[Federal Register Volume 88, Number 173 (Friday, September 8, 2023)]
[Proposed Rules]
[Pages 62152-62240]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-19032]
[[Page 62151]]
Vol. 88
Friday,
No. 173
September 8, 2023
Part II
Department of Labor
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Wage and Hour Division
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29 CFR Part 541
Defining and Delimiting the Exemptions for Executive, Administrative,
Professional, Outside Sales, and Computer Employees; Proposed Rule
Federal Register / Vol. 88, No. 173 / Friday, September 8, 2023 /
Proposed Rules
[[Page 62152]]
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DEPARTMENT OF LABOR
Wage and Hour Division
29 CFR Part 541
RIN 1235-AA39
Defining and Delimiting the Exemptions for Executive,
Administrative, Professional, Outside Sales, and Computer Employees
AGENCY: Wage and Hour Division, Department of Labor.
ACTION: Notice of proposed rulemaking.
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SUMMARY: In this proposal, the Department of Labor (Department) is
updating and revising the regulations issued under the Fair Labor
Standards Act implementing the exemptions from minimum wage and
overtime pay requirements for executive, administrative, professional,
outside sales, and computer employees. Significant proposed revisions
include increasing the standard salary level to the 35th percentile of
weekly earnings of full-time salaried workers in the lowest-wage Census
Region (currently the South)--$1,059 per week ($55,068 annually for a
full-year worker)--and increasing the highly compensated employee total
annual compensation threshold to the annualized weekly earnings of the
85th percentile of full-time salaried workers nationally ($143,988).
The Department is also proposing to add to the regulations an automatic
updating mechanism that would allow for the timely and efficient
updating of all the earnings thresholds.
DATES: Interested persons are invited to submit written comments on
this notice of proposed rulemaking (NPRM) on or before November 7,
2023.
ADDRESSES: You may submit comments, identified by Regulatory
Information Number (RIN) 1235-AA39, by either of the following methods:
Electronic Comments: Submit comments through the Federal
eRulemaking Portal at https://www.regulations.gov. Follow the
instructions for submitting comments.
Mail: Address written submissions to: Division of
Regulations, Legislation, and Interpretation, Wage and Hour Division,
U.S. Department of Labor, Room S-3502, 200 Constitution Avenue NW,
Washington, DC 20210.
Instructions: Response to this NPRM is voluntary. The Department
requests that no business proprietary information, copyrighted
information, or personally identifiable information be submitted in
response to this NPRM. Commenters submitting file attachments on
https://www.regulations.gov are advised that uploading text-recognized
documents--i.e., documents in a native file format or documents which
have undergone optical character recognition (OCR)--enable staff at the
Department to more easily search and retrieve specific content included
in your comment for consideration.
Anyone who submits a comment (including duplicate comments) should
understand and expect that the comment, including any personal
information provided, will become a matter of public record and will be
posted without change to https://www.regulations.gov. The Department
posts comments gathered and submitted by a third-party organization as
a group under a single document ID number on https://www.regulations.gov. All comments must be received by 11:59 p.m. ET on
November 7, 2023, for consideration in this rulemaking; comments
received after the comment period closes will not be considered.
The Department strongly recommends that commenters submit their
comments electronically via https://www.regulations.gov to ensure
timely receipt prior to the close of the comment period, as the
Department continues to experience delays in the receipt of mail.
Please submit only one copy of your comments by only one method.
Docket: For access to the docket to read background documents or
comments, go to the Federal eRulemaking Portal at https://www.regulations.gov.
FOR FURTHER INFORMATION CONTACT: Amy DeBisschop, Director, Division of
Regulations, Legislation, and Interpretation, Wage and Hour Division,
U.S. Department of Labor, Room S-3502, 200 Constitution Avenue NW,
Washington, DC 20210; telephone: (202) 693-0406 (this is not a toll-
free number). Alternative formats are available upon request by calling
1-866-487-9243. If you are deaf, hard of hearing, or have a speech
disability, please dial 7-1-1 to access telecommunications relay
services.
Questions of interpretation or enforcement of the agency's existing
regulations may be directed to the nearest Wage and Hour Division (WHD)
district office. Locate the nearest office by calling the WHD's toll-
free help line at (866) 4US-WAGE ((866) 487-9243) between 8 a.m. and 5
p.m. in your local time zone, or log onto WHD's website at https://www.dol.gov/agencies/whd/contact/local-offices for a nationwide listing
of WHD district and area offices.
SUPPLEMENTARY INFORMATION:
I. Executive Summary
The Fair Labor Standards Act (FLSA or Act) requires covered
employers to pay employees a minimum wage and, for employees who work
more than 40 hours in a week, overtime premium pay of at least 1.5
times the employee's regular rate of pay. Section 13(a)(1) of the FLSA,
which was included in the original Act in 1938, exempts from the
minimum wage and overtime pay requirements ``any employee employed in a
bona fide executive, administrative, or professional capacity.'' \1\
The exemption is commonly referred to as the ``white-collar'' or
executive, administrative, or professional (EAP) exemption. The statute
delegates to the Secretary of Labor (Secretary) the authority to define
and delimit the terms of the exemption. Since 1940, the regulations
implementing the EAP exemption have generally required that each of the
following three tests must be met: (1) the employee must be paid a
predetermined and fixed salary that is not subject to reduction because
of variations in the quality or quantity of work performed (the salary
basis test); (2) the amount of salary paid must meet a minimum
specified amount (the salary level test); and (3) the employee's job
duties must primarily involve executive, administrative, or
professional duties as defined by the regulations (the duties test).
The employer bears the burden of establishing the applicability of the
exemption.\2\ Job titles and job descriptions do not determine EAP
exemption status, nor does merely paying an employee a salary.
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\1\ 29 U.S.C. 213(a)(1).
