1)
of the regulations.'' Given that most (94.1 percent) registered nurses
have weekly earnings greater than $250, almost all registered nurses
could be classified as exempt under current regulations if they were
paid on a salary basis. Nevertheless, 75.5 percent of RNs continue to
be paid by the hour and are eligible for overtime pay, strongly
indicating there are other labor market factors involved in determining
how RNs are paid.
Just as many RNs continue to be paid overtime despite the fact the
current regulations classify them as performing exempt professional
duties, the Department believes the same will happen for other
occupations under the duties tests for highly compensated employees.
There are many more factors involved in employee compensation beyond
the FLSA requirements and an employer's desire to minimize overtime
costs. The nature of the work (particularly peak work loads in relation
to average work loads), the supply of qualified workers, the risk
tolerance of both the employer and the employee, and tradition/culture
are just some of the factors involved that influence whether or not a
particular job is paid on a salaried or hourly basis.
A review of the literature on pay policies posted by Human Resource
(HR) professionals on publicly accessible Internet sites with workforce
and salary themes (e.g., Salary.com) also indicates the ability of
employers to dictate the terms and conditions of employment is limited
by a variety of labor market conditions. The pertinent market
conditions include: Competition among employers, scarcity of skilled
workers, accessibility of information, and worker mobility.
The effect of competition for skilled workers by firms operating in
local or regional labor markets is clearly explained in the HR
literature, ``Just as organizations compete to sell their products and
services, they also compete with one another for talented employees.''
(Lena M. Bottos and Christopher J. Fusco, SPHR 2002, Competitive Pay
Policy, Salary.com, Inc.) Firms expend time and resources designing
compensation plans that attract and retain skilled workers, without
exhausting their limited financial resources. Under those conditions,
exploiting workers by imposing unsatisfactory working conditions, such
as excessive unpaid overtime, detracts from such firms' overall
competitive strategies. It also exposes them to increases in labor
turnover as displeased workers seek and find new jobs with competing
employers.
Therefore, the Department concludes that any analysis or comment
that explicitly or implicitly assumes that employers completely control
all the terms of employment and can heedlessly convert millions of
workers from nonexempt to exempt status to avoid paying overtime is
inconsistent with prevailing economic theory (particularly regarding
high-wage labor markets) and empirical analysis. For this reason, as
well as the many mistakes and incorrect assumptions explained above,
the Department finds the alternative impact analysis conducted by EPI
and submitted by the AFL-CIO to the record to be unpersuasive.
[[Page 22213]]
4.3 Estimated Number of Workers Converted to Nonexempt Status as a
Result of Raising the Salary Level
The Department estimates that the final rule will strengthen
overtime protection for millions of workers. Raising the salary level
test to $455 will:
Strengthen overtime protection for an additional
6.7 million salaried workers earning $155 or more but less than $455
per week regardless of their duties or exempt status. This includes 1.3
million exempt white-collar salaried workers who will gain overtime
protection and 5.4 million nonexempt salaried workers whose overtime
protection will be strengthened by the higher bright-line salary level
test compared to a combination of the salary basis test and the
confusing long and short duties tests in the current regulations.
Another 3.4 million white-collar employees who
are paid by the hour (and earn $155 or more but less than $455 per
week) but work in occupations with a high probability of being exempt
also will have their overtime protection strengthened. Under the
current regulations these workers are at some risk of being
misclassified and denied overtime. Under the higher salary level test
in the final rule, they will be guaranteed overtime regardless of their
duties or how they are paid.
These 10.1 million workers are predominantly
married women with less than a college education.
The estimated 1.3 million currently exempt salaried workers earning
at least $155 but less than $455 per week for all white-collar
occupations is the Department's best estimate of the number of workers
who are likely to gain compensation under the final rule. A detailed
breakdown of the estimates is presented in Table A-4 of Appendix A. The
occupations gaining most from raising the salary level are 203,000
managers and administrators not elsewhere classified, 143,000
supervisors and proprietors of sales occupations, 52,000 accountants
and auditors, 49,000 registered nurses, and 48,000 teachers not
elsewhere classified.
When developing this estimate, the Department did not focus
exclusively on the number of workers reporting overtime (41 or more
hours worked). The Department assumed that all of the estimated 1.3
million exempt salaried workers earning at least $155 but less than
$455 per week are likely to work some overtime during the year for two
reasons: First, the CPS Outgoing Rotation Group dataset likely
underestimated the number of employees who work some overtime during
the year; and second, employers have an economic disincentive to exempt
workers that never work overtime.
Moreover, because the CPS Outgoing Rotation Group dataset is based
on only twelve one-week reference periods, it provides a significantly
lower estimate of the number of employees who actually worked overtime
at some point during the year than a survey based upon a full-year
reference period such as the CPS Supplement. For example, the Bureau of
Labor Statistics notes that because the Annual Social and Economic
Supplement to the CPS has a ``reference period [that] is a full year,
the number of persons with some employment or unemployment greatly
exceeds the average levels for any given month, which are based on a 1-
week reference period, and the corresponding annual average of the
monthly estimates.'' (BLS, Work Experience of the Population in 2002,
Press Release.) The Department has determined that the same is likely
to be true for the number of workers who work overtime.
The Department believes that including all 1.3 million workers is
reasonable given the exempt status of these workers. Conferring exempt
status on an employee has both costs and benefits. The cost is that
these workers may work less than 40 hours per week without using leave,
and under the salary basis test employers cannot adjust employee pay
for working less than 40 hours. In fact, the CPS data states that about
23 percent of likely exempt workers worked less than 35 hours per week
during the reporting period. In this situation, employers have to pay
for hours that are not worked. This cost must be offset by the benefit
of flexibility. Both employers and employees may prefer a salary basis
for payment in order to smooth out cash flows; however, that preference
depends on the employer having a need for flexibility in the number of
hours the employee works, and the employee accepting that their pay
will not be tightly tied to hours worked. In other words, employers
will have a need for overtime and salaried employees would be willing
to work overtime. Therefore, employers have an economic disincentive to
exempt workers that never work overtime, and the Department considers
an exemption a strong signal that the worker is likely to work some
overtime during the year.
Furthermore, the Department considers the estimated 1.3 million
workers gaining compensation to be a lower bound estimate of the
workers who will benefit from raising the salary level to $455 per
week. Specifically, the following workers will also benefit:
An estimated 2.6 million nonexempt salaried
workers earning $155 or more but less than $455 per week in the white
collar occupations will gain some overtime protection (in the form of a
reduced probability of being misclassified) from the $455 bright line
salary level test compared to the current combination of long and short
duties tests.
Up to 14.0 million hourly paid workers earning
$155 or more but less than $455 per week in the white-collar
occupations will also benefit from the $455 bright line salary level
test. Under the current regulations these workers are at some risk of
being misclassified and denied overtime. Under the higher salary level
test in the final rule, they will be guaranteed overtime regardless of
their duties or how they are paid. This estimate includes the 3.4
million white-collar employees noted above who are paid by the hour but
work in occupations with a high probability of being exempt.
Raising the salary level test to $455 per week
will strengthen overtime protection for 2.8 million salaried workers in
blue-collar occupations, because their protection, which is based on
the duties tests under the current regulation, will be automatic under
the new rules. The Department concluded that most of these workers are
nonexempt under the current regulation, however, making their nonexempt
status certain will unambiguously increase their overtime protection.
4.4 Estimated Number of Workers Changing Exempt Status as a Result of
Updating the Duties Tests
Given the comparability of the standard tests in the final rule and
the current short tests (see Chapter 2), the Department has determined
the final rule is as protective as the current regulation for the 57.0
million workers who earn between $23,660 and $100,000 per year. The
differences in the number of workers who could change exempt status
under the standard duties tests compared to the current regulation are
too small to estimate quantitatively. The very few, if any, workers
whose exempt status might possibly change as a result of updating the
administrative and professional duties tests are likely to be offset by
workers gaining overtime protection as a result of the tightened
executive test.
Clearly, the final standard duties test for the executive exemption
is more protective than the current regulation with the additional
requirement from
[[Page 22214]]
the current long test. The numerous significant changes the Department
made in the final rule to return the administrative duties test to the
structure of the current rule, as well as the retention of terms that
are used in the current rule that have been the subject of numerous
clarifying court decisions and opinion letters, have made the standard
duties test for administrative employees in the final rule as
protective as the current short test. Further, the significant changes
the Department made in the final standard duties test for the learned
professional exemption to track the current rule's primary duty test,
to restructure the reference to acquiring advanced knowledge through
other means so that the final rule is consistent with the current rule,
to add language from the current long test that defines work requiring
advanced knowledge as ``work that is predominantly intellectual in
character,'' and to define work requiring advanced knowledge as
including work requiring the consistent exercise of discretion and
judgment have made the learned professional exemption in the final rule
at least as protective as the current rule. It should also be noted
that both the current and final rule recognize that the areas in which
the professional exemption may be available are expanding as knowledge
is developed, academic training is broadened and specialized degrees
are offered in new and diverse fields.
Before reaching this determination, the Department convened a group
of WHD and DOL employees with a combined total of more than 160 years
of WHD experience. The group was asked to quantitatively compare the
duties tests in the current and final standards with respect to how the
updated final rule could impact the probability of exemption. The group
concluded that, given the minor and editorial updates to the duties
tests in the final rule, the CPS data limitations, and the broad
probability ranges previously developed (see Table 3-2), the
differences in the exemption probabilities under the current and final
rule would be too small to estimate.
As the GAO previously noted, basing the estimates on the CPS and
the 1998 judgments of the WHD staff imposes some limitations on the
analysis: ``There are two major limitations on the use of CPS data.
First, the CPS occupational classifications do not distinguish between
supervisory and nonsupervisory employees, which is important for the
long and short duties tests under the Fair Labor Standards Act (FLSA).
Therefore, one job title, `managers and administrators,' could include
the President of General Motors, but it may also include an office
assistant. Second, CPS respondents self-identify their duties and some
may tend to exaggerate them. This may result in overestimates of the
number of management employees and, consequently, may overestimate the
number of exempt employees.'' (GAO/HEHS-99-164, pg. 42)
4.5 Estimated Number of Salaried Workers Converted to Exempt Status as
a Result of the Highly Compensated Test
Although the test in the final rule for highly compensated
employees who earn $100,000 or more per year is clearly more protective
than a simple salary level test, it is less stringent than both the
current short duties tests and the standard duties tests in the final
rule. The Department estimates that under the highly compensated test:
About 107,000 nonexempt white-collar workers who
earn $100,000 or more per year could be converted to exempt salaried
status as a result of the new highly compensated test. This includes
60,000 salaried and 47,000 paid hourly workers.
No blue-collar workers will be affected because
the test only applies to employees performing office or non-manual
work. Carpenters, electricians, mechanics, plumbers, iron workers,
craftsmen, operating engineers, longshoremen, construction workers,
laborers, and other employees who perform manual work are not exempt
under the test no matter how highly paid they might be.
No police officers, fire fighters, paramedics,
emergency medical technicians (EMTs), and other first responders will
be affected by the highly compensated test.
The vast majority of salaried white-collar
workers who earn $100,000 or more per year, 2.0 million of the 2.3
million, or 87.0 percent, are already exempt under the current short
test and will not be affected by the highly compensated test.
The methodology used to estimate the number of salaried workers
that could be classified as exempt under the duties tests for highly
compensated employees is similar to the methodology used to estimate
the number of exempt workers under the current short duties tests. The
primary distinction is that a higher set of probabilities was estimated
for each white-collar CPS occupational classification reflecting the
more limited duties tests for highly compensated workers.
Since the exemption for highly compensated workers is a new
provision, the probabilities of exemption for the four classifications
could not be estimated on the basis of historical experience, as was
done for the current duties tests in 1998 by the WHD staff (see Chapter
3). Therefore, the Department used a comparative approach whereby the
probabilities developed by the WHD staff were modified based upon an
analysis of the provisions of the highly compensated test in the final
rule relative to the short duties tests in the current rule. The
Department determined that this comparative approach should be used for
the highly compensated test because it is substantially different from
the current short duties test, whereas it should not be used for the
standard duties tests because they are substantially similar to the
current short duties tests.
In utilizing this approach, the Department rejected the worst-case
assumption used by some commenters, that under the proposed highly
compensated tests all workers earning more than the highly compensated
salary level ($65,000 per year in the proposal) could be made exempt.
Rather, the Department determined that some workers earning more than
$100,000 per year would remain nonexempt because the final highly
compensated test requires that exempt work be office or nonmanual and
that the employee ``customarily and regularly'' perform one or more of
the exempt duties or responsibilities of an executive, administrative,
or professional employee, and that the employee be paid at least $455
per week on a salary basis. Other workers would remain nonexempt
because most employers will adjust their compensation policies in a way
that maintains the stability of their workforce, pay structure, and
output levels while preserving their investment in human capital and
minimizing their turnover costs.
Although the highly compensated test in the final rule is clearly
more stringent than either a simple salary test or the highly
compensated test in the proposed rule, it is also clear that the highly
compensated test in the final rule is less stringent than both the
current short tests and the standard duties tests in the final rule. To
account for this, the Department determined that both the lower and
upper bound probability estimates for the four probability categories
should be higher than those used in Chapter 3 to estimate the number of
currently exempt workers (see Table 3-2).
For the ``Low or No Probability of Exemption''
classification, the Department raised the lower bound
[[Page 22215]]
probability of exemption from 9.9 percent estimated using the
methodology presented in Chapter 3 for earnings of $1,923 per week
(i.e., $100,000 per year) to 15.0 percent, and the upper bound
probability of exemption by approximately the same 5 percentage points,
from 10 percent to 15 percent (see Table 3-2). This represents an
increase of at least 50 percent for both the lower and upper bound
probabilities.
These increases are sizable for occupations that have little or no
probability of being exempt under the current short tests, but were
included because the WHD staff in 1998 considered it conceivable that
some exempt supervisors might be in the group.
For the ``Probably Not Exempt'' classification
both the lower and upper bound probabilities were raised by 10
percentage points. This raised the lower bound probability by
approximately 21 percent from the 48.4 percent calculated at $1,923 per
week (i.e., $100,000 per year) to 58.4 percent, and increased the upper
bound probability by 20 percent from the 50 percent in Table 3-2 to 60
percent.
These increases are sizable for occupations that have a relatively
low probability of being exempt under the current short tests.
For the ``Probably Exempt'' classification the
lower bound probability was increased from 88 percent (at $100,000 per
year) to 94 percent and the upper bound probability was raised from 90
percent to 96 percent. This raised both probabilities by 6 percentage
points and effectively reduced the probability of being nonexempt by 50
percent for workers in this category who earn more than $100,000 per
year.
For the ``High Probability of Exemption''
category both the lower and upper bound were set at the maximum value
of 100 percent.
The lower bound probability for both the ``Probably Exempt'' and
the ``High Probability of Exemption'' categories were already extremely
high at earnings of $100,000 per year using the methodology in Chapter
3 (88 percent and 99 percent, respectively). This is consistent with
the belief of the WHD staff that most workers in these categories
earning at least $100,000 are probably already exempt.
The estimated probabilities of Part 541--exemption status under the
duties tests for highly compensated employees are presented in Table 4-
1 for each coverage classification.
Table 4-1.--Part 541--Exemption Probability Categories for Salaried
Workers Under the Final Highly Compensated Test
------------------------------------------------------------------------
Lower bound Upper bound
Category estimate estimate
(percent) (percent)
------------------------------------------------------------------------
1. High Probability of Exemption.............. 100 100
2. Probably Exempt............................ 94 96
3. Probably Not Exempt........................ 58.4 60
4. Low or No Probability of Exemption......... 15 15
------------------------------------------------------------------------
Source: U.S. Department of Labor, based upon estimates in Table 3-2.
The specific probabilities of exemption for the annual salaries
between the $100,000 salary level for the highly compensated test and
the top coded salary of $150,000 per year (i.e., $2,885 per week) were
estimated using linear interpolation according to the following
equation:
[GRAPHIC] [TIFF OMITTED] TR23AP04.011
Where:
Prob--Exempt--HC = Probability of the individual in occupational
classification OCC being exempt under the duties tests for highly
compensated employees
PTERNWA = CPS weekly earnings variable
LB* = Lower bound probability from Table 4-1
UB* = Upper bound probability from Table 4-1
Linear interpolation was used rather than a nonlinear model because
the income distributions for all four categories are relatively linear
once weekly earnings reach $1,923 (i.e., the $100,000 annual earnings
level). Figure 4-1 presents a graphical illustration of the probable
exemption status for the ``Probably Not Exempt'' classification.
Similar illustrations could have been developed for the other three
classifications but were not included in the final RIA.
As Figure 4-1 illustrates, the probability of being exempt is
higher under the highly compensated test than under the standard test.
To estimate the number of additional employees that become exempt as a
result of the new highly compensated test, the Department simply
subtracted the estimated number of workers who would be exempt under
the standard tests from the total number who would be exempt under the
highly compensated tests.
[[Page 22216]]
[GRAPHIC] [TIFF OMITTED] TR23AP04.012
The Department excluded salaried computer system analysts and
scientists (in occupation 64) and salaried computer programmers (in
occupation 229) because they could have already been made exempt under
section 13(a)(17) of the Act. In addition, salaried registered nurses
(in occupation 95) and salaried pharmacists (occupation 96) were
excluded because they could have already been made exempt under both
the current short tests and the standard duties tests in the final
rule. Thus, the Department estimates approximately 60,000 additional
salaried workers earning $100,000 or more per year could become exempt
under the highly compensated test as compared to the current short test
or the standard duties tests in the final rule. A detailed breakdown of
the additional number of workers who could be made exempt under the
highly compensated tests is presented in Table A-5 of Appendix A.
4.6 Estimated Number of Hourly Paid Workers Converted to Exempt Status
as a Result of the Highly Compensated Test
The procedure used to estimate the number of highly compensated
hourly employees that could be converted to exempt salaried status
under the final rule is different from that used in Section 4.5
because, under both current regulations and the final rule, virtually
all hourly workers are considered nonexempt (except those not required
to be paid on a salary basis, such as doctors and lawyers). Thus,
before any hourly worker could be made exempt under the highly
compensated tests, employers would first have to convert them to a
salaried basis and pay them at least $455 per week plus commissions and
bonuses that brings their total compensation to $100,000 or more per
year. To estimate the number of hourly workers that could be converted,
the Department utilized a number of reasonable assumptions.
First, the Department assumed that over the 29 years since the last
revision to Part 541 the market has established an optimal distribution
between the number of salaried and hourly workers who earn $100,000 or
more per year. Although there are many more factors involved in
employee compensation beyond the FLSA requirements as was noted above
in Section 4.2, it appears that both employers and employees prefer a
salary basis for earnings at this level, given the greater than 7 to 1
ratio of salaried workers (2,321,000) to hourly workers (345,000)
subject to the Part 541 salary tests.
The nature of the work, the supply of qualified workers, the risk
tolerance of both the employer and the employee, and tradition/culture
are just some of the factors involved that influence whether or not a
particular job is paid on a salaried or hourly basis. Therefore, the
Department has determined that just as 63.4 percent of the RNs and 76.1
percent of the Pharmacists who earn $100,000 or more per year continue
to be paid by the hour (and eligible for overtime) despite the fact the
current regulations classify them as performing exempt professional
duties, the same will happen for other white-collar occupations under
the highly compensated test and that many paid hourly workers will
remain paid by the hour. The Department then assumed:
For both the ``Low or No Probability of
Exemption'' and the ``Probably Not Exempt'' categories, that highly
compensated white-collar hourly workers would have the same marginal
probability of being converted to exempt salaried status as the
currently nonexempt highly compensated salaried white-collar workers.
Thus, highly compensated white-collar hourly workers in these two
categories were assigned probabilities of exemption of 5 percent and 10
percent, respectively.
These probabilities are consistent with the Department's first
assumption that the market has established an optimal distribution
between the number of salaried and hourly workers who earn $100,000 or
more per year and that only a marginal change is likely to occur in the
exempt status of paid hourly workers who earn $100,000 or more per year
in these two categories.
Second, the Department assumed that:
The probability of being converted to exempt
salaried status for highly compensated white-collar hourly workers in
the ``Probably Exempt'' category is twice that of highly compensated
white-collar hourly workers in the ``Probably Not Exempt'' category, or
20 percent. Unlike the two
[[Page 22217]]
categories discussed above, the Department did not base its estimates
on the marginal probabilities for salaried white-collar workers in the
``Probably Exempt'' category because, as discussed in Section 4.5, the
upper bound probability for such workers in that category was limited
by its close proximity to 100 percent.
The Department also assumed that the probability
of being converted to exempt salaried status for highly compensated
white-collar hourly workers in the ``High Probability of Exemption''
category is twice that of highly compensated white-collar hourly
workers in the ``Probably Exempt'' category, or 40 percent. The
Department once again did not base its estimate on the marginal
probabilities for salaried white-collar workers in the ``High
Probability of Exemption'' category because, as discussed in Section
4.5, the upper bound probability for such workers in that category was
limited by its close proximity to 100 percent.
These estimates are presented in Table 4-2.
Table 4-2.--Estimated Probability of Exemption for White-Collar Hourly
Workers Earning at Least $100,000 per Year
------------------------------------------------------------------------
Estimated
Category probability
(percent)
------------------------------------------------------------------------
1. High Probability of Exemption........................... 40
2. Probably Exempt......................................... 20
3. Probably Not Exempt..................................... 10
4. Low or No Probability of Exemption...................... 5
------------------------------------------------------------------------
Source: U.S. Department of Labor.
Further, the Department rejected the worst-case assumption that
under the highly compensated test all paid hourly workers earning
$100,000 or more per year could be made exempt. Rather, the Department
determined that some paid hourly workers earning more than $100,000 per
year would remain nonexempt because the final highly compensated test
requires that exempt work be office or nonmanual and that the employee
``customarily and regularly'' perform one or more of exempt duties.
Other paid hourly workers would remain nonexempt because most employers
will adjust their compensation policies in a way that maintains the
stability of their workforce, pay structure, and output levels while
preserving their investment in human capital and minimizing their
turnover costs.
The next step was to estimate the number of hourly white-collar
workers earning $100,000 or more per year who would meet the duties
tests for highly compensated employees in the final rule. The
Department excluded approximately 29,000 computer professionals (in
occupations 64 and 229) because these computer professionals earning
$100,000 or more per year would currently be exempt under section
13(a)(17) of the Act. Approximately 22,000 registered nurses
(occupation 95) and 10,000 pharmacists (occupation 96) were also
excluded because current section 541.301(e)(1) has long recognized that
registered nurses and pharmacists perform exempt duties (and whether
they are, in fact, exempt turns on whether they are paid on a salary
basis). If it were advantageous for employers to convert any of these
workers to exempt status, they could and presumably would have been
converted under the current rule. After excluding these two groups,
there are approximately 182,000 hourly white-collar workers earning at
least $1,923 per week in the 251 white-collar occupations who
potentially could be impacted by the highly compensated tests. Workers
in occupations not subject to the salary level test (i.e., teachers in
educational establishments, doctors and lawyers) were previously
excluded from the analysis whether they are paid on a salary or hourly
basis.
The number of hourly workers in each white-collar occupation
earning at least $1,923 per week was multiplied by the associated
probability in Table 4-2 and summed across all occupations to arrive at
the Department's estimate that about 47,000 hourly workers could be
converted to exempt salaried status as the result of the highly
compensated test (Note: this procedure is equivalent to using the same
linear model as in Section 4.5 with all of the lines being horizontal).
Managers and administrators not elsewhere classified (occupation 22)
account for approximately 31 percent of all hourly workers that could
potentially be converted to exempt salaried status. No other occupation
accounts for more than five percent of the total. Table A-6 in Appendix
A presents the detailed breakdown by occupation.
4.7 Estimated Total Number of Workers Converted to Exempt Status as a
Result of the Highly Compensated Tests
The Department estimates that 107,000 workers could be converted to
exempt status as a result of the new highly compensated tests. The
major reason for the decrease in this estimate compared to the PRIA is
the salary level for the test being raised to $100,000 and there are
far fewer workers earning this higher salary. The Department estimates
there are 2.3 million salaried workers earning at least $100,000 in
white-collar occupations subject to the salary test, compared to 7.0
million earning at least $65,000. In addition, after excluding the
computer programmers, RNs and pharmacists, because they could already
be made exempt if paid on a salaried basis under the current rule, 2.0
million of the 2.1 million remaining highly compensated white-collar
salaried workers (95.2 percent) are estimated to be already exempt
under the current short duties tests. In addition, there are only
182,000 hourly workers that could be potentially impacted by the highly
compensated test at the $100,000 level. Moreover, the final rule's
highly compensated test applies only if the employee performs office or
non-manual work.
Thus, for example, police officers, firefighters, paramedics, and
other first responders could not be exempt under the highly compensated
test although the Department estimates that 1,300 police commissioners,
police and fire chiefs, and police captains who earn $100,000 or more
per year could be converted to exempt status. (However, 940 of these
1,300 workers are performing exempt duties but are currently nonexempt
because they report that they are paid by the hour, rather than on a
salary basis. Therefore, the Department believes that many of them are
unlikely to be converted because of the final rule.) Finally, by
increasing the earnings level for the highly compensated test and
adding the requirement that the exempt duties must be performed
customarily and regularly, the Department increased the probability
that the salaried workers at that level would already be exempt under
the current rule.
The Department notes that the CPS earnings data includes wages,
commissions and tips, but does not include some bonuses. According to
the Census Bureau Web site, the usual weekly earnings ``data represent
earnings before taxes and other deductions, and include any overtime
pay, commissions, or tips usually received (at the main job in the case
of multiple jobholders). Earnings reported on a basis other than weekly
(e.g., annual, monthly, hourly) are converted to weekly. The term
`usual' is as perceived by the respondent. If the respondent asks for a
definition of usual, interviewers are instructed to define the term as
more than half the weeks worked during the past 4 or 5 months.''
(http://www.bls.census.gov/cps/bconcept.htm)
[[Page 22218]]
The Department concludes that infrequent bonuses (e.g., Christmas
bonuses) are probably not reported as usual earnings, while regular
non-discretionary bonuses (such as those described in section
541.601(b) of the final rule) are likely to be included. Given that
some workers surveyed for the CPS may not have reported their non-
discretionary bonuses, the Department may have slightly underestimated
the number of workers potentially impacted by the highly compensated
test. However, the Department believes this is balanced by the fact
that the analysis was conducted using weekly earnings rather than
annual earnings as is required by the highly compensated test, which
may result in an overestimate of the number of workers earning $100,000
or more per year (weekly earnings were used because the CPS dataset
does not contain a variable for annual salary). Since there are many
more white-collar hourly workers earning less than $100,000 per year
than earning $100,000 or more per year, it is likely that basing the
estimate on a single week of data will likely result in the inclusion
of many more workers with an abnormally high earnings week (e.g., due
to a large amount of overtime or an unusually high commission) in the
estimate of workers earning $100,000 or more per year than the number
of workers excluded from the total of workers earning $100,000 or more
per year due to one abnormally low earnings week (e.g., due to the lack
of overtime or an unusually low commission).
Finally, as discussed above in Section 4.6, the estimate of 47,000
hourly workers who could be converted to exempt salaried status is
likely an overestimation due to the assumptions made about the ease of
converting these workers to a salary basis.
4.8 Estimated Total Impact of the Part 541 Revisions
As indicated in Table 4-3, the Department estimates 1.3 million
salaried workers earning less than $455 per week who are currently
exempt under the long and short duties tests could benefit from higher
earnings in the form of either paid overtime or higher base salaries.
In addition, an estimated 47,000 hourly workers and 60,000 salaried
workers with annual earnings of $100,000 or more could be converted to
exempt status as a result of the new highly compensated test.
Table 4-3.--Estimated Impact of the Final Rule on the Overtime Status of
White-collar Workers
------------------------------------------------------------------------
------------------------------------------------------------------------
Exempt to Nonexempt........................................ 1,298,000
Salaried Nonexempt to Exempt............................... 60,000
Hourly Nonexempt to Salaried Exempt........................ 47,000
------------------------------------------------------------------------
Source: CONSAD and the U.S. Department of Labor.
Chapter 5: Economic Profiles
In the PRIA, the Department presented estimates at the 2-digit
standard industry code (SIC) and by state. As noted above, several
commenters suggested more detailed breakdowns should have been
published. For example the AFL-CIO stated, ``Generalizing to a 2-digit
code loses important distinctions within industry sector, and this
causes a corresponding loss of precision within the study.''
However, there are not a sufficient number of observations in the
CPS dataset to provide reliable estimates even at the 2-digit level of
detail, much less the 4-digit level suggested by the AFL-CIO. For
example as discussed above, the methodology used in Chapter 3 was
conducted on a national level and was intended to produce national
estimates of the number of currently exempt workers. To produce
industry specific or regional estimates, the income distributions would
have had to have been developed at more disaggregated levels in order
to account for the industry or regional wage structure. While
sufficient to produce national estimates, the Department determined
that the CPS dataset was too small to develop income distributions for
each of the categories at this more disaggregated level.
Similarly, the costs presented below in Chapter 6 were estimated at
a national level and then allocated to specific major industry groups
on the basis of employment or number of employers. Presenting the data
at a more disaggregated level would simply indicate a degree of
precision that does not exist.
The Department decided to present nine industry sectors and the
government sector because these estimates are based on at least 998
observations, and an average observation number of 18,230 per sector.
The Department felt that these sample sizes were sufficient to
accurately represent the sectors. Further disaggregation would have
required the Department to extrapolate from smaller samples. For
example, a subset among all 50 states and industry categories would
have implied a dependence on a minimum sample size of 1 observation
(for a particular sector and state), and an average sample size of 14
observations across all states and sectors. Extrapolating from these
small sub-samples would be problematic, and would not offer the level
of precision desired by the commenters.
For this reason, the Department has developed the economic profiles
for the nine major industry categories plus State and Local Government.
Although compiled from more detailed levels, these profiles were
aggregated to match the level of precision available in the coverage
and cost estimates. The Department notes that due to these very same
data limitations, the GAO took a similar approach in presenting
aggregated data: ``Our work presents data for six industry groupings:
(1) Services; (2) retail trade; (3) manufacturing; (4) finance,
insurance, and real estate; (5) public sector; and (6) other. We
developed these groups by combining 932 detailed CPS industry codes.''
(GAO/HEHS-99-164, pg. 41)
Also, the number of employees presented in this chapter does not
match the numbers presented in Chapter 3 because of different data
sources and different time periods. For example, the covered employment
numbers presented in Chapter 3 only count each individual once
regardless of the number of jobs held. The covered employment numbers
presented in Chapter 5 are based on the number of workers employed by
each employer so some individuals are counted more than once.
5.1 Private Sector Profile
The AFL-CIO commented on the PRIA that, ``CONSAD has not provided--
and, given the sheer number of the sources, probably could not
provide--sufficient detail to allow for the reader to understand and/or
replicate the process.'' The AFL-CIO also stated, ``the study's
methodology is confusing, and because CONSAD does a poor job of
explanation, it is not capable of replication. For example, CONSAD uses
a myriad of statistical sources from several different time periods to
come up with the data it needs to estimate the number of exempt
employees under the proposal and the corresponding impact on
business.'' In the following section, the Department has attempted to
provide the detail that will allow the reader to understand and
replicate this analysis.
Since the FLSA and the Part 541 overtime regulations apply
nationally, the Department obtained data on firms in the private sector
primarily from the
[[Page 22219]]
U.S. Department of Commerce's Economic Census. The Economic Census is
the only data source that has the scope covered by the revised
regulations. The most recent Economic Census that is available was
published in 2001 for the year 1997. As noted in the footnotes to the
tables that follow, even this source had to be supplemented in some
cases with additional data.
First, the Department notes that it relied on only a single data
source to produce its estimates of the number of salaried and hourly
workers covered by the FLSA, the 2002 CPS Outgoing Rotation Group data
set. This was also the only source used to produce the estimates of the
number of exempt workers and the associated changes in overtime costs
related to changes in the regulations. As noted in Chapter 3, the CPS
data were supplemented with probabilities developed by the WHD
enforcement staff concerning the likelihood that workers in various
white-collar occupations would be exempt. These same assessments were
previously used by both the GAO and the University of Tennessee. They
were also used in an analysis by the EPI that the AFL-CIO submitted for
the record. In order to make the estimates easier to replicate, the
Department has added a considerable amount of additional detail in this
preamble that was not provided in the PRIA. For example, the Exempt
Status assessments of the WHD staff for each occupation are presented
in Appendix A.
Second, in order to estimate the one-time implementation costs, the
Department had to rely on the 1997 Economic Census (supplemented by the
1997 County Business Patterns) because some costs are based on the
number of establishments or firms and these are the latest available
data. Such information is not available in the 2002 CPS Outgoing
Rotation Group dataset. After assessing the economic impact of the
revisions, the Department relied on a number of other statistical
sources, such as multiple years of IRS and Dun & Bradstreet (D&B) data,
to obtain the payroll, revenue, and profit data needed to put the
estimated payroll and implementation costs in perceptive. Moreover, as
the AFL-CIO conceded, ``relying on several sources is not itself a
fatal flaw.''
Although the Department used various data sources covering
different time periods, this could not be avoided to complete the
required economic analysis since the primary data set used in the
analysis, the 2002 CPS, is based on the Standard Industrial
Classification (SIC) while most of the more recent data is based upon
the newer North American Industry Classification System (NAICS). The
U.S. Census Bureau cautions that ``While many of the individual SIC
industries correspond directly to industries as defined under the NAICS
system, most of the higher level groupings do not. Particular care
should be taken in comparing data for retail trade, wholesale trade,
and manufacturing, which are sector titles used in both NAICS and SIC,
but cover somewhat different groups of industries.'' (http://www.census.gov/epcd/ec97brdg/introbdg.htm) Given that the profit data
from Dun & Bradstreet (D&B) were also SIC based, the Department decided
to use data sets that were also SIC based rather than conduct a
complicated crosswalk conversion that potentially introduces other
errors into the analysis.
Although the use of SIC based data required the use of data from
several different years, the Department also determined that this was
unlikely to significantly bias the results. The CPS Outgoing Rotation
Group data came from 2002; the Economic Census, County Business
Patterns, and IRS data came from 1997; and the D&B data came from 2000,
2001 and 2002.
The D&B data on profits match up fairly well with the payroll cost
estimates derived from the 2002 CPS data presented in Chapter 6. The
D&B data from 2002 were from the same year as the CPS data. The use of
D&B data from 2000, the peak of the economic expansion, is likely to
somewhat overstate 2002 profits, while the use of D&B from 2001, the
year of the last recession and the 9/11 terrorist attacks, is likely to
somewhat understate 2002 profits. So on average, the Department has
determined that the use of D&B data from these three years is
reasonable and provides a valid comparison with the cost estimates
based upon the 2002 CPS data.
However, using the 1997 Economic Census, 1997 County Business
Patterns, and the 1997 IRS data is likely to affect the analysis
because the economy expanded for three years after the 1997 data were
collected. For example, civilian employment in 1997 averaged 129.6
million, while employment in 2002 averaged 134.3 million (based upon
the old weights). Therefore, use of the 1997 data is likely to
understate the 2002 payroll employment.
In Chapter 7, the Department adjusted the dollar values for the
1997 payroll data because wages continued to increase from 1997 to
2002. Nevertheless, the comparison of the adjusted 1997 payroll data
with the cost estimates based upon the 2002 CPS data are likely to
overstate the economic impacts presented in Chapter 7 because the
denominator (based upon the 1997 employment) will be relatively smaller
than the numerator (based upon 2002 employment).
While acknowledging these data issues, the Department notes that
they are unavoidable because the 1997 data is the latest available for
the required economic analysis. Although some more recent data (e.g.,
2001 County Business Patterns and 2001 Statistics of U.S. Business) are
available, these could not be used in this analysis because the newer
data are based on the North American Industry Classification System
(NAICS), while this analysis is tied to the dated Standard Industrial
Classification (SIC) used in both the CPS and D&B data.
Finally, some of the one-time implementation costs were based upon
the number of establishments in the 1997 Economic Census (supplemented
by the 1997 County Business Patterns). Although the Department was
unable to ascertain the relation of the establishment estimates in 1997
to those in 2002, it believes that on average the counts in 1997 are
likely to be less than those in 2002. Therefore, the impact of some
one-time implementation costs (i.e., those based on establishment
counts) is likely to be somewhat understated. Again, attempting to
update establishment counts using NAICS-based data would involve a
complicated crosswalk conversion that potentially introduces other
errors into the analysis. However, the sales revenue estimates are
similarly based on 1997 data. Although the Department adjusted the
dollar sales revenue data in Chapter 7 to account for inflation, no
adjustments were made to account for the growth in the number of
establishments. The Department believes these two effects will offset
themselves to some degree when calculating the cost to revenue ratios
in Chapter 7 and concludes this is the best approach available given
the scope of the regulations and the limitations of the available data
sources.
In summary, the Department attempted wherever possible to ensure
the compatibility of the different cost, payroll, revenue, and profit
numbers. The Department adjusted the 1997 estimates for inflation and
wage growth in order to allow for a valid comparison with the later
year cost estimates. In practice, however, this adjustment made very
little difference in the per firm percentage impacts described below;
for example, the average decrease in impact due to adjusting the
revenue numbers for inflation was less than one-tenth of
[[Page 22220]]
one percent. Therefore, the Department's per firm impact estimates are
robust to these assumptions. Unfortunately, the Department is unable to
adjust upward the number of establishments. This source of possible
underestimation of cost, however, is more than offset since the
Department did not quantify any of the benefits of this rule for the
purposes of per firm impact analysis. These benefits do accrue to the
same employers as the costs estimated in the following section.
The resulting estimates, based on 1997 data, indicate that there
are 6.5 million establishments with 99.8 million employees, annual
payroll totaling $2.8 trillion, annual sales revenues of $17.9
trillion, and annual pre-tax profits of $579.7 billion in the affected
industry sectors (see Table 5-1). Across all industries, the services
industry has the largest numbers of establishments, employees, and
payroll. This is followed by retail trade for establishments and
employees, and manufacturing for payroll. Annual sales are largest in
wholesale trade followed by manufacturing. Annual pre-tax profits are
largest for the finance, insurance, and real estate industry followed
by manufacturing.
On average, employment per establishment ranges from seven
employees in the agricultural services, forestry, and fishing industry
to 47 employees in manufacturing. The average annual payroll per
establishment ranges from $71,000 in the agricultural services,
forestry, and fishing industry to $1.6 million in manufacturing. The
average annual sales per establishment ranges from $504,000 in the
agricultural services, forestry, and fishing industry to $10.7 million
in manufacturing, while the average annual pre-tax profits per
establishment ranges from $20,000 in the agricultural services,
forestry, and fishing industry to $1.0 million in the mining industry.
Table 5-1.--Estimates of Establishments Covered by the FLSA and Their Associated Employment, Payrolls, Sales and Profits
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sales, receipts,
Number of Number of Annual payroll value of Pre-Tax profits
Industry Division establishments employees \1\ ($1,000) \2\ shipments ($1,000) \3\
($1,000)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Agricultural Services, Forestry, and Fishing\4\............... 116,523 777,671 $8,318,830 $58,687,096 $2,357,130
Mining........................................................ 25,103 531,683 21,566,696 179,763,175 25,488,881
Construction.................................................. 639,478 5,702,374 176,357,238 859,877,289 28,628,686
Manufacturing................................................. 377,456 17,796,092 608,751,849 4,037,904,247 94,604,018
Transportation and Public Utilities\5\........................ 331,594 6,767,563 247,245,240 1,226,952,529 76,411,219
Wholesale Trade............................................... 521,127 6,544,480 241,917,819 4,362,657,653 86,688,186
Retail Trade.................................................. 1,561,195 20,145,349 268,498,043 2,459,061,733 37,467,739
Finance, Insurance, and Real Estate........................... 661,389 7,397,569 273,607,500 2,250,789,643 156,048,617
Services \6\.................................................. 2,302,848 34,164,093 939,353,069 2,462,227,737 71,969,249
-------------------
All Industries.......................................... 6,536,713 99,826,874 2,785,616,284 17,897,921,102 579,663,726
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Unless otherwise noted, data are from USDOC (2001a).
Note: For SICs 07, 08, 09, and 89, the number of establishments, number of employees, and annual payroll are derived from the USDOC (1999) database.
Sales data are derived from the D&B (2001a) database.
\1\Employment is estimated when data suppression occurs.
\2\Values may be underestimated due to data suppression in USDOC (2001a).
\3\Pre-tax profits are based on sales data and pre-tax profit rates from D&B (2002), except for SIC 09 which is from D&B (2001b), and SICs 21, 60, 63,
and 64 which are from IRS (2000).
\4\Excludes agriculture (SICs 01 and 02).
\5\Excludes railroad transportation (SIC 40). All data for the U.S. Postal Service (SIC 43) are from USPS (1997). Also, data do not include large
certificated passenger carriers (in SIC 45) that report to the Office of Airline Statistics, U.S. Department of Transportation.
\6\Excludes private households (SIC 88).
Sources: U.S. Department of Commerce, Bureau of the Census (USDOC, 2001a), 1997 Economic Census: Comparative Statistics, downloaded from http://
www.census.gov/epcd/ec97sic/index.htmldownload;
U.S. Department of Commerce, Bureau of the Census (USDOC (1999), 1997 County Business Patterns; Dun & Bradstreet (D&B, 2001a), National Profile of
Businesses Database for Fiscal Year 2000;
Dun & Bradstreet (D&B, 2001b), Industry Norms and Key Business Ratios for Fiscal Year 2000/2001; Dun & Bradstreet (D&B, 2002), Industry Norms and Key
Business Ratios for Fiscal Year 2001/2002;
U.S. Department of the Treasury, Internal Revenue Service (IRS, 2000) Corporate Tax Returns for Active Corporations for 1997; And U.S. Postal Service
(USPS, 1997), 1997 Annual Report.
5.2 Private Sector Small Business Profile
The Small Business Regulatory Enforcement Fairness Act (SBREFA) of
1996 requires the Department to estimate the number of small businesses
affected by the final rule. For the industries of interest here, the
Small Business Administration (SBA) generally defines small businesses
using either a criterion based on employment or a criterion based on
annual sales. For a complete list of the SBA criteria, see the SBA Web
site at http://www.sba.gov/size/indextableofsize.html.
To estimate the number of, and employment in, firms covered under
SBREFA and affected by the final rule, the Department used the data
described above on the numbers of firms, establishments, employment,
payroll, and annual receipts for various firm size categories (i.e.,
employment ranges). The first step in this process involved developing
an employment-based firm size standard for each affected industry. For
the manufacturing and the retail and wholesale trade sectors, the SBA
firm size standard is based directly on employment. For other
industries, the SBA most often uses annual sales to define a small
business entity. For the industries where employment is not used, the
standards specified by the SBA have been converted to employment-based
firm size estimates. Specifically, employment-based firm size standards
were estimated by first calculating an employment level, based on the
industry average annual receipts per employee, that would be sufficient
to produce total sales per firm that are consistent with the sales-
based firm size standard. Then, the employment-based firm size standard
was chosen on the basis of the firm size categories defined in the
County Business Patterns data.
[[Page 22221]]
Specifically, the chosen employment-based standard corresponds to the
boundary between firm size categories in County Business Patterns that
is closest to the calculated employment level, regardless of whether it
is higher or lower than the calculated level.
Using these employment-based firm size standards for each affected
industry, the data have been used to estimate the percentages of all
firms, establishments, employment, payroll, and receipts in the
industry that correspond to the SBA firm size standard for a small
business entity. Separate percentages have been calculated for each
industry covered by the final rule. The percentages have then been
used, in conjunction with the corresponding estimates in Table 5-1, to
calculate the numbers of affected firms, establishments, employment,
and sales, receipts, or value of shipments in each industry that are
associated with firms covered under SBREFA.
The resulting estimates, based on 1997 data, for establishments
covered by SBREFA and the FLSA, indicate that there are 5.2 million
establishments with 38.7 million employees, annual payroll totaling
$939.7 billion, annual sales revenues of $5.7 trillion, and annual pre-
tax profits of $180.5 billion in the affected industry sectors (see
Table 5-2). Across all industries, the services industry has the
largest numbers of establishments, employees, and payroll. This is
followed by retail trade for establishments, and manufacturing for
employees and payroll. Annual sales are largest in wholesale trade
followed by manufacturing. Annual pre-tax profits are largest for
wholesale trade and services followed by manufacturing.
On average, employment per establishment ranges from four employees
in the finance, insurance, and real estate industry to 22 employees in
manufacturing. The average annual payroll per establishment ranges from
$43,000 in the agricultural services, forestry, and fishing industry to
$613,000 in manufacturing. The average annual sales per establishment
range from $145,000 in the agricultural services, forestry, and fishing
industry to $4.7 million in wholesale trade, while the average annual
pre-tax profits per establishment range from $5,000 in the agricultural
services, forestry, and fishing industry to $319,000 in the mining
industry.
Table 5-2.--National Estimates of Establishments Covered by Both SBREFA and the FLSA, and Their Associated Employment, Payrolls, Sales and Profits
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sales, receipts,
Number of Number of Annual payroll value of Pre-tax profits
Industry division establishments employees \1\ ($1,000) \2\ shipments ($1,000) \3\
($1,000)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Agricultural Services, Forestry, and Fishing \4\.............. 112,753 533,953 $4,881,450 $16,352,802 $591,216
Mining........................................................ 20,422 196,576 6,813,271 61,505,605 6,505,730
Construction.................................................. 626,526 4,083,143 110,470,847 541,608,129 21,109,308
Manufacturing................................................. 336,378 7,438,944 206,153,159 1,051,526,216 27,723,186
Transportation and Public Utilities \5\....................... 213,230 1,651,188 42,500,111 187,741,483 6,210,156
Wholesale Trade............................................... 419,518 3,412,996 110,749,281 2,002,294,028 40,071,557
Retail Trade.................................................. 1,072,889 7,321,520 85,165,909 672,361,280 17,360,512
Finance, Insurance, and Real Estate........................... 430,060 1,623,287 48,840,399 283,951,606 22,193,420
Services \6\.................................................. 1,985,065 12,460,309 324,122,531 872,922,124 38,694,702
-------------------
All Industries.......................................... 5,216,843 38,721,918 939,696,957 5,690,263,273 180,459,786
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Firms covered under SBREFA are based on the Small Business Administration (SBA) firm size standard (maximum number of employees) for a small
business entity.
Note: Unless otherwise noted, data are from USDOC (2001a).
Note: For SICs 07, 08, 09, and 89, the number of establishments, number of employees, and annual payroll are derived from the USDOC (1999) database.
Sales data are derived from the D&B (2001a) database.
\1\ Employment is estimated when data suppression occurs.
\2\ Values may be underestimated due to data suppression in USDOC (2001a).
\3\ Pre-tax profits are based on sales data and pre-tax profit rates from D&B (2002), except for SIC 09 which is from D&B (2001b), and SICs 21, 60, 63,
and 64 which are from IRS (2000).
\4\ Excludes agriculture (SICs 01 and 02).
\5\ Excludes railroad transportation (SIC 40). All data for the U.S. Postal Service (SIC 43) are from USPS (1997). Also, data do not include large
Certificated passenger carriers (in SIC 45) that report to the Office of Airline Statistics, U.S. Department of Transportation.
\6\ Excludes private households (SIC 88).
Sources: U.S. Department of Commerce, Bureau of the Census (USDOC, 2001a), 1997 Economic Census: Comparative Statistics, downloaded from http://www.census.gov/epcd/ec97sic/index.html#download;
U.S. Department of Commerce, Bureau of the Census (USDOC (1999), 1997 County Business Patterns; Dun & Bradstreet (D&B, 2001a), National Profile of
Businesses Database for Fiscal Year 2000;
Dun & Bradstreet (D&B, 2001b), Industry Norms and Key Business Ratios for Fiscal Year 2000/2001; Dun & Bradstreet (D&B, 2002), Industry Norms and Key
Business Ratios for Fiscal Year 2001/2002;
U.S. Department of the Treasury, Internal Revenue Service (IRS, 2000) Corporate Tax Returns for Active Corporations for 1997; and U.S. Postal Service
(USPS, 1997), 1997 Annual Report.
5.3 State and Local Government Profile
The Bureau of the Census collects data on state and local
government finances for the 50 states. The local government entities
for which data are collected include: 3,043 county governments, which
provide general government activities in specified geographic areas;
19,372 municipal governments, which provide general government services
for a specific population concentration in a defined area; 16,629
township governments, which provide general government services for
areas without regard to population concentrations; 34,683 special
district governments, which provide only one or a limited number of
designated functions, and have sufficient administrative and fiscal
autonomy to qualify as independent governments; and 13,726 school
district governments, which provide public elementary, secondary, or
higher education, and have sufficient administrative and fiscal
autonomy to qualify as independent governments.
Nearly 90,000 state and local governmental entities will be
affected by the final rule. Nationwide, these entities receive more
than $1.5 trillion in
[[Page 22222]]
general revenues, including revenues from taxes, some categories of
fees and charges, and intergovernmental transfers (see Table 5-3).
State and local government entities employ more than 16.7 million
workers and their payrolls exceed $472.9 billion.
Table 5-3.--State and Local Government Employment, Payroll and Revenue
----------------------------------------------------------------------------------------------------------------
Total Total revenue
Census region division employment Total payroll ($1,000) (FY
(1997) ($1,000) (1997) 1999-2000)
----------------------------------------------------------------------------------------------------------------
NORTHEAST REGION.......................................... 3,125,659 $105,089,601 $343,863,277
New England Division.................................. 787,604 24,050,377 83,842,665
Mid Atlantic Division................................. 2,338,055 81,039,224 260,020,612
MIDWEST REGION............................................ 4,024,781 107,566,034 341,985,336
East North Central Division........................... 2,695,154 75,893,117 240,173,619
West North Central Division........................... 1,329,627 31,672,917 101,811,717
SOUTH REGION.............................................. 5,938,313 148,975,497 484,923,138
South Atlantic Division............................... 2,984,616 78,443,501 260,912,968
East South Central Division........................... 1,026,199 23,959,899 78,848,812
West South Central Division........................... 1,927,498 46,572,098 145,161,358
WEST REGION............................................... 3,644,206 111,309,198 370,550,730
Mountain Division..................................... 1,093,048 27,431,594 91,648,161
Pacific Division...................................... 2,551,158 83,877,604 278,902,569
U.S. Total--All Regions............................. 16,732,959 472,940,330 1,541,322,481
----------------------------------------------------------------------------------------------------------------
Note: Employment, payroll and revenue data downloaded from the Census Bureau Web site. Some data suppression
existed in the original data file.
Note: General revenue consists of general revenue from own sources (taxes and some categories of fees and
charges) plus intergovernmental revenue.
Source: U.S. Department of Commerce (USDOC, 2002a), 1997 Census of Governments, for employment and payroll;
U.S. Department of Commerce (USDOC, 2002c), State and Local Government Finances, by Level of Government and by
State: 1999-2000, for General revenues.
Chapter 6: Estimated Implementation Costs and Payroll Impacts of the
Final Rule
In this section, the Department presents the methodology used to
estimate the implementation costs and payroll impacts to employers that
are associated with the final rule. As in the PRIA, the Department
determined that there are two components to compliance: The one-time
implementation costs associated with employers reviewing and coming
into compliance with the revised regulations, and the incremental
payroll transfers from employers to employees associated with changes
in the exempt status of the labor force.
The estimated costs of the final rule that are described below may
be somewhat overstated because they do not take into account costs
already borne by some employers under existing state or local laws. As
noted above, a number of state laws arguably impose more stringent
exemption standards than those provided under the current rules, or
even the new final rules. The FLSA does not preempt any such stricter
state and local standards. See Section 18 of the FLSA, 29 U.S.C. Sec.
218 and section 541.4 in the final regulations. As indicated in
Chapters 3 and 5 of this analysis, however, because of data limitations
and some uncertainty with the methodology, combined with the broad
probability classifications provided by DOL to GAO and used in this RIA
and other research, estimates of the number of exempt workers can only
be done at a national level and cannot be disaggregated by state. Thus,
the Department has not estimated the costs already imposed on some
employers by stricter pre-existing state or local laws, and,
consequently, the estimated costs to employers to comply with this
final rule may be somewhat overstated.
6.1 One-Time Implementation Costs
The one-time implementation costs contain two components. The first
component relates to the efforts employers will expend in adapting
their overtime policies in response to the revised regulations, and
then informing their employees about the updated policies. The second
component relates to the efforts employers will expend in reviewing the
duties performed by employees in particular job categories, and
determining whether, based on their adapted overtime policies,
employees in the job categories qualify for exemption from the overtime
provisions of the FLSA. The final rule contains no new information-
collection requirements subject to review and approval by the Office of
Management and Budget under the Paperwork Reduction Act of 1995 (44
U.S.C. 3501, et seq.). The information-collection requirements for
employers who claim exemption under 29 CFR Part 541 are contained in
the general FLSA recordkeeping requirements codified at 29 CFR Part
516, which were approved by the Office of Management and Budget under
OMB Control Number 1215-0017.
For both components, the costs are based on the amounts of time
typically required to perform the associated efforts, the average
hourly costs of the employees who perform the efforts and the numbers
of employers and establishments for which the efforts are performed.
Separate cost estimates are developed for nine broad industry divisions
in the private sector and for state and local government in the
aggregate. The industry divisions for which implementation costs have
been estimated include: Agricultural services; mining; construction;
manufacturing; transportation, communication, and public utilities;
wholesale trade; retail trade; finance, insurance, and real estate; and
services.
6.2 Estimated Costs Related To Adapting Overtime Policies
To estimate the efforts typically required by employers to
implement the revisions to the FLSA regulations, the Department of
Labor contacted six human resource experts from different regions
nationwide. For the first cost component, estimates were obtained for
the amount of time employers will typically require to: (1) Read and
understand the revised rule, (2) update and adapt their overtime
policies, (3) notify their employees of the policy changes, and (4)
perform all other pertinent activities at the corporate level. Separate
estimates were provided
[[Page 22223]]
for employers in eight employment size ranges. The ranges are: 1 to 4,
5 to 9, 10 to 19, 20 to 49, 50 to 99, 100 to 499, 500 to 999, and 1,000
or more employees per employer.
Based on the judgments provided by the human resource experts, it
is estimated that, on average nationwide, the efforts associated with
revising overtime policies will range from two hours per employer in
the smallest size range to 57 hours per employer in the largest size
range. The Department assumed the efforts required to implement the
revised regulations will be furnished substantially by human resources
specialists. The costs per hour for human resources specialists at
eight different skill or experience levels have been obtained from the
National Compensation Survey data compiled by the Bureau of Labor
Statistics (BLS). The average costs per hour for personnel, training,
and labor relation specialists working for employers in the eight
employment size ranges were estimated as weighted averages of the costs
per hour for the various skill or experience levels reported by the
BLS. Weights were developed by positing a typical staffing pattern for
human resources specialists working for employers or establishments in
different size ranges, and then calculating the average cost per hour
for the mix of workers corresponding to that staffing pattern. The
estimates of costs per hour calculated through this process rise
monotonically as size range increases, and range from $16.03 for the
smallest size range to $25.08 for the largest size range. These
estimates were then multiplied by a loading factor of 1.4 to account
for fringe benefits.
The cost per hour used for state and local governments is the
estimated cost per hour for private sector employers in the size range
from 100 to 499 employees.
Table 6-1.--Estimated Unit Implementation Time/Costs of the Final Rule by Size of Employer
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number of employees per employer
Unit time/cost category -------------------------------------------------------------------------------------------------------
1 to 4 5 to 9 10 to 19 20 to 49 50 to 99 100 to 499 500 to 999 1000+
--------------------------------------------------------------------------------------------------------------------------------------------------------
Hours per employer to revise overtime policies
Read and understand revised rule............ 1.0 2.0 4.0 6.0 8.0 10.0 24.0 32.0
Update or adapt overtime policies........... 0.5 0.5 1.3 2.0 3.0 5.0 12.0 16.0
Notify employees............................ 0.5 0.5 0.8 1.0 1.5 2.0 4.0 5.0
Other related activities.................... 0.0 0.3 0.5 1.0 1.0 2.0 4.0 4.0
--------------
Total hours per employer.................. 2.0 3.3 6.5 10.0 13.5 19.0 44.0 57.0
==============
Wage Rate for human resources specialists....... $16.03 $21.34 $21.78 $22.91 $23.39 $24.02 $24.20 $25.08
Cost per hour................................... $22.44 $29.88 $30.49 $32.07 $32.75 $33.63 $33.88 $35.11
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: CONSAD and the U.S. Department of Labor.
The estimated implementation efforts and costs were derived by
summing the corresponding estimates for the individual industry
divisions and calculating ratios, as appropriate, to estimate average
hours and average costs. For all industry divisions except state and
local government, identical calculations were performed to estimate
implementation costs. Those calculations are explained below and are
followed by a discussion of the additional calculations involved in
estimating implementation costs for state and local government.
For each industry division, the estimated cost that employers will
incur to revise their overtime policies was calculated, for each
employment size range, as the product of: (1) The total hours required
per employer, on average, to perform the associated efforts, (2) the
average cost per hour for human resources specialists working for
employers in that size range, and (3) the number of employers in the
size range. The derivation of values for items (1) and (2) have been
discussed above. The values for item (3) were derived from data in the
U.S. Department of Commerce (2002), Statistics of U.S. Businesses 1996.
The total estimated values for the industry division were calculated by
summing the values for the various size ranges. It should be noted that
using the 1996 data may understate these implementation costs because
the number of employers likely has grown since then.
The implementation costs for state and local government to review
the final rule and to revise their overtime policies were estimated in
a manner similar to that used for the private sector. However, because
no data are available that describe the size distribution of state and
local government entities, the estimation was performed at the
aggregate level.
As is shown in Table 6-2, the total nationwide cost to review the
final rule and revise the overtime policies is estimated to be $627
million.
Table 6-2.--Estimated Costs To Review the Final Rule and Revise Overtime Policies, by Industry
----------------------------------------------------------------------------------------------------------------
Total hours to Cost to revise
Industry division Number of revise overtime overtime
employers policies policies
----------------------------------------------------------------------------------------------------------------
Agricultural services..................................... 101,356 350,553 $9,845,483
Mining.................................................... 17,384 98,090 3,009,596
Construction.............................................. 597,393 2,227,515 63,501,051
Manufacturing............................................. 297,154 2,231,762 70,711,656
[[Page 22224]]
Transportation, communication & public utilities.......... 209,122 983,166 29,311,496
Wholesale trade........................................... 325,432 1,765,346 53,735,371
Retail trade.............................................. 909,206 4,068,622 120,331,292
Finance, insurance & real estate (FIRE)................... 411,052 1,650,164 47,787,363
Services.................................................. 1,877,862 7,662,502 222,849,283
State and Local Government................................ 89,953 179,906 6,049,519
-------------------
All Industries...................................... 4,835,913 21,217,625 627,132,111
----------------------------------------------------------------------------------------------------------------
Source: CONSAD and the U.S. Department of Labor.
Estimates were also developed for the portion of the implementation
costs in each private-sector industry division incurred by small
businesses (i.e., businesses that are covered under the Small Business
Regulatory Enforcement Fairness Act (SBREFA)). For each industry
division, the portion of the aggregate costs of revising corporate
overtime policies that will be incurred by firms covered by SBREFA was
based on the portion of the total number of establishments in the
industry division that are operated by small businesses and is
presented in Table 6-3.
Table 6-3.--Estimated Share of Costs To Review Final Rule and Revise Overtime Policies Incurred by Small
Businesses, by Industry
----------------------------------------------------------------------------------------------------------------
Small business share of total cost
Industry division Total industry -----------------------------------
Percentage Cost
----------------------------------------------------------------------------------------------------------------
Agricultural services..................................... $9,845,483 0.9676 $9,526,490
Mining.................................................... 3,009,596 0.8135 2,448,307
Construction.............................................. 63,501,051 0.9797 62,211,980
Manufacturing............................................. 70,711,656 0.8912 63,018,228
Transportation, communication & public utilities.......... 29,311,496 0.6430 18,847,292
Wholesale trade........................................... 53,735,371 0.8050 43,256,973
Retail trade.............................................. 120,331,292 0.6872 82,691,664
Finance, insurance & real estate.......................... 47,787,363 0.6502 31,071,344
Services.................................................. 222,849,283 0.8620 192,096,082
-------------------
Total private sector................................ 621,082,592 0.8134 505,168,359
----------------------------------------------------------------------------------------------------------------
Source: CONSAD and the U.S. Department of Labor.
6.3 Estimated Cost To Reexamine Jobs
The methodology used to estimate the costs related to the
reexamination of jobs was significantly different from that used in
Section 6.2 because the Department assumed that employers would have to
conduct the job review at the establishment level. Therefore, rather
then basing the cost estimates on the number of employers, as was done
for the review of the final rule and the revision of the overtime
policies, the Department based the cost estimates for the job reviews
on the number of potentially affected white-collar workers. In
addition, since the CPS database does not contain information related
to the size of the worker's employer, the Department used an average
cost of $32.41 per hour ($23.15, obtained from the BLS National
Compensation Survey for a labor relation specialist, multiplied by 1.4
to account for fringe benefits).
Based upon the analysis in Chapter 3, the Department assumed that
none of the blue-collar jobs (e.g., occupations in the 239 excluded
OCCs) would have to be reviewed. As was shown in Chapter 2, none of the
revisions should cause employers to think that currently nonexempt
blue-collar workers could possibly be made exempt under the final rule.
So employers should not incur any additional expenses related to these
workers after completing the process of adapting their overtime
policies in response to the revised regulations.
The Department assumed that for the white-collar workers earning
less than $455 per week, employers would only review the jobs of
workers who are currently exempt and would not review the jobs of any
currently nonexempt workers. As was shown in Chapter 2, the $455 salary
level in the final rule should make it absolutely clear to employers
that the currently nonexempt white-collar workers earning less than
$455 per week could not possibly be made exempt under the final rule.
So, again, employers should not incur any additional expenses related
to these workers after completing the process of adapting their
overtime policies in response to the revised regulations.
As is more fully discussed in the next section of this chapter,
employers will have to determine how to alter the compensation for each
of the approximately 1.3 million currently exempt workers earning less
than $455 per week. In some cases employers will decide to pay the
overtime premium, while in others employers will decide to increase the
worker's salary in order to maintain the exemption. The Department
assumed that on average these reviews would take approximately \1/2\
hour per currently exempt employee to complete. For most employees, the
review will consist of an examination of their payroll records to
determine how they should be paid under the final rule (e.g., pay
overtime or increase their salaries). The duties of the remaining,
relatively small number of employees
[[Page 22225]]
(i.e., only a portion of those whom employers decide to maintain in
exempt status by increasing their salaries to $455 or more) will have
to be reexamined to determine if they continue to qualify for exemption
given the minor differences in the duties tests under the final rule
compared to the current rule. While it may take employers more than 30
minutes to reexamine these few workers, it will take less than 30
minutes for many others. Thus, the Department estimated that the cost
of reexamining the jobs of workers earning less than $455 per week
would be about $21 million (1.3 million workers x \1/2\ hour per worker
x $32.41 per hour).
In assessing the costs of reviewing the jobs of the highly
compensated white-collar workers, the Department assumed that employers
would use an approach complementary to that assumed for the lower-wage
white-collar workers. Employers would only review the jobs of workers
who are currently nonexempt and would not review the jobs of any
currently exempt workers earning $100,000 or more per year. As shown in
Chapter 2, the duties test for the highly compensated workers is less
stringent than those under either the current short tests or the
standard tests in the final rule. Thus, the Department assumed that
after completing the process of adapting their overtime policies in
response to the revised regulations, employers would conclude that all
currently exempt highly compensated workers would continue to be exempt
under the final rule and, therefore, would not expend additional
resources to review any of these jobs. In addition, as explained in
Chapter 4, the Department excluded computer programmers, registered
nurses and pharmacists. It is unlikely that employers would review
these jobs due to the final rule given that these workers could already
be made Part 541-exempt under the current rule if they are paid on a
salaried basis.
The Department assumed that on average employers would take
approximately \1/2\ hour to review the duties of each currently
nonexempt highly compensated employee to determine if they could be
made exempt under the highly compensated test. In addition, the
Department assumed that employers would expend an additional \1/2\ hour
to review the pay basis of each hourly worker to determine if it could
be modified to comply with the requirements of the highly compensated
test. For most employees, the review will consist of an examination of
their payroll records to determine how they currently are paid and how
they should be paid under the final rule (e.g., paid overtime or paid
on a salary basis). While it may take employers more than one hour to
reexamine both the duties and compensation of some workers, it will
clearly not be necessary for employers to review both the duties and
compensation of many others (e.g., there is no need to review the
compensation of hourly workers whose duties are not exempt under the
highly compensated test). The Department estimated that the cost of
reexamining the jobs and pay of current salaried workers earning
$100,000 or more per year would be approximately $4.4 million (270,000
workers x \1/2\ hour per worker x $32.41 per hour) and the cost of
reexamining the jobs of current hourly workers earning $100,000 or more
per year would be approximately $6 million (182,600 workers x 1 hour
per worker x $32.41 per hour). The Department believes that this
estimate probably overstates the costs to businesses because many
employers will probably choose not to review the jobs of hourly workers
who could not easily be converted to a salary basis (e.g., workers
covered by union contracts).
For workers earning $455 to $1,923 per week, the Department assumed
that none of the hourly workers would require a job review and that
employers would review only a portion of the jobs held by salaried
workers. Given the comparability of the standard tests in the final
rule with the short tests in the current rule (see Chapter 2), the
Department assumed that after completing the process of adapting their
overtime policies in response to the revised regulations, employers
would conclude that all of the current hourly workers earning $455 to
$1,923 per week would continue to be nonexempt under the final rule and
would not expend additional resources to review any of these jobs.
The Department also assumed that, given the comparability of the
standard tests in the final rule with the short tests in the current
rule, extensive reexamination of exemption status will likely be
required for only a minor portion of the white-collar jobs in which
salaried workers earning $455 to $1,923 per week are employed in any
establishment. As demonstrated above, the duties tests in the standard
tests of the final rule do not differ greatly from the current short
duties tests. As a result, employers will likely conclude, after
completing the process of adapting their overtime policies, that no
change in exemption status is warranted for most of their white-collar
jobs.
Appreciable effort will only be expended for reviewing the duties
of the remaining, relatively small number of white-collar salaried
employees earning $455 to $1,923 per week whose status might be
impacted by the changed duties tests. To account for the slight changes
in the rule (such as the inclusion of some requirements from the long
tests), the Department assumed that employers would take one hour to
review the duties of 10 percent of all white-collar salaried employees
earning $455 to $1,923 per week to either ensure that they are still
exempt or to determine if they could be made exempt under the final
rule. Given the comparability of the duties tests in the current short
tests and the final standard tests, the Department feels that both the
one hour and the 10 percent may be overestimates. Nevertheless, based
upon these assumptions, the Department estimated that the cost of
reexamining the jobs of the white-collar salaried employees earning
$455 to $1,923 per week would be approximately $80 million (10 percent
x 24.7 million workers x 1 hour per worker x $32.41 per hour).
The total nationwide cost to conduct the job reviews is estimated
to be $111 million. As is shown in Table 6-4, these costs were then
apportioned to each industry division in proportion to its share of the
affected work force.
Table 6-4.--Estimated Costs To Reexamine Jobs, by Industry
------------------------------------------------------------------------
Total hours to Cost to
Industry division reexamine reexamine
affected jobs affected jobs
------------------------------------------------------------------------
Agricultural Services, Forestry, and 11,552 $374,407
Fishing............................
Mining.............................. 15,598 505,542
Construction........................ 125,380 4,063,562
Manufacturing....................... 500,511 16,221,574
Transportation and Public Utilities. 256,757 8,321,482
[[Page 22226]]
Wholesale Trade..................... 212,294 6,880,451
Retail Trade........................ 403,130 13,065,451
Finance, Insurance, and Real Estate. 488,120 15,819,984
Services............................ 1,256,435 40,721,065
State and Local Government.......... 167,532 5,429,724
-------------------
All Industries................ 3,437,311 111,403,241
------------------------------------------------------------------------
Source: CONSAD and the U.S. Department of Labor.
For each industry division, the portion of the aggregate costs of
reexamining the exemption status of specific jobs that will be incurred
by firms covered by SBREFA has been estimated on the basis of the
proportion of the total employment in the industry division that is in
such firms and is presented in Table 6-5.
Table 6-5.--Estimated Share of Costs To Reexamine Jobs Incurred by Small Businesses, by Industry
----------------------------------------------------------------------------------------------------------------
Small business share of total
industry cost
Industry division Total industry -----------------------------------
Percentage Cost
----------------------------------------------------------------------------------------------------------------
Agricultural services..................................... $374,407 0.6866 $257,068
Mining.................................................... 505,542 0.3697 186,899
Construction.............................................. 4,063,562 0.7160 2,909,511
Manufacturing............................................. 16,221,574 0.4180 6,780,618
Transportation, communication & public utilities.......... 8,321,482 0.2440 2,030,442
Wholesale trade........................................... 6,880,451 0.5215 3,588,155
Retail trade.............................................. 13,065,451 0.3634 4,747,985
Finance, insurance & real estate.......................... 15,819,984 0.2194 3,470,904
Services.................................................. 40,721,065 0.3647 14,850,972
-------------------
Total private sector................................ 105,973,517 0.3663 38,822,554
----------------------------------------------------------------------------------------------------------------
Source: CONSAD and the U.S. Department of Labor.
6.4 Incremental Payroll Impact
The Department based its estimates of the incremental payroll
impact on the preceding analysis used to estimate the number of
salaried workers converted from exempt to nonexempt status as a result
of raising the salary level for the standard tests to $455 per week.
However, the Department acknowledges that these estimates may vary for
a variety of reasons. For example, these estimates were developed
utilizing a snapshot of the labor market provided by the 2002 CPS data,
which may not be a perfect predictor of the amount of overtime worked
in future years. Moreover, the Department also recognizes that
employers may adjust their payrolls in reaction to the final rule in a
variety of ways, especially in the long term as employers and employees
adjust to the final rule.
However, employers are, at all times, obligated to pay overtime in
accordance with the FLSA. For example, employers could pay overtime to
their low-income, white-collar workers for any hours worked over 40, or
they could raise the salaries of these currently exempt workers to at
least $455 per week to maintain their exempt status. The Department
estimates that 1.3 million low-income, white-collar salaried workers
are likely to see larger paychecks as a result of these responses.
In this analysis, the Department assumes that the best estimate of
the impact on employers of changing the status of some salaried workers
from exempt to nonexempt as a result of raising the salary level for
the standard tests is the lower of the amount of raising the worker's
salary to $455 or the amount of the paying for the overtime hours that
were previously exempt under the current rules. There were about 1,000
observations in the potentially impacted occupations with weekly
earnings (item PTERNWA) $155 or more and less than $455, and actual
hours worked (PEHRACT1, the CPS variable name) greater than 40.
The Department estimates the amount of raising the individual's
salary to $455 by multiplying the net increase in salary ($455--
PTERNWA) by the Prob--Exempt and by the weight (PWORWGT).
The Department estimated the number of exempt hours that would be
converted to paid overtime hours by multiplying the number of hours in
excess of 40 (PEHRACT1--40) for each of the workers by the Prob--Exempt
and by the weight (PWORWGT). In this manner, the Department estimated
173.0 million hours would be converted from exempt to nonexempt as a
result of raising the salary level to $455.
Since there is no hourly pay rate for salaried workers in the
dataset, the employer impacts associated with converting exempt hours
to nonexempt had to be estimated from the weekly earnings data. In
addition, the Department assumed that the weekly wage for a salaried
worker covers the usual hours worked by the employee. The equivalent
hourly wage rate would be the weekly earnings (item PTERNWA) divided by
the usual hours worked weekly (item PEHRUSL1). If the worker were
converted from exempt to nonexempt status, the worker would only be
paid an additional premium of one-half times the hourly rate for each
hour worked in excess of 40, because the base compensation for the
overtime hours is already included in the worker's salary. Thus, the
amount of the employer's additional weekly overtime
[[Page 22227]]
pay would be the overtime hours converted to nonexempt times the hourly
pay rate times 0.5 (this assumption is consistent with the enforcement
approach currently used by the Department to calculate back pay when a
salaried employee is found to not qualify for exemption under Part 541
and it is clear that the salary was intended to serve as payment for
all hours worked each week).
The weekly increase in payroll for each worker is the lower of the
amount of raising the worker's salary to $455 or the amount of paying
for the overtime hours that were currently exempt. The total weekly
impact due to raising the salary level would be the sum of the weekly
increase in payroll for all workers. Since the data in the CPS annual
Outgoing Rotation Group data set consists of 12 months of observations,
the Department has assumed the data account for the seasonal variations
in overtime hours worked. The annual impact is the weekly increase in
payroll multiplied by 52, which is approximately $375 million. Table 6-
6 presents the impact for each industry division and the portion
attributed to small businesses in the private sector.
For the proposed rule, the Department estimated a range of impacts
based, in part, on an alternative assumption that the pay of currently
exempt salaried workers represents compensation for a standard 40-hour
work week. For the final rule, the Department chose to develop a point-
estimate instead of a range for the impact associated with raising the
salary level tests, and has estimated the impact in a way that is
consistent with the longstanding enforcement approach used by the
Department to calculate back pay when a salaried employee is found to
not qualify for exemption under Part 541. For these reasons, and those
mentioned above, the Department acknowledges that the impact of raising
the salary level tests may vary. Employers, however, are obligated to
pay time-and-one-half for any overtime hours worked by nonexempt
employees beyond 40 per week.
Table 6-6.--Estimated Payroll Impact by Industry and Size of Business
----------------------------------------------------------------------------------------------------------------
SBREFA covered
All firms Percent SBREFA firms
SIC industry division incremental covered incremental
payroll impact payroll impact
----------------------------------------------------------------------------------------------------------------
Agricultural Services, Forestry, and Fishing.............. $802,343 68.7% $551,210
Mining.................................................... 90,738 37.0 33,573
Construction.............................................. 14,486,732 71.6 10,372,500
Manufacturing............................................. 28,377,501 41.8 11,861,795
Transportation and Public Utilities....................... 24,913,745 24.4 6,078,954
Wholesale Trade........................................... 7,168,683 52.2 3,742,053
Retail Trade.............................................. 107,300,882 36.3 38,950,220
Finance, Insurance, and Real Estate....................... 39,960,717 21.9 8,751,397
Services.................................................. 141,881,530 36.5 51,786,758
-------------------
All Private Sector.................................. 364,982,872 36.2 132,128,461
State and Local Government................................ 9,850,334 ................ ................
-------------------
All Industries...................................... 374,833,206 ................ ................
----------------------------------------------------------------------------------------------------------------
Source: CONSAD and the U.S. Department of Labor.
6.5 Total Costs of the Final Rule
The Department estimates that the total first-year costs are
approximately $1.1 billion. This is equal to the sum of the
implementation costs related to reviewing the regulation and revising
company policies ($627 million), the implementation costs related to
reviewing the jobs ($111 million), and the increased payroll costs
related to raising the salary level to $455 per week ($375 million). In
subsequent years, the Department estimates that employers could
experience a payroll increase of as much as $375 million per year.
Table 6-7 presents a summary of the costs by industry.
Table 6-7.--Estimated First Year Costs by Industry
----------------------------------------------------------------------------------------------------------------
Revise OT Total first year
Industry division policies Reexamine jobs Payroll costs costs
----------------------------------------------------------------------------------------------------------------
Agricultural Services, Forestry, and $9,845,483 $374,407 $802,343 $11,022,234
Fishing................................