\2\ See, e.g., Idaho Sheet Metal Works, Inc. v. Wirtz, 383 U.S.
190, 209 (1966); Walling v. Gen. Indus. Co., 330 U.S. 545, 547-48
(1947).
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Consistent with its broad authority under the statute, the
Department is proposing compensation thresholds that will work
effectively with the standard duties test and the highly compensated
employee duties test to better identify who is employed in a bona fide
EAP capacity. Specifically, the Department is proposing to set the
standard salary level at the 35th percentile of weekly earnings of
full-time salaried workers in the lowest-wage Census Region ($1,059 per
week or $55,068 annually for a full-year worker) \3\ and the highly
[[Page 62153]]
compensated employee total annual compensation threshold at the
annualized weekly earnings of the 85th percentile of full-time salaried
workers nationally ($143,988). These proposed compensation thresholds
are firmly grounded in the authority that the FLSA grants to the
Secretary to define and delimit the EAP exemption, a power the
Secretary has exercised for over 80 years.
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\3\ In determining earnings percentiles in its part 541
rulemakings since 2004, the Department has consistently looked at
nonhourly earnings for full-time workers from the Current Population
Survey (CPS) Merged Outgoing Rotation Group (MORG) data collected by
the Bureau of Labor Statistics (BLS). As explained in section
VII.B.5, the Department considers data representing compensation
paid to nonhourly workers to be an appropriate proxy for
compensation paid to salaried workers, although for simplicity the
Department uses the terms salaried and nonhourly interchangeably in
this proposal. The Department relied on CPS MORG data for calendar
year 2022 to develop this NPRM, including to determine the proposed
salary level. In the final rule, the Department will use the most
recent data available, which will change the dollar figures. For
example, if after consideration of comments received, the final rule
were to adopt the proposed salary level of the 35th percentile of
weekly earnings of full-time salaried workers in the lowest-wage
Census region (currently the South), in the fourth quarter of 2023
the Department projects that the salary threshold could be $1,140
per week or $59,285 for a full-year worker. To calculate this, the
Department applied the Congressional Budget Office projections of
the employment cost index for wages and salaries of workers in
private industry growing by 4.5 percent in 2023 to the 35th
percentile of weekly earnings of full-time salaried workers in the
South from the fourth quarter of 2022, which was $1,091 per week or
$56,732 for a full-year worker. As an additional example, in the
first quarter of 2024, the Department projects that the salary
threshold could be $1,158 per week or $60,209 for a full-year
worker; the Department applied the 4.5 percent growth rate to the
35th percentile of weekly earnings of full-time salaried workers in
the South from the first quarter of 2023, which was $1,108 per week
or $57,616 for a full-year worker.
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The proposed increase in the standard salary level to the 35th
percentile of weekly earnings of full-time salaried workers in the
lowest-wage Census Region better fulfills the Department's obligation
under the statute to define and delimit who is employed in a bona fide
EAP capacity. Upon reflection, the Department has determined that its
rulemakings over the past 20 years, since the Department simplified the
test for the EAP exemption in 2004 by replacing the historic two-test
system for determining exemption status with the single standard test,
have vacillated between two distinct approaches: One used in rules in
2004 \4\ and 2019,\5\ that exempted lower-paid workers who historically
had been entitled to overtime because they did not meet the more
detailed duties requirements of the test that was in place from 1949 to
2004; and one used in a rule in 2016,\6\ that restored overtime
protection to lower-paid white-collar workers who performed significant
amounts of nonexempt work but also removed from the exemption other
lower-paid workers who historically were exempt under the prior test,
an approach that received unfavorable treatment in litigation.\7\
Having grappled with these different approaches to setting the standard
salary level, this proposal retains the simplified standard test, the
benefits of which were recognized in the Department's 2004, 2016 and
2019 rulemakings,\8\ while updating the standard salary level to
account for earnings growth since the 2019 rule and adjusting the
salary level methodology based on the lessons learned in recent
rulemakings.
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\4\ 69 FR 22121 (April 23, 2004).
\5\ 84 FR 51230 (Sept. 27, 2019).
\6\ 81 FR 32391 (May 23, 2016).
\7\ The Department never enforced the 2016 rule because it was
invalidated by the U.S. District Court for the Eastern District of
Texas. See Nevada v. U.S. Department of Labor, 275 F.Supp.3d 795
(E.D. Tex. 2017).
\8\ See 84 FR 51243-45; 81 FR 32414, 32444-45; 69 FR 22126-28.
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The Department's proposed standard salary level will, in
combination with the standard duties test, better define and delimit
which employees are employed in a bona fide EAP capacity. By setting a
salary level above what the methodology used in 2004 and 2019 would
produce using current data, the proposal would ensure that, consistent
with the Department's historical approach to the exemption, fewer
lower-paid white-collar employees who perform significant amounts of
nonexempt work are included in the exemption. At the same time, by
setting the salary level below the methodology used in 2016, the
proposal would allow employers to continue to use the exemption for
many lower-paid white-collar employees who were made exempt under the
2004 standard duties test. The combined effect would be a more
effective test for determining who is employed in a bona fide EAP
capacity.
The Department is also proposing to increase the salary levels in
the U.S territories, which have not been changed since 2004.
Traditionally, the Department has set special salary levels only for
territories that were not subject to the Federal minimum wage. In the
2004 rule, the Department ended the use of special salary levels for
Puerto Rico and the U.S. Virgin Islands, as they had become subject to
the Federal minimum wage since the Department last updated the part 541
salary levels, and set a special salary level only for American Samoa,
which remained not subject to the Federal minimum wage.\9\ In the 2019
rule, however, the Department elected to preserve the salary level set
in 2004 ($455 per week) for employees in Puerto Rico, Guam, the U.S.
Virgin Islands, and the Commonwealth of the Northern Mariana Islands
(CNMI) instead of applying the new standard salary level of $684 per
week that applied to employees in the 50 states and the District of
Columbia.\10\ In doing so, the Department for the first time set a
special salary level for employees in territories that were subject to
the Federal minimum wage. In accordance with the Department's
traditional practice, and in the interest of applying the FLSA
uniformly to areas subject to the Federal minimum wage, the Department
is proposing to apply the standard salary level to employees in all
territories that are subject to the Federal minimum wage and to
maintain a special salary level only for employees in American Samoa,
because that territory remains subject to special minimum wage rates.
The Department is also proposing to update the special base rate for
employees in the motion picture industry.
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\9\ 69 FR 22172.
\10\ 84 FR 51246.
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The Department is also proposing to update the earnings threshold
for the highly compensated employee (HCE) exemption, which was added to
the regulations in 2004 and applies to certain highly compensated
employees and combines a much higher annual compensation requirement
with a minimal duties test. The HCE test's primary purpose is to serve
as a streamlined alternative for very highly compensated employees
because a very high level of compensation is a strong indicator of an
employee's exempt status, thus eliminating the need for a detailed
duties analysis.\11\ In this rulemaking, the Department is proposing to
increase the HCE total annual compensation threshold to the annualized
weekly earnings amount of the 85th percentile of full-time salaried
workers nationally ($143,988). The proposed HCE threshold is high
enough to exclude employees who are not ``at the very top of [the]
economic ladder'' \12\ and would guard against the unintended exemption
of workers who are not bona fide EAP employees, including those in
high-income regions and industries.
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\11\ See 69 FR 22173-74.
\12\ Id. at 22174.
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In each of its part 541 rulemakings since 2004, the Department
recognized the need to regularly update the earnings thresholds to
ensure that they remain effective in helping differentiate between
exempt and nonexempt employees. As the Department observed in these
rulemakings, even a well-calibrated salary level that is not kept up to
date becomes obsolete as wages for nonexempt workers increase over
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time.\13\ Long intervals between rulemakings have resulted in eroded
earnings thresholds based on outdated earnings data that were ill-
equipped to help identify bona fide EAP employees.
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\13\ 84 FR 51250-51; 81 FR 32430; see also 69 FR 22212, 22164.
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To address this problem, in the 2004 and 2019 rules the Department
expressed its commitment to regularly updating the salary levels.\14\
In the 2016 rule, it included a regulatory provision to automatically
update the salary levels.\15\ Based on its long experience with
updating the salary levels, the Department has determined that adopting
a regulatory provision for automatically updating the salary levels,
with an exception for pausing future updates under certain conditions,
is the most viable and efficient way to ensure the EAP exemption
earnings thresholds keep pace with changes in employee pay and thus
remain effective in helping determine exemption status. The proposed
automatic updating mechanism would allow for the timely, predictable,
and efficient updating of the earnings thresholds.
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\14\ 69 FR 22171; 84 FR 51251-52.
\15\ 81 FR 32430.
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The Department estimates that in Year 1, 3.4 million currently
exempt employees who earn at least the current salary level of $684 per
week but less than the proposed standard salary level of $1,059 per
week would, absent the employer paying them at or above the new salary
level, gain overtime protection. For more than half of these employees,
this proposal would restore overtime protections that the employees
would have been entitled to under every rule prior to the 2019 rule.
The Department also estimates that 248,900 employees who are currently
exempt under the HCE test would be affected by the proposed increase in
the HCE total annual compensation level. Absent the employer paying
these employees at or above the new HCE level, the exemption status of
these employees would turn on the standard duties test (which these
employees do not meet) rather than the minimal duties test that applies
to employees earning at or above the HCE threshold. The economic
analysis of the proposed rule quantifies the direct costs resulting
from the rule: (1) regulatory familiarization costs; (2) adjustment
costs; and (3) managerial costs. The Department estimates that total
annualized direct employer costs over the first 10 years would be $664
million with a 7 percent discount rate. This rulemaking will also give
employees higher earnings in the form of transfers of income from
employers to employees. The Department estimates annualized transfers
would be $1.3 billion, with a 7 percent discount rate.
II. Background
A. The FLSA
The FLSA generally requires covered employers to pay employees at
least the Federal minimum wage (currently $7.25 an hour) for all hours
worked, and overtime premium pay of one and one-half times the regular
rate of pay for all hours worked over 40 in a workweek.\16\ However,
section 13(a)(1) of the FLSA, codified at 29 U.S.C. 213(a)(1), 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 [an] outside salesman (as such
terms are defined and delimited from time to time by regulations of the
Secretary [of Labor], subject to the provisions of [the Administrative
Procedures Act] . . .).'' The FLSA does not define the terms
``executive,'' ``administrative,'' ``professional,'' or ``outside
salesman,'' but rather delegates that task to the Secretary. Pursuant
to Congress's grant of rulemaking authority, since 1938 the Department
has issued regulations at 29 CFR part 541 to define and delimit the
scope of the section 13(a)(1) exemption.\17\ Because Congress
explicitly delegated to the Secretary the authority to define and
delimit the specific terms of the exemption, the regulations so issued
have the binding effect of law.\18\
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\16\ See 29 U.S.C. 206(a), 207(a).
\17\ See Helix Energy Solutions, Group Inc. v. Hewitt, 143 S.Ct.
677, 682 (2023) (``Under [section 13(a)(1)], the Secretary sets out
a standard for determining when an employee is a bona fide
executive.'').
\18\ See Betterton v. Francis, 432 U.S. 416, 425 n.9 (1977).
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The exemption for executive, administrative, or professional
employees (EAP exemption) was included in the original FLSA legislation
passed in 1938.\19\ It was modeled after similar provisions contained
in the earlier National Industrial Recovery Act of 1933 (NIRA) and
state law precedents.\20\ As the Department has explained in prior
rules, the EAP exemption is premised on two policy considerations.