Mining.................................. 3,009,596 505,542 90,738 3,605,876
Construction............................ 63,501,051 4,063,562 14,486,732 82,051,346
Manufacturing........................... 70,711,656 16,221,574 28,377,501 115,310,731
Transportation and Public Utilities..... 29,311,496 8,321,482 24,913,745 62,546,723
Wholesale Trade......................... 53,735,371 6,880,451 7,168,683 67,784,505
Retail Trade............................ 120,331,292 13,065,451 107,300,882 240,697,625
Finance, Insurance, and Real Estate..... 47,787,363 15,819,984 39,960,717 103,568,065
Services................................ 222,849,283 40,721,065 141,881,530 405,451,877
State and Local Government.............. 6,049,519 5,429,724 9,850,334 21,329,577
-------------------
All Industries.................... 627,132,111 111,403,241 374,833,206 1,113,368,558
----------------------------------------------------------------------------------------------------------------
Source: CONSAD and the U.S. Department of Labor.
[[Page 22228]]
Total first-year costs for small business are approximately $676
million as shown in Table 6-8. This is equal to the sum of the
implementation costs related to reviewing the regulation and revising
company policies ($505 million), the implementation costs related to
reviewing the jobs ($39 million), and the increased payroll costs
related to raising the salary level to $455 per week ($132 million). In
subsequent years, the Department estimates that small business
employers may experience a payroll increase of as much as $132 million
per year.
Table 6-8.--Estimated First Year Small Business Costs by Industry
----------------------------------------------------------------------------------------------------------------
Revise OT Total first year
Industry division policies Reexamine jobs Payroll costs costs
----------------------------------------------------------------------------------------------------------------
Agricultural Services, Forestry, and $9,526,490 $257,068 $551,210 $10,334,767
Fishing................................
Mining.................................. 2,448,307 186,899 33,573 2,668,779
Construction............................ 62,211,980 2,909,511 10,372,500 75,493,991
Manufacturing........................... 63,018,228 6,780,618 11,861,795 81,660,641
Transportation and Public Utilities..... 18,847,292 2,030,442 6,078,954 26,956,687
Wholesale Trade......................... 43,256,973 3,588,155 3,742,053 50,587,181
Retail Trade............................ 82,691,664 4,747,985 38,950,220 126,389,869
Finance, Insurance, and Real Estate..... 31,071,344 3,470,904 8,751,397 43,293,645
Services................................ 192,096,082 14,850,972 51,786,758 258,733,812
-------------------
All Private Sector Industries..... 505,168,359 38,822,554 132,128,461 676,119,373
----------------------------------------------------------------------------------------------------------------
Source: CONSAD and the U.S. Department of Labor.
Total first-year costs for state and local governments are
approximately $21 million. This is equal to the sum of the
implementation costs related to reviewing the regulation and revising
agency policies ($6 million), the implementation costs related to
reviewing the jobs ($5 million), and the increased payroll costs
related to raising the salary level to $455 per week ($10 million). In
subsequent years, the Department estimates that state and local
governments may experience a payroll increase of as much as $10 million
per year.
Chapter 7: Economic Impacts
7.1 Typical Impacts
The impacts on the typical entity in each of the nine major private
sector industry divisions and in state and local governments were
examined using the ratios of the first-year costs to payrolls, revenue
and profits. This approach was based on the assumption that if the
first-year costs were manageable, so too would be the lower costs in
subsequent years.
As shown in Table 7-1, the ratio of total first-year costs to
payrolls averaged 0.04 percent nationwide in the private sector. The
largest impact relative to payrolls was approximately 0.12 percent in
agricultural services. The ratio of total first-year costs to revenue
averaged less than 0.01 percent nationwide in the private sector. The
largest impact relative to revenue was approximately 0.02 percent in
agricultural services and the services industries. The ratio of total
first-year costs to pre-tax profit averaged 0.19 percent nationwide in
the private sector. The largest impact relative to pre-tax profit was
approximately 0.64 percent in the retail industry. The Department
concludes that impacts of this magnitude are clearly affordable and
will not result in significant disruptions to typical firms in any of
the major industry sectors.
Table 7-1.--Economic Impacts of the Part 541 Revisions by Industry Division, Based on First-Year Costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
First-year
costs as a First-year
Sales, receipts, First-year First-year percentage costs as a
Industry division Annual payroll value of Pre-tax profits costs costs as a of sales, percentage
($1,000) shipments ($1,000) ($1,000) percentage receipts, of pre-tax
($1,000) of payroll value of profit
shipments
--------------------------------------------------------------------------------------------------------------------------------------------------------
Agricultural services......................... $9,324,346 $63,936,121 $2,357,130 $11,022 0.12 0.02 0.47
Mining........................................ 24,173,512 195,841,349 25,488,881 3,606 0.01 0.00 0.01
Construction.................................. 197,673,938 936,785,456 28,628,686 82,051 0.04 0.01 0.29
Manufacturing................................. 682,333,069 4,399,057,890 94,604,018 115,311 0.02 0.00 0.12
Trans., Comm., & Public Utilities............. 277,130,334 1,336,692,223 76,411,219 62,547 0.02 0.00 0.08
Wholesale trade............................... 271,158,976 4,752,857,521 86,688,186 67,785 0.02 0.00 0.08
Retail trade.................................. 300,952,012 2,679,002,338 37,467,739 240,698 0.08 0.01 0.64
Finance, Insurance, and Real Estate........... 306,679,061 2,452,102,212 156,048,617 103,568 0.03 0.00 0.07
Services...................................... 1,052,894,811 2,682,451,513 71,969,249 405,452 0.04 0.02 0.56
-------------------
All Industries.......................... 2,785,616,284 17,897,921,102 579,663,726 1,092,039 0.04 0.01 0.19
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Annual payroll; sales, receipts, value of shipments; and pre-tax profits are from Table 5-1. Payrolls were adjusted from 1997 values using the CPI-
U (1997 index = 160.5; 2002 index = 179.9). Sales revenue and Value of shipments were adjusted from 1997 using GDP Price Index (1997 index = 95.415;
2002 index = 130.949).
First-Year Costs in 2002 dollars are from Table 6-7.
[[Page 22229]]
The total first-year costs for state and local governments (also
presented in Table 6-7) were allocated among census regions on the
basis of data on the numbers of local governments, special districts,
and school districts in each state. These were then aggregated to
produce data on total numbers of local government entities by census
region. The estimated 2,500 state government entities were allocated
among the census regions on the basis of the numbers of local
government entities in the census regions.
As shown in Table 7-2, the ratio of total first-year costs to both
payrolls and revenue were less than one-hundredth of one-percent
nationwide in the public sector. The highest impact was in the West
North Central Census Division, where the ratio of first-year costs to
payrolls was 0.014 percent and the ratio of first-year costs to revenue
was 0.004 percent. The Department concludes that impacts of this
magnitude are clearly affordable and will not result in significant
disruptions to typical state and local governments.
Thus, the Department concludes that the Part 541 revisions will not
have a significant impact on typical entities in either the public or
private sectors.
Table 7-2.--Economic Impacts of the Part 541 Revisions on State and Local Governments by Census Division Based
on First-Year Costs
----------------------------------------------------------------------------------------------------------------
First-year First-year
Total payroll Total revenue First-year costs as a costs as a
Census division ($1,000) ($1,000) costs percentage percentage
($1,000) of payroll of revenue
----------------------------------------------------------------------------------------------------------------
New England Division................. $26,957,401 $91,341,625 $894 0.003 0.001
Mid Atlantic Division................ 90,834,619 283,277,080 2,424 0.003 0.001
East North Central Division.......... 85,066,491 261,654,955 4,729 0.006 0.002
West North Central Division.......... 35,501,295 110,917,845 4,882 0.014 0.004
South Atlantic Division.............. 87,925,145 284,249,249 1,506 0.002 0.001
East South Central Division.......... 26,855,986 85,901,118 1,070 0.004 0.001
West South Central Division.......... 52,201,373 158,144,715 2,074 0.004 0.001
Mountain Division.................... 30,747,313 99,845,252 1,756 0.006 0.002
Pacific Division..................... 94,016,081 303,847,856 1,995 0.002 0.001
-------------------
All Census Divisions........... 530,105,704 1,679,179,695 21,330 0.004 0.001
----------------------------------------------------------------------------------------------------------------
Note: Annual payroll; sales, receipts, value of shipments; and pre-tax profits are from Table 5-3. Payrolls were
adjusted from 1997 values using the CPI-U (1997 index = 160.5; 2002 index = 179.9). Sales revenue and Value of
shipments were adjusted from 1997 using GDP Price Index (1997 index = 95.415; 2002 index = 130.949).
First-Year Costs (in 2002 dollars) are based on Table 6-7 (allocated amongst the Census divisions according to
the procedure described in the text).
7.2 Small Business Impacts
As is shown in Table 7-3, the ratio of first-year costs to payrolls
averaged 0.07 percent for private sector small businesses nationwide.
The largest impact relative to payrolls was approximately 0.19 percent
for small businesses in agricultural services. The ratio of first-year
costs to revenue averaged approximately 0.01 percent for private sector
small businesses nationwide. The largest impact relative to revenues
was approximately 0.06 percent for small businesses in agricultural
services. The ratio of first-year costs to pre-tax profit averaged 0.37
percent for private sector small businesses nationwide. The largest
impact relative to pre-tax profit was approximately 1.75 percent for
small businesses in agricultural services.
Particular concern over such impacts was expressed by the National
Restaurant Association, which stated, ``Since salary levels have not
been changed in over a quarter century, the Association agrees that the
existing salary levels are out of date. However, it is important to
emphasize that the substantial increase proposed by DOL will have a
major impact on employers in the restaurant industry, particularly
those who are located in areas of the country with lower general wage
rates. In addition, restaurants generally have very small profit-to-
loss (`P + L') margins each year.''
The NFIB expressed concern that under the proposed rule two
industries, general merchandise stores and private educational
services, would suffer payroll cost increases of more than two percent
of pretax profit. See Table 5.4 of Final Report, Economic Analysis of
the Proposed and Alternative Rules for the Fair Labor Standards Act
(FLSA) Regulations at 29 CFR 541, prepared by CONSAD Research
Corporation, February 10, 2003, p. 75-76, incorporated by reference at
68 FR 15573; March 31, 2003 (estimated 4.5 percent increase for general
merchandise stores and 2.03 percent increase for educational services).
The NFIB noted that given the ``large percentage of our members'' in
the general merchandise category, the estimated 4.5 percent increased
payroll cost ``would be a significant burden,'' particularly for a
small business owner struggling with economic conditions. The NFIB also
expressed similar concern regarding a ``significant burden'' for its
members in the private educational services sector and urged the
Department to carefully review any payroll increases resulting from
updating the rule. The Department has given these comments serious
consideration. Under the final rule, as noted in Table 7-3, first-year
costs are estimated to be less than four-tenths of a percent of pre-tax
profit for all SBREFA-covered small businesses, and approximately
seven-tenths of a percent for all small business retail trade and
services industries.
As discussed throughout the preamble, the Department maintains it
has taken a prudent course of action in revising Part 541. First-year
costs of the magnitude estimated in Table 7-3 are clearly affordable
and will not result in significant disruptions to small businesses in
any of the major industry sectors. Moreover, these impacts do not
include the possible decrease in payroll impacts due to the highly
compensated test, and the benefits of the rule in the form of lower
litigation costs, which accrue to the same groups of employers as the
costs of the rule. The Department chose to look at the per-firm impacts
to employers without netting out these advantages in order to look at
what may accrue to firms that are not under current litigation risk and
do not employ highly compensated employees who may be reclassified as
exempt.
[[Page 22230]]
Therefore these averages likely overstate the true impact of the rule
on businesses and small businesses.
Table 7-3.--Economic Impacts of the Part 541 Revisions on Small Businesses Covered by SBREFA, by Industry Division Based on First-Year Costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
First-year
costs as a First-year
Sales, receipts, First-year First-year percentage costs as a
Industry division Annual payroll value of Pre-tax profits costs costs as a of sales, percentage
($1,000) shipments ($1,000) ($1,000) percentage receipts, of pre-tax
($1,000) of payroll value of profit
shipments
--------------------------------------------------------------------------------------------------------------------------------------------------------
Agricultural services......................... $5,471,482 $17,815,411 $591,216 $10,335 0.19 0.06 1.75
Mining........................................ 7,636,807 67,006,719 6,505,730 2,669 0.03 0.00 0.04
Construction.................................. 123,823,709 590,050,028 21,109,308 75,494 0.06 0.01 0.36
Manufacturing................................. 231,071,360 1,145,575,629 27,723,186 81,661 0.04 0.01 0.29
Trans., Comm., & Public Utilities............. 47,637,196 204,533,244 6,210,156 26,957 0.06 0.01 0.43
Wholesale trade............................... 124,135,798 2,181,380,935 40,071,557 50,587 0.04 0.00 0.13
Retail trade.................................. 95,460,106 732,497,854 17,360,512 126,390 0.13 0.02 0.73
Finance, Insurance, and Real Estate........... 54,743,849 309,348,483 22,193,420 43,294 0.08 0.01 0.20
Services...................................... 363,299,958 950,997,033 38,694,702 258,734 0.07 0.03 0.67
-------------------
All Industries.......................... 939,696,957 5,690,263,273 180,459,786 676,119 0.07 0.01 0.37
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Annual payroll; sales, receipts, value of shipments; and pre-tax profits are from Table 5-2. Payrolls were adjusted from 1997 values using the CPI-
U (1997 index = 160.5; 2002 index = 179.9). Sales revenue and Value of shipments were adjusted from 1997 using GDP Price Index (1997 index = 95.415;
2002 index = 130.949).
First-Year Costs (in 2002 Dollars) are from Table 6-8.
Chapter 8: Estimating the Benefits
The Department has determined that the final rule provides a
variety of benefits to both workers and employers. Although some
benefits can be estimated, data limitations require the Department to
discuss other benefits only qualitatively. For example, 2.8 million
salaried workers in blue-collar occupations who earn $155 or more and
less than $455 per week will benefit from increased overtime protection
because their nonexempt status, which is based on the duties tests
under the current rules, will be guaranteed and unambiguous under the
final rule. The final rule also makes it more difficult to exempt
workers from overtime as executive employees. Although the final rule
will plainly benefit workers, data limitations prevent the Department
from estimating the dollar value of these benefits. Moreover, salaried
workers will also benefit from more equitable treatment in disciplinary
actions (i.e., under the current rule an employer would have to suspend
an exempt manager for a full week for a Title VII violation in order to
preserve the employee's exempt status even if the company's policy
called for just a three-day suspension without pay; under the final
rule salaried employees would lose only three days of pay).
One of the largest benefits to workers comes from having clearer
rules that are easier to understand and enforce. Workers will better
know their rights and whether they are being paid correctly (instead of
going years without knowing whether they should be paid overtime).
Fewer workers will be unintentionally misclassified, and they will not
have to go to court and possibly wait years to recover back pay.
Clearer, more up-to-date rules will also help the Wage and Hour
Division more vigorously enforce the law, ensuring that workers are
being paid fairly and accurately. The safe harbor provision in the
final rule will also continue to ensure that employees whose pay is
reduced in violation of the salary basis test are made whole and will
encourage employers to adopt and communicate employment policies
prohibiting improper pay deductions to their workers.
Employers will also benefit in a variety of ways from the final
rule. As estimated in Chapter 4, the highly compensated test in the
final rule could result in approximately 107,000 currently nonexempt
white-collar workers earning $100,000 or more per year being converted
to exempt salaried status. Some employers could experience a reduction
in their payroll costs related to this change in status. However,
neither the record in this rulemaking nor the economic literature
provides a means for quantifying the amount of this reduction. The
highly compensated test does not require employers to change the
exemption status of their workers who earn $100,000 or more per year,
so the effect of this provision is far less certain than the impact of
the raising the salary level test. Moreover, as discussed in Chapter 4,
there are a variety of reasons why employers might not convert the
exemption status of these highly paid workers. These include, but are
not limited to, the incentives to preserve an investment in human
capital, retain institutional memory, and minimize turnover costs, as
well as the nature of the work, tradition, and culture. Although the
Department has tried to account for these incentives when estimating
the number of workers who could be affected, these estimates do not
completely account for all of the effects, particularly the market
power of these highly skilled workers.
As noted earlier, data limitations and the uncertainty that remains
with the updated RIA methodology reduces the ability to precisely
estimate the impact of the highly compensated test. Specifically, the
RIA is based on a methodology that was originally designed to produce
reasonable estimates of the number of exempt workers at the national
level across all incomes. It was not designed to measure changes in
payroll costs for a small group of workers at the very upper end of the
income distribution. Nor can it be adapted or updated to generate these
types of estimates without a number of simplifying assumptions that are
inconsistent with high-wage labor
[[Page 22231]]
markets. For example, to estimate the change in payroll costs from the
highly compensated test requires the assumption that employers would no
longer pay a premium for overtime hours when, in fact, 63.4 percent of
the RNs and 76.1 percent of the Pharmacists who earn $100,000 or more
per year continue to be paid by the hour (and eligible for overtime)
despite the fact the current regulations classify them as performing
exempt professional duties. The Department expects that most employers
will adjust their compensation policies in a way that maintains the
stability of their workforce, pay structure, and output levels while
preserving their investment in human capital, and are likely to
continue to pay many highly compensated workers by the hour. Although
the Department could have assumed that some portion of the overtime
hours would not be paid, there is nothing in the record, the economic
literature, or the WHD's enforcement experience on which to base the
assumption.
One benefit to employers that can be quantified based on the record
is the benefit of having clearer rules that are easier to understand.
Several commenters offered evidence that clearer, up-to-date rules are
likely to reduce costly litigation. For example, Verizon noted that the
current rule ``offers little assistance to employers * * * who have to
make challenging exemption classification decisions in the high
technology environment of the twenty-first century. And the importance
of making correct exemption classification decisions has never been
higher. In recent years, employers have increasingly found themselves
the target of large-scale class actions with multi-million dollar
exposures challenging various exemption classification decisions that
were based on good faith attempts to comply with the law.'' The
National Association of Federal Wage Hour Consultants stated, ``The
business community has faced numerous unnecessary `class inclusion
type' law suits in the past few years and some of these have been
brought in part as the result of a lack of proper interpretation of
various parts of the regulations or regulations that are difficult to
comprehend * * * Secondly, the legal community appears likewise to have
problems when it comes to providing guidance to its clients as
enforcement through interpretations and litigation have rendered
varying results.'' Finally, Edward Potter, on behalf of the Employment
Policy Foundation (EPF) noted that ``[s]implification of rules may
reasonably reduce the number of case filings by one-third to one-half,
based on the error rate reductions used elsewhere in DOL's analysis.''
EPF also suggested that ``[c]ost savings for reduced litigation would
include reductions in total cases filed--including both those cases
found to have merit and those without merit.''
Other commenters noted that the proposed rule, particularly the
proposed administrative duties test, ``is somewhat vague and
subjective'' and that it ``appears to invite another generation of
court litigation to clarify the meaning of its key terms.'' For
example, the National Association of Manufacturers stated that ``like
the language in the current regulations, the proposed `position of
responsibility' language is subjective, ambiguous, and, if adopted,
could be the subject of a flood of litigation.'' And the International
Foodservice Distributors Association noted, ``The proposal must not
merely substitute one subjective phrase for another. If the rule is to
succeed in its goal of providing clarity to employers, it must make
clear the distinctions between exempt and nonexempt activity. While
IFDA recognizes the difficulty of this task across the entire economy,
unless it is accomplished the new rule will only result in increased
litigation as court battles are waged to delineate key terms of the new
rule.''
As explained elsewhere in the preamble, the Department recognizes
the benefit of retaining relevant portions of the current standard so
as not to completely jettison decades of federal court decisions and
agency opinion letters and has made significant changes to the final
rule that are intended to clarify the existing regulation, to make the
rule easier to understand and apply to the 21st Century workplace, and
to better reflect existing federal case law. The Department believes
that the final rule accomplishes these objectives and will result in
some reduction in litigation, particularly in the long term.
Another benefit to workers and employers is enhanced compliance
with the FLSA. Updating Part 541 will be a catalyst for employers to
review the exemption classifications of their workforce and will result
in greater levels of compliance with the law. More employers will
understand exactly what their obligations are for paying overtime.
Fewer workers will be unintentionally misclassified, and the potential
legal liability that employers have under the current regulation will
be reduced. Reducing regulatory red tape and litigation costs will free
up resources and stimulate economic growth. The updated safe harbor
provision in the final rule encourages employers to adopt proactive
management practices, enables them to reimburse employees for overtime
errors, and take meaningful measures to prevent improper deductions.
The benefit for employers of clearer rules and the safe harbor
provision comes from the lower liquidated damage awards that are
associated with having fewer Part 541 overtime and salary basis
violations (see Table 8-1). These proactive management practices will
also reduce costly and lengthy litigation expenses.
The recent increase in large-scale class action overtime lawsuits
in recent years illustrates the significant cost to the economy as that
has resulted from the ambiguities in the current rule (a fact noted by
a number of commenters such as Verizon, the National Association of
Federal Wage Hour Consultants, and EPF). This increase in overtime
litigation has been widely reported. For example, the Washington Post
reported on April 10, 2004 that the number of Federal lawsuits
involving overtime ``held steady'' at approximately 1,500 per year in
the 1990s but increased to 3,904 in 2002 and 2,751 in 2003, and the
National Law Journal, Vol. 26, No. 30, March 29, 2004, reported that
since July 2001, ``wage-and-hour class actions have skyrocketed.''
To estimate the benefit of clearer rules and the safe harbor
provision, the Department used data from a Minimum Wage Study
Commission report that estimated overtime violation rates by industry
(Report of the Minimum Wage Study Commission, Volume 1, May 1981,
p.154) and assumed that these rates still apply today. The Department
applied these rates to the number of white-collar salaried employees
who worked overtime, the overtime hours that they worked, and their
estimated earnings from those hours, from the Current Population Survey
(CPS) Outgoing Rotation Group dataset, and then reduced these estimates
by three-quarters (based on WHD investigation experience) to account
for the other types of overtime violations, such as off-the-clock-work
and straight time for all hours, that occur in addition to violations
of the ``white collar'' exemptions. The benefit estimates are derived
from the assumption, reflected in the comments, that clarifying the
rule and the safe harbor provision will reduce the number of Part 541
violations. Specifically, the Department assumed that clarifying the
rule and the safe harbor provision would reduce overtime violations by
25 percent (the low-range estimate used in the PRIA). The actual
calculation is: ``Total
[[Page 22232]]
Overtime x Hours for these Workers'' x ``FLSA Overtime Violation Rate''
x ``Share Overtime Violations - 541 Related'' x ``Reduction in 541
Violations'' x ``Average Hourly Earnings per Worker'' x ``the overtime
premium or 0.50'' (see Table 8-1).
The Department currently estimates the benefits from updating and
clarifying the Part 541 rule that are associated with reduced
liquidated damages to be at least $252.2 million. The services industry
is estimated to have the largest quantifiable benefits, followed by
retail trade and the finance, insurance, and real estate industry (see
Table 8-1). However, based on comments in the record, the Department
believes that the estimates presented in Table 8-1 may understate the
actual benefits of the final rule that are associated with liquidated
damages. For example, EPF commented that ``[s]implification of rules
may reasonably reduce the number of case filings by one-third to one-
half, based on the error rate reductions used elsewhere in DOL's [PRIA]
analysis.'' Using EPF's one-third to one-half reduction rates instead
of the Department's more conservative 25 percent assumption would
increase the estimated benefits to $336.3 million to $504.5 million.
However, liquidated damages are only one part of the costs
associated with Part 541 litigation. There are many other significant
benefits that cannot be quantified in this analysis because although
there is anecdotal evidence of other Part 541 related costs, data
limitations preclude the Department from developing other quantitative
estimates. Thus, the estimates presented in Table 8-1 do not include
benefits such as reduced litigation-related costs including plaintiffs'
attorneys fees, defense costs, and court related expenses that can be
substantial; reduced back wage liability due to the safe harbor
provision; the lower costs associated with determining the exempt
status of employees including conducting expensive time-and-motion
studies and other outside human resource expenses; and improved
management productivity from reduced WHD investigations and private
litigation. Consequently, the Department believes that the benefits due
to clarifying the rules and the safe harbor provision are significantly
higher than the quantified amount of $252.2 million.
[[Page 22233]]
Table 8-1.--Estimated Benefits of Revised FLSA Regulations at 29 CFR 541
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Transportation,
Agricultural communication, Finance, State and local
services Mining Construction Manufacturing and Public Wholesale trade Retail trade insurance, and Services government Total
utilities real estate
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total white-collar workers who 48,761 63,989 410,010 1,988,986 794,799 861,156 1,754,428 1,445,543 2,889,213 201,997 10,458,882
worked overtime................
Total overtime hours for these 34,395,423 66,031,880 279,597,133 1,193,109,481 471,925,654 544,699,007 1,155,081,280 872,722,033 1,772,769,183 117,693,406 6,508,024,479
workers........................
------------------
Average annual overtime per 705 1,032 682 600 594 633 658 604 614 583 622
worker.....................
==================
Total annual earnings for these $2,398,158,778 $4,509,404,749 $26,221,165,904 $143,621,959,659 $54,632,035,944 $54,371,706,153 $90,225,585,058 $105,911,687,622 $188,027,119,347 $11,904,722,482 $681,823,545,696
workers........................
Average annual earnings per $49,182 $70,471 $63,952 $72,209 $68,737 $63,138 $51,427 $73,268 $65,079 $58,935 $65,191
worker.........................
------------------
Average hourly earnings per $17.66 $22.65 $23.16 $26.94 $25.71 $23.28 $18.78 $27.30 $24.16 $22.13 $24.12
worker.....................
==================
FLSA overtime violation rate \1\ 8.8% 3.1% 4.9% 1.5% 3.2% 5.6% 8.1% 5.3% 7.1% 0.5% 5.3%
Share overtime violations--541 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0%
related \2\....................
------------------
Adjusted 541 violation rate. 2.2% 0.8% 1.2% 0.4% 0.8% 1.4% 2.0% 1.3% 1.8% 0.1% 1.3%
Number of 541 violations........ 1,073 496 5,023 7,459 6,358 12,056 35,527 19,153 51,284 252 138,681
Reduction in 541 violations \3\. 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0%
==================
Benefit from clarifying rule $1,670,145 $1,448,601 $9,913,431 $15,069,504 $12,132,214 $22,187,719 $54,909,560 $39,461,662 $95,032,301 $407,036 $252,232,174
& safe harbor \4\..........
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Overtime Violation Rates from 1981 Minimum Wage Commission Report, Vol. 1.
\2\ Percentage from Wage and Hour Division enforcement experience.
\3\ This reduction is associated with clarifying the rule and the safe harbor provision.
\4\ These benefits are liquidated damages that are not incurred.
[[Page 22234]]
VII. Other Regulatory Analysis
Unfunded Mandates Reform
The Unfunded Mandates Reform Act of 1995, 2 U.S.C. 1501, requires
agencies to prepare a written statement that identifies the: (1)
Authorizing legislation; (2) cost-benefit analysis; (3) macro-economic
effects; (4) summary of state, local, and tribal government input; and
(5) identification of reasonable alternatives and selection, or
explanation of non-selection, of the least costly, most cost-effective
or least burdensome alternative; for rules for which a general notice
of proposed rulemaking was published and that include any federal
mandate that may result in increased expenditures by state, local, and
tribal governments, in the aggregate, or by the private sector, of $118
million or more in any one year.
(1) Authorizing Legislation
This rule is issued pursuant to Section 13(a)(1) of the Fair Labor
Standards 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 * * *).'' The requirements of the exemption provided by this
section of the Act are contained in this rule, 29 CFR Part 541.
Section 3(e) of the Fair Labor Standards Act, 29 U.S.C. 203(e)
defines ``employee'' to include most individuals employed by a state,
political subdivision of a state, or interstate governmental agency.
Section 3(x) of the Fair Labor Standards Act, 29 U.S.C. 203(x), also
defines public agencies to include the government of a state or
political subdivision thereof, or any interstate governmental agency.
(2) Cost-Benefit Analysis
For purposes of the Unfunded Mandates Reform Act of 1995, this rule
includes a Federal mandate that might result in increased expenditures
by the private sector of more than $118 million in any one year, but
the rule will not result in increased expenditures by State, local and
tribal governments, in the aggregate, of $118 million or more in any
one year. Based on the Regulatory Impact Analysis (RIA), the Department
has determined that the final rule will result in first-year costs for
state and local governments of approximately $21 million. In subsequent
years, the Department estimates that state and local governments may
experience a payroll increase of as much as $10 million per year.
The benefits accruing to state and local governments will be
similar to those accruing to other employers. Like other employers,
state and local governments will benefit from having clearer rules that
are easier to understand. State and local governments will understand
exactly what their obligations are for paying overtime. Fewer workers
will be unintentionally misclassified, and the potential legal
liability that employers have under the current regulation will be
reduced. Reducing regulatory red tape and litigation costs will free up
resources.
(3) Macro-Economic Effects
Agencies are expected to estimate the effect of a regulation on the
national economy, such as the effect on productivity, economic growth,
full employment, creation of productive jobs, and international
competitiveness of United States goods and services, if accurate
estimates are reasonably feasible and the effect is relevant and
material. 5 U.S.C. 1532(a)(4). However, OMB guidance on this
requirement notes that such macro-economic effects tend to be
measurable in nationwide econometric models only if the economic impact
of the regulation reaches 0.25 percent to 0.5 percent of Gross Domestic
Product, or in the range of $1.5 billion to $3.0 billion. A regulation
with smaller aggregate effect is not likely to have a measurable impact
in macro-economic terms unless it is highly focused on a particular
geographic region or economic sector, which is not the case with this
proposed rule.
The Department's RIA estimates that the total first-year impacts on
employers of the final rule will be approximately $1.1 billion.
However, given OMB's guidance, the Department has determined that a
full macro-economic analysis is not likely to show any measurable
impact on the economy.
The ratio of total first-year costs to private sector payrolls
averaged 0.04 percent nationwide, the ratio of total first-year costs
to private sector revenue averaged less than 0.01 percent nationwide,
and the ratio of total first-year costs to private sector pre-tax
profit averaged 0.19 percent nationwide in the private sector. The
Department concludes that impacts of this magnitude are clearly
affordable and will not result in significant disruptions to typical
firms in any of the major industry sectors.
The ratio of total first-year state and local government costs were
less than one-hundredth of one-percent of both state and local
government payrolls and revenue. Impacts of this magnitude will not
result in significant disruptions to typical state and local
governments.
(4) Summary of State, Local, and Tribal Government Input
Many state and local public employers and employees commented on
specific aspects of the proposed rule. These have been addressed above
in the preamble and, where appropriate, changes have been made to the
final rule. In addition, many of the comments from state and local
governments concerned the ability of these entities to absorb the costs
related to the proposed revisions. For example, the Public Sector FLSA
Coalition stated, ``The result of adopting proposed Section
541.100(a)(4) could be that state and local governments would be forced
to reclassify many of their currently exempt executive managers and
supervisors as non-exempt. This possible limitation on the use of the
executive exemption in the public sector was apparently not
contemplated or intended by the Department. The * * * Department's
statements concerning the methods by which resulting increased payroll
costs could be ameliorated by employers may be of no assistance to the
public sector.'' The preamble to the final rule clarifies how the
executive exemption applies in the public sector and the impact of
section 541.100(a)(4), which requires that an employee either have
authority to hire or fire employees or that the employee's
recommendations regarding the change in status of other employees be
given particular weight. The Department also added a definition of
``particular weight.''
The preamble of the proposed rule contains (at 68 FR 15583) a brief
summary and history of this rule and its impact on state, local and
tribal governments. As noted therein, Congress amended the FLSA in 1985
following the Garcia decision to readjust how the Act would apply to
public sector employers by allowing (1) compensatory time off in lieu
of cash overtime pay, (2) partial overtime exemptions for police and
fire departments, (3) the use of unpaid volunteers in certain
circumstances, and (4) a temporary phase-in period for meeting FLSA
compliance obligations. Garcia v. San Antonio Metropolitan
[[Page 22235]]
Transit Authority, 469 U.S. 528 (1985). However, Congress enacted no
special provisions for public agencies related to the section 13(a)(1)
exemptions or the 541 regulations. As a result, the same rules for
determining 541-exempt employees in the private sector were initially
applied to the public sector following the 1985 amendments.
When first confronted with the requirements of the FLSA, many state
and local governments attempted to classify nearly all of their non-
supervisory ``white-collar'' workers as exempt administrative employees
without regard to whether their primary duty related directly to agency
management policies or general business operations, or whether they met
the existing discretion and independent judgment test. In the late
1980s, several Governors and state and local government agencies urged
the Department to exempt many public sector classifications (including
social workers, detectives, probation officers, and others) to avoid
having the overtime requirements (either through increased costs or
reduced hours of service) disrupt the level of public services they
need to provide. In 1989, following a review of the concerns expressed,
former Labor Secretary Elizabeth Dole responded by confirming what was
required to meet the administrative exemption's duties test as applied
to public sector employees, but also solicited specific input with
accompanying rationale to support requested changes. Responses were
limited but argued generally that government services should be
considered unique because of the impact on health, safety, welfare or
liberty of citizens. This, they argued, should allow exemption of
positions in law enforcement and criminal justice, human services,
health care and rehabilitation services, and the unemployment
compensation systems, regardless of whether any particular employee's
job duties included important decision-making authority on how the
government agency is internally operated or managed. In effect, the
suggestions essentially overlooked the focus on ``management or general
business operations'' that has always been an essential foundation to
the administrative employee exemption, but without explaining why that
result was consistent with the intent of the FLSA and the exemptions
provided by section 13(a)(1) as applied to the public sector. They also
urged that the DOL redefine the professional exemption to recognize a
broader contemporary use of that term in government employment, again
without regard to the historical application of the professional
exemption to only the recognized professions in particular fields of
science or learning in which specialized intellectual instruction and
specific academic training were prerequisites for entry into those
particular professions. No supporting justifications were provided to
explain how this broader application of the exemption would be in
accord with the purposes of the FLSA or the exemptions in Section
13(a)(1).
During a growing wave of private lawsuits filed by public employees
against their employers challenging their exempt status, a series of
court decisions were issued that sharply limited public employers'
ability to successfully claim exemption under the ``salary basis''
rule. This prompted the Department to modify the ``salary basis'' rule
to provide specific relief to public employers based on principles of
public accountability in a final rule establishing 29 CFR Sec. 541.5d
issued in August 1992 (57 FR 37666; Aug. 19, 1992). Under this special
rule, the fact that a public sector pay and leave system included
partial-day deductions from pay for absences not covered by accrued
paid leave became irrelevant to determining a public sector employee's
eligibility for exemption. This particular provision was carried over
into the Department's recent proposed rule, at Sec. 541.709 (68 FR
15597; March 31, 2003) and is included in the final rule at Sec.
541.710.
Public sector employers have become less vocal over FLSA issues
since the Department's 1992 rulemaking on the ``salary basis'' issue.
The U.S. Supreme Court's 1997 decision in Auer v. Robbins, 519 U.S. 452
(1997), a public sector case involving the City of St. Louis Police
Department and disciplinary deductions from pay, may also have relieved
many public agencies' concerns over pay-docking for discipline.
Although public agency organizations were invited to the
Department's stakeholder meetings in 2002 to address concerns over the
Part 541 regulations, most did not respond to the invitations. The
International Personnel Management Association, accompanied by the
National Public Employers Labor Relations Association and the U.S.
Conference of Mayors, suggested that progressive discipline systems are
common in the public sector (some collectively bargained) and the
``salary basis'' rule for exempt workers, which prohibits disciplinary
deductions except for major safety rules, conflicts with such systems.
Representatives of the Interstate Labor Standards Association (ILSA)
submitted written views suggesting that the salary threshold be indexed
to the current minimum wage or some multiple thereof (i.e., three times
the minimum wage for a 40-hour workweek or $618 per week). One
additional idea was to relate the salary levels to those of the
supervised employees. No other input was provided.
The proposed rule intended to clarify and thus simplify the
exemptions' duties tests, but would continue to apply the same basic
duties tests in both the public and private sectors. The public sector
has been regulated under a different set of pay-docking rules since
1992, and additional revisions included in the final rule would broaden
permissible disciplinary deductions to include partial-week suspensions
for infractions of certain workplace conduct rules such as sexual
harassment and work-place violence. The Department is not persuaded,
however, by the comments seeking a separate, less-stringent duties test
rule applicable solely to the public sector.
As discussed above in the RIA, the estimated first-year costs for
state and local government are approximately $21 million, approximately
half of which are one-time implementation costs. This $21 million
constitutes an average of less than $250 for each of the approximately
90,000 state and local entities. The Department considers impacts of
this magnitude to be quite small both in absolute terms and in relation
to payrolls and revenue.
(5) Least Burdensome Option or Explanation Required
The Department's consideration of various options has been
described throughout the preamble. The Department believes that it has
chosen the least burdensome option that updates, clarifies, and
simplifies the rule. One alternative option would have set the
exemptions' salary level at a rate lower than $455 per week, which
might impose lower direct payroll costs on employers, but may not
necessarily be the most cost-effective or least burdensome alternative
for employers. A lower salary level could result in a less effective
``bright-line'' test that separates exempt workers from those nonexempt
workers whom Congress intended to cover by the Act. Greater ambiguity
regarding who is exempt and nonexempt increases the potential legal
liability from unintentionally misclassifying workers, and thus the
ultimate cost of the regulation.
[[Page 22236]]
Executive Order 13132 (Federalism)
This rule will not have ``substantial direct effects on the States,
on the relationship between the national government and the States, or
on the distribution of power and responsibilities among the various
levels of government.'' As noted previously, the FLSA explicitly
applies to states, political subdivisions of states, and interstate
governmental entities, 29 U.S.C. 203(e), (x). To the extent necessary,
the final rule addresses effects on state and local government
employers, including retaining the previous rule's specific exception
to the salary basis requirement for public employees (now at section
541.710) that was promulgated in 1992 (57 FR 37677 (August 19, 1992))
to address state constitutional or statutory public accountability
requirements in the funding of state and local governments. As
described above, the Department considers the estimated cost impacts of
the rule on state and local governments to be quite small both in
absolute terms and in relation to payrolls and revenues. State and
local governments will also accrue benefits from this final rule like
other employers in the form of clearer rules and reduced litigation.