First, the type of work exempt employees perform is difficult to
standardize to any time frame and cannot be easily spread to other
workers after 40 hours in a week, making enforcement of the overtime
provisions difficult and generally precluding the potential job
expansion intended by the FLSA's time-and-a-half overtime premium.\21\
Second, exempted workers typically earn salaries well above the minimum
wage and are presumed to enjoy other privileges to compensate them for
their long hours of work. These include, for example, above-average
fringe benefits and better opportunities for advancement, setting them
apart from nonexempt workers entitled to overtime pay.\22\
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\19\ See Fair Labor Standards Act of 1938, Public Law 75-718,
13(a)(1), 52 Stat. 1060, 1067 (June 25, 1938).
\20\ See National Industrial Recovery Act, Public Law 73-67, ch.
90, title II, 206(2), 48 Stat 195, 204-5 (June 16, 1933).
\21\ See Report of the Minimum Wage Study Commission, Volume IV,
pp. 236 and 240 (June 1981).
\22\ See id.
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Although section 13(a)(1) exempts covered employees from both the
FLSA's minimum wage and overtime requirements, its most significant
impact is its removal of these employees from the Act's overtime
protections. An employer may employ such employees for any number of
hours in the workweek without paying the minimum hourly wage or an
overtime premium. Some state laws have stricter exemption standards
than those described above. The FLSA does not preempt any such stricter
state standards. If a state establishes a higher standard than the
provisions of the FLSA, the higher standard applies in that state.\23\
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\23\ See 29 U.S.C. 218(a).
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B. Regulatory History
The Department's part 541 regulations have consistently looked to
the duties performed by the employee and the salary paid by the
employer in determining whether an individual is employed in a bona
fide executive, administrative, or professional capacity. Since 1940,
the Department's implementing regulations have generally required each
of three tests to be met for the exemption to apply: (1) the employee
must be paid a predetermined and fixed salary that is not subject to
reduction because of variations in the quality or quantity of work
performed (the salary basis test); (2) the amount of salary paid must
meet a minimum specified amount (the salary level test); and (3) the
employee's job duties must primarily involve executive, administrative,
or professional duties as defined by the regulations (the duties test).
1. The Part 541 Regulations From 1938 to 2004
The Department issued the first version of the part 541 regulations
in October 1938.\24\ The Department's initial regulations included a
$30 per
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week compensation requirement for executive and administrative
employees, as well as a duties test that prohibited employers from
using the exemption for executive, administrative, and professional
employees who performed ``[a] substantial amount of work of the same
nature as that performed by nonexempt employees of the employer.'' \25\
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\24\ 3 FR 2518 (Oct. 20, 1938).
\25\ Id.
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The Department issued the first update to its part 541 regulations
in October 1940,\26\ following extensive public hearings.\27\ Among
other changes, the 1940 update added the salary basis requirement to
the tests for executive, administrative, and professional employees;
newly applied the salary level requirement to professional employees;
and introduced a 20 percent cap on nonexempt work for executive and
professional employees, replacing language which prohibited the
performance of a ``substantial amount'' of nonexempt work.\28\
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\26\ 5 FR 4077 (Oct. 15, 1940).
\27\ See ``Executive, Administrative, Professional . . . Outside
Salesman'' Redefined, Wage and Hour Division, U.S. Department of
Labor, Report and Recommendations of the Presiding Officer [Harold
Stein] at Hearings Preliminary to Redefinition (Oct. 10, 1940)
(Stein Report).
\28\ 5 FR 4077.
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The Department conducted further hearings on the part 541
regulations in 1947,\29\ and issued revised regulations in December
1949.\30\ The 1949 rulemaking updated the salary levels set in 1940 and
introduced a second, less stringent duties test for higher paid
executive, administrative, and professional employees.\31\ Thus,
beginning in 1949, the part 541 regulations contained two tests for the
EAP exemption. These tests became known as the ``long'' test and the
``short'' test. The long test paired a lower earnings threshold with a
more rigorous duties test that generally limited the performance of
nonexempt work to no more than 20 percent of an employee's hours worked
in a workweek. The short test paired a higher salary level and a less
rigorous duties test, with no specified limit on the performance of
nonexempt work. From 1958 until 2004, the regulations in place
generally set the long test salary level to exclude from exemption
approximately the lowest-paid 10 percent of salaried white-collar
employees who performed EAP duties in lower wage areas and industries
and set the short test salary level significantly higher. The salary
and duties components of each test complemented each other, and the two
tests worked in combination to determine whether an individual was
employed in a bona fide EAP capacity. Lower-paid employees who met the
long test salary level but did not meet the higher short test salary
level were subject to the long duties test which ensured that employees
were, in fact, employed in a bona fide EAP capacity by limiting the
amount of time they could spend on nonexempt work. Employees who met
the higher short test salary level were considered to be more likely to
meet the requirements of the long duties test and thus were subject to
a short-cut duties test for determining exemption status.
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\29\ See Report and Recommendations on Proposed Revisions of
Regulations, Part 541, by Harry Weiss, Presiding Officer, Wage and
Hour and Public Contracts Divisions, U.S. Department of Labor (June
30, 1949) (Weiss Report).
\30\ See 14 FR 7705 (Dec. 24, 1949).
\31\ Id. at 7706.
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Additional changes to the regulations, including salary level
updates, were made in 1954,\32\ 1958,\33\ 1961,\34\ 1963,\35\ 1967,\36\
1970,\37\ 1973,\38\ and 1975.\39\ The Department revised the part 541
regulations twice in 1992 but did not update the salary threshold at
that time.\40\ None of these updates changed the basic structure of the
long and short tests.