In addition, the FLSA specifies that employers must comply with any
state or municipal laws, regulations or ordinances establishing a
higher minimum wage or lower maximum work week than those established
under the Act, 29 U.S.C. 218(a). Section 541.4 in the final regulations
clarifies in the rule itself that state laws providing additional
worker protections are not preempted and that employers must continue
to comply with those laws. Consequently, under the terms of section 6
of E.O. 13132, it has been determined that this rule does not have
sufficient federalism implications to warrant the preparation of a
federalism summary impact statement.
Regulatory Flexibility Act and Executive Order 13272
The Regulatory Flexibility Act of 1980, as amended by the Small
Business Regulatory Enforcement Fairness Act of 1996, 5 U.S.C. 601 et
seq., requires agencies to prepare regulatory flexibility analyses, and
make them available for public comment, when promulgating regulations
that will have ``a significant economic impact on a substantial number
of small entities.'' Accordingly, the following analysis assesses the
impact of these regulations on small entities as defined by the
applicable SBA size standards.
In accordance with E.O. 13272, ``Proper Consideration of Small
Entities in Agency Rulemaking,'' this rule has been reviewed to assess
its potential impact on small businesses, small governmental
jurisdictions, and small organizations, as provided by the Regulatory
Flexibility Act. The Department gave the notice of proposed rulemaking
and the initial regulatory flexibility analysis to the Chief Counsel
for Advocacy of the Small Business Administration for review.
The County Attorney for the County of Culpeper, Virginia, asserted
that the DOL has never reviewed the effects of Part 541 on state and
local governments or sought to minimize its burdens. This, according to
the County Attorney, is a failure by the DOL to meet its obligations
under the RFA and Executive Order 13272. This commenter cited as the
most obvious example the ``salary basis'' test and the flood of
litigation against public employers in the aftermath of the U.S.
Supreme Court's 1985 decision in Garcia v. San Antonio Metropolitan
Transit Authority, 469 U.S. 528 (1985). The County Attorney suggested
that the Department should confer with state and local officials and
jointly prepare proposed rules designed specifically for government
employers that recognize the differences between urban and rural
governments and between large and small government jurisdictions, and
which minimize the burden on these employers while still conforming to
Congressional intent. (The crux of this issue in the Department's view,
of course, is how best to minimize the burden on these employers while
still conforming to Congressional intent.)
The Department disagrees with this comment. The Department has, in
fact, reviewed the impact of these regulations on state and local
governments and sought to minimize burdens on state and local
governments and on small entities to the extent permitted by
Congressional intent and the statutory objectives of the FLSA. A case
simply has not been made for creating separate, less-stringent
exemption criteria under special rules for state and local governments
that bypass Congressional intent or the statutory objectives of the
FLSA and the exemptions provided in section 13(a)(1).
Final Regulatory Flexibility Analysis
(1) Succinct Statement of Need For, and Objectives of, Rule
Section 13(a)(1) of the Fair Labor Standards Act (FLSA), 29 U.S.C.
213(a)(1), directs the Secretary of Labor to issue regulations ``from
time to time'' (subject to the Administrative Procedure Act) to define
and delimit the terms ``any employee employed in a bona fide executive,
administrative, or professional capacity * * * or in the capacity of
outside salesman * * *'' Employees who meet the specified regulatory
criteria are completely exempt from minimum wage and overtime pay under
the FLSA. The existing regulations require payment ``on a salary
basis,'' at not less than specified minimum amounts, and certain
additional tests must be met related to an employee's primary job
duties and responsibilities. The duties tests were last modified in
1949 and have remained essentially unchanged since. The salary levels
required for exemption were last updated in 1975 on an interim basis.
In 1999, the U.S. General Accounting Office reviewed these regulations
and recommended that the Secretary of Labor comprehensively review and
update them, and make necessary changes to better meet the needs of
both employers and employees in the modern work place. These
regulations were also recommended for reform in public comments
submitted on OMB's 2001 and 2002 Reports to Congress on the Costs and
Benefits of Regulations. The Department proposed revisions to these
regulations in response to the concerns that have been raised over the
years, to update, clarify and simplify them for the 21st Century
workplace. The objectives of the revised rule are to provide clear and
concise regulatory guidance to implement the statutory exemption, in
plain language, to assist employers and employees in determining
whether an employee is exempt from the FLSA as a bona fide executive,
administrative, professional, or outside sales employee.
(2) Summary of Significant Issues Raised in Comments and Responses
Thereto
Many of the issues raised by small businesses in the public
comments received on the proposed rule are described in the preamble
above. The significant issues raised by representatives of small
businesses and the U.S. Small Business Administration's Office of
Advocacy (``Advocacy'') are repeated here to meet the guidelines under
the Regulatory Flexibility Act.
Advocacy commended the Department for its outreach to small
entities in developing the proposed rule and encouraged those efforts
to continue, including the development of small entity compliance
assistance materials for the final rule. The Department will continue
to expand its
[[Page 22237]]
available compliance assistance materials related to these regulations
for small entities.
Primary duty test: Small business representatives informed Advocacy
that the proposed movement away from a percentage-of-time primary duty
test was an important development in reducing the regulation's
compliance burden on small businesses. Advocacy recommended that the
Department incorporate the proposed primary duty test in the final
rule. The final rule includes the proposed primary duty test, with
minor and clarifying modifications.
Salary test: Small businesses told Advocacy that, because of
regional differences in salaries and industry characteristics, they
will face disproportionate burdens if the Department adopts the $425
per week minimum salary test. Advocacy stated that, in different
regions of the country, small business employees enjoy the same or
similar living standards with very different salaries. Further, some
small business industries, such as retail stores and restaurants,
operate on thin margins with labor costs constituting a significant
portion of their expenses. Many of these small businesses rely heavily
on small numbers of management-level employees who would no longer be
exempt from overtime. Advocacy encouraged the Department to provide
flexibility to small businesses under the salary test, such as lower
minimum salary levels for small businesses, to alleviate the
disproportionate effects. At a minimum, Advocacy urged the Department
not to adopt a minimum salary test for small businesses above $425 per
week.
The National Small Business Association (NSBA) (formerly National
Small Business United) commented in general support of the proposal and
asserted overall that the benefits of the changes would outweigh the
potentially negative impacts of the changes on its members. However,
NSBA also commented that lower salary tests (both the standard tests
and the highly compensated test) would be more desirable for small
businesses.
The National Federation of Independent Business (NFIB) observed
that DOL's analysis showed two industries in which incremental payroll
costs rise by more than two percent of pretax profit--general
merchandise stores (SIC 53) and private educational services (SIC 82)--
when employees are reclassified according to the proposed new FLSA
rules (based on 2001 data). NFIB suggested that any agency proffering
rule changes that cause potential losses in small firm profits ought to
give careful consideration to ameliorating those particular
circumstances.
The Department carefully considered the FLSA's statutory purposes
and the context for its exemption of ``white-collar'' employees under
section 13(a)(1), and studied its extensive regulatory history.
Employees who qualify under these exemptions are exempt from the Act's
minimum wage and overtime requirements. They are assumed to enjoy a
certain prestige, status, and importance within their employer's
organization commensurate with the exempt level accorded their
position, as well as other compensatory privileges in exchange for not
being covered by the Act. Consequently, to achieve its intended
purpose, the salary level adopted for exemption should help to
accurately distinguish exempt from nonexempt workers under these
principles, and without inviting evasion of the FLSA's minimum wage and
overtime requirements for large numbers of workers for whom the Act's
basic protections were intended. At the same time, the level selected
should not operate to exclude large numbers of employees whose jobs
were intended to be within the exemption. Accordingly, in arriving at
the salary level, the Department's methodology specifically considered
salary levels actually being paid by small business industries (such as
retail stores and restaurants), and in lower-wage regions (such as the
South). Therefore, the Department concluded these commenters have not
fully understood the true effects of the Department's methodology in
setting the exemption's salary level.
Although the analysis does not include precise data delineating the
salary levels paid by small businesses to their exempt employees in
each exemption category (due to data limitations), the Department
applied a reasonable proxy that takes into account lower-wage
industries that include many small businesses, specifically by looking
to the salary levels actually being paid in the retail and service
sectors and in the South. This approach is based on and entirely
consistent with previous revisions of these regulations. It tries to
approximate the lower portion of the range of prevailing salaries
already being paid to employees intended for exemption (thus mitigating
actual impacts in retail stores and restaurants and in lower-wage
regions of the country). For example, when the Department revised the
regulations in 1958, it looked at the salaries paid to exempt employees
and set rates ``at about the levels at which no more than about 10
percent of those in the lowest-range 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.'' In the 1958 Kantor Report (at 5-7) and the 1940 Stein Report
(at 32), it was noted that ``* * * these figures are averages, and the
act applies to low-wage areas and industries as well as to high-wage
groups. Caution therefore dictates the adoption of a figure that is
somewhat lower, though of the same general magnitude.'' Moreover, the
1949 Weiss Report (at 11-15) stated ``To be sure, salaries vary,
industry by industry, and in different parts of the country, and it
undoubtedly occurs that an employee may have a high order of
responsibility without a commensurate salary. By and large, however, if
the salary levels are selected carefully and if they approximate the
prevailing minimum salaries for this type of personnel and are above
the generally prevailing levels for nonexempt occupations, they can be
useful adjuncts in satisfying employers and employees as well as the
Divisions as to the exempt status of the particular individuals.'' DOL
set a salary level at that time at a ``figure slightly lower than might
be indicated by the data'' because of concerns regarding the impact of
the salary level increases on small businesses: ``The salary test for
bona fide executives must not be set so high as to exclude large
numbers of the executives of small establishments from the exemption.''
The Department's current approach was similar, and thus already
specifically considered the lower salary levels paid by smaller
businesses in the retail and service sectors and in the South, which
the data confirm pay lower wages. The Department's approach is designed
specifically to achieve a careful and delicate balance: Mitigate the
adverse impacts of raising the salary threshold on smaller businesses
covered by the law while staying consistent with the objectives of the
statute to clearly define and delimit which workers qualify for
exemption as Congress intended, and at the same time helping to prevent
the misclassification of obviously nonexempt employees. Adopting an
even lower minimum salary level for small businesses, when the
methodology has already given special consideration to lower salaries
being paid in the retail and service sectors and in the South (two
cohorts in which small businesses are prevalent), would result in a
rule that fails to effectuate its statutory purposes.
The FLSA itself does provide special treatment for small entities
under some of its exemptions, e.g., smaller farms
[[Page 22238]]
and small newspapers are specifically exempt and enterprises with
annual dollar volumes of business less than $500,000 per year are not
covered under the enterprise coverage test. Small businesses that have
as their only regular employees the owner or parent, spouse, child or
other member of the immediate family of the owner are also specifically
excluded from the FLSA's enterprise coverage test. However, the FLSA's
statutory exemption for white-collar employees in section 13(a)(1)
contains no special provision based on size of business.
Regional and population-based salary differentials were also
previously considered and rejected in prior revisions of these
regulations. They were considered unworkable because they would
increase enormously the difficulties of administration and enforcement,
and were questionably beyond the Administrator's authority under the
Act (perceived as comparable to setting different minimum wages for a
class of workers that Congress specifically exempted). See 1940 Stein
Report at 5-6 and 32. While the Department did once again reconsider
these possible options in response to suggestions from commenters, no
new arguments or rationales were advanced during this rulemaking that
would overcome the same shortcomings and previously-reached
conclusions. Setting multiple minimum salary levels according to SBA
size standards industry-by-industry would present the same
insurmountable challenges.
As described under the Unfunded Mandates Reform Act section in the
preamble of the proposed rule (see 68 FR 15584), the Department
considered as an alternative option setting the salary level even lower
than the proposed $425 per week and concluded that, while it might
appear to impose lower direct payroll costs on employers, it may not
necessarily be the most cost-effective or least burdensome alternative
for employers. A lower salary level that is not above the generally
prevailing levels for nonexempt occupations fails to adequately
distinguish bona fide exempt workers from those nonexempt workers whom
Congress intended to protect. It provides a less effective ``bright-
line'' test under the exemption, which invites misclassification.
Greater ambiguity over who is and who is not exempt increases the
potential legal liability for employers from unintentionally
misclassifying workers, and thus the ultimate cost of the regulation.
Reducing the needless ambiguity of the existing regulations is one of
the principal objectives of the final rule. Setting the exemption
salary level at or near the wage levels paid to large numbers of
nonexempt workers would fail the objectives of these regulations and
the purposes of the statute.
The law provides considerable built-in flexibility to small
businesses to enable them to respond to the regulations in the most
cost-effective manner that best suits their individual needs. The FLSA
requires that covered employers comply with its basic minimum wage and
overtime pay requirements unless a particular exemption applies. Unless
it chooses to do so, no employer is required to claim an exemption from
the law or to pay an employee the salary level required for the
``white-collar'' exemptions. The law therefore provides a measure of
maximum flexibility to employers in this respect for meeting their
compliance obligations.
Employers affected by the final rule could respond in a variety of
ways. For example, they could adhere to a 40-hour work week (by
spreading available work to more employees, and limiting each to no
more than 40 hours of work per week, consistent with the statutory
objective of the FLSA's overtime requirements); pay the statutory
overtime premiums to affected employees who work more than 40 hours per
week; or raise exempt employees' salaries to the new level required
under the final rule. Given the range of responses employers may take
when confronted with paying overtime to an employee previously treated
as exempt, and in light of the Department's methodology that
specifically considered lower salary levels actually being paid by
small businesses in the retail sector and in the South, the Department
believes that it has properly considered the available options that are
consistent with the purposes of the statute and has selected a
regulatory approach that alleviates the perceived disproportionate
effects that small businesses have suggested would occur under the
rule.
Enforcement flexibility: Advocacy noted that SBREFA requires
Federal agencies to establish policies which reduce or waive civil
penalties for small businesses in appropriate cases. Advocacy
encouraged the Department to consider civil penalty flexibility where
appropriate, noting that flexibility in dealing with small businesses
will encourage such entities to work more closely with the Department
to voluntarily achieve compliance. The Department's policies under the
FLSA for reducing or waiving civil money penalties for small businesses
under appropriate circumstances are fully consistent with SBREFA
requirements and principles. However, there is a distinction between
civil money penalties and statutory wages due under the FLSA.
Violations of the FLSA's minimum wage or overtime provisions create an
employer liability directly to its employees who were not paid their
statutory wages due. The Department has no authority under the FLSA or
SBREFA to reduce or waive an employer's liability to employees for
statutory minimum wages or overtime pay legally due. The Department
will continue to expand its compliance assistance efforts to promote
voluntary employer compliance with these regulations, especially for
smaller businesses.
Small business representatives and Advocacy commented that the safe
harbor's requirement for a pre-existing ``written policy'' may exclude
some small businesses which do not produce written compliance materials
in the ordinary course of their business. Understanding that the
purpose of this requirement is to encourage regulated entities to
better understand the law's requirements, Advocacy still believed that
the Department should not exclude small businesses from the proposed
safe harbor, while offering it to large businesses that are more able
to dedicate resources to drafting comprehensive written employment
policies. While Advocacy commended the DOL for including a safe harbor
provision, it encouraged the Department to consider alternatives to the
written policy requirement proposed at Sec. 541.603.
After carefully considering all the comments on the proposal and
pertinent case law on the current rule's ``window of correction,'' the
Department modified the proposed rule's safe harbor requirement. The
final rule does not require employers to adopt and communicate a
written employment policy in order to utilize the rule's safe harbor.
While an employer must still have a policy prohibiting improper pay
deductions, and clearly communicate it to its employees, a written
policy is no longer required. In addition, the clearly communicated
policy must also now include a complaint mechanism. Communication to
employees in some form is important so that employees will also benefit
from this notification of their rights under the FLSA. As other
commenters (e.g., the American Health Care Association, American
Corporate Counsel Association, and National Association of
Manufacturers) have stated, adopting a written policy is the best
evidence of the employer's good faith efforts to comply. Further, this
[[Page 22239]]
particular requirement is narrowly focused on an employer's policy
prohibiting improper pay deductions, which includes a complaint
mechanism, for salaried-exempt workers; it does not suggest the
adoption of ``comprehensive written employment policies'' covering
other matters.
Small entity compliance guide: Advocacy noted that the Department
has historically made compliance materials available to small
businesses via its Web site. Advocacy encouraged the Department to
update and revise these compliance assistance materials for small
entity use with the new rule, as well as to distribute these materials
to small businesses that do not have access to the Internet. The
Department is revising all pertinent compliance assistance materials
for small entities' use with the new rule and will distribute printed
versions of the materials for employers that do not have access to the
Internet. The Department has also planned a comprehensive compliance
assistance effort on the changes in the regulations so that employers
will better understand their compliance responsibilities and employees
will better understand their rights under the new rules.
The American Hotel & Lodging Association and the International
Franchise Association both commented that, for the lodging industry,
entities with annual receipts of less than $6 million are considered
``small'' according to SBA size standards. They asserted that the
FLSA's statutory exemption for firms with annual revenues less that
$500,000 does not relieve the Department of the requirement in the
Regulatory Flexibility Act to address the disproportionate impact on
smaller firms. The impact of the dramatically increased salary
threshold on an owner of a single, limited-service hotel in a rural
area could be quite significant, they maintained, and they urged the
Department to more carefully explore regulatory alternatives for
reducing significant economic impact on small entities. For the reasons
discussed more fully above, the Department disagrees that it has not
carefully explored the available regulatory alternatives consistent
with the purposes of the statute in ways that address the
disproportionate impact on smaller firms. The Department believes that
it has properly considered the available options and has selected a
regulatory approach that appropriately considers the lower salary
levels being paid by smaller businesses in the retail sector and in the
South, thereby mitigating the perceived disproportionate effects that
would otherwise occur to small businesses. In so doing, the Department
has not, contrary to the assertions of these commenters, assumed that
the FLSA's statutory coverage test relieves the DOL of its obligations
under the Regulatory Flexibility Act.
(3) Number of Small Entities Covered by the Rule
The Department based its small firm estimates on the same data
sources used for the private sector as a whole. Based on SBA's size
standards for small business entities, the Department estimates more
than 5.2 million establishments impacted by the final standard are
considered to be small businesses. These small firms employ
approximately 38.7 million workers with an annual payroll of $940
billion. Their total annual sales are estimated to be $5.7 trillion and
their annual pre-tax profits are estimated to be $180 billion.
Approximately 80 percent of the affected establishments are considered
to be small businesses and they account for 39 percent of the
employment, 35 percent of the payroll, 32 percent of the annual sales,
and 31 percent of the annual pre-tax profits.
(4) Reporting, Recordkeeping and Other Compliance Requirements of the
Rule
Although an employer claiming an exemption from the FLSA under 29
CFR Part 541 must be prepared to establish affirmatively that all
required conditions for the exemption are met, this rule contains no
reporting or recordkeeping requirements as a condition for the
exemption. However, the recordkeeping requirements for employers
claiming exemptions from the FLSA under 29 CFR Part 541 for particular
employees are contained in the general FLSA recordkeeping regulations,
applicable to all employers covered by the FLSA (codified at 29 CFR
Part 516; see 29 CFR Sec. 516.0 and 516.3) and have been approved by
the Office of Management and Budget Control Number 1215-0017. There are
no other compliance requirements under the final rule.
(5) Steps Taken To Minimize Significant Impact on Small Entities
Consistent With Objectives of Applicable Statutes
The FLSA generally requires employers to pay covered nonexempt
employees at least the federal minimum wage of $5.15 per hour, and
time-and-one-half overtime premium pay for hours worked over 40 per
week. Under the terms of the statute, Congress excluded some smaller
businesses (those with annual revenues less than $500,000) from the
definition of covered ``enterprises'' (although individual workers who
are engaged in interstate commerce or who produce goods for such
commerce may be individually covered by the FLSA). This rule clarifies
and updates the criteria for the statutory exemption from the FLSA for
executive, administrative, professional, and outside sales employees
for all employers covered by the FLSA.
The factual, policy and legal reasons for selecting the regulatory
alternatives adopted in the final rule are set out in full detail above
in section (2) of this Final Regulatory Flexibility Analysis and
elsewhere in the preceding sections of the preamble discussing the
public comments received on specific sections of the proposal and our
responses thereto, and include the statutory objectives of the FLSA and
the purposes of the section 13(a)(1) exemptions; the extensive
regulatory history and procedures followed during prior updates of
these regulations; extensive public commentary over the years on the
current rules as recently documented by the GAO and others; available
data for determining the scope and impact of making changes to the
current rule; and the regulatory principles embodied in the Paperwork
Reduction Act, the Regulatory Flexibility Act, and the various
Executive Orders applicable to the rulemaking process.
The Department considered a number of alternatives to the rule that
would impact small entities. One alternative is not to change the
existing regulations. This alternative was rejected because the
Department has determined the existing salary tests, which have not
been raised in more than 28 years, no longer distinguish between bona
fide executive, administrative, and professional employees and those
who should not be considered for exemption. Also, the duties tests,
which were last modified in 1949, are viewed in the regulated community
as too complicated, confusing, and outdated for the modern workplace.
Two other alternatives are to raise the salary levels and not
update the duties tests, or conversely to update the duties tests
without raising the salary levels. However, the Department rejected
these alternatives and concluded that raising the salary levels is
necessary to reestablish a clear, relevant bright-line test between
exempt and nonexempt workers. Moreover, the duties tests were last
revised in 1949 and have remained essentially unchanged since that
time, and the salary levels were last updated in 1975. The Department
has determined that updating both the salary level and duties tests is
necessary
[[Page 22240]]
to better meet the needs of both employees and employers in the modern
workplace and to anticipate future workplace trends.
Another alternative is to adjust the salary levels for the standard
test for inflation. However, the Department has never relied solely on
inflation adjustments to determine the appropriate salary levels, and
has decided to continue its long-standing regulatory practice to reject
such mechanical adjustments for inflation and base the salary levels
for exemption on wage levels actually being paid in the economy with
appropriate consideration given to low-wage regions and low-wage
industries and the effects on smaller businesses, as explained above.
Assessment of the Impact on Families
A number of commenters, including numerous individuals who
submitted form letters, expressed concerns that the proposed rule would
have an adverse impact on families.
Many of these comments were based upon the erroneous assertion that
the proposed rule would have made millions of workers exempt from
overtime and, as a result, would have deprived families of a
significant source of income. As discussed more fully above (see
Chapters 2 and 4 of the RIA), many of these allegations were based upon
misleading and inappropriate comparisons between the existing ``long''
duties tests and the standard tests in the final regulation. The
``long'' duties tests, under which some employees are exempt and others
nonexempt, have been replaced in the final rule by guaranteed overtime
protection. Accordingly, the Department concludes that no worker who
earns less than $455 per week will lose their overtime protection under
the final rule.
The Department estimates that 1.3 million white-collar workers
earning less than $455 per week ($23,660 per year) are Part 541-exempt
under the current rule. These workers are likely to benefit under the
final rule in the form of increased compensation of approximately $375
million per year in the form of either paid overtime or higher
salaries. According to the CPS data, many of these workers are married
women and minorities with less than a college degree. Another 5.4
million salaried workers who earn between $155 and $455 per week will
have their overtime protection strengthened because their protection,
which is based on the duties tests under the current regulation, will
be guaranteed under the final rule.
The Department also has determined that the final rule is as
protective as the current regulation for workers who earn between
$23,660 and $100,000 per year. On the whole, employees will gain
overtime protection because some revisions are more protective than the
existing short duties tests. For example, the executive duties test in
the final rule is more protective than the current short duties test
and the final rule is more protective for police officers, fire
fighters, paramedics, emergency medical technicians, and other first
responders, and the highly compensated test does not apply to them. The
Part 541 exemptions also do not apply to manual laborers or other non-
management blue-collar workers such as carpenters, electricians,
mechanics, plumbers, iron workers, craftsmen, operating engineers,
longshoremen, construction workers and laborers.
Additionally, clearer more up-to-date rules will also help the Wage
and Hour Division more vigorously enforce the law, ensuring that
workers are being paid fairly and accurately. Fewer workers will be
unintentionally misclassified; therefore they will not have to go to
court and wait years for their back pay. This will have a positive
impact on workers, especially low-wage, vulnerable workers and their
families.
An estimated 107,000 workers who earn $100,000 or more per year
could lose their overtime protection due to the new highly compensated
test. However, as discussed in Chapters 4 and 8 of the RIA, there are a
variety of reasons why employers might not convert the exemption status
of these highly paid workers. These include, but are not limited to,
the incentives to preserve an investment in human capital, retain
institutional memory, and minimize turnover costs, as well as the
nature of the work, and tradition and culture. Moreover, it would be
incorrect to assume that employers would no longer pay a premium for
overtime hours to these workers when 63.4 percent of the RNs and 76.1
percent of the Pharmacists who earn $100,000 or more per year continue
to be paid by the hour (and eligible for overtime) despite the fact the
current regulations classify them as performing exempt professional
duties. The Department expects that most employers will adjust their
compensation policies in a way that maintains the stability of their
workforce, pay structure, and output levels while preserving their
investment in human capital, and are unlikely to reduce the
compensation of many highly paid workers, even if they could
theoretically be made exempt under the new highly compensated tests.
Therefore, the Department has determined that the final rule will
have an overall positive impact on families, and: (1) Is unlikely to
affect the stability or safety of the family, particularly the marital
commitment; (2) has no affect on the authority and rights of parents in
the education, nurture, and supervision of their children; (3) is
likely to help the family perform its functions; (4) is likely to
increase the disposable income of families and children and help reduce
poverty; (5) can not be carried out by State or local government or by
the family; and (6) does not establish an implicit or explicit policy
concerning the relationship between the behavior and personal
responsibility of youth, and the norms of society. Accordingly, this
rule has been assessed under section 654 of the Treasury and General
Government Appropriations Act, 1999, for its effect on family well-
being and the undersigned hereby certifies that the rule will not
adversely affect the well-being of families.
Executive Order 13045, Protection of Children
In accordance with Executive Order 13045, the Department has
evaluated this rule and determined that it has no environmental health
risk or safety risk that may disproportionately affect children.
Appendix A--Detailed Coverage Estimates
Table A-1.--Blue-Collar Occupations That Are Most Likely Nonexempt Under the Current and Final Executive,
Administrative, or Professional Exemptions
----------------------------------------------------------------------------------------------------------------
OCC code Occupation title Paid hourly Nonhourly
----------------------------------------------------------------------------------------------------------------
403..................................... Launderers and ironers.......... 0 3,239
404..................................... Cooks, private household........ 9,448 2,052
405..................................... Housekeepers and butlers........ 6,892 3,275
406..................................... Child care workers, private 265,010 213,825
household.
407..................................... Private household cleaners and 451,534 506,876
servants.
[[Page 22241]]
416..................................... Fire inspection and fire 10,707 1,748
prevention occupations.
417..................................... Firefighting occupations........ 98,804 129,880
418..................................... Police and detectives, public 301,015 250,539
service.
423..................................... Sheriffs, bailiffs, and other 72,306 72,512
law enforcement officers.
424..................................... Correctional institution 171,867 129,503
officers.
425..................................... Crossing guards................. 30,947 4,612
426..................................... Guards and police, except public 681,655 134,843
service.
427..................................... Protective service occupations, 86,808 9,192
not elsewhere classified
(n.e.c.).
434..................................... Bartenders...................... 272,490 37,341
435..................................... Waiters and waitresses.......... 1,289,086 144,701
436..................................... Cooks........................... 1,821,259 251,916
438..................................... Food counter, fountain and 394,989 8,887
related occupations.
439..................................... Kitchen workers, food 309,683 26,521
preparation.
443..................................... Waiters'/waitresses' assistants. 617,109 56,396
444..................................... Miscellaneous food preparation 582,667 56,533
occupations.
445..................................... Dental assistants............... 176,900 31,036
446..................................... Health aides, except nursing.... 300,666 45,918
447..................................... Nursing aides, orderlies, and 1,905,597 254,413
attendants.
449..................................... Maids and housemen.............. 548,780 71,577
453..................................... Janitors and cleaners........... 1,616,839 404,414
454..................................... Elevator operators.............. 5,635 771
455..................................... Pest control occupations........ 30,692 24,887
457..................................... Barbers......................... 12,811 25,388
458..................................... Hairdressers and cosmetologists. 214,791 330,329
459..................................... Attendants, amusement and 210,873 33,786
recreation facilities.
461..................................... Guides.......................... 23,487 8,556
462..................................... Ushers.......................... 34,419 3,724
463..................................... Public transportation attendants 79,221 43,725
464..................................... Baggage porters and bellhops.... 38,447 3,765
465..................................... Welfare service aides........... 78,519 28,057
466..................................... Family child care providers..... 7,676 13,031
467..................................... Early childhood teacher's 400,055 105,253
assistants.
468..................................... Child care workers, n.e.c....... 164,678 45,236
469..................................... Personal service occupations, 167,870 61,095
n.e.c..
473..................................... Farmers, except horticultural... 1,233 304
479..................................... Farm workers.................... 19,370 3,883
483..................................... Marine life cultivation workers. 767 0
484..................................... Nursery workers................. 6,319 119
486..................................... Groundskeepers and gardeners, 628,009 163,202
except farm.
487..................................... Animal caretakers, except farm.. 83,895 21,766
488..................................... Grader and sorter, agricultural 38,938 5,673
products.
489..................................... Inspectors, agricultural 1,946 1,214
products.
495..................................... Forestry workers, except logging 3,992 1,752
496..................................... Timber cutting and logging 22,039 12,078
occupations.
497..................................... Captains and other officers, 819 1,761
fishing vessels.
498..................................... Fishers......................... 4,933 15,923
505..................................... Automobile mechanics............ 295,415 167,163
506..................................... Auto mechanic apprentices....... 2,215 0
507..................................... Bus, truck, and stationary 193,638 37,272
engine mechanics.
508..................................... Aircraft engine mechanics....... 25,871 7,301
509..................................... Small engine repairers.......... 32,026 8,790
514..................................... Automobile body and related 95,820 49,978
repairers.
515..................................... Aircraft mechanics, except 10,919 652
engine.
516..................................... Heavy equipment mechanics....... 134,978 25,158
517..................................... Farm equipment mechanics........ 22,825 5,604
518..................................... Industrial machinery repairers.. 373,093 56,377
519..................................... Machinery maintenance 13,041 1,085
occupations.
523..................................... Electronic repairers, 133,521 34,011
communications & industrial
equip.
525..................................... Data processing equipment 152,554 105,323
repairers.
526..................................... Household appliance and power 22,840 5,872
tool repairers.
527..................................... Telephone line installers and 32,469 7,938
repairers.
529..................................... Telephone installers and 177,639 49,190
repairers.
533..................................... Misc electrical and electronic 62,529 9,374
equipment repairers.
534..................................... Heating, air conditioning, and 240,044 44,067
refrigeration mechanics.
535..................................... Camera, watch, and musical 12,339 4,306
instrument repairers.
536..................................... Locksmiths and safe repairers... 12,211 3,458
538..................................... Office machine repairers........ 30,822 14,624
539..................................... Mechanical controls and valve 15,324 713
repairers.
543..................................... Elevator installers and 19,960 6,189
repairers.
544..................................... Millwrights..................... 57,777 4,543
547..................................... Specified mechanics and 300,199 87,967
repairers, n.e.c..
[[Page 22242]]
549..................................... Not specified mechanics and 222,588 64,692
repairers.
563..................................... Brickmasons and stonemasons..... 142,889 28,805
564..................................... Brickmason and stonemason 75 0
apprentices.
565..................................... Tile setters, hard and soft..... 46,051 24,579
566..................................... Carpet installers............... 48,699 33,509
567..................................... Carpenters...................... 912,769 201,178
569..................................... Carpenter apprentices........... 8,875 0
573..................................... Drywall installers.............. 85,860 28,609
575..................................... Electricians.................... 597,557 113,341
576..................................... Electrician apprentices......... 43,746 1,183
577..................................... Electrical power installers and 98,532 16,873
repairers.
579..................................... Painters, construction and 333,738 75,698
maintenance.
583..................................... Paperhangers.................... 4,407 1,037
584..................................... Plasterers...................... 32,335 10,035
585..................................... Plumbers, pipefitters, and 371,718 72,324
steamfitters.
587..................................... Plumber, pipefitter, and 13,377 0
steamfitter apprentices.
588..................................... Concrete and terrazzo finishers. 81,316 12,391
589..................................... Glaziers........................ 33,148 5,472
593..................................... Insulation workers.............. 46,275 5,649
594..................................... Paving, surfacing, and tamping 9,194 80
equipment operators.
595..................................... Roofers......................... 129,010 21,411
596..................................... Sheetmetal duct installers...... 39,013 1,057
597..................................... Structural metal workers........ 61,917 1,904
598..................................... Drillers, earth................. 9,141 1,776
599..................................... Construction trades, n.e.c...... 187,340 39,904
614..................................... Drillers, oil well.............. 17,924 3,243
615..................................... Explosives workers.............. 3,178 1,183
616..................................... Mining machine operators........ 22,315 4,121
617..................................... Mining occupations, n.e.c....... 19,104 3,636
634..................................... Tool and die makers............. 80,616 12,172
635..................................... Tool and die maker apprentices.. 2,859 0
636..................................... Precision assemblers, metal..... 23,659 1,136
637..................................... Machinists...................... 386,873 51,058
643..................................... Boilermakers.................... 19,509 776
644..................................... Precision grinders, filers, and 8,516 1,707
tool sharpeners.
645..................................... Patternmakers and model makers, 4,683 0
metal.
646..................................... Lay-out workers................. 5,255 635
647..................................... Precious stones and metals 29,041 6,328
workers.
649..................................... Engravers, metal................ 7,338 1,551
653..................................... Sheet metal workers............. 92,387 15,576
654..................................... Sheet metal worker apprentices.. 1,381 0
656..................................... Patternmakers and model makers, 839 0
wood.
657..................................... Cabinet makers and bench 44,767 7,285
carpenters.
658..................................... Furniture and wood finishers.... 13,123 3,757
659..................................... Misc precision woodworkers...... 0 725
666..................................... Dressmakers..................... 36,301 7,723
667..................................... Tailors......................... 12,153 15,389
668..................................... Upholsterers.................... 28,643 12,756
669..................................... Shoe repairers.................. 2,501 2,396
674..................................... Misc precision apparel and 1,800 4,664
fabric workers.
675..................................... Hand molders and shapers, except 12,376 2,561
jewelers.
676..................................... Patternmakers, lay-out workers, 3,466 1,486
and cutters.
677..................................... Optical goods workers........... 56,957 12,550
678..................................... Dental laboratory and medical 39,047 14,883
appliance technicians.
679..................................... Bookbinders..................... 21,558 823
683..................................... Electrical/electronic equipment 195,790 26,801
assemblers.
684..................................... MIsc precision workers, n.e.c... 20,615 2,864
686..................................... Butchers and meat cutters....... 186,712 22,176
687..................................... Bakers.......................... 106,414 20,607
688..................................... Food batchmakers................ 52,048 808
689..................................... Inspectors, testers, and graders 105,805 45,156
693..................................... Adjusters and calibrators....... 2,428 1,243
694..................................... Water and sewage treatment plant 67,078 14,568
operators.
695..................................... Power plant operators........... 33,157 9,373
696..................................... Stationary engineers............ 89,271 36,207
699..................................... Miscellaneous plant and system 31,904 6,416
operators.
703..................................... Set-up operators, lathe and 10,097 0
turning machine.
704..................................... Operators, lathe and turning 20,200 725
machine.
705..................................... Milling and planing machine 5,203 754
operators.
706..................................... Punching and stamping press 65,301 1,990
machine operators.
707..................................... Rolling machine operators....... 6,821 1,090
[[Page 22243]]
708..................................... Drilling and boring machine 6,431 0
operators.
709..................................... Grinding, abrading, buffing, & 78,620 8,005
polishing machine operators.
713..................................... Forging machine operators....... 12,998 0
714..................................... Numerical control machine 31,734 1,992
operators.
715..................................... Misc metal plastic stone & glass 24,559 1,398
working mach operators.
717..................................... Fabricating machine operators, 10,165 2,159
n.e.c..
719..................................... Molding and casting machine 77,105 5,147
operators.
723..................................... Metal plating machine operators. 17,160 1,108
724..................................... Heat treating equipment 9,526 688
operators.
725..................................... Misc metal and plastic 19,318 209
processing machine operators.
726..................................... Wood lathe, routing, and planing 6,929 0
machine operators.
727..................................... Sawing machine operators........ 65,134 5,919
728..................................... Shaping and joining machine 3,918 0
operators.
729..................................... Nailing and tacking machine 830 0
operators.
733..................................... Miscellaneous woodworking 19,125 2,170
machine operators.
734..................................... Printing press operators........ 212,969 40,073
735..................................... Photoengravers and lithographers 21,890 0
736..................................... Typesetters and compositors..... 10,799 7,777
737..................................... Miscellaneous printing machine 25,667 5,677
operators.
738..................................... Winding and twisting machine 35,208 0
operators.
739..................................... Knitting, looping, taping, and 28,864 1,849
weaving machine operators.
743..................................... Textile cutting machine 7,841 2,060
operators.
744..................................... Textile sewing machine operators 263,639 62,550
745..................................... Shoe machine operators.......... 7,011 1,163
747..................................... Pressing machine operators...... 62,228 10,349
748..................................... Laundering and dry cleaning 153,071 26,466
machine operators.
749..................................... Miscellaneous textile machine 27,920 1,030
operators.
753..................................... Cementing and gluing machine 18,824 0
operators.
754..................................... Packaging and filling machine 245,604 17,916
operators.
755..................................... Extruding and forming machine 25,335 2,570
operators.
756..................................... Mixing and blending machine 95,832 6,349
operators.