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\32\ 19 FR 4405 (July 17, 1954).
\33\ 23 FR 8962 (Nov. 18, 1958).
\34\ 26 FR 8635 (Sept. 15, 1961).
\35\ 28 FR 9505 (Aug. 30, 1963).
\36\ 32 FR 7823 (May 30, 1967).
\37\ 35 FR 883 (Jan. 22, 1970).
\38\ 38 FR 11390 (May 7, 1973).
\39\ 40 FR 7091 (Feb. 19, 1975).
\40\ The Department first created a limited exception from the
salary basis test for public employees. 57 FR 37677 (Aug. 19, 1992).
The Department also implemented a 1990 law requiring it to
promulgate regulations permitting employees in certain computer-
related occupations to qualify as exempt under section 13(a)(1) of
the FLSA. 57 FR 46744 (Oct. 9, 1992); see Public Law 101-583, sec.
2, 104 Stat. 2871 (Nov. 15, 1990).
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The Department described the salary levels adopted in the 1975 rule
as ``interim rates,'' intended to ``be in effect for an interim period
pending the completion of a study [of worker earnings] by the Bureau of
Labor Statistics . . . in 1975.'' \41\ However, those salary levels
remained in effect until 2004. The utility of the salary levels in
helping to define the EAP exemption decreased as wages rose during this
period. In 1991, the Federal minimum wage rose to $4.25 per hour,\42\
which for a 40-hour week exceeded the lower long test salary level of
$155 per week for executive and administrative employees and equaled
the long test salary level of $170 per week for professional employees.
In 1997, the Federal minimum wage rose to $5.15 per hour,\43\ which for
a 40-hour week not only exceeded the long test salary levels, but also
was close to the higher short test salary level of $250 per week.
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\41\ 40 FR 7091.
\42\ See Public Law 101-157, sec. 2, 103 Stat. 938 (Nov. 17,
1989).
\43\ See Public Law 104-188, sec. 2104(b), 110 Stat 1755 (Aug.
20, 1996).
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2. Part 541 Regulations From 2004 to 2019
The Department issued a final rule in April 2004 (the 2004 rule)
\44\ that updated the part 541 salary levels for the first time since
1975 and made several significant changes to the regulations. Most
significantly, the Department eliminated the separate long and short
tests and replaced them with a single standard test. The Department set
the standard salary level at $455 per week, which was equivalent to the
20th percentile of weekly earnings of full-time salaried workers in the
lowest-wage Census Region (the South) and in the retail industry
nationally. The Department paired the new standard salary level test
with a new standard duties test for executive, administrative, and
professional employees, respectively, which was substantially
equivalent to the short duties test used in the two-test system.\45\
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\44\ 69 FR 22122.
\45\ See id. at 22192-93 (acknowledging ``de minimis differences
in the standard duties tests compared to the short duties tests'').
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In the 2004 rule, the Department acknowledged that the switch from
a two-test system to a one-test system was a significant change in the
regulatory structure,\46\ and noted that the shift to setting the
salary level based on ``the lowest 20 percent of salaried employees in
the South, rather than the lowest 10 percent'' of EAP employees was
made, in part, ``because of the proposed change from the `short' and
`long' test structure.'' \47\ The Department asserted that elimination
of the long duties test was warranted because ``the relatively small
number of employees currently earning from $155 to $250 per week, and
thus tested for exemption under the `long' duties test, will gain
stronger protections under the increased minimum salary level which . .
. guarantees overtime protection for all employees earning less than
$455 per week.'' \48\ The Department acknowledged, however, that the
new standard salary level was comparable to the long test salary level
used in the two-test system (i.e., if the Department's long test salary
level methodology had been applied to contemporaneous
[[Page 62156]]
data).\49\ Thus, employees who would have been subject to the more
rigorous long duties test if the two-test system had been updated were
subject to the equivalent of the short duties test under the new
standard test. For example, under the 2004 rule's standard test, an
employee who earned just over the rule's standard salary threshold of
$455 in weekly salary, and who met the standard duties test, was exempt
even if they would not have met the previous long duties test because
they spent substantial amounts of time performing nonexempt work. If
the Department had instead retained the two-test system and updated the
long test salary level to $455, that same employee would have been
nonexempt because they would have been subject to the more rigorous
duties analysis due to their lower salary.
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\46\ See id. at 22126-28.
\47\ Id. at 22167.
\48\ Id. at 22126.
\49\ Id. at 22169. The Department last set the long and short
test salary levels in 1975. Throughout this proposal, when the
Department refers to the relationship of salary levels set in 2004,
2016, and 2019 to equivalent long or short test salary levels, it is
referring to salary levels based on current (at the relevant point
in time) data that, in the case of the long test salary level, would
exclude the lowest-paid 10 percent of exempt EAP employees in low-
wage industries and areas and, in the case of the short test salary
level, would be 149 percent of a contemporaneous long test salary
level. The short test salary ratio of 149 percent is the simple
average of the 15 historical ratios of the short test salary level
to the long test salary level. See 81 FR 32467 & n.149.
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In the 2004 rule, the Department also created a new test for
exemption for certain highly compensated employees.\50\ The HCE test
paired a minimal duties requirement--customarily and regularly
performing at least one of the exempt duties or responsibilities of an
EAP employee--with a high total annual compensation requirement of
$100,000, a threshold that exceeded the annual earnings of
approximately 93.7 percent of salaried workers nationwide.\51\ The
Department also ended the use of special salary levels for Puerto Rico
and the U.S. Virgin Islands, as they had become subject to the Federal
minimum wage since the Department last updated the part 541 salary
levels in 1975, and set a special salary level only for American Samoa,
which remained not subject to the Federal minimum wage.\52\ The
Department expressed its intent ``in the future to update the salary
levels on a more regular basis, as it did prior to 1975.'' \53\
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\50\ 69 FR 22169.
\51\ See id. (Table 3).
\52\ Id. at 22172.
\53\ Id. at 22171.
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In May 2016, the Department issued a final rule (the 2016 rule)
that retained the single test system and the standard duties test but
increased the standard salary level and provided for regular updating.
The 2016 rule (1) increased the standard salary level from the 2004
salary level of $455 to $913 per week, the 40th percentile of weekly
earnings of full-time salaried workers in the lowest-wage Census Region
(the South); \54\ (2) increased the HCE test total annual compensation
amount from $100,000 to $134,004 per year; \55\ (3) increased the
special salary level for EAP workers in American Samoa; \56\ (4)
allowed employers, for the first time, to credit nondiscretionary
bonuses, incentive payments, and commissions paid at least quarterly
towards up to 10 percent of the standard salary level; \57\ and (5)
added a mechanism to automatically update the part 541 earnings
thresholds every 3 years.\58\ The standard salary level was set at the
low end of the historical range of short test salary levels used in the
pre-2004 two-test system.\59\ The 2016 rule did not change any of the
standard duties test criteria.\60\ The 2016 rule was scheduled to take
effect on December 1, 2016.
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\54\ 81 FR 32550.
\55\ Id.
\56\ Id. at 32551.
\57\ See id.
\58\ See id. at 32550-51 (Sec. 541.602(a)(3)).
\59\ Id. at 32405 (noting the historical range of short test
salary levels was $889 to $1,231 based on an application of the
short test methodology to contemporaneous data).
\60\ Id. at 32444.
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On November 22, 2016, the U.S. District Court for the Eastern
District of Texas issued an order preliminarily enjoining the
Department from implementing and enforcing the 2016 rule.\61\ On August
31, 2017, the district court granted summary judgment to the plaintiff
challengers, holding that the 2016 rule's salary level exceeded the
Department's authority and invalidating the rule.\62\ On October 30,
2017, the Department of Justice appealed to the U.S. Court of Appeals
for the Fifth Circuit, which subsequently granted the Department's
motion to hold that appeal in abeyance while the Department of Labor
undertook further rulemaking. Following an NPRM published on March 22,
2019,\63\ the Department published a final rule on September 27, 2019
(the 2019 rule),\64\ which formally rescinded and replaced the 2016
rule.
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\61\ See Nevada v. U.S. Department of Labor, 218 F. Supp. 3d 520
(E.D. Tex. 2016).
\62\ See Nevada, 275 F.Supp.3d 795 (E.D. Tex. 2017).
\63\ See 84 FR 10900 (Mar. 22, 2019).
\64\ See 84 FR 51230.
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The 2019 rule (1) raised the standard salary level from the 2004
salary level of $455 to $684 per week, the 20th percentile of weekly
earnings of full-time salaried workers in the lowest-wage Census Region
(the South) and in the retail industry nationally; (2) increased the
HCE total annual compensation threshold from $100,000 to $107,432; (3)
allowed employers to credit nondiscretionary bonuses and incentive
payments (including commissions) paid at least annually to satisfy up
to 10 percent of the standard salary level; and (4) established special
salary levels for all U.S. territories.\65\ The 2019 rule did not make
changes to the standard duties test.\66\ While utilizing the same
methodology used in the 2004 rule to set the salary threshold, the
Department did not assert that this methodology constituted the outer
limit for defining and delimiting the salary threshold. Rather, the
Department reasoned the 2004 methodology was well-established,
reasonable, would minimize uncertainty and potential legal challenge,
and would address the concerns of the district court that the 2016 rule
over-emphasized the salary level.\67\ The Department acknowledged that
the new salary level was below the long test salary level used in the
pre-2004 two-test system.\68\ As in its 2004 rule, the Department
``reaffirm[ed] its intent to update the standard salary level and HCE
total annual compensation threshold more regularly in the future using
notice-and-comment rulemaking.'' \69\ The Department noted that large
gaps between rulemakings did not serve employer or employee interests
and diminished the usefulness of the salary level test, and that
regular increases promoted predictable and incremental change.\70\ The
2019 rule took effect on January 1, 2020.\71\
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\65\ The Department established special salary levels of $455
per week for Puerto Rico, Guam, the U.S. Virgin Islands, and the
CNMI (effectively continuing the 2004 salary level); it also
maintained the 2004 rule's $380 per week special salary level for
employees in American Samoa. 84 FR 51246.
\66\ See id. at 51241-43.
\67\ See id. at 51242.
\68\ Id. at 51244.
\69\ Id. at 51251.
\70\ See id. at 51251-52.
\71\ A lawsuit challenging the 2019 rule was filed in August
2022 and, at the time this proposal was drafted, remains pending in
the U.S. District Court for the Western District of Texas. Mayfield
v. U.S. Department of Labor, Case No. 1:22-cv-00792.
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C. Overview of Existing Regulatory Requirements
The part 541 regulations contain specific criteria that define each
category of exemption provided for in section 13(a)(1) for bona fide
executive, administrative, professional, and outside sales employees,
as well as teachers and academic administrative personnel. The
regulations also define exempt computer employees under
[[Page 62157]]
sections 13(a)(1) and 13(a)(17). The employer bears the burden of
establishing the applicability of any exemption from the FLSA's pay
requirements.\72\ Job titles and job descriptions do not determine
exemption status, nor does merely paying an employee a salary rather
than an hourly rate.
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\72\ See, e.g., Idaho Sheet Metal, 383 U.S. at 209; Walling, 330
U.S. at 547-48.