757..................................... Separating, filtering, and 55,133 12,234
clarifying machine operators.
758..................................... Compressing and compacting 16,170 1,115
machine operators.
759..................................... Painting and paint spraying 117,753 12,971
machine operators.
763..................................... Roasting and baking machine 1,670 0
operators, food.
764..................................... Washing, cleaning, and pickling 7,693 0
machine operators.
765..................................... Folding machine operators....... 9,730 1,081
766..................................... Furnace, kiln, and oven 41,021 4,617
operators, except food.
768..................................... Crushing and grinding machine 33,990 3,233
operators.
769..................................... Slicing and cutting machine 121,141 8,195
operators.
773..................................... Motion picture projectionists... 8,832 0
774..................................... Photographic process machine 74,174 13,386
operators.
777..................................... Miscellaneous machine operators, 882,925 76,713
n.e.c..
779..................................... Machine operators, not specified 329,240 39,598
783..................................... Welders and cutters............. 416,948 30,243
784..................................... Solderers and brazers........... 11,415 0
785..................................... Assemblers...................... 940,542 110,419
786..................................... Hand cutting and trimming 6,998 0
occupations.
787..................................... Hand molding, casting, and 12,481 1,496
forming occupations.
789..................................... Hand painting, coating, and 18,227 0
decorating occupations.
793..................................... Hand engraving and printing 5,887 309
occupations.
795..................................... Miscellaneous hand working 34,894 15,860
occupations.
796..................................... Production inspectors, checkers, 377,166 63,000
and examiners.
797..................................... Production testers.............. 42,433 7,419
798..................................... Production samplers and weighers 2,789 466
799..................................... Graders and sorters, except 103,271 11,534
agricultural.
804..................................... Truck drivers................... 1,257,626 361,681
806..................................... Driver-sales workers............ 57,728 70,691
808..................................... Bus drivers..................... 451,774 134,867
809..................................... Taxicab drivers and chauffeurs.. 140,630 121,002
813..................................... Parking lot attendants.......... 43,783 6,349
814..................................... Motor transportation 6,029 536
occupations, n.e.c..
823..................................... Railroad conductors and 0 98
yardmasters.
824..................................... Locomotive operating occupations 16,157 789
825..................................... Railroad brake, signal, and 1,977 0
switch operators.
828..................................... Ship captains and mates, except 3,014 3,098
fishing boats.
829..................................... Sailors and deckhands........... 644 762
833..................................... Marine engineers................ 144 147
834..................................... Bridge, lock, and lighthouse 836 803
tenders.
844..................................... Operating engineers............. 207,133 41,129
845..................................... Longshore equipment operators... 2,950 0
[[Page 22244]]
848..................................... Hoist and winch operators....... 14,914 923
849..................................... Crane and tower operators....... 59,531 7,474
853..................................... Excavating and loading machine 72,226 5,875
operators.
855..................................... Grader, dozer, and scraper 40,091 5,440
operators.
856..................................... Industrial truck and tractor 493,407 43,160
equipment operators.
859..................................... Misc material moving equipment 56,887 6,768
operators.
865..................................... Helpers, mechanics, and 25,150 3,270
repairers.
866..................................... Helpers, construction trades.... 107,065 6,016
867..................................... Helpers, surveyor............... 3,080 791
868..................................... Helpers, extractive occupations. 4,282 0
869..................................... Construction laborers........... 842,685 148,765
874..................................... Production helpers.............. 60,632 3,457
875..................................... Garbage collectors.............. 38,478 12,855
876..................................... Stevedores...................... 10,544 2,342
877..................................... Stock handlers and baggers...... 1,022,741 57,619
878..................................... Machine feeders and offbearers.. 57,112 1,302
883..................................... Freight, stock, and material 637,494 73,143
handlers, n.e.c..
885..................................... Garage and service station 153,955 13,631
related occupations.
887..................................... Vehicle washers and equipment 255,171 25,212
cleaners.
888..................................... Hand packers and packagers...... 366,936 23,410
889..................................... Laborers, except construction... 1,066,097 123,495
--------------------
Total........................... 35,208,824 7,621,800
----------------------------------------------------------------------------------------------------------------
Note: Some numbers may not add due to rounding.
Source: CONSAD and the U.S. Department of Labor.
Table A-2.--Number of FLSA Covered Workers in White-collar Occupation That Are Subject to the Part 541 Salary
Level Test
----------------------------------------------------------------------------------------------------------------
Exempt status Hourly paid Salaried
OCC code Occupation title code (1) workers workers
----------------------------------------------------------------------------------------------------------------
4.................................. Chief executives & general 1 6,437 16,284
administrators, public
admin.
5.................................. Administrators & officials, 1 133,691 275,701
public administration.
6.................................. Administrators, protective 1 16,367 33,128
services.
7.................................. Financial managers......... 1 119,763 625,039
8.................................. Personnel & labor relations 1 30,326 180,553
managers.
9.................................. Purchasing managers........ 1 29,311 102,247
13................................. Managers, marketing, 1 83,850 605,262
advertising, & public
relations.
14................................. Admin, education & related 1 45,618 85,111
fields.
15................................. Managers, medicine & health 1 278,599 498,011
17................................. Managers, food serving & 3 423,699 706,689
lodging establishments.
18................................. Managers, properties & real 3 114,633 308,022
estate.
19................................. Funeral directors.......... 2 10,388 32,306
21................................. Managers, service 1 188,874 479,990
organizations, n.e.c. (2).
22................................. Managers & administrators, 1 1,203,610 4,778,194
n.e.c..
23................................. Accountants & auditors..... 1 443,659 1,020,879
24................................. Underwriters............... 1 35,944 59,503
25................................. Other financial officers... 2 163,865 591,312
26................................. Management analysts........ 2 62,981 244,104
27................................. Personnel, training, & 2 202,064 365,268
labor relations
specialists.
28................................. Purchasing agents & buyers, 2 4,155 4,800
farm products.
29................................. Buyers, wholesale & retail 2 105,708 105,447
trade except farm products.
33................................. Purchase agents & buyers, 2 83,157 126,564
n.e.c..
34................................. Business & promotion agents 2 4,849 30,822
35................................. Construction inspectors.... 3 36,718 28,236
36................................. Inspectors & compliance 3 64,857 109,744
officers, except
construction.
37................................. Management related 2 249,125 223,981
occupations, n.e.c..
43................................. Architects................. 1 29,545 106,161
44................................. Aerospace engineers........ 1 17,473 55,016
45................................. Metallurgical & materials 1 5,286 16,242
engineers.
46................................. Mining engineers........... 1 1,077 4,528
47................................. Petroleum engineers........ 1 666 12,768
48................................. Chemical engineers......... 1 9,965 67,074
49................................. Nuclear engineers.......... 1 1,607 828
53................................. Civil engineers............ 1 67,305 155,453
54................................. Agricultural engineers..... 1 350 1,408
55................................. Engineers, electrical & 1 115,616 499,179
electronic.
56................................. Engineers, industrial...... 1 55,812 169,410
57................................. Engineers, mechanical...... 1 54,395 229,289
[[Page 22245]]
58................................. Marine & naval architects.. 1 3,943 7,187
59................................. Engineers, n.e.c........... 1 59,412 204,684
63................................. Surveyors & mapping 2 8,286 6,771
scientists.
64................................. Computer systems analysts & 1 300,404 1,182,634
scientists.
65................................. Operations & systems 1 70,749 154,890
researchers & analysts.
66................................. Actuaries.................. 1 0 15,038
67................................. Statisticians.............. 1 4,485 18,483
68................................. Mathematical scientists, 1 0 3,314
n.e.c..
69................................. Physicists & astronomers... 1 2,128 14,535
73................................. Chemists, except 1 23,469 95,037
biochemists.
74................................. Atmospheric & space 1 2,031 3,595
scientists.
75................................. Geologists & geodesists.... 1 7,934 30,534
76................................. Physical scientists, n.e.c. 1 11,719 24,178
77................................. Agricultural & food 1 10,103 20,486
scientists.
78................................. Biological & life 1 18,383 67,745
scientists.
79................................. Forestry & conservation 1 2,742 9,085
scientists.
83................................. Medical scientists......... 1 18,769 54,452
84................................. Physicians................. 1 0 0
85................................. Dentists................... 1 0 0
86................................. Veterinarians.............. 1 1,037 16,267
87................................. Optometrists............... 1 0 0
88................................. Podiatrists................ 1 0 0
89................................. Health diagnosing 1 0 0
practitioners, n.e.c..
95................................. Registered nurses.......... 1 1,627,489 567,191
96................................. Pharmacists................ 1 122,210 78,029
97................................. Dietitians................. 3 45,172 23,771
98................................. Respiratory therapists..... 3 75,024 22,684
99................................. Occupational therapists.... 3 33,605 32,130
103................................ Physical therapists........ 2 80,964 72,325
104................................ Speech therapists.......... 2 29,295 77,446
105................................ Therapists, n.e.c.......... 2 46,667 43,329
106................................ Physicians' assistants..... 1 53,420 34,053
113................................ Earth, environmental, & 1 0 0
marine science teachers.
114................................ Biological science teachers 1 0 0
115................................ Chemistry teachers......... 1 0 0
116................................ Physics teachers........... 1 0 0
117................................ Natural science teachers, 1 0 719
n.e.c..
118................................ Psychology teachers........ 1 0 580
119................................ Economics teachers......... 1 0 0
123................................ History teachers........... 1 0 0
124................................ Political science teachers. 1 0 0
125................................ Sociology teachers......... 1 0 0
126................................ Social science teachers, 1 0 0
n.e.c..
127................................ Engineering teachers....... 1 0 0
128................................ Math. science teachers..... 1 0 0
129................................ Computer science teachers.. 1 0 840
133................................ Medical science teachers... 1 0 0
134................................ Health specialties teachers 1 0 0
135................................ Business, commerce, & 1 0 0
marketing teachers.
136................................ Agriculture & forestry 1 0 0
teachers.
137................................ Art, drama, & music 1 0 0
teachers.
138................................ Physical education teachers 1 0 0
139................................ Education teachers......... 1 0 0
143................................ English teachers........... 1 0 1,221
144................................ Foreign language teachers.. 1 0 0
145................................ Law teachers............... 1 0 0
146................................ Social work teachers....... 1 0 0
147................................ Theology teachers.......... 1 0 0
148................................ Trade & industrial teachers 1 0 0
153................................ Teachers, postsecondary, 1 0 0
n.e.c..
154................................ Postsecondary teachers, 1 1,230 5,885
subject not specified.
155................................ Teachers, prekindergarten & 2 270,615 90,593
kindergarten.
156................................ Teachers, elementary school 1 0 0
157................................ Teachers, secondary school. 1 0 0
158................................ Teachers, special education 1 5,755 9,028
159................................ Teachers, n.e.c............ 1 356,988 334,426
163................................ Counselors, Educational & 2 15,448 30,107
Vocational.
164................................ Librarians................. 1 83,000 111,753
165................................ Archivists & curators...... 1 9,744 14,922
166................................ Economists................. 2 24,240 72,828
[[Page 22246]]
167................................ Psychologists.............. 1 65,812 129,335
168................................ Sociologists............... 2 0 384
169................................ Social scientists, n.e.c... 2 11,574 14,821
173................................ Urban planners............. 2 3,676 11,002
174................................ Social workers............. 3 338,352 460,604
175................................ Recreation workers......... 3 94,737 34,825
178................................ Lawyers & Judges........... 1 0 0
183................................ Authors.................... 2 16,392 35,455
184................................ Technical writers.......... 3 19,907 37,555
185................................ Designers.................. 1 246,100 297,869
186................................ Musicians & composers...... 1 14,771 79,138
187................................ Actors & directors......... 1 27,520 83,834
188................................ Painters, sculptors, craft- 1 70,319 42,485
artists, & artist
printmakers.
189................................ Photographers.............. 1 65,293 36,661
193................................ Dancers.................... 1 8,941 15,053
194................................ Artists, performers, & 1 41,483 37,539
related workers, n.e.c..
195................................ Editors & reporters........ 3 91,740 166,068
197................................ Public relations 3 45,106 126,849
specialists.
198................................ Announcers................. 2 13,544 21,290
199................................ Athletes................... 4 27,688 48,316
203................................ Clinical laboratory 3 296,794 63,229
technologists &
technicians.
204................................ Dental hygienists.......... 3 92,852 35,461
205................................ Health record technologists 3 17,001 3,783
& technicians.
206................................ Radiologic technicians..... 3 140,955 30,201
207................................ Licensed practical nurses.. 3 325,853 45,359
208................................ Health technologists & 3 632,527 108,100
technicians, n.e.c..
213................................ Electrical & electronic 4 249,019 140,988
technicians.
214................................ Industrial engineering 4 5,952 765
technicians.
215................................ Mechanical engineering 4 11,789 5,626
technicians.
216................................ Engineering technicians, 4 129,531 51,567
n.e.c..
217................................ Drafting occupations....... 4 148,837 76,029
218................................ Surveying & mapping 4 40,315 12,458
technicians.
223................................ Biological technicians..... 4 88,414 36,733
224................................ Chemical technicians....... 4 49,811 13,038
225................................ Science technicians, n.e.c. 4 71,249 23,561
226................................ Airplane pilots & 4 5,647 11,943
navigators.
227................................ Air traffic controllers.... 4 3,037 7,013
228................................ Broadcast equipment 4 24,496 20,545
operators.
229................................ Computer programmers....... 2 122,757 421,040
233................................ Tool programmers, numerical 4 6,099 2,917
control.
234................................ Legal assistants........... 4 144,284 210,917
235................................ Technicians, n.e.c......... 4 54,139 60,414
243................................ Supervisors & Proprietors, 2 1,323,873 2,148,481
Sales Occupations.
253................................ Insurance sales occupations 2 101,531 346,959
254................................ Real estate sales 3 55,261 423,875
occupations.
255................................ Securities & financial 2 61,157 396,030
services sales occupations.
256................................ Advertising & related sales 2 42,796 126,558
occupations.
257................................ Sales occupations, other 3 261,085 416,743
business services.
258................................ Sales engineers............ 3 2,475 31,762
259................................ Sales representatives, 3 294,010 1,099,707
mining, manufact, &
wholesale.
263................................ Sales workers, motor 4 30,391 33,687
vehicles & boats.
264................................ Sales workers, apparel..... 4 336,383 37,347
265................................ Sales workers, shoes....... 4 79,014 12,018
266................................ Sales workers, furniture & 4 85,411 89,456
home furnishings.
267................................ Sales workers, radio, Tv, 4 198,369 115,694
hi-fi, & appliances.
268................................ Sales workers, hardware & 4 201,525 79,240
building supplies.
269................................ Sales workers, parts....... 4 78,297 35,749
274................................ Sales workers, other 4 1,107,970 243,311
commodities.
275................................ Sales counter clerks....... 4 140,467 29,730
276................................ Cashiers................... 4 2,703,603 190,465
277................................ Street & door-to-door sales 4 0 0
workers.
278................................ News vendors............... 4 36,633 52,989
283................................ Demonstrators, promoters & 4 62,402 8,814
models, sales.
284................................ Auctioneers................ 4 1,003 3,083
285................................ Sales support occupations, 4 10,446 9,115
n.e.c..
303................................ Supervisors, general office 1 160,230 212,649
304................................ Supervisors, computer 1 3,280 12,961
equipment operators.
305................................ Supervisors, financial 1 44,084 61,890
records processing.
306................................ Chief communications 1 2,343 3,105
operators.
307................................ Supervisors, distribution, 1 74,454 84,487
scheduling, & adjusting
clerks.
[[Page 22247]]
308................................ Computer operators......... 4 183,860 97,773
309................................ Peripheral equipment 4 4,681 0
operators.
313................................ Secretaries................ 4 1,320,713 779,365
314................................ Stenographers.............. 4 64,749 43,868
315................................ Typists.................... 4 342,925 182,082
316................................ Interviewers............... 4 109,971 38,015
317................................ Hotel clerks............... 4 115,438 15,670
318................................ Transportation ticket & 4 134,226 83,940
reservation agents.
319................................ Receptionists.............. 4 843,415 174,717
323................................ Information clerks, n.e.c.. 4 310,301 101,956
325................................ Classified-ad clerks....... 4 1,394 912
326................................ Correspondence clerks...... 4 4,826 3,215
327................................ Order clerks............... 4 212,118 68,155
328................................ Personnel clerks, except 4 43,039 15,127
payroll & timekeeping.
329................................ Library clerks............. 4 107,372 19,863
335................................ File clerks................ 4 234,692 48,289
336................................ Records clerks............. 4 136,166 59,547
337................................ Bookkeepers, accounting, & 4 845,993 456,374
auditing clerks.
338................................ Payroll & timekeeping 4 106,358 54,940
clerks.
339................................ Billing clerks............. 4 152,019 52,185
343................................ Cost & rate clerks......... 4 33,709 15,380
344................................ Billing, posting, & 4 120,303 32,171
calculating machine
operators.
345................................ Duplicating machine 4 25,214 3,785
operators.
346................................ Mail preparing & paper 4 2,978 1,311
handling machine operators.
347................................ Office mach. operators, 4 12,459 6,940
n.e.c..
348................................ Telephone operators........ 4 99,426 19,448
353................................ Communications equipment 4 14,637 5,031
operators, n.e.c..
354................................ Postal clerks, except mail 4 224,732 50,333
carriers.
355................................ Mail carriers, postal 4 250,642 85,477
service.
356................................ Mail clerks, except postal 4 124,113 20,708
service.
357................................ Messengers................. 4 98,258 25,407
359................................ Dispatchers................ 4 172,039 76,155
363................................ Production coordinators.... 4 118,886 97,632
364................................ Traffic, shipping, & 4 537,884 66,810
receiving clerks.
365................................ Stock & inventory clerks... 4 345,187 77,301
366................................ Meter readers.............. 4 38,823 7,657
368................................ Weighers, measurers, 4 41,663 2,906
checkers, & samplers.
373................................ Expediters................. 4 268,885 37,551
374................................ Material recording, 4 9,301 2,445
scheduling, & distrib.
clerks, n.e.c..
375................................ Insurance adjusters, 2 249,632 242,454
examiners, & investigators.
376................................ Investigators & adjusters, 2 733,381 337,862
except insurance.
377................................ Eligibility clerks, social 4 57,835 29,759
welfare.
378................................ Bill & account collectors.. 4 159,577 47,047
379................................ General office clerks...... 4 558,808 196,513
383................................ Bank tellers............... 4 389,140 73,812
384................................ Proofreaders............... 4 10,630 1,213
385................................ Data-entry keyers.......... 4 420,358 137,486
386................................ Statistical clerks......... 4 71,842 23,091
387................................ Teachers' aides............ 4 538,233 254,634
389................................ Administrative support 4 590,574 390,186
occupations, n.e.c..
413................................ Supervisors, firefighting & 3 17,820 26,194
fire prevention
occupations.
414................................ Supervisors, police & 3 55,659 58,505
detectives.
415................................ Supervisors, guards........ 4 38,215 22,766
433................................ Supervisors, food 3 415,710 75,847
preparation & service
occupations.
448................................ Supervisors, cleaning & 4 121,660 55,974
building service workers.
456................................ Supervisors, personal 4 43,608 28,049
service occupations.
475................................ Managers, farms, except 3 1,640 1,184
horticultural.
476................................ Managers, horticultural 3 4,224 125
specialty farms.
477................................ Supervisors, farm workers.. 4 734 0
485................................ Supervisors, related 4 54,229 39,120
agricultural occupations.
494................................ Supervisors, forestry & 4 2,794 6,109
logging workers.
503................................ Supervisors, mechanics & 3 91,019 123,140
repairers.
553................................ Supervisors, brickmasons, 4 1,204 1,260
stonemasons, & tile
setters.
554................................ Supervisors, carpenters & 4 12,875 1,646
related workers.
555................................ Supervisors, electricians & 4 20,131 9,715
power transmission
installers.
556................................ Supervisors, painters, 4 7,584 4,577
paperhangers, & plasterers.
557................................ Supervisors, plumbers, 4 15,965 573
pipefitters, &
steamfitters.
558................................ Supervisors, construction, 4 297,676 183,104
n.e.c..
613................................ Supervisors, extractive 3 13,961 16,199
occupations.
628................................ Supervisors, production 3 542,035 431,574
occupations.
[[Page 22248]]
803................................ Supervisors, motor vehicle 4 37,310 55,345
operators.
843................................ Supervisors, material 4 6,006 1,054
moving equipment operators.
864................................ Supervisors, handlers, 4 7,992 5,735
equip cleaners, &
laborers, n.e.c..
------------------------------
Total...................... .............. 32,694,067 31,686,296
----------------------------------------------------------------------------------------------------------------
(1) See Table 3-2.
(2) Not elsewhere classified (n.e.c.)
Note: Some numbers may not add due to rounding.
Source: CONSAD and the U.S. Department of Labor.
Table A-3.--Number of Exempt and Nonexempt White-Collar Salaried Workers Who Earn More Than $155 per Week
--------------------------------------------------------------------------------------------------------------------------------------------------------
Exempt status Subject to Total
OCC code Occupational title code\1\ salary tests nonexempt Total exempt
--------------------------------------------------------------------------------------------------------------------------------------------------------
4.............................................. Chief executives and general 1 14,668 716 13,952
administrators, public admin.
5.............................................. Administrators & officials, public 1 269,143 16,033 253,110
administration.
6.............................................. Administrators, protective services.... 1 32,316 1,666 30,650
7.............................................. Financial managers..................... 1 623,191 28,750 594,441
8.............................................. Personnel & labor relations managers... 1 180,553 8,868 171,685
9.............................................. Purchasing managers.................... 1 102,247 4,269 97,978
13............................................. Managers, marketing, advertising, & 1 602,720 24,853 577,867
public relations.
14............................................. Admin, education & related fields...... 1 83,791 6,004 77,788
15............................................. Managers, medicine & health............ 1 491,118 28,208 462,910
17............................................. Managers, food serving & lodging 3 685,704 497,115 188,589
establishments.
18............................................. Managers, properties & real estate..... 3 287,864 203,605 84,259
19............................................. Funeral directors...................... 2 29,867 8,024 21,843
21............................................. Managers, service organizations, 1 469,483 28,098 441,385
n.e.c.(2).
22............................................. Managers & administrators, n.e.c....... 1 4,727,919 201,405 4,526,514
23............................................. Accountants & auditors................. 1 1,007,059 56,089 950,970
24............................................. Underwriters........................... 1 59,503 3,536 55,967
25............................................. Other financial officers............... 2 582,440 153,454 428,986
26............................................. Management analysts.................... 2 237,587 56,734 180,853
27............................................. Personnel, training, & labor relations 2 359,471 104,951 254,520
specialists.
28............................................. Purchasing agents & buyers, farm 2 4,800 1,149 3,651
products.
29............................................. Buyers, wholesale & retail trade except 2 103,738 30,285 73,453
farm products.
33............................................. Purchase agents & buyers, n.e.c........ 2 125,570 39,014 86,556
34............................................. Business & promotion agents............ 2 30,822 9,936 20,886
35............................................. Construction inspectors................ 3 27,939 19,074 8,865
36............................................. Inspectors & compliance officers, 3 107,722 71,768 35,954
except construction.
37............................................. Management related occupations, n.e.c.. 2 220,371 76,347 144,024
43............................................. Architects............................. 1 106,161 5,138 101,023
44............................................. Aerospace engineers.................... 1 55,015 1,669 53,346
45............................................. Metallurgical & materials engineers.... 1 16,242 613 15,629
46............................................. Mining engineers....................... 1 4,528 137 4,391
47............................................. Petroleum engineers.................... 1 12,768 503 12,265
48............................................. Chemical engineers..................... 1 67,075 2,168 64,907
49............................................. Nuclear engineers...................... 1 828 65 763
53............................................. Civil engineers........................ 1 155,242 6,787 148,455
54............................................. Agricultural engineers................. 1 1,408 60 1,348
55............................................. Engineers, electrical & electronic..... 1 496,379 18,953 477,426
56............................................. Engineers, industrial.................. 1 169,410 7,803 161,607
57............................................. Engineers, mechanical.................. 1 229,289 9,176 220,113
58............................................. Marine & naval architects.............. 1 7,187 418 6,769
59............................................. Engineers, n.e.c....................... 1 204,685 9,158 195,527
63............................................. Surveyors & mapping scientists......... 2 6,771 1,920 4,851
64............................................. Computer systems analysts & scientists. 1 1,176,238 50,415 1,125,823
65............................................. Operations & systems researchers & 1 153,985 7,753 146,232
analysts.
66............................................. Actuaries.............................. 1 15,038 573 14,465
67............................................. Statisticians.......................... 1 17,607 909 16,698
68............................................. Mathematical scientists, n.e.c......... 1 3,315 170 3,145
69............................................. Physicists & astronomers............... 1 14,534 375 14,159
73............................................. Chemists, except biochemists........... 1 94,243 4,316 89,927
74............................................. Atmospheric & space scientists......... 1 3,294 150 3,144
75............................................. Geologists & geodesists................ 1 30,535 1,624 28,911
76............................................. Physical scientists, n.e.c............. 1 24,178 1,301 22,877
77............................................. Agricultural & food scientists......... 1 19,592 1,097 18,495
78............................................. Biological & life scientists........... 1 67,745 3,638 64,107
[[Page 22249]]
79............................................. Forestry & conservation scientists..... 1 9,086 521 8,565
83............................................. Medical scientists..................... 1 53,678 2,817 50,861
84............................................. Physicians............................. 1 0 0 0
85............................................. Dentists............................... 1 0 0 0
86............................................. Veterinarians.......................... 1 16,267 925 15,342
87............................................. Optometrists........................... 1 0 0 0
88............................................. Podiatrists............................ 1 0 0 0
89............................................. Health diagnosing practitioners, n.e.c. 1 0 0 0
95............................................. Registered nurses...................... 1 555,307 33,950 521,357
96............................................. Pharmacists............................ 1 78,029 3,413 74,616
97............................................. Dietitians............................. 3 19,933 14,570 5,363
98............................................. Respiratory therapists................. 3 22,683 16,353 6,330
99............................................. Occupational therapists................ 3 30,448 20,984 9,464
103............................................ Physical therapists.................... 2 71,231 19,999 51,232
104............................................ Speech therapists...................... 2 75,935 23,298 52,637
105............................................ Therapists, n.e.c...................... 2 42,330 14,038 28,292
106............................................ Physicians' assistants................. 1 33,962 1,714 32,248
113............................................ Earth, environmental, & marine science 1 0 0 0
teachers.
114............................................ Biological science teachers............ 1 0 0 0
115............................................ Chemistry teachers..................... 1 0 0 0
116............................................ Physics teachers....................... 1 0 0 0
117............................................ Natural science teachers, n.e.c........ 1 719 53 666
118............................................ Psychology teachers.................... 1 579 23 556
119............................................ Economics teachers..................... 1 0 0 0
123............................................ History teachers....................... 1 0 0 0
124............................................ Political science teachers............. 1 0 0 0
125............................................ Sociology teachers..................... 1 0 0 0
126............................................ Social science teachers, n.e.c......... 1 0 0 0
127............................................ Engineering teachers................... 1 0 0 0
128............................................ Math. science teachers................. 1 0 0 0
129............................................ Computer science teachers.............. 1 840 78 762
133............................................ Medical science teachers............... 1 0 0 0
134............................................ Health specialties teachers............ 1 0 0 0
135............................................ Business, commerce, & marketing 1 0 0 0
teachers.
136............................................ Agriculture & forestry teachers........ 1 0 0 0
137............................................ Art, drama, & music teachers........... 1 0 0 0
138............................................ Physical education teachers............ 1 0 0 0
139............................................ Education teachers..................... 1 0 0 0
143............................................ English teachers....................... 1 1,221 112 1,109
144............................................ Foreign language teachers.............. 1 0 0 0
145............................................ Law teachers........................... 1 0 0 0
146............................................ Social work teachers................... 1 0 0 0
147............................................ Theology teachers...................... 1 0 0 0
148............................................ Trade & industrial teachers............ 1 0 0 0
153............................................ Teachers, postsecondary, n.e.c......... 1 0 0 0
154............................................ Postsecondary teachers, subject not 1 5,076 267 4,809
specified.
155............................................ Teachers, prekindergarten & 2 76,066 30,609 45,457
kindergarten.
156............................................ Teachers, elementary school............ 1 0 0 0
157............................................ Teachers, secondary school............. 1 0 0 0
158............................................ Teachers, special education............ 1 9,028 687 8,341
159............................................ Teachers, n.e.c........................ 1 310,873 20,692 290,181
163............................................ Counselors, Educational & Vocational... 2 27,863 8,566 19,297
164............................................ Librarians............................. 1 107,389 6,701 100,688
165............................................ Archivists & curators.................. 1 14,923 843 14,080
166............................................ Economists............................. 2 70,746 19,706 51,040
167............................................ Psychologists.......................... 1 128,495 7,890 120,605
168............................................ Sociologists........................... 2 384 64 320
169............................................ Social scientists, n.e.c............... 2 14,053 4,105 9,948
173............................................ Urban planners......................... 2 11,002 2,952 8,050
174............................................ Social workers......................... 3 451,756 334,732 117,024
175............................................ Recreation workers..................... 3 32,037 25,091 6,946
178............................................ Lawyers & Judges....................... 1 0 0 0
183............................................ Authors................................ 2 34,782 10,031 24,751
184............................................ Technical writers...................... 3 37,555 24,974 12,581
185............................................ Designers.............................. 1 288,719 17,193 271,526
186............................................ Musicians & composers.................. 1 56,491 4,179 52,312
187............................................ Actors & directors..................... 1 79,236 4,050 75,186
188............................................ Painters, sculptors, craft-artists, & 1 41,755 2,804 38,951
artist printmakers.
189............................................ Photographers.......................... 1 34,892 2,523 32,369
193............................................ Dancers................................ 1 13,353 1,170 12,183
[[Page 22250]]
194............................................ Artists, performers, & related workers, 1 34,090 2,557 31,533
n.e.c..
195............................................ Editors & reporters.................... 3 157,150 108,308 48,842
197............................................ Public relations specialists........... 3 123,346 85,253 38,093
198............................................ Announcers............................. 2 20,866 7,653 13,213
199............................................ Athletes............................... 4 42,674 40,167 2,507
203............................................ Clinical laboratory technologists & 3 61,577 45,016 16,561
technicians.
204............................................ Dental hygienists...................... 3 35,460 25,944 9,516
205............................................ Health record technologists & 3 3,784 2,745 1,039
technicians.
206............................................ Radiologic technicians................. 3 28,006 20,200 7,806
207............................................ Licensed practical nurses.............. 3 43,258 33,490 9,768
208............................................ Health technologists & technicians, 3 106,209 82,319 23,890
n.e.c..
213............................................ Electrical & electronic technicians.... 4 138,664 128,529 10,135
214............................................ Industrial engineering technicians..... 4 765 694 71
215............................................ Mechanical engineering technicians..... 4 5,626 5,186 440
216............................................ Engineering technicians, n.e.c......... 4 51,567 48,131 3,436
217............................................ Drafting occupations................... 4 75,759 70,934 4,825
218............................................ Surveying & mapping technicians........ 4 12,459 11,812 647
223............................................ Biological technicians................. 4 36,520 34,477 2,043
224............................................ Chemical technicians................... 4 13,038 12,151 887
225............................................ Science technicians, n.e.c............. 4 22,813 21,248 1,565
226............................................ Airplane pilots & navigators........... 4 11,942 10,899 1,043
227............................................ Air traffic controllers................ 4 7,013 6,476 537
228............................................ Broadcast equipment operators.......... 4 17,606 16,514 1,092
229............................................ Computer programmers................... 2 419,594 106,640 312,954
233............................................ Tool programmers, numerical control.... 4 2,917 2,818 99
234............................................ Legal assistants....................... 4 210,484 197,927 12,557
235............................................ Technicians, n.e.c..................... 4 58,809 54,794 4,015
243............................................ Supervisors & Proprietors, Sales 2 2,110,973 639,504 1,471,469
Occupations.
253............................................ Insurance sales occupations............ 2 338,111 104,906 233,205
254............................................ Real estate sales occupations.......... 3 397,214 274,422 122,792
255............................................ Securities & financial services sales 2 389,500 94,325 295,175
occupations.
256............................................ Advertising & related sales occupations 2 124,299 38,599 85,700
257............................................ Sales occupations, other business 3 406,506 274,454 132,052
services.
258............................................ Sales engineers........................ 3 31,762 19,486 12,276
259............................................ Sales representatives, mining, 3 1,083,546 719,374 364,172
manufact, & wholesale.
263............................................ Sales workers, motor vehicles & boats.. 4 33,687 31,744 1,943
264............................................ Sales workers, apparel................. 4 32,719 31,061 1,658
265............................................ Sales workers, shoes................... 4 10,726 10,400 326
266............................................ Sales workers, furniture & home 4 81,247 76,908 4,339
furnishings.
267............................................ Sales workers, radio, Tv, hi-fi, & 4 110,822 103,629 7,193
appliances.
268............................................ Sales workers, hardware & building 4 76,624 71,853 4,771
supplies.
269............................................ Sales workers, parts................... 4 34,874 32,885 1,989
274............................................ Sales workers, other commodities....... 4 218,581 206,150 12,431
275............................................ Sales counter clerks................... 4 26,317 24,997 1,320
276............................................ Cashiers............................... 4 166,023 159,718 6,305
277............................................ Street & door-to-door sales workers.... 4 0 0 0
278............................................ News vendors........................... 4 31,236 30,207 1,029
283............................................ Demonstrators, promoters & models, 4 4,717 4,385 332
sales.
284............................................ Auctioneers............................ 4 3,083 2,863 220
285............................................ Sales support occupations, n.e.c....... 4 5,922 5,641 281
303............................................ Supervisors, general office............ 1 209,218 15,033 194,185
304............................................ Supervisors, computer equipment 1 12,650 761 11,889
operators.
305............................................ Supervisors, financial records 1 61,890 3,713 58,177
processing.
306............................................ Chief communications operators......... 1 3,105 200 2,905
307............................................ Supervisors, distribution, scheduling, 1 82,713 5,465 77,248
& adjusting clerks.
308............................................ Computer operators..................... 4 95,419 89,818 5,601
309............................................ Peripheral equipment operators......... 4 0 0 0
313............................................ Secretaries............................ 4 732,456 700,875 31,581
314............................................ Stenographers.......................... 4 41,427 39,303 2,124
315............................................ Typists................................ 4 173,573 165,891 7,682
316............................................ Interviewers........................... 4 34,809 33,181 1,628
317............................................ Hotel clerks........................... 4 15,560 14,859 701
318............................................ Transportation ticket & reservation 4 83,940 79,540 4,400
agents.
319............................................ Receptionists.......................... 4 159,035 152,899 6,136
323............................................ Information clerks, n.e.c.............. 4 91,913 88,119 3,794
325............................................ Classified-ad clerks................... 4 912 894 18
326............................................ Correspondence clerks.................. 4 3,215 3,000 215
327............................................ Order clerks........................... 4 66,907 63,590 3,317
328............................................ Personnel clerks, except payroll & 4 15,127 14,429 698
timekeeping.
329............................................ Library clerks......................... 4 19,863 18,989 874
[[Page 22251]]
335............................................ File clerks............................ 4 43,795 42,138 1,657
336............................................ Records clerks......................... 4 55,612 52,888 2,724
337............................................ Bookkeepers, accounting, & auditing 4 418,533 400,568 17,965
clerks.
338............................................ Payroll & timekeeping clerks........... 4 52,725 50,180 2,545
339............................................ Billing clerks......................... 4 51,114 48,834 2,280
343............................................ Cost & rate clerks..................... 4 15,380 14,589 791
344............................................ Billing, posting, & calculating machine 4 32,171 30,724 1,447
operators.
345............................................ Duplicating machine operators.......... 4 3,479 3,249 230
346............................................ Mail preparing & paper handling machine 4 1,310 1,277 33
operators.
347............................................ Office mach. operators, n.e.c.......... 4 6,940 6,656 284
348............................................ Telephone operators.................... 4 18,620 17,753 867
353............................................ Communications equipment operators, 4 5,030 4,854 176
n.e.c..
354............................................ Postal clerks, except mail carriers.... 4 48,045 45,012 3,033
355............................................ Mail carriers, postal service.......... 4 83,867 78,774 5,093
356............................................ Mail clerks, except postal service..... 4 20,309 19,526 783
357............................................ Messengers............................. 4 19,617 18,875 742
359............................................ Dispatchers............................ 4 76,155 72,302 3,853
363............................................ Production coordinators................ 4 96,876 91,080 5,796
364............................................ Traffic, shipping, & receiving clerks.. 4 64,564 61,118 3,446
365............................................ Stock & inventory clerks............... 4 74,641 70,701 3,940
366............................................ Meter readers.......................... 4 7,657 7,253 404
368............................................ Weighers, measurers, checkers, & 4 2,610 2,453 157
samplers.
373............................................ Expediters............................. 4 36,606 34,866 1,740
374............................................ Material recording, scheduling, & 4 2,445 2,256 189
distrib. clerks, n.e.c..
375............................................ Insurance adjusters, examiners, & 2 241,764 80,980 160,784
investigators.
376............................................ Investigators & adjusters, except 2 331,895 120,907 210,988
insurance.
377............................................ Eligibility clerks, social welfare..... 4 28,952 27,659 1,293
378............................................ Bill & account collectors.............. 4 47,047 44,833 2,214
379............................................ General office clerks.................. 4 184,737 176,255 8,482
383............................................ Bank tellers........................... 4 69,136 66,580 2,556
384............................................ Proofreaders........................... 4 1,213 1,126 87
385............................................ Data-entry keyers...................... 4 130,882 124,925 5,957
386............................................ Statistical clerks..................... 4 22,689 21,461 1,228
387............................................ Teachers' aides........................ 4 233,796 227,718 6,078
389............................................ Administrative support occupations, 4 376,525 355,756 20,769
n.e.c..