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To satisfy the EAP exemption, employees must meet certain tests
regarding their job duties \73\ and generally must be paid on a salary
basis at least the amount specified in the regulations.\74\ Some
employees, such as doctors, lawyers, teachers, and outside sales
employees, are not subject to salary tests.\75\ Others, such as
academic administrative personnel and computer employees, are subject
to special, contingent earning thresholds.\76\ The standard salary
level for the EAP exemption is currently $684 per week (equivalent to
$35,568 per year), and the total annual compensation level for highly
compensated employees under the HCE test is currently $107,432.\77\ A
special salary level of $455 per week applies to employees in Puerto
Rico, Guam, the U.S. Virgin Islands, and the CNMI; \78\ a special
salary level of $380 per week applies to employees in American Samoa;
\79\ and employers can pay a special weekly ``base rate'' of $1,043 per
week to employees in the motion picture producing industry.\80\
Nondiscretionary bonuses and incentive payments (including commissions)
paid on an annual or more frequent basis may be used to satisfy up to
10 percent of the standard or special salary levels.\81\
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\73\ For a description of the duties that are required to be
performed under the EAP exemption, see Sec. Sec. 541.100 (executive
employees); 541.200 (administrative employees); 541.300,
541.303-.304 (teachers and professional employees); 541.400
(computer employees); 541.500 (outside sales employees).
\74\ Alternatively, administrative and professional employees
may be paid on a fee basis for a single job regardless of the time
required for its completion as long as the hourly rate for work
performed (i.e., the fee payment divided by the number of hours
worked) would total at least the weekly amount specified in the
regulation if the employee worked 40 hours. See Sec. 541.605.
\75\ See Sec. Sec. 541.303(d); 541.304(d); 541.500(c);
541.600(e). Such employees are also not subject to a fee basis test.
\76\ See Sec. 541.600(c) and (d).
\77\ See Sec. Sec. 541.600(a); 541.601(a)(1).
\78\ See Sec. Sec. 541.100; 541.200; 541.300.
\79\ See id.
\80\ See Sec. 541.709.
\81\ Sec. 541.602(a)(3).
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Under the HCE test, employees who receive at least $107,432 in
total annual compensation are exempt from the FLSA's overtime
requirements if they customarily and regularly perform at least one of
the exempt duties or responsibilities of an executive, administrative,
or professional employee identified in the standard tests for
exemption.\82\ The HCE test applies only to employees whose primary
duty includes performing office or non-manual work.\83\ Employees
qualifying for exemption under the HCE test must receive at least the
$684 per week standard salary portion of their pay on a salary or fee
basis without regard to the payment of nondiscretionary bonuses and
incentive payments.\84\
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\82\ Sec. 541.601.
\83\ Sec. 541.601(d).
\84\ See Sec. 541.601(b)(1); see also 84 FR 51249.
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III. Need for Rulemaking
The goal of this rulemaking is to set effective earnings thresholds
to help define and delimit the FLSA's EAP exemption. To this end, the
Department is proposing to make appropriate increases to the standard
salary level and the HCE test's total annual compensation requirement,
apply the standard salary level to territories subject to the Federal
minimum wage, and update the special salary levels for American Samoa
and the motion picture industry. The Department is also proposing to
maintain the effectiveness of these earnings thresholds by adding a
provision to automatically update the standard salary level and the HCE
annual compensation threshold every 3 years with current wage data
(which would also have the effect of updating the levels in American
Samoa and for the motion picture industry). The updating mechanism
would also temporarily delay a scheduled automatic update if, and
while, the Department engages in notice-and-comment rulemaking to
change the salary level methodology and/or the updating mechanism.
The part 541 regulations have always included salary requirements.
From the beginning, there has been ``wide agreement'' that the amount
paid to an employee is ``a valuable and easily applied index to the
`bona fide' character of the employment for which [the] exemption is
claimed.'' \85\ Because EAP employees ``are denied the protection of
the Act,'' they are ``assumed [to] enjoy compensatory privileges''
which distinguish them from nonexempt employees, including
substantially higher pay.\86\ The Department has long recognized that
the salary level test is a useful criterion for identifying bona fide
EAP employees and providing a practical guide for employers and
employees, thus tending to reduce litigation and ensuring nonexempt
employees receive the overtime protection to which they are
entitled.\87\ The salary level test also facilitates application of the
exemption by saving employees and employers from having to apply the
more time-consuming duties analysis to a large group of employees who
do not meet the duties test.\88\ For these reasons, the salary level
test has been a key part of how the Department defines and delimits the
EAP exemption since the beginning of its rulemaking on the EAP
exemption.\89\ However, the Department has always recognized that any
salary level will result in some employees who meet the duties test but
do not earn enough to meet the salary level test, and thus are
nonexempt and therefore eligible for overtime by virtue of their
pay.\90\ This is simply a feature of a salary level test; it does not
undermine the efficacy of the salary level test but instead is taken
into account in determining where the salary level is set.
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\85\ Stein Report at 19.
\86\ Id.; see also Report of the Minimum Wage Study Commission,
Volume IV, p. 236 (``Higher base pay, greater fringe benefits,
improved promotion potential and greater job security have
traditionally been considered as normal compensatory benefits
received by EAP employees, which set them apart from non-EAP
employees.'').
\87\ See 84 FR 51237; Weiss Report at 8.
\88\ Report and Recommendations on Proposed Revision of
Regulations, Part 541, Under the Fair Labor Standards Act, by Harry
S. Kantor, Assistant Administrator, Office of Regulations and
Research, Wage and Hour and Public Contracts Divisions, U.S.
Department of Labor (Mar. 3, 1958) (Kantor Report) at 2-3; 69 FR
22165; 84 FR 51280.
\89\ See 84 FR 51237.
\90\ See, e.g., Kantor Report at 5.