413............................................ Supervisors, firefighting & fire 3 26,194 16,772 9,422
prevention occupations.
414............................................ Supervisors, police & detectives....... 3 58,504 40,386 18,118
415............................................ Supervisors, guards.................... 4 22,766 21,276 1,490
433............................................ Supervisors, food preparation & service 3 70,106 55,774 14,332
occupations.
448............................................ Supervisors, cleaning & building 4 54,408 51,853 2,555
service workers.
456............................................ Supervisors, personal service 4 26,864 25,548 1,316
occupations.
475............................................ Managers, farms, except horticultural.. 3 1,184 874 310
476............................................ Managers, horticultural specialty farms 3 125 107 18
477............................................ Supervisors, farm workers.............. 4 0 0 0
485............................................ Supervisors, related agricultural 4 38,427 36,355 2,072
occupations.
494............................................ Supervisors, forestry & logging workers 4 5,291 5,050 241
503............................................ Supervisors, mechanics & repairers..... 3 121,639 83,730 37,909
553............................................ Supervisors, brickmasons, stonemasons, 4 1,260 1,229 31
& tile setters.
554............................................ Supervisors, carpenters & related 4 1,646 1,505 141
workers.
555............................................ Supervisors, electricians & power 4 9,715 8,922 793
trans. installers.
556............................................ Supervisors, painters, paperhangers, & 4 4,577 4,224 353
plasterers.
557............................................ Supervisors, plumbers, pipefitters, & 4 573 532 41
steamfitters.
558............................................ Supervisors, construction, n.e.c....... 4 182,003 169,694 12,309
613............................................ Supervisors, extractive occupations.... 3 16,199 10,366 5,833
628............................................ Supervisors, production occupations.... 3 429,007 294,158 134,849
803............................................ Supervisors, motor vehicle operators... 4 55,346 52,412 2,934
843............................................ Supervisors, material moving equipment 4 1,054 993 61
operators.
864............................................ Supervisors, handlers, equip cleaners, 4 5,736 5,449 287
& laborers, n.e.c..
Total.................................. .............. 30,883,198 11,443,807 19,439,391
--------------------------------------------------------------------------------------------------------------------------------------------------------
(1) See Table 3-2.
(2) Not elsewhere classified (n.e.c.)
Note: Some numbers may not add due to rounding.
Source: CONSAD and the U.S. Department of Labor.
[[Page 22252]]
Table A-4.--Number of White-Collar Salaried Workers Earning at Least
$155 but Less Than $455 per Week Who Will Most Likely Gain Compensation
Under the Final Rule
------------------------------------------------------------------------
Number of exempt
OCC code Occupation title workers
------------------------------------------------------------------------
4............................ Chief executives & 734
general
administrators,
public admin.
5............................ Administrators & 21,133
officials, public
administration.
6............................ Administrators, 2,666
protective services.
7............................ Financial managers... 31,190
8............................ Personnel & labor 7,436
relations managers.
9............................ Purchasing managers.. 1,881
13........................... Managers, marketing, 24,677
advertising, &
public relations.
14........................... Admin, education & 17,564
related fields.
15........................... Managers, medicine & 45,404
health.
17........................... Managers, food 16,070
serving & lodging
establishments.
18........................... Managers, properties 7,086
& real estate.
19........................... Funeral directors.... 912
21........................... Managers, service 45,865
organizations,
n.e.c. (*).
22........................... Managers & 203,179
administrators,
n.e.c..
23........................... Accountants & 51,848
auditors.
24........................... Underwriters......... 4,624
25 Other financial 21,432
officers.
26........................... Management analysts.. 3,997
27........................... Personnel, training, 12,066
& labor relations
specialists.
29........................... Buyers, wholesale & 4,393
retail trade except
farm products.
33........................... Purchase agents & 5,287
buyers, n.e.c..
34........................... Business & promotion 2,611
agents.
36........................... Inspectors & 541
compliance officers,
except construction.
37........................... Management related 14,795
occupations, n.e.c..
Other Executive, 468
Administrative, &
Managerial Occ's.
43........................... Architects........... 2,303
44........................... Aerospace engineers.. 1,107
45........................... Metallurgical & 629
materials engineers.
48........................... Chemical engineers... 500
53........................... Civil engineers...... 2,929
55........................... Engineers, electrical 14,205
& electronic.
56........................... Engineers, industrial 2,699
57........................... Engineers, mechanical 5,691
59........................... Engineers, n.e.c..... 6,233
64........................... Computer systems 36,784
analysts &
scientists.
65........................... Operations & systems 8,087
researchers &
analysts.
67........................... Statisticians........ 1,445
68........................... Mathematical 934
scientists, n.e.c..
73........................... Chemists, except 4,740
biochemists.
75........................... Geologists & 672
geodesists.
76........................... Physical scientists, 790
n.e.c..
77........................... Agricultural & food 1,405
scientists.
78........................... Biological & life 4,710
scientists.
83........................... Medical scientists... 3,669
86........................... Veterinarians........ 594
95........................... Registered nurses.... 48,506
96........................... Pharmacists.......... 4,541
97........................... Dietitians........... 561
103.......................... Physical therapists.. 1,875
104.......................... Speech therapists.... 1,183
105.......................... Therapists, n.e.c.... 4,420
106.......................... Physicians' 1,592
assistants.
143.......................... English teachers..... 1,109
155.......................... Teachers, 19,966
prekindergarten &
kindergarten.
158.......................... Teachers, special 768
education.
159.......................... Teachers, n.e.c...... 48,451
163.......................... Counselors, 1,719
Educational &
Vocational.
164.......................... Librarians........... 7,439
166.......................... Economists........... 2,167
167.......................... Psychologists........ 13,839
169.......................... Social scientists, 990
n.e.c..
174.......................... Social workers....... 8,776
175.......................... Recreation workers... 1,632
183.......................... Authors.............. 1,829
185.......................... Designers............ 32,399
186.......................... Musicians & composers 19,399
187.......................... Actors & directors... 8,568
188.......................... Painters, sculptors, 4,895
craft-artists, &
artist printmakers.
189.......................... Photographers........ 8,397
193.......................... Dancers.............. 6,811
[[Page 22253]]
194.......................... Artists, performers, 9,974
& related workers,
n.e.c..
195.......................... Editors & reporters.. 1,830
197.......................... Public relations 1,172
specialists.
198.......................... Announcers........... 2,822
Other Professional 2,754
Specialty Occ's (1).
203.......................... Clinical laboratory 1,199
technologists &
technicians.
204.......................... Dental hygienists.... 752
206.......................... Radiologic 619
technicians.
207.......................... Licensed practical 1,245
nurses.
208.......................... Health technologists 5,563
& technicians,
n.e.c..
229.......................... Computer programmers. 12,603
Other Technicians & 1,551
Related Support
Occ's (2).
243.......................... Supervisors & 143,856
Proprietors, Sales
Occupations.
253.......................... Insurance sales 29,218
occupations.
254.......................... Real estate sales 8,715
occupations.
255.......................... Securities & 12,588
financial services
sales occupations.
256.......................... Advertising & related 9,836
sales occupations.
257.......................... Sales occupations, 7,263
other business
services.
259.......................... Sales 13,161
representatives,
mining, manufact, &
wholesale.
274.......................... Sales workers, other 954
commodities.
276.......................... Cashiers............. 1,107
Other Sales Occ's (3) 2,342
303.......................... Supervisors, general 27,243
office.
305.......................... Supervisors, 1,870
financial records
processing.
307.......................... Supervisors, 10,172
distribution,
scheduling, &
adjusting clerks.
313.......................... Secretaries.......... 4,825
315.......................... Typists.............. 874
319.......................... Receptionists........ 1,220
323.......................... Information clerks, 727
n.e.c..
337.......................... Bookkeepers, 2,685
accounting, &
auditing clerks.
375.......................... Insurance adjusters, 16,705
examiners, &
investigators.
376.......................... Investigators & 36,422
adjusters, except
insurance.
379.......................... General office clerks 1,095
383.......................... Bank tellers......... 688
385.......................... Data-entry keyers.... 749
387.......................... Teachers' aides...... 2,203
389.......................... Administrative 1,387
support occupations,
n.e.c..
Other Administrative 5,969
Support Occ's (4).
628.......................... Supervisors, 4,334
production
occupations.
433.......................... Supervisors, food 3,664
preparation &
service occupations.
503.......................... Supervisors, 1,424
mechanics &
repairers.
414.......................... Supervisors, police & 1,144
detectives.
All Other White- 1,514
Collar Occ's (5).
-------------------
Total................ 1,297,855
------------------------------------------------------------------------
(*) Not elsewhere classified (n.e.c.)
(1) All of the occupations included in this group have less than 500
workers who will become nonexempt such as Urban Planners, Nuclear
Engineers, Actuaries, and Archivists.
(2) All of the occupations included in this group have less than 500
workers who will become nonexempt such as Legal Assistants, Drafting
Occ's, Electrical Technicians, Engineering Technicians, and Biological
Technicians.
(3) All of the occupations included in this group have less than 500
workers who will become nonexempt such as Sales Workers Furniture,
Sales Workers Radio TV, Sales Engineers, Sales Workers Hardware, and
News Vendors.
(4) All of the occupations included in this group have less than 450
workers who will become nonexempt such as Order Clerks, Computer
Operators, Dispatchers, Transportation Ticket Agents, Stock Clerks,
Stenographers, and Billing Clerks.
(5) All of the occupations included in this group have less than 400
workers who will become nonexempt such as supervisors for cleaning &
building service, construction, motor vehicle operators, and
extractive occupations.
Note: Some numbers may not add due to rounding.
Source: CONSAD and the U.S. Department of Labor.
Table A-5.--Number of Exempt White-Collar Salaried Workers Under the Highly Compensated Test
----------------------------------------------------------------------------------------------------------------
Total exempt Newly exempt
Total exempt under highly under highly
OCC code Occupational title under standard compensated compensated
duties test test test
----------------------------------------------------------------------------------------------------------------
17................................. Managers, food serving & 15,163 18,195 3,031
lodging establishments.
18................................. Managers, properties & real 12,993 15,599 2,606
estate.
22................................. Managers & administrators, 751,160 752,900 1,740
n.e.c. (*).
25................................. Other financial officers... 58,462 62,303 3,841
26................................. Management analysts........ 28,086 29,883 1,797
[[Page 22254]]
27................................. Personnel, training, & 19,012 20,239 1,227
labor relations
specialists.
Other Executive, 358,867 361,087 2,216
Administrative, &
Managerial Occ's.
174................................ Social workers............. 3,747 4,492 745
195................................ Editors & reporters........ 5,305 6,369 1,064
197................................ Public relations 2,979 3,571 592
specialists.
Other Professional 247,644 250,238 2,600
Specialty Occ's (2).
Technicians & Related 2,858 4,011 1,151
Support Occ's (3).
243................................ Supervisors & Proprietors, 122,665 130,626 7,961
Sales Occupations.
253................................ Insurance sales occupations 26,647 28,365 1,719
254................................ Real estate sales 17,449 20,945 3,496
occupations.
255................................ Securities & financial 72,297 77,083 4,786
services sales occupations.
257................................ Sales occupations, other 19,824 23,767 3,943
business services.
258................................ Sales engineers............ 3,232 3,866 633
259................................ Sales representatives, 40,365 48,394 8,029
mining, manufact, &
wholesale.
Other Sales Occ's (4)...... 9,865 11,711 1,847
Administrative Support 18,332 20,554 2,102
Occ's (5).
628................................ Supervisors, production 6,444 7,724 1,281
occupations.
All Other White-Collar 4,642 5,813 1,170
Occ's (6).
----------------------------------------------------------------------------------------------------------------
(*) Not elsewhere classified (n.e.c.).
(1) Computer system analysts and scientists (occupation 64), registered nurses (occupation 95), pharmacists
(occupation 96) and computer programmers (occupation 229) were removed from the analysis (see Section 4-3).
(2) All of the occupations included in this group have less than 300 workers who could become exempt such as
Dietitians, Athletes, Economists and Electrical Engineers.
(3) All of the occupations included in this group have less than 350 workers who could become exempt such as
Legal Assistants, Electrical Technicians, Engineering Technicians and Airplane Pilots.
(4) All of the occupations included in this group have less than 500 workers who could become exempt such as
Advertising & Related Sales and Sales Workers Radio TV.
(5) All of the occupations included in this group have less than 400 workers who could become exempt such as
supervisory Investigators & Adjusters, Administrative Support Occ's, and Secretaries.
(6) All of the occupations included in this group have less than 300 workers who could become exempt such as
supervisors for mechanics & repairers, and extractive occupations.
Note: Some numbers may not add due to rounding.
Source: CONSAD Research Corporation and U.S. Department of Labor.
Table A-6.--Number of White-Collar Paid Hourly Workers Who Could Become Exempt Under the Highly Compensated Test
----------------------------------------------------------------------------------------------------------------
Estimated
Total number number who
of paid hourly could become
OCC code Occupational title workers exempt under
earning at highly
least $100,000 compensated
per year test
----------------------------------------------------------------------------------------------------------------
5.......................................... Administrators & officials, public 2,035 814
administration.
6.......................................... Administrators, protective services 1,949 779
7.......................................... Financial managers................. 2,576 1,031
13......................................... Managers, marketing, advertising, & 1,309 523
public relations.
15......................................... Managers, medicine & health........ 3,471 1,388
21......................................... Managers, service organizations, 3,591 1,436
n.e.c. (*).
22......................................... Managers & administrators, n.e.c... 36,487 14,595
23......................................... Accountants & auditors............. 6,737 2,695
26......................................... Management analysts................ 4,879 976
Other Executive, Administrative, & 9,031 1,875
Managerial Occ's.
43......................................... Architects......................... 1,379 552
44......................................... Aerospace engineers................ 1,657 663
55......................................... Engineers, electrical & electronic. 5,762 2,305
56......................................... Engineers, industrial.............. 4,168 1,667
57......................................... Engineers, mechanical.............. 1,726 690
59......................................... Engineers, n.e.c................... 1,889 756
65......................................... Operations & systems researchers & 1,639 656
analysts.
76......................................... Physical scientists, n.e.c......... 1,542 617
156........................................ Teachers, elementary school........ 1,724 689
185........................................ Designers.......................... 3,826 1,531
188........................................ Painters, sculptors, craft-artists, 2,401 960
& artist printmakers.
Other Professional Specialty Occ's 18,048 4,099
(2).
Technicians & Related Support Occ's 19,294 1,231
(3).
[[Page 22255]]
243........................................ Supervisors & Proprietors, Sales 9,522 1,904
Occupations.
Other Sales Occ's (4).............. 12,125 1,170
Administrative Support Occ's (5)... 11,618 631
All Other White-Collar Occ's (6)... 12,002 829
-----------------
Total.............................. 182,387 47,062
----------------------------------------------------------------------------------------------------------------
(*) Not elsewhere classified (n.e.c.).
(1) Computer system analysts and scientists (occupation 64), registered nurses (occupation 95), pharmacists
(occupation 96) and computer programmers (occupation 229) were removed from the analysis (see Section 4-3).
(2) All of the occupations included in this group have less than 350 workers who could become exempt such as
Actors & Directors, Nuclear Engineers, Chemical Engineers, Civil Engineers, Medical Scientists, etc.
(3) All of the occupations included in this group have less than 300 workers who could become exempt such as
Health Technologists, Clinical Laboratory Technologists, Airplane Pilots, etc.
(4) All of the occupations included in this group have less than 450 workers who could become exempt such as
Sales Representatives for Mining & Manufacturing, Advertising & Related Sales, etc.
(5) All of the occupations included in this group have less than 150 workers who could become exempt such as
supervisory Secretaries and Mail Carriers for the Postal Service.
(6) All of the occupations included in this group have less than 300 workers who could become exempt such as
supervisors for construction, production, and extractive occupations.
Note: Some numbers may not add due to rounding.
Source: CONSAD and the U.S. Department of Labor.
Appendix B
Analysis of the 2003 Current Population Survey Outgoing Rotation Group
Data
The Department conducted an analysis of the recently released
2003 Current Population Survey (CPS) Outgoing Rotation Group data to
determine if the updated data would have an impact on the
conclusions reached in the regulatory impact analysis (RIA) using
the 2002 data. Although it is not possible to completely update the
RIA due to the significant changes made to the CPS in 2003, the
following analysis indicates that using the 2003 data would not
alter the Department's determination of the salary level test nor
would using the 2003 data have a significant impact on the RIA
conclusions.
Impact of the Changes to the CPS
In 2003, the industry and occupation classifications used in the
CPS were significantly revised. The industry classification for
workers was changed from the 1987 Standard Industrial Classification
(SIC) system to the 2002 North American Industry Classification
System (NAICS). Using the 2003 CPS data would require updating the
data used to develop the profiles in Chapter 5 of the RIA, the cost
estimates presented in Chapter 6 that are based upon the number of
establishments in each industry, and the assessment of the impacts
presented in Chapter 7. These revisions would also require a
complicated conversion of the Dunn and Bradstreet profit data from
the SIC system it uses to the NAICS system.
In 2003, the CPS changed its occupational classification of
workers from the 1990 Standard Occupational Classification (SOC)
system to the 2000 SOC system used in the 2000 Census. The
significant changes that were made to the 2000 SOC make comparisons
between 2002 CPS occupational categories and 2003 categories very
difficult. The U.S. Census Bureau warns that ``you cannot compare
the categories directly across the two years. The wording of the
categories is different, and, even when the words appear to be the
same, the definitions of the categories are sometimes different.''
(U.S. Census Bureau, ``Instructions for Creating 1990-2000
Occupation Crosswalks, Using the Occupation Crosswalk
Template,''April 30, 2003) The Census Bureau also notes that
although ``different crosswalks could be created based on many
different variables, including geography, sex, and race * * * the
crosswalk for occupational distributions is likely different in New
York compared to Kansas, and for men compared to women. To create
many different crosswalks depending on all characteristics, however,
would require a very large sample controlled for all these
variables. Neither financial nor human resources were available to
create and analyze such a large sample.''
The baseline estimates of the number of currently exempt and
nonexempt workers (presented in Chapter 3) as well as the changes in
the exemption status of workers resulting from the final rule
(presented in Chapter 4) were based upon the exemption probability
determinations made by the Wage and Hour Division staff in response
to the GAO request in 1998 (see Chapter 3). These exemption
probabilities were directly tied to the definitions of the 1990 SOC
categories used in the 2002 CPS (and prior years) and not the
definitions of the 2000 SOC categories used in the 2003 CPS.
Further, many of the costs developed in Chapter 6 of the RIA were
also developed on the basis of these determinations, particularly
the determination of the occupations considered white-collar and
blue-collar. After reviewing the 1990 SOC categories and the 2000
SOC categories, the Department has determined that it is not
possible to accurately map the exemption probabilities developed for
the 1990 SOC categories to the 2000 SOC categories, particularly
given the Census Bureau warnings. Many of the 1990 categories are
mapped to several 2000 categories and many of 2000 categories are
mapped to several 1990 categories, and as noted above many of the
underlying definitions have changed. There is also an increase in
the number of management and service-related occupations; an
increase in occupations formerly called ``professional'' and
``technical,'' especially healthcare and computer-related
occupations; and a decrease in the number of clerical, maintenance,
and production occupations.
Although it is theoretically possible to develop a schema to
apportion the probabilities developed for the 1990 SOC categories to
the 2000 SOC categories, the Department has determined that doing so
could significantly distort the WHD exemption probability
determinations for many occupations in the 2003 CPS. For example,
the probability exemptions for engineering and science technicians
in the 2002 CPS range from zero to 10 percent. However, these 1990
CPS categories, that each have the lowest exemption probability
(zero to 10 percent), would be mapped to computer specialists,
architects, life and physical scientists, and art and design
workers, among others that may or may not have a higher exemption
probability. Simply apportioning the probabilities without
completely understanding the definitions underlying the new
occupation categories could lead to erroneous results. Moreover,
because some of the definitions of the 2000 SOC categories are
different than the 1990 categories it is not certain that an
accurate exemption probability crosswalk could be developed.
[[Page 22256]]
Therefore, the Department determined that, given the judgments
needed to apportion the probabilities used for the 1990 SOC
categories, it would be more precise to develop an entirely new set
of probabilities for the 2000 SOC categories before using them. The
Department also concluded, however, that developing an entire new
set of probabilities at this stage of the rulemaking would not be
appropriate, because the resulting estimates would not have had the
benefit of review by GAO and others. Thus, the Department concluded
that the 2003 CPS should not be used in the RIA and has only
compared descriptive statistics from the 2003 CPS to the 2002 CPS in
this Appendix. This comparison, however, strongly suggests that the
quantitative and qualitative conclusions reached in the RIA using
the 2002 CPS data are still valid.
Estimated Number of Workers Covered by the FLSA
The 2003 CPS data estimates a total employment level of 137.7
million compared to 134.3 million in the RIA using the 2002 CPS
data. As noted in the RIA, most of the difference (2.2 million, or
64.7 percent) is due to using weights adjusted for the 2000 Census
counts in the 2003 CPS, and using weights based on the 1990 Census
in the 2002 CPS does not significantly affect the accuracy or
quality of the results. The remaining difference (1.2 million or
35.3 percent) is due to employment growth as the economy expanded.
Following the procedure discussed in Chapter 3 of the RIA, the
Department excluded workers who are specifically exempt from the
FLSA's overtime provisions. A description of each group excluded,
along with the specific CPS categories and codes used are presented
in Table B-1. A total of 21.2 million workers were excluded compared
to 19.5 million in the RIA using the 2002 CPS data.
Table B-1.--Workers Exempt from the FLSA's Overtime Provisions
----------------------------------------------------------------------------------------------------------------
Number of
Occupation CPS categories/codes workers
(1,000's)
----------------------------------------------------------------------------------------------------------------
Self-Employed or Unpaid Volunteers.............. (PEIO1COW = 6, 7 & 8) and not (PEIO1OCD = 2040, 13,974
2050 & 2060).
Clergy and Religious............................ (PEIO1OCD = 2040, 2050 & 2060) not in (PEIO1COW = 555
1).
Employees of Carriers........................... ................................................. ...........
Rail............................................ (PEIO1OCD = 9240, 9200, 9260 & 9230) in (PEIO1ICD 101
= 6080 & 6290).
Highway......................................... (PEIO1OCD = 7110, 7200, 7210, 7220 & 9130) in 1,323
(PEIO1ICD = 6170 & 6370).
Sea............................................. (PEIO1OCD = 9310, 9300, 9520 & 9330) in (PEIO1ICD 30
= 6090 & 6280).
Air............................................. (PEIO1OCD = 9030, 7140 & 6070.................... 147
Agriculture..................................... (PEIO1ICD = 170 & 180)........................... 1,879
Partsmen, Salesmen & Mechanics at Auto Dealers.. (PEIO1OCD = 4700, 4760, 4850, 4750, 7110, 7200, 830
7210, 7220, 7150 & 7160) in (PEIO1ICD = 4670).
Federal Employees (Not postal, TVA and LC)...... (PEIO1COW = 1) not in (PEIO1ICD = 6370), not in 2,381
((PEIO1ICD = 570) in (GESTFIPS = 21, 47, 28, 01,
13, 37 & 51)), and not in ((PEIO1ICD = 6770) in
(GESTFIPS = 11)).
------------
Total....................................... ................................................. 21,222
----------------------------------------------------------------------------------------------------------------
Note: Equivalent to Table 3-1 and associated text in the RIA.
Source: U.S. Department of Labor.
After excluding the workers in occupations exempt from the
FLSA's overtime provisions 116.5 million workers remain compared to
an estimated 114.8 million using the 2002 CPS data (see Table B-2).
In 2003, there were 70.3 million paid hourly workers and 46.2
million salaried workers compared to 69.0 million paid hourly
workers and 45.8 million salaried workers in 2002. The difference
between the total numbers of salaried employees is just 0.9 percent.
Table B-2.--Estimated Number of Workers Covered by the FLSA
------------------------------------------------------------------------
Number of workers (1,000's)
Year --------------------------------
Hourly Salary Total
------------------------------------------------------------------------
2002................................... 68,982 45,784 114,765
2003................................... 70,300 46,202 116,514
------------------------------------------------------------------------
Source: U.S. Department of Labor.
PEERNHRY = 1 for Hourly Workers and 2 for Salaried.
Estimated Number of Workers Subject to the Part 541 Salary Test
The Department also developed estimates of the number of workers
subject to the Part 541 salary level tests using the 2003 CPS data.
As was done in Chapter 3 of the RIA, the Department excluded workers
in occupations not subject to the salary tests. Table B-3 presents a
description of each group excluded, along with the specific codes
used. In 2003, there were 7.6 million workers were covered by the
FLSA's overtime provisions but not subject to the salary level test,
the same number that was estimated in the RIA using 2002 CPS data.
Table B-3.--Workers Not subject to the Part 541 Salary Level Test in 2003
----------------------------------------------------------------------------------------------------------------
Number of
Occupation CPS codes workers
(1,000's)
----------------------------------------------------------------------------------------------------------------
Teachers & Academic Administrative Personnel in (PEIO1OCD = 230, 2000, 2200, 2300, 2310, 2320, 6,157
Education Establishments. 2330, 2340 & 2550) in (PEIO1ICD = 7860 & 7870).
Doctors......................................... (PEIO1OCD = 3060, 3010, 3040, 3120 & 3260)....... 643
Lawyers & Judges................................ (PEIO1OCD = 2100 & 2110)......................... 632
Street & Door-to-Door Sales..................... (PEIO1OCD = 4950)................................ 151
----------------------------------------------------
Total....................................... ................................................. 7,583
----------------------------------------------------------------------------------------------------------------
Note: Equivalent to Table 3-3 and the associated text in the RIA.
Source: U.S. Department of Labor.
[[Page 22257]]
In 2003, 108.9 million workers were covered by the FLSA's
overtime provisions and subject to the salary level test compared to
107.2 million workers in 2002 (see Table B-4). In 2003, 69.2 million
of these workers were paid by the hour and 39.7 million were
salaried employees compared to 67.9 million paid hourly workers and
39.3 million salaried workers in 2002.
Table B-4.--Estimated Number of Workers Covered by the FLSA and Subject
to the Salary Level Test
------------------------------------------------------------------------
Number of Workers (1,000's)
Year --------------------------------
Hourly Salary Total
------------------------------------------------------------------------
2002................................... 67,903 39,308 107,211
2003................................... 69,247 39,683 108,930
------------------------------------------------------------------------
Source: U.S. Department of Labor.
The distribution of workers by income who are covered by the
FLSA and subject to the Part 541 salary level tests in 2002 and 2003
are presented in tables B-5 and B-6. Based upon the 2003 CPS data,
the Department estimates that 6.7 million salaried workers who earn
between $155 and $455 per week would have their overtime protection
strengthened by raising the salary level test in the final rule.
This is similar to the 6.7 million based on the 2002 CPS data that
was estimated in the RIA. Therefore, the Department concludes that
using the 2003 CPS data would not change its estimate of the number
of salaried workers who earn between $155 and $455 per week who will
have their overtime protection strengthened by the final rule.
Based upon the 2003 CPS data, the Department estimates there are
2.9 million workers who earn $1,923 or more per week compared to 2.7
million in 2002. Most of the difference, 82.5 percent, is from the
increase in salaried workers, the vast majority of whom (as
estimated in the RIA) are probably exempt under the current
regulation. However, it is not possible to estimate the number of
exempt and nonexempt workers because of the changes to the
occupation categories discussed above.
Table B-5.--Workers Subject to the 541 Salary Level Tests in 2002
------------------------------------------------------------------------
Covered workers (1,000's)
Weekly earnings --------------------------------------
Hourly Salary Total
------------------------------------------------------------------------
Less than $155................... 7,700 1,767 9,467
$155 to $454.99.................. 31,351 6,749 38,100
$455 to $1,923.07................ 28,506 28,472 56,978
$1,923.08 or more................ 345 2,321 2,666
--------------
Total........................ 67,902 39,309 107,211
------------------------------------------------------------------------
Source: U.S. Department of Labor.
Table B-6.--Workers Subject to the 541 Salary Level Tests in 2003
------------------------------------------------------------------------
Covered workers (1,000's)
Weekly earnings --------------------------------------
Hourly Salary Total
------------------------------------------------------------------------
Less than $155................... 7,470 1,537 9,007
$155 to $454.99.................. 30,920 6,692 37,612
$455 to $1,923.07................ 30,463 28,902 59,365
$1,923.08 or more................ 394 2,552 2,946
--------------
Total............................ 69,247 39,683 108,930
------------------------------------------------------------------------
Source: U.S. Department of Labor.
The 2003 CPS Data and the Salary Level Test
As discussed in the preamble, the Department based its
determination of the $455 weekly salary level requirement in the
Part 541 duties tests, in part, on preamble Tables 3, 4 and 5.
Although it is not possible to update preamble Table 4 (Likely
Exempt Workers) because of the changes to the occupation categories
(see discussion above), updates of the other two tables using the
2003 CPS data are presented below.
Although the median weekly earnings for all full-time salary
workers covered by the overtime provisions of the FLSA increased
from $800 in 2002 to $808 in 2003, Table B-7 suggests that salaries
declined in retail in 2003 compared to 2002. The 20th percentile in
retail was just under $450 in 2003 (see Table B-7) compared to $455
in 2002 (see Preamble Table 3). Thus, the choice of the $455 salary
level is valid whether it is based upon the 2002 or the 2003 CPS
data. The Department also notes that the lack of salary growth in
retail appears to be consistent with many of the comments that were
received on behalf of small businesses and summarized in the
preamble (see the Regulatory Flexibility Analysis).
Summary
Although it is not possible to completely update the RIA due to
the significant changes made to the occupation categories that were
used in the 2002 CPS, an analysis of descriptive statistics from the
2003 CPS indicates that using the 2003 data would not alter the
Department's determination of the salary level test nor would using
the 2003 data have a significant impact on the RIA conclusions. The
number of workers, 6.7 million, who earn between $155 and $455 per
week and will have their overtime protection strengthened by the
final rule is unchanged using the 2003 data, and the number of
workers who earn more than $100,000 per year and could have their
exemption status changed is not significantly higher.
[[Page 22258]]
Table B-7.--Full-Time Salaried Employees Covered by the FLSA in 2003
----------------------------------------------------------------------------------------------------------------
Earnings Percentile
----------------------------------------------------------------------------------------------------------------
Weekly Annual All South Retail
----------------------------------------------------------------------------------------------------------------
$155 $8,060 1.5 1.4 2.2
255 13,260 4.1 4.6 5.9
355 18,460 9.2 10.8 12.2
380 19,760 10.1 11.9 13.5
405 21,060 12.8 15.1 17.4
425 22,100 13.8 16.3 18.5
450 23,400 15.2 18.0 20.3
455 23,660 15.3 18.0 20.3
460 23,920 15.4 18.1 20.4
465 24,180 16.6 19.5 21.9
470 24,440 16.7 19.5 22.0
475 24,700 16.8 19.7 22.2
480 24,960 17.3 20.2 22.8
485 25,220 18.2 21.3 24.2
490 25,480 18.3 21.4 24.4
495 25,740 18.4 21.5 24.4
500 26,000 20.5 23.8 27.3
550 28,600 23.6 27.7 30.6
600 31,200 29.7 35.0 37.5
650 33,800 33.3 39.2 41.9
700 36,400 39.2 45.6 49.5
750 39,000 43.0 50.1 52.9
800 41,600 48.2 55.1 58.8
850 44,200 51.8 58.5 61.9
900 46,800 55.8 62.3 66.1
950 49,400 58.6 64.9 68.2
1,000 52,000 64.4 70.4 74.3
1,100 57,200 68.8 74.3 77.6
1,200 62,400 74.2 79.1 81.9
1,300 67,600 77.6 82.0 84.5
1,400 72,800 81.2 84.8 86.7
1,500 78,000 84.4 87.5 89.1
1,600 83,200 86.7 89.3 90.6
1,700 88,400 88.3 90.7 92.0
1,800 93,600 90.0 92.0 93.3
1,900 98,800 91.1 92.8 93.8
1,925 100,100 92.8 94.2 95.2
1,950 101,400 92.9 94.3 95.2
1,975 102,700 93.0 94.3 95.5
2,000 104,000 93.3 94.5 95.7
2,100 109,200 93.8 94.9 96.3
2,200 114,400 94.6 95.6 96.6
2,300 119,600 94.9 95.8 97.3
2,400 124,800 95.8 96.5 97.8
2,500 130,000 96.6 97.2 100.0
----------------------------------------------------------------------------------------------------------------
Note: Equivalent to Table 3 in the Preamble.
Source: U.S. Department of Labor.
Table B-8.--Full-Time Hourly Workers Covered by the FLSA in 2003
----------------------------------------------------------------------------------------------------------------
Earnings Percentile
----------------------------------------------------------------------------------------------------------------
Weekly Annual All South Retail
----------------------------------------------------------------------------------------------------------------
$155 $8,060 1.1 1.2 1.8
255 13,260 6.8 8.6 12.1
355 18,460 23.8 28.1 38.3
380 19,760 29.2 34.2 45.1
405 21,060 36.1 41.7 52.6
425 22,100 38.9 44.7 55.6
450 23,400 43.4 49.5 60.4
455 23,660 43.8 49.8 60.8
460 23,920 44.6 50.6 61.7
465 24,180 45.2 51.3 62.3
470 24,440 45.6 51.8 62.8
475 24,700 46.0 52.2 63.2
480 24,960 49.0 55.3 66.2
485 25,220 49.5 55.8 66.8
490 25,480 50.0 56.4 67.1
495 25,740 50.4 56.8 67.5
[[Page 22259]]
500 26,000 52.2 58.7 69.1
550 28,600 58.2 64.5 74.6
600 31,200 66.1 71.6 81.2
650 33,800 70.2 75.3 84.4
700 36,400 74.7 79.3 87.5
750 39,000 78.0 82.1 89.4
800 41,600 82.0 85.7 91.9
850 44,200 84.3 87.5 93.2
900 46,800 86.6 89.5 94.3
950 49,400 88.2 90.9 95.2
1,000 52,000 90.7 93.0 96.3
1,100 57,200 93.1 94.9 97.2
1,200 62,400 95.1 96.3 98.1
1,300 67,600 96.3 97.1 98.5
1,400 72,800 97.2 97.8 98.9
1,500 78,000 97.9 98.4 99.1
1,600 83,200 98.4 98.8 99.2
1,700 88,400 98.7 99.0 99.4
1,800 93,600 99.0 99.2 99.6
1,900 98,800 99.1 99.3 99.6
1,925 100,100 99.2 99.4 99.6
1,950 101,400 99.3 99.4 99.6
1,975 102,700 99.3 99.4 99.6
2,000 104,000 99.3 99.4 99.7
2,100 109,200 99.4 99.5 99.7
2,200 114,400 99.5 99.6 99.8
2,300 119,600 99.6 99.6 99.8
2,400 124,800 99.7 99.7 99.8
2,500 130,000 99.7 99.7 99.8
----------------------------------------------------------------------------------------------------------------
Note: Equivalent to Table 5 in the Preamble.
Source: U.S. Department of Labor.
Appendix C--List of References
Report of the Minimum Wage Study Commission, Volume 1, May 1981
Office of Management and Budget, ``Reports to Congress on the
Costs and Benefits of Regulations'', 2001 and 2002.
``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'').
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'').
Report and Recommendations on Proposed Revisions of Regulations,
Part 541, Under the Fair Labor Standards Act, by Harry S. Kantor,
Presiding Officer, Wage and Hour and Public Contracts Divisions,
U.S. Department of Labor (March 3, 1958) (``Kantor Report'').
U.S. General Accounting Office, Fair Labor Standards Act: White-
Collar Exemptions in the Modern Work Place, Report to the
Subcommittee on Workforce Protections, Committee on Education and
the Workforce, U.S. House of Representatives, GAO/HEHS-99-164,
September 30, 1999.
Cohen, Malcom S. and Donal R. Grimes, ``The `New Economy' and
Its Impact on Executive, Administrative and Professional Exemptions
to the Fair Labor Standards Act (FLSA),'' prepared for the
University of Tennessee under a contract with the U.S. Department of
Labor, Employment Standards Administration, Wage and Hour Division.
Ann Arbor, MI: Employment Research Corporation, January 2001.
CONSAD Research Corporation, ``Final Report, Economic Analysis
of the Proposed and Alternative Rules for the Fair Labor Standards
Act (FLSA) Regulations at 29 CFR 541,'' February 10, 2003.
U.S. Department of Labor, Employment Standards Administration,
Wage and Hour Division, Opinion Letter, WH-363, November 10, 1975
(opinion letter regarding dental hygienists).
U.S. Department of Labor, Employment Standards Administration,
Wage and Hour Division, Field Operations Handbook, http://www.dol.gov/esa/whd/foh/index.htm
U.S. Department of Labor, Bureau of Labor Statistics and U.S.
Department of Commerce, Bureau of the Census, 2002 Current
Population Survey (CPS) Outgoing Rotation Group http://www.bls.census.gov/cps/cpsmain.htm
U.S. Department of Commerce, Bureau of the Census Web site, CPS
Appendix, http://www.census.gov/apsd/techdoc/cps/sep97/det-occ.html
U.S. Department of Commerce, Bureau of the Census (USDOC,
2001a), 1997 Economic Census: Comparative Statistics, http://
www.census.gov/epcd/ec97sic/index.htmldownload
U.S. Department of Commerce, Bureau of the Census (USDOC, 1999),
1997 County Business Patterns.
U.S. Department of the Treasury, Internal Revenue Service (IRS,
2000), Corporate Tax Returns for Active Corporations for 1997.
U.S. Postal Service (USPS, 1997), 1997 Annual Report.
U.S. Department of Labor, Bureau of Labor Statistics, 1998
Standard Occupational Classification (SOC) system, http://www.bls.gov/soc/home.htm
O*NET, the Occupational Information Network, http://www.onetcenter.org/whatsnew.html
U.S. Small Business Administration, Table of Small Business Size
Standards, http://www.sba.gov/size/indextableofsize.html
U.S. Department of Commerce, Bureau of Census (USDOC, 2002a),
1997 Census of Governments.
U.S. Department of Commerce, Bureau of Census (USDOC, 2002c),
State and Local Government Employment and Payroll Data (Revised June
2001), by State and Function: March 1999.
U.S. Department of Commerce, Bureau of Census (USDOC, 2002c),
State and Local Government Finances, by Level of Government and by
State: 1999-2000.
U.S. Department of Labor, Bureau of Labor Statistics, National
Compensation Survey.
U.S. Department of Commerce (2002), Statistics of U.S.
Businesses 1996.
U.S. Department of Labor, Bureau of Labor Statistics, Work
Experience of the Population in 2002, Press Release.
Dun & Bradstreet (D&B, 2001a), National Profile of Businesses
Database for Fiscal Year 2000.
[[Page 22260]]
Dun & Bradstreet (D&B, 2001b), Industry Norms and Key Business
Ratios for Fiscal Year 2000/2001.
Dun & Bradstreet (D&B, 2002), Industry Norms and Key Business
Ratios for Fiscal Year 2001/2002.
Bell and Hart; ``Unpaid Work''; Economica, 66: 271-290, 1999
Bell, Hart, Hubler, and Schwerdt, ``Paid and Unpaid Overtime
Working in Germany and the UK,'' IZA Discussion Paper Number 133,
Bonn, Germany: The Institute for the Study of Labor, March 2000,
Lena M. Bottos and Christopher J. Fusco; ``Competitive Pay
Policy'; SPHR 2002; Salary.com, Inc.
List of Subjects in 29 CFR Part 541
Labor, Minimum wages, Overtime pay, Salaries, Teachers, Wages.
Signed at Washington, DC, this 16th day of April 2004.
Victoria A. Lipnic,
Assistant Secretary for Employment Standards.
Tammy D. McCutchen,
Administrator, Wage and Hour Division.
0
For the reasons set forth above, 29 CFR part 541 is revised to read as
follows:
PART 541--DEFINING AND DELIMITING THE EXEMPTIONS FOR EXECUTIVE,
ADMINISTRATIVE, PROFESSIONAL, COMPUTER AND OUTSIDE SALES EMPLOYEES
Subpart A--General Regulations
Sec.
541.0 Introductory statement.
541.1 Terms used in regulations.
541.2 Job titles insufficient.
541.3 Scope of the section 13(a)(1) exemptions.
541.4 Other laws and collective bargaining agreements.
Subpart B--Executive Employees
541.100 General rule for executive employees.
541.101 Business owner.
541.102 Management.
541.103 Department or subdivision.
541.104 Two or more other employees.
541.105 Particular weight.
541.106 Concurrent duties.
Subpart C--Administrative Employees
541.200 General rule for administrative employees.
541.201 Directly related to management or general business
operations.
541.202 Discretion and independent judgment.
541.203 Administrative exemption examples.
541.204 Educational establishments.
Subpart D--Professional Employees
541.300 General rule for professional employees.
541.301 Learned professionals.
541.302 Creative professionals.
541.303 Teachers.
541.304 Practice of law or medicine.
Subpart E--Computer Employees
541.400 General rule for computer employees.
541.401 Computer manufacture and repair.
541.402 Executive and administrative computer employees.
Subpart F--Outside Sales Employees
541.500 General rule for outside sales employees.
541.501 Making sales or obtaining orders.
541.502 Away from employer's place of business.
541.503 Promotion work.
541.504 Drivers who sell.
Subpart G--Salary Requirements
541.600 Amount of salary required.
541.601 Highly compensated employees.
541.602 Salary basis.
541.603 Effect of improper deductions from salary.
541.604 Minimum guarantee plus extras.
541.605 Fee basis.
541.606 Board, lodging or other facilities.
Subpart H--Definitions And Miscellaneous Provisions
541.700 Primary duty.
541.701 Customarily and regularly.
541.702 Exempt and nonexempt work.
541.703 Directly and closely related.
541.704 Use of manuals.
541.705 Trainees.
541.706 Emergencies.
541.707 Occasional tasks.
541.708 Combination exemptions.
541.709 Motion picture producing industry.
541.710 Employees of public agencies.
Authority: 29 U.S.C. 213; Public Law 101-583, 104 Stat. 2871;
Reorganization Plan No. 6 of 1950 (3 CFR 1945-53 Comp. p. 1004);
Secretary's Order No. 4-2001 (66 FR 29656).
Subpart A--General Regulations
Sec. 541.0 Introductory statement.
(a) Section 13(a)(1) of the Fair Labor Standards Act, as amended,
provides an exemption from the Act's minimum wage and overtime
requirements for 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 an
outside sales employee, 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. Section 13(a)(17) of the Act
provides an exemption from the minimum wage and overtime requirements
for computer systems analysts, computer programmers, software
engineers, and other similarly skilled computer employees.
(b) The requirements for these exemptions are contained in this
part as follows: executive employees, subpart B; administrative
employees, subpart C; professional employees, subpart D; computer
employees, subpart E; outside sales employees, subpart F. Subpart G
contains regulations regarding salary requirements applicable to most
of the exemptions, including salary levels and the salary basis test.
Subpart G also contains a provision for exempting certain highly
compensated employees. Subpart H contains definitions and other
miscellaneous provisions applicable to all or several of the
exemptions.
(c) Effective July 1, 1972, the Fair Labor Standards Act was
amended to include within the protection of the equal pay provisions
those employees exempt from the minimum wage and overtime pay
provisions as bona fide executive, administrative, and professional
employees (including any employee employed in the capacity of academic
administrative personnel or teacher in elementary or secondary
schools), or in the capacity of an outside sales employee under section
13(a)(1) of the Act. The equal pay provisions in section 6(d) of the
Fair Labor Standards Act are administered and enforced by the United
States Equal Employment Opportunity Commission.
Sec. 541.1 Terms used in regulations.
Act means the Fair Labor Standards Act of 1938, as amended.
Administrator means the Administrator of the Wage and Hour
Division, United States Department of Labor. The Secretary of Labor has
delegated to the Administrator the functions vested in the Secretary
under sections 13(a)(1) and 13(a)(17) of the Fair Labor Standards Act.
Sec. 541.2 Job titles insufficient.
A job title alone is insufficient to establish the exempt status of
an employee. The exempt or nonexempt status of any particular employee
must be determined on the basis of whether the employee's salary and
duties meet the requirements of the regulations in this part.
Sec. 541.3 Scope of the section 13(a)(1) exemptions.
(a) The section 13(a)(1) exemptions and the regulations in this
part do not apply to manual laborers or other ``blue collar'' workers
who perform work involving repetitive operations with their hands,
physical skill and energy. Such nonexempt ``blue collar'' employees
gain the skills and knowledge required for performance of their routine
manual and physical work through apprenticeships and on-the-job
training, not through the prolonged
[[Page 22261]]
course of specialized intellectual instruction required for exempt
learned professional employees such as medical doctors, architects and
archeologists. Thus, for example, non-management production-line
employees and non-management employees in maintenance, construction and
similar occupations such as carpenters, electricians, mechanics,
plumbers, iron workers, craftsmen, operating engineers, longshoremen,
construction workers and laborers are entitled to minimum wage and
overtime premium pay under the Fair Labor Standards Act, and are not
exempt under the regulations in this part no matter how highly paid
they might be.
(b)(1) The section 13(a)(1) exemptions and the regulations in this
part also do not apply to police officers, detectives, deputy sheriffs,
state troopers, highway patrol officers, investigators, inspectors,
correctional officers, parole or probation officers, park rangers, fire
fighters, paramedics, emergency medical technicians, ambulance
personnel, rescue workers, hazardous materials workers and similar
employees, regardless of rank or pay level, who perform work such as
preventing, controlling or extinguishing fires of any type; rescuing
fire, crime or accident victims; preventing or detecting crimes;
conducting investigations or inspections for violations of law;
performing surveillance; pursuing, restraining and apprehending
suspects; detaining or supervising suspected and convicted criminals,
including those on probation or parole; interviewing witnesses;
interrogating and fingerprinting suspects; preparing investigative
reports; or other similar work.
(2) Such employees do not qualify as exempt executive employees
because their primary duty is not management of the enterprise in which
the employee is employed or a customarily recognized department or
subdivision thereof as required under Sec. 541.100. Thus, for example,
a police officer or fire fighter whose primary duty is to investigate
crimes or fight fires is not exempt under section 13(a)(1) of the Act
merely because the police officer or fire fighter also directs the work
of other employees in the conduct of an investigation or fighting a
fire.
(3) Such employees do not qualify as exempt administrative
employees because their primary duty is not the performance of work
directly related to the management or general business operations of
the employer or the employer's customers as required under Sec.
541.200.
(4) Such employees do not qualify as exempt professionals because
their primary duty is not the performance of work requiring knowledge
of an advanced type in a field of science or learning customarily
acquired by a prolonged course of specialized intellectual instruction
or the performance of work requiring invention, imagination,
originality or talent in a recognized field of artistic or creative
endeavor as required under Sec. 541.300. Although some police
officers, fire fighters, paramedics, emergency medical technicians and
similar employees have college degrees, a specialized academic degree
is not a standard prerequisite for employment in such occupations.
Sec. 541.4 Other laws and collective bargaining agreements.
The Fair Labor Standards Act provides minimum standards that may be
exceeded, but cannot be waived or reduced. Employers must comply, for
example, with any Federal, State or municipal laws, regulations or
ordinances establishing a higher minimum wage or lower maximum workweek
than those established under the Act. Similarly, employers, on their
own initiative or under a collective bargaining agreement with a labor
union, are not precluded by the Act from providing a wage higher than
the statutory minimum, a shorter workweek than the statutory maximum,
or a higher overtime premium (double time, for example) than provided
by the Act. While collective bargaining agreements cannot waive or
reduce the Act's protections, nothing in the Act or the regulations in
this part relieves employers from their contractual obligations under
collective bargaining agreements.
Subpart B--Executive Employees
Sec. 541.100 General rule for executive employees.
(a) The term ``employee employed in a bona fide executive
capacity'' in section 13(a)(1) of the Act shall mean any employee:
(1) Compensated on a salary basis at a rate of not less than $455
per week (or $380 per week, if employed in American Samoa by employers
other than the Federal Government), exclusive of board, lodging or
other facilities;
(2) Whose primary duty is management of the enterprise in which the
employee is employed or of a customarily recognized department or
subdivision thereof;
(3) Who customarily and regularly directs the work of two or more
other employees; and
(4) Who has the authority to hire or fire other employees or whose
suggestions and recommendations as to the hiring, firing, advancement,
promotion or any other change of status of other employees are given
particular weight.
(b) The phrase ``salary basis'' is defined at Sec. 541.602;
``board, lodging or other facilities'' is defined at Sec. 541.606;
``primary duty'' is defined at Sec. 541.700; and ``customarily and
regularly'' is defined at Sec. 541.701.
Sec. 541.101 Business owner.
The term ``employee employed in a bona fide executive capacity'' in
section 13(a)(1) of the Act also includes any employee who owns at
least a bona fide 20-percent equity interest in the enterprise in which
the employee is employed, regardless of whether the business is a
corporate or other type of organization, and who is actively engaged in
its management. The term ``management'' is defined in Sec. 541.102.
The requirements of Subpart G (salary requirements) of this part do not
apply to the business owners described in this section.
Sec. 541.102 Management.
Generally, ``management'' includes, but is not limited to,
activities such as interviewing, selecting, and training of employees;
setting and adjusting their rates of pay and hours of work; directing
the work of employees; maintaining production or sales records for use
in supervision or control; appraising employees' productivity and
efficiency for the purpose of recommending promotions or other changes
in status; handling employee complaints and grievances; disciplining
employees; planning the work; determining the techniques to be used;
apportioning the work among the employees; determining the type of
materials, supplies, machinery, equipment or tools to be used or
merchandise to be bought, stocked and sold; controlling the flow and
distribution of materials or merchandise and supplies; providing for
the safety and security of the employees or the property; planning and
controlling the budget; and monitoring or implementing legal compliance
measures.
Sec. 541.103 Department or subdivision.
(a) The phrase ``a customarily recognized department or
subdivision'' is intended to distinguish between a mere collection of
employees assigned from time to time to a specific job or series of
jobs and a unit with permanent status and function. A customarily
recognized department or subdivision must have a permanent status and a
continuing function. For example, a
[[Page 22262]]
large employer's human resources department might have subdivisions for
labor relations, pensions and other benefits, equal employment
opportunity, and personnel management, each of which has a permanent
status and function.
(b) When an enterprise has more than one establishment, the
employee in charge of each establishment may be considered in charge of
a recognized subdivision of the enterprise.
(c) A recognized department or subdivision need not be physically
within the employer's establishment and may move from place to place.
The mere fact that the employee works in more than one location does
not invalidate the exemption if other factors show that the employee is
actually in charge of a recognized unit with a continuing function in
the organization.
(d) Continuity of the same subordinate personnel is not essential
to the existence of a recognized unit with a continuing function. An
otherwise exempt employee will not lose the exemption merely because
the employee draws and supervises workers from a pool or supervises a
team of workers drawn from other recognized units, if other factors are
present that indicate that the employee is in charge of a recognized
unit with a continuing function.
Sec. 541.104 Two or more other employees.
(a) To qualify as an exempt executive under Sec. 541.100, the
employee must customarily and regularly direct the work of two or more
other employees. The phrase ``two or more other employees'' means two
full-time employees or their equivalent. One full-time and two half-
time employees, for example, are equivalent to two full-time employees.
Four half-time employees are also equivalent.
(b) The supervision can be distributed among two, three or more
employees, but each such employee must customarily and regularly direct
the work of two or more other full-time employees or the equivalent.
Thus, for example, a department with five full-time nonexempt workers
may have up to two exempt supervisors if each such supervisor
customarily and regularly directs the work of two of those workers.
(c) An employee who merely assists the manager of a particular
department and supervises two or more employees only in the actual
manager's absence does not meet this requirement.
(d) Hours worked by an employee cannot be credited more than once
for different executives. Thus, a shared responsibility for the
supervision of the same two employees in the same department does not
satisfy this requirement. However, a full-time employee who works four
hours for one supervisor and four hours for a different supervisor, for
example, can be credited as a half-time employee for both supervisors.
Sec. 541.105 Particular weight.
To determine whether an employee's suggestions and recommendations
are given ``particular weight,'' factors to be considered include, but
are not limited to, whether it is part of the employee's job duties to
make such suggestions and recommendations; the frequency with which
such suggestions and recommendations are made or requested; and the
frequency with which the employee's suggestions and recommendations are
relied upon. Generally, an executive's suggestions and recommendations
must pertain to employees whom the executive customarily and regularly
directs. It does not include an occasional suggestion with regard to
the change in status of a co-worker. An employee's suggestions and
recommendations may still be deemed to have ``particular weight'' even
if a higher level manager's recommendation has more importance and even
if the employee does not have authority to make the ultimate decision
as to the employee's change in status.
Sec. 541.106 Concurrent duties.
(a) Concurrent performance of exempt and nonexempt work does not
disqualify an employee from the executive exemption if the requirements
of Sec. 541.100 are otherwise met. Whether an employee meets the
requirements of Sec. 541.100 when the employee performs concurrent
duties is determined on a case-by-case basis and based on the factors
set forth in Sec. 541.700. Generally, exempt executives make the
decision regarding when to perform nonexempt duties and remain
responsible for the success or failure of business operations under
their management while performing the nonexempt work. In contrast, the
nonexempt employee generally is directed by a supervisor to perform the
exempt work or performs the exempt work for defined time periods. An
employee whose primary duty is ordinary production work or routine,
recurrent or repetitive tasks cannot qualify for exemption as an
executive.
(b) For example, an assistant manager in a retail establishment may
perform work such as serving customers, cooking food, stocking shelves
and cleaning the establishment, but performance of such nonexempt work
does not preclude the exemption if the assistant manager's primary duty
is management. An assistant manager can supervise employees and serve
customers at the same time without losing the exemption. An exempt
employee can also simultaneously direct the work of other employees and
stock shelves.
(c) In contrast, a relief supervisor or working supervisor whose
primary duty is performing nonexempt work on the production line in a
manufacturing plant does not become exempt merely because the nonexempt
production line employee occasionally has some responsibility for
directing the work of other nonexempt production line employees when,
for example, the exempt supervisor is unavailable. Similarly, an
employee whose primary duty is to work as an electrician is not an
exempt executive even if the employee also directs the work of other
employees on the job site, orders parts and materials for the job, and
handles requests from the prime contractor.
Subpart C--Administrative Employees
Sec. 541.200 General rule for administrative employees.
(a) The term ``employee employed in a bona fide administrative
capacity'' in section 13(a)(1) of the Act shall mean any employee:
(1) Compensated on a salary or fee basis at a rate of not less than
$455 per week (or $380 per week, if employed in American Samoa by
employers other than the Federal Government), exclusive of board,
lodging or other facilities;
(2) Whose primary duty is the performance of office or non-manual
work directly related to the management or general business operations
of the employer or the employer's customers; and
(3) Whose primary duty includes the exercise of discretion and
independent judgment with respect to matters of significance.
(b) The term ``salary basis'' is defined at Sec. 541.602; ``fee
basis'' is defined at Sec. 541.605; ``board, lodging or other
facilities'' is defined at Sec. 541.606; and ``primary duty'' is
defined at Sec. 541.700.
Sec. 541.201 Directly related to management or general business
operations.
(a) To qualify for the administrative exemption, an employee's
primary duty must be the performance of work directly related to the
management or general business operations of the employer or the
employer's customers. The phrase ``directly related to the management
or general business operations'' refers to the type of work
[[Page 22263]]
performed by the employee. To meet this requirement, an employee must
perform work directly related to assisting with the running or
servicing of the business, as distinguished, for example, from working
on a manufacturing production line or selling a product in a retail or
service establishment.
(b) Work directly related to management or general business
operations includes, but is not limited to, work in functional areas
such as tax; finance; accounting; budgeting; auditing; insurance;
quality control; purchasing; procurement; advertising; marketing;
research; safety and health; personnel management; human resources;
employee benefits; labor relations; public relations, government
relations; computer network, internet and database administration;
legal and regulatory compliance; and similar activities. Some of these
activities may be performed by employees who also would qualify for
another exemption.
(c) An employee may qualify for the administrative exemption if the
employee's primary duty is the performance of work directly related to
the management or general business operations of the employer's
customers. Thus, for example, employees acting as advisers or
consultants to their employer's clients or customers (as tax experts or
financial consultants, for example) may be exempt.
Sec. 541.202 Discretion and independent judgment.
(a) To qualify for the administrative exemption, an employee's
primary duty must include the exercise of discretion and independent
judgment with respect to matters of significance. In general, the
exercise of discretion and independent judgment involves the comparison
and the evaluation of possible courses of conduct, and acting or making
a decision after the various possibilities have been considered. The
term ``matters of significance'' refers to the level of importance or
consequence of the work performed.
(b) The phrase ``discretion and independent judgment'' must be
applied in the light of all the facts involved in the particular
employment situation in which the question arises. Factors to consider
when determining whether an employee exercises discretion and
independent judgment with respect to matters of significance include,
but are not limited to: whether the employee has authority to
formulate, affect, interpret, or implement management policies or
operating practices; whether the employee carries out major assignments
in conducting the operations of the business; whether the employee
performs work that affects business operations to a substantial degree,
even if the employee's assignments are related to operation of a
particular segment of the business; whether the employee has authority
to commit the employer in matters that have significant financial
impact; whether the employee has authority to waive or deviate from
established policies and procedures without prior approval; whether the
employee has authority to negotiate and bind the company on significant
matters; whether the employee provides consultation or expert advice to
management; whether the employee is involved in planning long- or
short-term business objectives; whether the employee investigates and
resolves matters of significance on behalf of management; and whether
the employee represents the company in handling complaints, arbitrating
disputes or resolving grievances.
(c) The exercise of discretion and independent judgment implies
that the employee has authority to make an independent choice, free
from immediate direction or supervision. However, employees can
exercise discretion and independent judgment even if their decisions or
recommendations are reviewed at a higher level. Thus, the term
``discretion and independent judgment'' does not require that the
decisions made by an employee have a finality that goes with unlimited
authority and a complete absence of review. The decisions made as a
result of the exercise of discretion and independent judgment may
consist of recommendations for action rather than the actual taking of
action. The fact that an employee's decision may be subject to review
and that upon occasion the decisions are revised or reversed after
review does not mean that the employee is not exercising discretion and
independent judgment. For example, the policies formulated by the
credit manager of a large corporation may be subject to review by
higher company officials who may approve or disapprove these policies.
The management consultant who has made a study of the operations of a
business and who has drawn a proposed change in organization may have
the plan reviewed or revised by superiors before it is submitted to the
client.
(d) An employer's volume of business may make it necessary to
employ a number of employees to perform the same or similar work. The
fact that many employees perform identical work or work of the same
relative importance does not mean that the work of each such employee
does not involve the exercise of discretion and independent judgment
with respect to matters of significance.
(e) The exercise of discretion and independent judgment must be
more than the use of skill in applying well-established techniques,
procedures or specific standards described in manuals or other sources.
See also Sec. 541.704 regarding use of manuals. The exercise of
discretion and independent judgment also does not include clerical or
secretarial work, recording or tabulating data, or performing other
mechanical, repetitive, recurrent or routine work. An employee who
simply tabulates data is not exempt, even if labeled as a
``statistician.''
(f) An employee does not exercise discretion and independent
judgment with respect to matters of significance merely because the
employer will experience financial losses if the employee fails to
perform the job properly. For example, a messenger who is entrusted
with carrying large sums of money does not exercise discretion and
independent judgment with respect to matters of significance even
though serious consequences may flow from the employee's neglect.
Similarly, an employee who operates very expensive equipment does not
exercise discretion and independent judgment with respect to matters of
significance merely because improper performance of the employee's
duties may cause serious financial loss to the employer.
Sec. 541.203 Administrative exemption examples.
(a) Insurance claims adjusters generally meet the duties
requirements for the administrative exemption, whether they work for an
insurance company or other type of company, if their duties include
activities such as interviewing insureds, witnesses and physicians;
inspecting property damage; reviewing factual information to prepare
damage estimates; evaluating and making recommendations regarding
coverage of claims; determining liability and total value of a claim;
negotiating settlements; and making recommendations regarding
litigation.
(b) Employees in the financial services industry generally meet the
duties requirements for the administrative exemption if their duties
include work such as collecting and analyzing information regarding the
customer's income, assets, investments or debts; determining which
financial products best meet the customer's needs and financial
circumstances; advising the customer regarding the advantages and
disadvantages of different financial
[[Page 22264]]
products; and marketing, servicing or promoting the employer's
financial products. However, an employee whose primary duty is selling
financial products does not qualify for the administrative exemption.
(c) An employee who leads a team of other employees assigned to
complete major projects for the employer (such as purchasing, selling
or closing all or part of the business, negotiating a real estate
transaction or a collective bargaining agreement, or designing and
implementing productivity improvements) generally meets the duties
requirements for the administrative exemption, even if the employee
does not have direct supervisory responsibility over the other
employees on the team.
(d) An executive assistant or administrative assistant to a
business owner or senior executive of a large business generally meets
the duties requirements for the administrative exemption if such
employee, without specific instructions or prescribed procedures, has
been delegated authority regarding matters of significance.
(e) Human resources managers who formulate, interpret or implement
employment policies and management consultants who study the operations
of a business and propose changes in organization generally meet the
duties requirements for the administrative exemption. However,
personnel clerks who ``screen'' applicants to obtain data regarding
their minimum qualifications and fitness for employment generally do
not meet the duties requirements for the administrative exemption. Such
personnel clerks typically will reject all applicants who do not meet
minimum standards for the particular job or for employment by the
company. The minimum standards are usually set by the exempt human
resources manager or other company officials, and the decision to hire
from the group of qualified applicants who do meet the minimum
standards is similarly made by the exempt human resources manager or
other company officials. Thus, when the interviewing and screening
functions are performed by the human resources manager or personnel
manager who makes the hiring decision or makes recommendations for
hiring from the pool of qualified applicants, such duties constitute
exempt work, even though routine, because this work is directly and
closely related to the employee's exempt functions.
(f) Purchasing agents with authority to bind the company on
significant purchases generally meet the duties requirements for the
administrative exemption even if they must consult with top management
officials when making a purchase commitment for raw materials in excess
of the contemplated plant needs.
(g) Ordinary inspection work generally does not meet the duties
requirements for the administrative exemption. Inspectors normally
perform specialized work along standardized lines involving well-
established techniques and procedures which may have been catalogued
and described in manuals or other sources. Such inspectors rely on
techniques and skills acquired by special training or experience. They
have some leeway in the performance of their work but only within
closely prescribed limits.
(h) Employees usually called examiners or graders, such as
employees that grade lumber, generally do not meet the duties
requirements for the administrative exemption. Such employees usually
perform work involving the comparison of products with established
standards which are frequently catalogued. Often, after continued
reference to the written standards, or through experience, the employee
acquires sufficient knowledge so that reference to written standards is
unnecessary. The substitution of the employee's memory for a manual of
standards does not convert the character of the work performed to
exempt work requiring the exercise of discretion and independent
judgment.
(i) Comparison shopping performed by an employee of a retail store
who merely reports to the buyer the prices at a competitor's store does
not qualify for the administrative exemption. However, the buyer who
evaluates such reports on competitor prices to set the employer's
prices generally meets the duties requirements for the administrative
exemption.
(j) Public sector inspectors or investigators of various types,
such as fire prevention or safety, building or construction, health or
sanitation, environmental or soils specialists and similar employees,
generally do not meet the duties requirements for the administrative
exemption because their work typically does not involve work directly
related to the management or general business operations of the
employer. Such employees also do not qualify for the administrative
exemption because their work involves the use of skills and technical
abilities in gathering factual information, applying known standards or
prescribed procedures, determining which procedure to follow, or
determining whether prescribed standards or criteria are met.
Sec. 541.204 Educational establishments.
(a) The term ``employee employed in a bona fide administrative
capacity'' in section 13(a)(1) of the Act also includes employees:
(1) Compensated for services on a salary or fee basis at a rate of
not less than $455 per week (or $380 per week, if employed in American
Samoa by employers other than the Federal Government) exclusive of
board, lodging or other facilities, or on a salary basis which is at
least equal to the entrance salary for teachers in the educational
establishment by which employed; and
(2) Whose primary duty is performing administrative functions
directly related to academic instruction or training in an educational
establishment or department or subdivision thereof.
(b) The term ``educational establishment'' means an elementary or
secondary school system, an institution of higher education or other
educational institution. Sections 3(v) and 3(w) of the Act define
elementary and secondary schools as those day or residential schools
that provide elementary or secondary education, as determined under
State law. Under the laws of most States, such education includes the
curriculums in grades 1 through 12; under many it includes also the
introductory programs in kindergarten. Such education in some States
may also include nursery school programs in elementary education and
junior college curriculums in secondary education. The term ``other
educational establishment'' includes special schools for mentally or
physically disabled or gifted children, regardless of any
classification of such schools as elementary, secondary or higher.
Factors relevant in determining whether post-secondary career programs
are educational institutions include whether the school is licensed by
a state agency responsible for the state's educational system or
accredited by a nationally recognized accrediting organization for
career schools. Also, for purposes of the exemption, no distinction is
drawn between public and private schools, or between those operated for
profit and those that are not for profit.
(c) The phrase ``performing administrative functions directly
related to academic instruction or training'' means work related to the
academic operations and functions in a school rather than to
administration along the lines of general business operations. Such
academic administrative functions include operations directly in the
field of education. Jobs relating to areas outside the educational
field are not
[[Page 22265]]
within the definition of academic administration.
(1) Employees engaged in academic administrative functions include:
the superintendent or other head of an elementary or secondary school
system, and any assistants, responsible for administration of such
matters as curriculum, quality and methods of instructing, measuring
and testing the learning potential and achievement of students,
establishing and maintaining academic and grading standards, and other
aspects of the teaching program; the principal and any vice-principals
responsible for the operation of an elementary or secondary school;
department heads in institutions of higher education responsible for
the administration of the mathematics department, the English
department, the foreign language department, etc.; academic counselors
who perform work such as administering school testing programs,
assisting students with academic problems and advising students
concerning degree requirements; and other employees with similar
responsibilities.
(2) Jobs relating to building management and maintenance, jobs
relating to the health of the students, and academic staff such as
social workers, psychologists, lunch room managers or dietitians do not
perform academic administrative functions. Although such work is not
considered academic administration, such employees may qualify for
exemption under Sec. 541.200 or under other sections of this part,
provided the requirements for such exemptions are met.
Subpart D--Professional Employees
Sec. 541.300 General rule for professional employees.
(a) The term ``employee employed in a bona fide professional
capacity'' in section 13(a)(1) of the Act shall mean any employee:
(1) Compensated on a salary or fee basis at a rate of not less than
$455 per week (or $380 per week, if employed in American Samoa by
employers other than the Federal Government), exclusive of board,
lodging, or other facilities; and
(2) Whose primary duty is the performance of work:
(i) Requiring knowledge of an advanced type in a field of science
or learning customarily acquired by a prolonged course of specialized
intellectual instruction; or
(ii) Requiring invention, imagination, originality or talent in a
recognized field of artistic or creative endeavor.
(b) The term ``salary basis'' is defined at Sec. 541.602; ``fee
basis'' is defined at Sec. 541.605; ``board, lodging or other
facilities'' is defined at Sec. 541.606; and ``primary duty'' is
defined at Sec. 541.700.
Sec. 541.301 Learned professionals.
(a) To qualify for the learned professional exemption, an
employee's primary duty must be the performance of work requiring
advanced knowledge in a field of science or learning customarily
acquired by a prolonged course of specialized intellectual instruction.
This primary duty test includes three elements:
(1) The employee must perform work requiring advanced knowledge;
(2) The advanced knowledge must be in a field of science or
learning; and
(3) The advanced knowledge must be customarily acquired by a
prolonged course of specialized intellectual instruction.
(b) The phrase ``work requiring advanced knowledge'' means work
which is predominantly intellectual in character, and which includes
work requiring the consistent exercise of discretion and judgment, as
distinguished from performance of routine mental, manual, mechanical or
physical work. An employee who performs work requiring advanced
knowledge generally uses the advanced knowledge to analyze, interpret
or make deductions from varying facts or circumstances. Advanced
knowledge cannot be attained at the high school level.
(c) The phrase ``field of science or learning'' includes the
traditional professions of law, medicine, theology, accounting,
actuarial computation, engineering, architecture, teaching, various
types of physical, chemical and biological sciences, pharmacy and other
similar occupations that have a recognized professional status as
distinguished from the mechanical arts or skilled trades where in some
instances the knowledge is of a fairly advanced type, but is not in a
field of science or learning.
(d) The phrase ``customarily acquired by a prolonged course of
specialized intellectual instruction'' restricts the exemption to
professions where specialized academic training is a standard
prerequisite for entrance into the profession. The best prima facie
evidence that an employee meets this requirement is possession of the
appropriate academic degree. However, the word ``customarily'' means
that the exemption is also available to employees in such professions
who have substantially the same knowledge level and perform
substantially the same work as the degreed employees, but who attained
the advanced knowledge through a combination of work experience and
intellectual instruction. Thus, for example, the learned professional
exemption is available to the occasional lawyer who has not gone to law
school, or the occasional chemist who is not the possessor of a degree
in chemistry. However, the learned professional exemption is not
available for occupations that customarily may be performed with only
the general knowledge acquired by an academic degree in any field, with
knowledge acquired through an apprenticeship, or with training in the
performance of routine mental, manual, mechanical or physical
processes. The learned professional exemption also does not apply to
occupations in which most employees have acquired their skill by
experience rather than by advanced specialized intellectual
instruction.
(e) (1) Registered or certified medical technologists. Registered
or certified medical technologists who have successfully completed
three academic years of pre-professional study in an accredited college
or university plus a fourth year of professional course work in a
school of medical technology approved by the Council of Medical
Education of the American Medical Association generally meet the duties
requirements for the learned professional exemption.
(2) Nurses. Registered nurses who are registered by the appropriate
State examining board generally meet the duties requirements for the
learned professional exemption. Licensed practical nurses and other
similar health care employees, however, generally do not qualify as
exempt learned professionals because possession of a specialized
advanced academic degree is not a standard prerequisite for entry into
such occupations.
(3) Dental hygienists. Dental hygienists who have successfully
completed four academic years of pre-professional and professional
study in an accredited college or university approved by the Commission
on Accreditation of Dental and Dental Auxiliary Educational Programs of
the American Dental Association generally meet the duties requirements
for the learned professional exemption.
(4) Physician assistants. Physician assistants who have
successfully completed four academic years of pre-professional and
professional study, including graduation from a physician assistant
program accredited by the Accreditation Review Commission on Education
for the Physician Assistant, and who are certified by the National
Commission on Certification of Physician Assistants generally meet the
[[Page 22266]]
duties requirements for the learned professional exemption.
(5) Accountants. Certified public accountants generally meet the
duties requirements for the learned professional exemption. In
addition, many other accountants who are not certified public
accountants but perform similar job duties may qualify as exempt
learned professionals. However, accounting clerks, bookkeepers and
other employees who normally perform a great deal of routine work
generally will not qualify as exempt professionals.
(6) Chefs. Chefs, such as executive chefs and sous chefs, who have
attained a four-year specialized academic degree in a culinary arts
program, generally meet the duties requirements for the learned
professional exemption. The learned professional exemption is not
available to cooks who perform predominantly routine mental, manual,
mechanical or physical work.
(7) Paralegals. Paralegals and legal assistants generally do not
qualify as exempt learned professionals because an advanced specialized
academic degree is not a standard prerequisite for entry into the
field. Although many paralegals possess general four-year advanced
degrees, most specialized paralegal programs are two-year associate
degree programs from a community college or equivalent institution.
However, the learned professional exemption is available for paralegals
who possess advanced specialized degrees in other professional fields
and apply advanced knowledge in that field in the performance of their
duties. For example, if a law firm hires an engineer as a paralegal to
provide expert advice on product liability cases or to assist on patent
matters, that engineer would qualify for exemption.
(8) Athletic trainers. Athletic trainers who have successfully
completed four academic years of pre-professional and professional
study in a specialized curriculum accredited by the Commission on
Accreditation of Allied Health Education Programs and who are certified
by the Board of Certification of the National Athletic Trainers
Association Board of Certification generally meet the duties
requirements for the learned professional exemption.
(9) Funeral directors or embalmers. Licensed funeral directors and
embalmers who are licensed by and working in a state that requires
successful completion of four academic years of pre-professional and
professional study, including graduation from a college of mortuary
science accredited by the American Board of Funeral Service Education,
generally meet the duties requirements for the learned professional
exemption.
(f) The areas in which the professional exemption may be available
are expanding. As knowledge is developed, academic training is
broadened and specialized degrees are offered in new and diverse
fields, thus creating new specialists in particular fields of science
or learning. When an advanced specialized degree has become a standard
requirement for a particular occupation, that occupation may have
acquired the characteristics of a learned profession. Accrediting and
certifying organizations similar to those listed in paragraphs (e)(1),
(e)(3), (e)(4), (e)(8) and (e)(9) of this section also may be created
in the future. Such organizations may develop similar specialized
curriculums and certification programs which, if a standard requirement
for a particular occupation, may indicate that the occupation has
acquired the characteristics of a learned profession.
Sec. 541.302 Creative professionals.
(a) To qualify for the creative professional exemption, an
employee's primary duty must be the performance of work requiring
invention, imagination, originality or talent in a recognized field of
artistic or creative endeavor as opposed to routine mental, manual,
mechanical or physical work. The exemption does not apply to work which
can be produced by a person with general manual or intellectual ability
and training.
(b) To qualify for exemption as a creative professional, the work
performed must be ``in a recognized field of artistic or creative
endeavor.'' This includes such fields as music, writing, acting and the
graphic arts.
(c) The requirement of ``invention, imagination, originality or
talent'' distinguishes the creative professions from work that
primarily depends on intelligence, diligence and accuracy. The duties
of employees vary widely, and exemption as a creative professional
depends on the extent of the invention, imagination, originality or
talent exercised by the employee. Determination of exempt creative
professional status, therefore, must be made on a case-by-case basis.
This requirement generally is met by actors, musicians, composers,
conductors, and soloists; painters who at most are given the subject
matter of their painting; cartoonists who are merely told the title or
underlying concept of a cartoon and must rely on their own creative
ability to express the concept; essayists, novelists, short-story
writers and screen-play writers who choose their own subjects and hand
in a finished piece of work to their employers (the majority of such
persons are, of course, not employees but self-employed); and persons
holding the more responsible writing positions in advertising agencies.
This requirement generally is not met by a person who is employed as a
copyist, as an ``animator'' of motion-picture cartoons, or as a
retoucher of photographs, since such work is not properly described as
creative in character.
(d) Journalists may satisfy the duties requirements for the
creative professional exemption if their primary duty is work requiring
invention, imagination, originality or talent, as opposed to work which
depends primarily on intelligence, diligence and accuracy. Employees of
newspapers, magazines, television and other media are not exempt
creative professionals if they only collect, organize and record
information that is routine or already public, or if they do not
contribute a unique interpretation or analysis to a news product. Thus,
for example, newspaper reporters who merely rewrite press releases or
who write standard recounts of public information by gathering facts on
routine community events are not exempt creative professionals.
Reporters also do not qualify as exempt creative professionals if their
work product is subject to substantial control by the employer.
However, journalists may qualify as exempt creative professionals if
their primary duty is performing on the air in radio, television or
other electronic media; conducting investigative interviews; analyzing
or interpreting public events; writing editorials, opinion columns or
other commentary; or acting as a narrator or commentator.
Sec. 541.303 Teachers.
(a) The term ``employee employed in a bona fide professional
capacity'' in section 13(a)(1) of the Act also means any employee with
a primary duty of teaching, tutoring, instructing or lecturing in the
activity of imparting knowledge and who is employed and engaged in this
activity as a teacher in an educational establishment by which the
employee is employed. The term ``educational establishment'' is defined
in Sec. 541.204(b).
(b) Exempt teachers include, but are not limited to: Regular
academic teachers; teachers of kindergarten or nursery school pupils;
teachers of gifted or disabled children; teachers of skilled and semi-
skilled trades and occupations; teachers engaged in automobile driving
instruction; aircraft flight instructors; home economics teachers; and
vocal or instrumental
[[Page 22267]]
music instructors. Those faculty members who are engaged as teachers
but also spend a considerable amount of their time in extracurricular
activities such as coaching athletic teams or acting as moderators or
advisors in such areas as drama, speech, debate or journalism are
engaged in teaching. Such activities are a recognized part of the
schools' responsibility in contributing to the educational development
of the student.
(c) The possession of an elementary or secondary teacher's
certificate provides a clear means of identifying the individuals
contemplated as being within the scope of the exemption for teaching
professionals. Teachers who possess a teaching certificate qualify for
the exemption regardless of the terminology (e.g., permanent,
conditional, standard, provisional, temporary, emergency, or unlimited)
used by the State to refer to different kinds of certificates. However,
private schools and public schools are not uniform in requiring a
certificate for employment as an elementary or secondary school
teacher, and a teacher's certificate is not generally necessary for
employment in institutions of higher education or other educational
establishments. Therefore, a teacher who is not certified may be
considered for exemption, provided that such individual is employed as
a teacher by the employing school or school system.
(d) The requirements of Sec. 541.300 and Subpart G (salary
requirements) of this part do not apply to the teaching professionals
described in this section.
Sec. 541.304 Practice of law or medicine.
(a) The term ``employee employed in a bona fide professional
capacity'' in section 13(a)(1) of the Act also shall mean:
(1) Any employee who is the holder of a valid license or
certificate permitting the practice of law or medicine or any of their
branches and is actually engaged in the practice thereof; and
(2) Any employee who is the holder of the requisite academic degree
for the general practice of medicine and is engaged in an internship or
resident program pursuant to the practice of the profession.
(b) In the case of medicine, the exemption applies to physicians
and other practitioners licensed and practicing in the field of medical
science and healing or any of the medical specialties practiced by
physicians or practitioners. The term ``physicians'' includes medical
doctors including general practitioners and specialists, osteopathic
physicians (doctors of osteopathy), podiatrists, dentists (doctors of
dental medicine), and optometrists (doctors of optometry or bachelors
of science in optometry).
(c) Employees engaged in internship or resident programs, whether
or not licensed to practice prior to commencement of the program,
qualify as exempt professionals if they enter such internship or
resident programs after the earning of the appropriate degree required
for the general practice of their profession.
(d) The requirements of Sec. 541.300 and subpart G (salary
requirements) of this part do not apply to the employees described in
this section.
Subpart E--Computer Employees
Sec. 541.400 General rule for computer employees.
(a) Computer systems analysts, computer programmers, software
engineers or other similarly skilled workers in the computer field are
eligible for exemption as professionals under section 13(a)(1) of the
Act and under section 13(a)(17) of the Act. Because job titles vary
widely and change quickly in the computer industry, job titles are not
determinative of the applicability of this exemption.
(b) The section 13(a)(1) exemption applies to any computer employee
compensated on a salary or fee basis at a rate of not less than $455
per week (or $380 per week, if employed in American Samoa by employers
other than the Federal Government), exclusive of board, lodging or
other facilities, and the section 13(a)(17) exemption applies to any
computer employee compensated on an hourly basis at a rate not less
than $27.63 an hour. In addition, under either section 13(a)(1) or
section 13(a)(17) of the Act, the exemptions apply only to computer
employees whose primary duty consists of:
(1) The application of systems analysis techniques and procedures,
including consulting with users, to determine hardware, software or
system functional specifications;
(2) The design, development, documentation, analysis, creation,
testing or modification of computer systems or programs, including
prototypes, based on and related to user or system design
specifications;
(3) The design, documentation, testing, creation or modification of
computer programs related to machine operating systems; or
(4) A combination of the aforementioned duties, the performance of
which requires the same level of skills.
(c) The term ``salary basis'' is defined at Sec. 541.602; ``fee
basis'' is defined at Sec. 541.605; ``board, lodging or other
facilities'' is defined at Sec. 541.606; and ``primary duty'' is
defined at Sec. 541.700.
Sec. 541.401 Computer manufacture and repair.
The exemption for employees in computer occupations does not
include employees engaged in the manufacture or repair of computer
hardware and related equipment. Employees whose work is highly
dependent upon, or facilitated by, the use of computers and computer
software programs (e.g., engineers, drafters and others skilled in
computer-aided design software), but who are not primarily engaged in
computer systems analysis and programming or other similarly skilled
computer-related occupations identified in Sec. 541.400(b), are also
not exempt computer professionals.
Sec. 541.402 Executive and administrative computer employees.
Computer employees within the scope of this exemption, as well as
those employees not within its scope, may also have executive and
administrative duties which qualify the employees for exemption under
subpart B or subpart C of this part. For example, systems analysts and
computer programmers generally meet the duties requirements for the
administrative exemption if their primary duty includes work such as
planning, scheduling, and coordinating activities required to develop
systems to solve complex business, scientific or engineering problems
of the employer or the employer's customers. Similarly, a senior or
lead computer programmer who manages the work of two or more other
programmers in a customarily recognized department or subdivision of
the employer, and whose recommendations as to the hiring, firing,
advancement, promotion or other change of status of the other
programmers are given particular weight, generally meets the duties
requirements for the executive exemption.
Subpart F--Outside Sales Employees
Sec. 541.500 General rule for outside sales employees.
(a) The term ``employee employed in the capacity of outside
salesman'' in section 13(a)(1) of the Act shall mean any employee:
(1) Whose primary duty is:
(i) making sales within the meaning of section 3(k) of the Act, or
(ii) obtaining orders or contracts for services or for the use of
facilities for
[[Page 22268]]
which a consideration will be paid by the client or customer; and
(2) Who is customarily and regularly engaged away from the
employer's place or places of business in performing such primary duty.
(b) The term ``primary duty'' is defined at Sec. 541.700. In
determining the primary duty of an outside sales employee, work
performed incidental to and in conjunction with the employee's own
outside sales or solicitations, including incidental deliveries and
collections, shall be regarded as exempt outside sales work. Other work
that furthers the employee's sales efforts also shall be regarded as
exempt work including, for example, writing sales reports, updating or
revising the employee's sales or display catalogue, planning
itineraries and attending sales conferences.
(c) The requirements of subpart G (salary requirements) of this
part do not apply to the outside sales employees described in this
section.
Sec. 541.501 Making sales or obtaining orders.
(a) Section 541.500 requires that the employee be engaged in:
(1) Making sales within the meaning of section 3(k) of the Act, or
(2) Obtaining orders or contracts for services or for the use of
facilities.
(b) Sales within the meaning of section 3(k) of the Act include the
transfer of title to tangible property, and in certain cases, of
tangible and valuable evidences of intangible property. Section 3(k) of
the Act states that ``sale'' or ``sell'' includes any sale, exchange,
contract to sell, consignment for sale, shipment for sale, or other
disposition.
(c) Exempt outside sales work includes not only the sales of
commodities, but also ``obtaining orders or contracts for services or
for the use of facilities for which a consideration will be paid by the
client or customer.'' Obtaining orders for ``the use of facilities''
includes the selling of time on radio or television, the solicitation
of advertising for newspapers and other periodicals, and the
solicitation of freight for railroads and other transportation
agencies.
(d) The word ``services'' extends the outside sales exemption to
employees who sell or take orders for a service, which may be performed
for the customer by someone other than the person taking the order.
Sec. 541.502 Away from employer's place of business.
An outside sales employee must be customarily and regularly engaged
``away from the employer's place or places of business.'' The outside
sales employee is an employee who makes sales at the customer's place
of business or, if selling door-to-door, at the customer's home.
Outside sales does not include sales made by mail, telephone or the
Internet unless such contact is used merely as an adjunct to personal
calls. Thus, any fixed site, whether home or office, used by a
salesperson as a headquarters or for telephonic solicitation of sales
is considered one of the employer's places of business, even though the
employer is not in any formal sense the owner or tenant of the
property. However, an outside sales employee does not lose the
exemption by displaying samples in hotel sample rooms during trips from
city to city; these sample rooms should not be considered as the
employer's places of business. Similarly, an outside sales employee
does not lose the exemption by displaying the employer's products at a
trade show. If selling actually occurs, rather than just sales
promotion, trade shows of short duration (i.e., one or two weeks)
should not be considered as the employer's place of business.
Sec. 541.503 Promotion work.
(a) Promotion work is one type of activity often performed by
persons who make sales, which may or may not be exempt outside sales
work, depending upon the circumstances under which it is performed.
Promotional work that is actually performed incidental to and in
conjunction with an employee's own outside sales or solicitations is
exempt work. On the other hand, promotional work that is incidental to
sales made, or to be made, by someone else is not exempt outside sales
work. An employee who does not satisfy the requirements of this subpart
may still qualify as an exempt employee under other subparts of this
rule.
(b) A manufacturer's representative, for example, may perform
various types of promotional activities such as putting up displays and
posters, removing damaged or spoiled stock from the merchant's shelves
or rearranging the merchandise. Such an employee can be considered an
exempt outside sales employee if the employee's primary duty is making
sales or contracts. Promotion activities directed toward consummation
of the employee's own sales are exempt. Promotional activities designed
to stimulate sales that will be made by someone else are not exempt
outside sales work.
(c) Another example is a company representative who visits chain
stores, arranges the merchandise on shelves, replenishes stock by
replacing old with new merchandise, sets up displays and consults with
the store manager when inventory runs low, but does not obtain a
commitment for additional purchases. The arrangement of merchandise on
the shelves or the replenishing of stock is not exempt work unless it
is incidental to and in conjunction with the employee's own outside
sales. Because the employee in this instance does not consummate the
sale nor direct efforts toward the consummation of a sale, the work is
not exempt outside sales work.
Sec. 541.504 Drivers who sell.
(a) Drivers who deliver products and also sell such products may
qualify as exempt outside sales employees only if the employee has a
primary duty of making sales. In determining the primary duty of
drivers who sell, work performed incidental to and in conjunction with
the employee's own outside sales or solicitations, including loading,
driving or delivering products, shall be regarded as exempt outside
sales work.
(b) Several factors should be considered in determining if a driver
has a primary duty of making sales, including, but not limited to: a
comparison of the driver's duties with those of other employees engaged
as truck drivers and as salespersons; possession of a selling or
solicitor's license when such license is required by law or ordinances;
presence or absence of customary or contractual arrangements concerning
amounts of products to be delivered; description of the employee's
occupation in collective bargaining agreements; the employer's
specifications as to qualifications for hiring; sales training;
attendance at sales conferences; method of payment; and proportion of
earnings directly attributable to sales.
(c) Drivers who may qualify as exempt outside sales employees
include:
(1) A driver who provides the only sales contact between the
employer and the customers visited, who calls on customers and takes
orders for products, who delivers products from stock in the employee's
vehicle or procures and delivers the product to the customer on a later
trip, and who receives compensation commensurate with the volume of
products sold.
(2) A driver who obtains or solicits orders for the employer's
products from persons who have authority to commit the customer for
purchases.
(3) A driver who calls on new prospects for customers along the
employee's route and attempts to convince them of the desirability of
accepting regular delivery of goods.
(4) A driver who calls on established customers along the route and
[[Page 22269]]
persuades regular customers to accept delivery of increased amounts of
goods or of new products, even though the initial sale or agreement for
delivery was made by someone else.
(d) Drivers who generally would not qualify as exempt outside sales
employees include:
(1) A route driver whose primary duty is to transport products sold
by the employer through vending machines and to keep such machines
stocked, in good operating condition, and in good locations.
(2) A driver who often calls on established customers day after day
or week after week, delivering a quantity of the employer's products at
each call when the sale was not significantly affected by solicitations
of the customer by the delivering driver or the amount of the sale is
determined by the volume of the customer's sales since the previous
delivery.
(3) A driver primarily engaged in making deliveries to customers
and performing activities intended to promote sales by customers
(including placing point-of-sale and other advertising materials, price
stamping commodities, arranging merchandise on shelves, in coolers or
in cabinets, rotating stock according to date, and cleaning and
otherwise servicing display cases), unless such work is in furtherance
of the driver's own sales efforts.
Subpart G--Salary Requirements
Sec. 541.600 Amount of salary required.
(a) To qualify as an exempt executive, administrative or
professional employee under section 13(a)(1) of the Act, an employee
must be compensated on a salary basis at a rate of not less than $455
per week (or $380 per week, if employed in American Samoa by employers
other than the Federal Government), exclusive of board, lodging or
other facilities. Administrative and professional employees may also be
paid on a fee basis, as defined in Sec. 541.605.
(b) The $455 a week may be translated into equivalent amounts for
periods longer than one week. The requirement will be met if the
employee is compensated biweekly on a salary basis of $910, semimonthly
on a salary basis of $985.83, or monthly on a salary basis of
$1,971.66. However, the shortest period of payment that will meet this
compensation requirement is one week.
(c) In the case of academic administrative employees, the
compensation requirement also may be met by compensation on a salary
basis at a rate at least equal to the entrance salary for teachers in
the educational establishment by which the employee is employed, as
provided in Sec. 541.204(a)(1).
(d) In the case of computer employees, the compensation requirement
also may be met by compensation on an hourly basis at a rate not less
than $27.63 an hour, as provided in Sec. 541.400(b).
(e) In the case of professional employees, the compensation
requirements in this section shall not apply to employees engaged as
teachers (see Sec. 541.303); employees who hold a valid license or
certificate permitting the practice of law or medicine or any of their
branches and are actually engaged in the practice thereof (see Sec.
541.304); or to employees who hold the requisite academic degree for
the general practice of medicine and are engaged in an internship or
resident program pursuant to the practice of the profession (see Sec.
541.304). In the case of medical occupations, the exception from the
salary or fee requirement does not apply to pharmacists, nurses,
therapists, technologists, sanitarians, dietitians, social workers,
psychologists, psychometrists, or other professions which service the
medical profession.
Sec. 541.601 Highly compensated employees.
(a) An employee with total annual compensation of at least $100,000
is deemed exempt under section 13(a)(1) of the Act if the employee
customarily and regularly performs any one or more of the exempt duties
or responsibilities of an executive, administrative or professional
employee identified in subparts B, C or D of this part.
(b) (1) ``Total annual compensation'' must include at least $455
per week paid on a salary or fee basis. Total annual compensation may
also include commissions, nondiscretionary bonuses and other
nondiscretionary compensation earned during a 52-week period. Total
annual compensation does not include board, lodging and other
facilities as defined in Sec. 541.606, and does not include payments
for medical insurance, payments for life insurance, contributions to
retirement plans and the cost of other fringe benefits.
(2) If an employee's total annual compensation does not total at
least the minimum amount established in paragraph (a) of this section
by the last pay period of the 52-week period, the employer may, during
the last pay period or within one month after the end of the 52-week
period, make one final payment sufficient to achieve the required
level. For example, an employee may earn $80,000 in base salary, and
the employer may anticipate based upon past sales that the employee
also will earn $20,000 in commissions. However, due to poor sales in
the final quarter of the year, the employee actually only earns $10,000
in commissions. In this situation, the employer may within one month
after the end of the year make a payment of at least $10,000 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.
(3) An employee who does not work a full year for the employer,
either because the employee is newly hired after the beginning of the
year or ends the employment before the end of the year, may qualify for
exemption under this section if the employee receives a pro rata
portion of the minimum amount established in paragraph (a) of this
section, based upon the number of weeks that the employee will be or
has been employed. An employer may make one final payment as under
paragraph (b)(2) of this section within one month after the end of
employment.
(4) The employer may utilize any 52-week period as the year, such
as a calendar year, a fiscal year, or an anniversary of hire year. If
the employer does not identify some other year period in advance, the
calendar year will apply.
(c) A high level of compensation is a strong indicator of an
employee's exempt status, thus eliminating the need for a detailed
analysis of the employee's job duties. Thus, a highly compensated
employee will qualify for exemption if the employee customarily and
regularly performs any one or more of the exempt duties or
responsibilities of an executive, administrative or professional
employee identified in subparts B, C or D of this part. An employee may
qualify as a highly compensated executive employee, for example, if the
employee customarily and regularly directs the work of two or more
other employees, even though the employee does not meet all of the
other requirements for the executive exemption under Sec. 541.100.
(d) This section applies only to employees whose primary duty
includes performing office or non-manual work. Thus, for example, non-
management production-line workers and non-management employees in
maintenance, construction and similar occupations
[[Page 22270]]
such as carpenters, electricians, mechanics, plumbers, iron workers,
craftsmen, operating engineers, longshoremen, construction workers,
laborers and other employees who perform work involving repetitive
operations with their hands, physical skill and energy are not exempt
under this section no matter how highly paid they might be.
Sec. 541.602 Salary basis.
(a) General rule. An employee will be considered to be paid on a
``salary basis'' within the meaning of these regulations if the
employee regularly receives each pay period on a weekly, or less
frequent basis, a predetermined amount constituting all or part of the
employee's compensation, which amount is not subject to reduction
because of variations in the quality or quantity of the work performed.
Subject to the exceptions provided in paragraph (b) of this section, an
exempt employee must receive the full salary for any week in which the
employee performs any work without regard to the number of days or
hours worked. Exempt employees need not be paid for any workweek in
which they perform no work. An employee is not paid on a salary basis
if deductions from the employee's predetermined compensation are made
for absences occasioned by the employer or by the operating
requirements of the business. If the employee is ready, willing and
able to work, deductions may not be made for time when work is not
available.
(b) Exceptions. The prohibition against deductions from pay in the
salary basis requirement is subject to the following exceptions:
(1) Deductions from pay may be made when an exempt employee is
absent from work for one or more full days for personal reasons, other
than sickness or disability. Thus, if an employee is absent for two
full days to handle personal affairs, the employee's salaried status
will not be affected if deductions are made from the salary for two
full-day absences. However, if an exempt employee is absent for one and
a half days for personal reasons, the employer can deduct only for the
one full-day absence.
(2) Deductions from pay may be made for absences of one or more
full days occasioned by sickness or disability (including work-related
accidents) if the deduction is made in accordance with a bona fide
plan, policy or practice of providing compensation for loss of salary
occasioned by such sickness or disability. The employer is not required
to pay any portion of the employee's salary for full-day absences for
which the employee receives compensation under the plan, policy or
practice. Deductions for such full-day absences also may be made before
the employee has qualified under the plan, policy or practice, and
after the employee has exhausted the leave allowance thereunder. Thus,
for example, if an employer maintains a short-term disability insurance
plan providing salary replacement for 12 weeks starting on the fourth
day of absence, the employer may make deductions from pay for the three
days of absence before the employee qualifies for benefits under the
plan; for the twelve weeks in which the employee receives salary
replacement benefits under the plan; and for absences after the
employee has exhausted the 12 weeks of salary replacement benefits.
Similarly, an employer may make deductions from pay for absences of one
or more full days if salary replacement benefits are provided under a
State disability insurance law or under a State workers' compensation
law.
(3) While an employer cannot make deductions from pay for absences
of an exempt employee occasioned by jury duty, attendance as a witness
or temporary military leave, the employer can offset any amounts
received by an employee as jury fees, witness fees or military pay for
a particular week against the salary due for that particular week
without loss of the exemption.
(4) Deductions from pay of exempt employees may be made for
penalties imposed in good faith for infractions of safety rules of
major significance. Safety rules of major significance include those
relating to the prevention of serious danger in the workplace or to
other employees, such as rules prohibiting smoking in explosive plants,
oil refineries and coal mines.
(5) Deductions from pay of exempt employees may be made for unpaid
disciplinary suspensions of one or more full days imposed in good faith
for infractions of workplace conduct rules. Such suspensions must be
imposed pursuant to a written policy applicable to all employees. Thus,
for example, an employer may suspend an exempt employee without pay for
three days for violating a generally applicable written policy
prohibiting sexual harassment. Similarly, an employer may suspend an
exempt employee without pay for twelve days for violating a generally
applicable written policy prohibiting workplace violence.
(6) An employer is not required to pay the full salary in the
initial or terminal week of employment. Rather, an employer may pay a
proportionate part of an employee's full salary for the time actually
worked in the first and last week of employment. In such weeks, the
payment of an hourly or daily equivalent of the employee's full salary
for the time actually worked will meet the requirement. However,
employees are not paid on a salary basis within the meaning of these
regulations if they are employed occasionally for a few days, and the
employer pays them a proportionate part of the weekly salary when so
employed.
(7) An employer is not required to pay the full salary for weeks in
which an exempt employee takes unpaid leave under the Family and
Medical Leave Act. Rather, when an exempt employee takes unpaid leave
under the Family and Medical Leave Act, an employer may pay a
proportionate part of the full salary for time actually worked. For
example, if an employee who normally works 40 hours per week uses four
hours of unpaid leave under the Family and Medical Leave Act, the
employer could deduct 10 percent of the employee's normal salary that
week.
(c) When calculating the amount of a deduction from pay allowed
under paragraph (b) of this section, the employer may use the hourly or
daily equivalent of the employee's full weekly salary or any other
amount proportional to the time actually missed by the employee. A
deduction from pay as a penalty for violations of major safety rules
under paragraph (b)(4) of this section may be made in any amount.
Sec. 541.603 Effect of improper deductions from salary.
(a) An employer who makes improper deductions from salary shall
lose the exemption if the facts demonstrate that the employer did not
intend to pay employees on a salary basis. An actual practice of making
improper deductions demonstrates that the employer did not intend to
pay employees on a salary basis. The factors to consider when
determining whether an employer has an actual practice of making
improper deductions include, but are not limited to: the number of
improper deductions, particularly as compared to the number of employee
infractions warranting discipline; the time period during which the
employer made improper deductions; the number and geographic location
of employees whose salary was improperly reduced; the number and
geographic location of managers responsible for taking the improper
deductions; and whether the employer has a clearly communicated policy
permitting or prohibiting improper deductions.
(b) If the facts demonstrate that the employer has an actual
practice of
[[Page 22271]]
making improper deductions, the exemption is lost during the time
period in which the improper deductions were made for employees in the
same job classification working for the same managers responsible for
the actual improper deductions. Employees in different job
classifications or who work for different managers do not lose their
status as exempt employees. Thus, for example, if a manager at a
company facility routinely docks the pay of engineers at that facility
for partial-day personal absences, then all engineers at that facility
whose pay could have been improperly docked by the manager would lose
the exemption; engineers at other facilities or working for other
managers, however, would remain exempt.
(c) Improper deductions that are either isolated or inadvertent
will not result in loss of the exemption for any employees subject to
such improper deductions, if the employer reimburses the employees for
such improper deductions.
(d) If an employer has a clearly communicated policy that prohibits
the improper pay deductions specified in Sec. 541.602(a) and includes
a complaint mechanism, reimburses employees for any improper deductions
and makes a good faith commitment to comply in the future, such
employer will not lose the exemption for any employees unless the
employer willfully violates the policy by continuing to make improper
deductions after receiving employee complaints. If an employer fails to
reimburse employees for any improper deductions or continues to make
improper deductions after receiving employee complaints, the exemption
is lost during the time period in which the improper deductions were
made for employees in the same job classification working for the same
managers responsible for the actual improper deductions. The best
evidence of a clearly communicated policy is a written policy that was
distributed to employees prior to the improper pay deductions by, for
example, providing a copy of the policy to employees at the time of
hire, publishing the policy in an employee handbook or publishing the
policy on the employer's Intranet.
(e) This section shall not be construed in an unduly technical
manner so as to defeat the exemption.
Sec. 541.604 Minimum guarantee plus extras.
(a) An employer may provide an exempt employee with additional
compensation without losing the exemption or violating the salary basis
requirement, if the employment arrangement also includes a guarantee of
at least the minimum weekly-required amount paid on a salary basis.
Thus, for example, an exempt employee guaranteed at least $455 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 $455 each week paid
on a salary basis. Similarly, the exemption is not lost if an exempt
employee who is guaranteed at least $455 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 $500 for any week in which
the employee performs any work, and who normally works four or five
shifts each week, may be paid $150 per shift without violating the
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 of $650 per week who also receives a
commission of one-half percent of all sales in the store or five
percent of the store's profits, which in some weeks may total as much
as, or even more than, the guaranteed salary.
Sec. 541.605 Fee basis.
(a) Administrative and professional employees may be paid on a fee
basis, rather than on a salary basis. An employee will be considered to
be paid on a ``fee basis'' within the meaning of these regulations if
the employee is paid an agreed sum for a single job regardless of the
time required for its completion. These payments resemble piecework
payments with the important distinction that generally a ``fee'' is
paid for the kind of job that is unique rather than for a series of
jobs repeated an indefinite number of times and for which payment on an
identical basis is made over and over again. Payments based on the
number of hours or days worked and not on the accomplishment of a given
single task are not considered payments on a fee basis.
(b) To determine whether the fee payment meets the minimum amount
of salary required for exemption under these regulations, the amount
paid to the employee will be tested by determining the time worked on
the job and whether the fee payment is at a rate that would amount to
at least $455 per week if the employee worked 40 hours. Thus, an artist
paid $250 for a picture that took 20 hours to complete meets the
minimum salary requirement for exemption since earnings at this rate
would yield the artist $500 if 40 hours were worked.
Sec. 541.606 Board, lodging or other facilities.
(a) To qualify for exemption under section 13(a)(1) of the Act, an
employee must earn the minimum salary amount set forth in Sec.
541.600, ``exclusive of board, lodging or other facilities.'' The
phrase ``exclusive of board, lodging or other facilities'' means ``free
and clear'' or independent of any claimed credit for non-cash items of
value that an employer may provide to an employee. Thus, the costs
incurred by an employer to provide an employee with board, lodging or
other facilities may not count towards the minimum salary amount
required for exemption under this part 541. Such separate transactions
are not prohibited between employers and their exempt employees, but
the costs to employers associated with such transactions may not be
considered when determining if an employee has received the full
required minimum salary payment.
(b) Regulations defining what constitutes ``board, lodging, or
other facilities'' are contained in 29 CFR part 531. As described in 29
CFR 531.32, the term ``other facilities'' refers to items similar to
board and lodging, such as meals furnished at company restaurants or
cafeterias or by hospitals, hotels, or restaurants to their employees;
meals, dormitory rooms, and tuition furnished by a college to its
student employees; merchandise furnished at company stores or
commissaries, including articles of food, clothing, and household
effects; housing furnished for dwelling purposes; and transportation
furnished
[[Page 22272]]
to employees for ordinary commuting between their homes and work.
Subpart H--Definitions and Miscellaneous Provisions
Sec. 541.700 Primary duty.
(a) To qualify for exemption under this part, an employee's
``primary duty'' must be the performance of exempt work. The term
``primary duty'' means the principal, main, major or most important
duty that the employee performs. Determination of an employee's primary
duty must be based on all the facts in a particular case, with the
major emphasis on the character of the employee's job as a whole.
Factors to consider when determining the primary duty of an employee
include, but are not limited to, the relative importance of the exempt
duties as compared with other types of duties; the amount of time spent
performing exempt work; the employee's relative freedom from direct
supervision; and the relationship between the employee's salary and the
wages paid to other employees for the kind of nonexempt work performed
by the employee.
(b) The amount of time spent performing exempt work can be a useful
guide in determining whether exempt work is the primary duty of an
employee. Thus, employees who spend more than 50 percent of their time
performing exempt work will generally satisfy the primary duty
requirement. Time alone, however, is not the sole test, and nothing in
this section requires that exempt employees spend more than 50 percent
of their time performing exempt work. Employees who do not spend more
than 50 percent of their time performing exempt duties may nonetheless
meet the primary duty requirement if the other factors support such a
conclusion.
(c) Thus, for example, assistant managers in a retail establishment
who perform exempt executive work such as supervising and directing the
work of other employees, ordering merchandise, managing the budget and
authorizing payment of bills may have management as their primary duty
even if the assistant managers spend more than 50 percent of the time
performing nonexempt work such as running the cash register. However,
if such assistant managers are closely supervised and earn little more
than the nonexempt employees, the assistant managers generally would
not satisfy the primary duty requirement.
Sec. 541.701 Customarily and regularly.
The phrase ``customarily and regularly'' means a frequency that
must be greater than occasional but which, of course, may be less than
constant. Tasks or work performed ``customarily and regularly''
includes work normally and recurrently performed every workweek; it
does not include isolated or one-time tasks.
Sec. 541.702 Exempt and nonexempt work.
The term ``exempt work'' means all work described in Sec. Sec.
541.100, 541.101, 541.200, 541.300, 541.301, 541.302, 541.303, 541.304,
541.400 and 541.500, and the activities directly and closely related to
such work. All other work is considered ``nonexempt.''
Sec. 541.703 Directly and closely related.
(a) Work that is ``directly and closely related'' to the
performance of exempt work is also considered exempt work. The phrase
``directly and closely related'' means tasks that are related to exempt
duties and that contribute to or facilitate performance of exempt work.
Thus, ``directly and closely related'' work may include physical tasks
and menial tasks that arise out of exempt duties, and the routine work
without which the exempt employee's exempt work cannot be performed
properly. Work ``directly and closely related'' to the performance of
exempt duties may also include recordkeeping; monitoring and adjusting
machinery; taking notes; using the computer to create documents or
presentations; opening the mail for the purpose of reading it and
making decisions; and using a photocopier or fax machine. Work is not
``directly and closely related'' if the work is remotely related or
completely unrelated to exempt duties.
(b) The following examples further illustrate the type of work that
is and is not normally considered as directly and closely related to
exempt work:
(1) Keeping time, production or sales records for subordinates is
work directly and closely related to an exempt executive's function of
managing a department and supervising employees.
(2) The distribution of materials, merchandise or supplies to
maintain control of the flow of and expenditures for such items is
directly and closely related to the performance of exempt duties.
(3) A supervisor who spot checks and examines the work of
subordinates to determine whether they are performing their duties
properly, and whether the product is satisfactory, is performing work
which is directly and closely related to managerial and supervisory
functions, so long as the checking is distinguishable from the work
ordinarily performed by a nonexempt inspector.
(4) A supervisor who sets up a machine may be engaged in exempt
work, depending upon the nature of the industry and the operation. In
some cases the setup work, or adjustment of the machine for a
particular job, is typically performed by the same employees who
operate the machine. Such setup work is part of the production
operation and is not exempt. In other cases, the setting up of the work
is a highly skilled operation which the ordinary production worker or
machine tender typically does not perform. In large plants, non-
supervisors may perform such work. However, particularly in small
plants, such work may be a regular duty of the executive and is
directly and closely related to the executive's responsibility for the
work performance of subordinates and for the adequacy of the final
product. Under such circumstances, it is exempt work.
(5) A department manager in a retail or service establishment who
walks about the sales floor observing the work of sales personnel under
the employee's supervision to determine the effectiveness of their
sales techniques, checks on the quality of customer service being
given, or observes customer preferences is performing work which is
directly and closely related to managerial and supervisory functions.
(6) A business consultant may take extensive notes recording the
flow of work and materials through the office or plant of the client;
after returning to the office of the employer, the consultant may
personally use the computer to type a report and create a proposed
table of organization. Standing alone, or separated from the primary
duty, such note-taking and typing would be routine in nature. However,
because this work is necessary for analyzing the data and making
recommendations, the work is directly and closely related to exempt
work. While it is possible to assign note-taking and typing to
nonexempt employees, and in fact it is frequently the practice to do
so, delegating such routine tasks is not required as a condition of
exemption.
(7) A credit manager who makes and administers the credit policy of
the employer, establishes credit limits for customers, authorizes the
shipment of orders on credit, and makes decisions on whether to exceed
credit limits would be performing work exempt under Sec. 541.200. Work
that is directly and closely related to these exempt duties may include
checking the status of accounts to determine whether the credit limit
would be exceeded by the shipment of a new order, removing credit
reports from the files for analysis,
[[Page 22273]]
and writing letters giving credit data and experience to other
employers or credit agencies.
(8) A traffic manager in charge of planning a company's
transportation, including the most economical and quickest routes for
shipping merchandise to and from the plant, contracting for common-
carrier and other transportation facilities, negotiating with carriers
for adjustments for damages to merchandise, and making the necessary
rearrangements resulting from delays, damages or irregularities in
transit, is performing exempt work. If the employee also spends part of
the day taking telephone orders for local deliveries, such order-taking
is a routine function and is not directly and closely related to the
exempt work.
(9) An example of work directly and closely related to exempt
professional duties is a chemist performing menial tasks such as
cleaning a test tube in the middle of an original experiment, even
though such menial tasks can be assigned to laboratory assistants.
(10) A teacher performs work directly and closely related to exempt
duties when, while taking students on a field trip, the teacher drives
a school van or monitors the students' behavior in a restaurant.
Sec. 541.704 Use of manuals.
The use of manuals, guidelines or other established procedures
containing or relating to highly technical, scientific, legal,
financial or other similarly complex matters that can be understood or
interpreted only by those with advanced or specialized knowledge or
skills does not preclude exemption under section 13(a)(1) of the Act or
the regulations in this part. Such manuals and procedures provide
guidance in addressing difficult or novel circumstances and thus use of
such reference material would not affect an employee's exempt status.
The section 13(a)(1) exemptions are not available, however, for
employees who simply apply well-established techniques or procedures
described in manuals or other sources within closely prescribed limits
to determine the correct response to an inquiry or set of
circumstances.
Sec. 541.705 Trainees.
The executive, administrative, professional, outside sales and
computer employee exemptions do not apply to employees training for
employment in an executive, administrative, professional, outside sales
or computer employee capacity who are not actually performing the
duties of an executive, administrative, professional, outside sales or
computer employee.
Sec. 541.706 Emergencies.
(a) An exempt employee will not lose the exemption by performing
work of a normally nonexempt nature because of the existence of an
emergency. Thus, when emergencies arise that threaten the safety of
employees, a cessation of operations or serious damage to the
employer's property, any work performed in an effort to prevent such
results is considered exempt work.
(b) An ``emergency'' does not include occurrences that are not
beyond control or for which the employer can reasonably provide in the
normal course of business. Emergencies generally occur only rarely, and
are events that the employer cannot reasonably anticipate.
(c) The following examples illustrate the distinction between
emergency work considered exempt work and routine work that is not
exempt work:
(1) A mine superintendent who pitches in after an explosion and
digs out workers who are trapped in the mine is still a bona fide
executive.
(2) Assisting nonexempt employees with their work during periods of
heavy workload or to handle rush orders is not exempt work.
(3) Replacing a nonexempt employee during the first day or partial
day of an illness may be considered exempt emergency work depending on
factors such as the size of the establishment and of the executive's
department, the nature of the industry, the consequences that would
flow from the failure to replace the ailing employee immediately, and
the feasibility of filling the employee's place promptly.
(4) Regular repair and cleaning of equipment is not emergency work,
even when necessary to prevent fire or explosion; however, repairing
equipment may be emergency work if the breakdown of or damage to the
equipment was caused by accident or carelessness that the employer
could not reasonably anticipate.
Sec. 541.707 Occasional tasks.
Occasional, infrequently recurring tasks that cannot practicably be
performed by nonexempt employees, but are the means for an exempt
employee to properly carry out exempt functions and responsibilities,
are considered exempt work. The following factors should be considered
in determining whether such work is exempt work: Whether the same work
is performed by any of the exempt employee's subordinates;
practicability of delegating the work to a nonexempt employee; whether
the exempt employee performs the task frequently or occasionally; and
existence of an industry practice for the exempt employee to perform
the task.
Sec. 541.708 Combination exemptions.
Employees who perform a combination of exempt duties as set forth
in the regulations in this part for executive, administrative,
professional, outside sales and computer employees may qualify for
exemption. Thus, for example, an employee whose primary duty involves a
combination of exempt administrative and exempt executive work may
qualify for exemption. In other words, work that is exempt under one
section of this part will not defeat the exemption under any other
section.
Sec. 541.709 Motion picture producing industry.
The requirement that the employee be paid ``on a salary basis''
does not apply to an employee in the motion picture producing industry
who is compensated at a base rate of at least $695 a week (exclusive of
board, lodging, or other facilities). Thus, an employee in this
industry who is otherwise exempt under subparts B, C or D of this part,
and who is employed at a base rate of at least $695 a week is exempt if
paid a proportionate amount (based on a week of not more than 6 days)
for any week in which the employee does not work a full workweek for
any reason. Moreover, an otherwise exempt employee in this industry
qualifies for exemption if the employee is employed at a daily rate
under the following circumstances:
(a) The employee is in a job category for which a weekly base rate
is not provided and the daily base rate would yield at least $695 if 6
days were worked; or
(b) The employee is in a job category having a weekly base rate of
at least $695 and the daily base rate is at least one-sixth of such
weekly base rate.
Sec. 541.710 Employees of public agencies.
(a) An employee of a public agency who otherwise meets the salary
basis requirements of Sec. 541.602 shall not be disqualified from
exemption under Sec. Sec. 541.100, 541.200, 541.300 or 541.400 on the
basis that such employee is paid according to a pay system established
by statute, ordinance or regulation, or by a policy or practice
established pursuant to principles of public accountability, under
which the employee accrues personal leave and sick leave and which
requires the public agency employee's pay to be reduced or such
employee to be placed on leave without pay for absences for personal
reasons or because
[[Page 22274]]
of illness or injury of less than one work-day when accrued leave is
not used by an employee because:
(1) Permission for its use has not been sought or has been sought
and denied;
(2) Accrued leave has been exhausted; or
(3) The employee chooses to use leave without pay.
(b) Deductions from the pay of an employee of a public agency for
absences due to a budget-required furlough shall not disqualify the
employee from being paid on a salary basis except in the workweek in
which the furlough occurs and for which the employee's pay is
accordingly reduced.
[FR Doc. 04-9016 Filed 4-20-04; 10:40 am]
BILLING CODE 4510-27-P