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The Department continues to believe that the amount paid to an
employee is important evidence that they are employed in a bona fide
EAP capacity, and that the salary level test ``is a vital element in
the regulations.'' \91\ The salary level test benefits employees and
employers alike, which is why--despite disagreement over the
appropriate magnitude of the part 541 earnings thresholds--an
``overwhelming majority'' of stakeholders have supported the retention
of such thresholds in prior part 541 rulemakings.\92\
---------------------------------------------------------------------------
\91\ Weiss Report at 9.
\92\ 84 FR 51235; see also Stein Report at 5, 19; Weiss Report
at 9.
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The Department's authority to set a salary level is not without
limits, and the salary test's role in defining and delimiting the scope
of the EAP exemption must allow for additional examination of employee
duties for employees whose salary exceeds the
[[Page 62158]]
salary level.\93\ Examination of duties for such employees is necessary
in part because the salaries earned by employees who do and do not
perform exempt job duties overlap. As explained in greater detail
below, the proposed standard salary level set at the 35th percentile of
weekly earnings of full-time salaried workers in the lowest-wage Census
Region ($1,059 per week, $55,068 annually) would, in combination with
the standard duties test, better identify which employees are employed
in a bona fide EAP capacity in a one-test system. By setting a salary
level above what would currently be the equivalent of the long test
salary level ($925 per week), the proposal would restore the right to
overtime pay for salaried white-collar employees who prior to the 2019
rule were always considered nonexempt if they earned below the long
test (or long test-equivalent) salary level and ensure that fewer
white-collar employees who perform significant amounts of nonexempt
work and earn between the long and short test salary levels are
included in the exemption. At the same time, by setting the standard
salary level well below what would currently be the equivalent of the
short test salary level ($1,378 per week),\94\ the proposal would
address the concerns that have been raised about excluding from the EAP
exemption too many white-collar employees solely based on their salary
level. As discussed in section IV.A.4 below, the duties test would
continue to determine exemption status for almost three-quarters of all
salaried white-collar employees subject to the part 541 regulations,
allowing employers to continue to use the exemption for 24.5 million
salaried white-collar workers who earn at least the proposed salary
level and meet the standard duties test.\95\ The proposed salary level
would also reasonably distribute between employees and their employers
what the Department now understands to be the impact of the shift from
a two-test to a one-test system on employees earning between the long
and short test salary levels.
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\93\ 84 FR 51238 (noting salary's ``useful, but limited,
role'').
\94\ During the period from 1949 to 2004, the ratio of the short
test salary level to the long test salary levels ranged from
approximately 130 percent to 180 percent. See 81 FR 32403. The
simple average of the 15 historical ratios of the short test salary
level to the long test salary level is 149 and the Department
calculates the short test salary level as 149 percent of the long
test salary level. See id. at 32467 & n.149.
\95\ This number does not include the additional 8.1 million
workers employed in occupations that are not subject to the salary
level test, such as doctors, lawyers, and teachers. Such employees
are unaffected by this rulemaking because their exemption status is
always determined by the duties test.
---------------------------------------------------------------------------
Since switching from a two-test to a one-test system for defining
and delimiting the EAP exemption in 2004, the Department has followed
different approaches to set the single standard salary level. In 2004,
the Department set the new standard salary level roughly equivalent to
the 20th percentile of weekly earnings of full-time salaried workers in
the South and in the retail industry nationwide ($455 per week).\96\
This approach produced a salary level amount that was equivalent to the
lower long test salary level under the two-test system.\97\ Because it
was equivalent to the long test salary level, employees who
historically earned less than the long test salary level continued to
be entitled to overtime compensation because they earned below the new
standard salary level. However, because the new standard duties test
was substantially equivalent to the less rigorous short duties
test,\98\ employees who were paid the equivalent of the lower long test
salary level and who met the less rigorous short duties test also now
met the standard duties test and were not entitled to overtime
compensation. This approach broadened the EAP exemption because all
employees between the long and short test salary levels who
historically had not been considered bona fide EAP employees because
they did not meet the long duties test became exempt. The Department
followed this same methodology to set the standard salary level in
2019, although applying the 2004 rule's methodology resulted in a
salary level that was a lower amount than what would have been the
equivalent of the long test salary level.\99\ This broadened the EAP
exemption even further by, for the first time, setting a salary level
that exempted a group of white-collar employees earning below the
equivalent of the long test salary level (based on contemporaneous
data). Both the 2004 and 2019 rules thus effectively placed the impact
of the shift from a two-test to a one-test system on lower-salaried
white-collar employees--both those who earned below the short test
salary level and were traditionally protected by the more rigorous long
duties test (i.e., because they performed substantial amounts of
nonexempt work), and, in the case of the 2019 rule, those who had
previously been protected by a salary level set at or equivalent to the
long test salary.
---------------------------------------------------------------------------
\96\ See 69 FR 22168.
\97\ See id. at 22168-69.
\98\ Id. at 22214.
\99\ See 84 FR 51260 (Table 4) (showing that the salary level
derived from the Department's long test methodology would have been
$724 per week rather than the finalized $684 per week amount).
---------------------------------------------------------------------------
To address the concern that the 2004 rule did not provide overtime
compensation for lower-salaried white-collar employees performing large
amounts of nonexempt work who historically were not considered bona
fide EAP employees, in 2016 the Department set the standard salary
level at the 40th percentile of weekly earnings of full-time salaried
workers in the lowest-wage Census Region (the South), which produced a
salary level that was at the low end of the historical range of short
test salary levels.\100\ This approach restored overtime protection to
white-collar employees who perform substantial amounts of nonexempt
work and earned between the equivalent of the long test salary level
and the short test salary level. However, this approach also made
nonexempt some employees who had previously met the long duties test--
employees who earned between the long test salary level and the low end
of the short test salary range and performed only a limited amount of
nonexempt work. Until 2004 employers could use the long test to exempt
these employees, and under the 2004 rule these employees remained
exempt under the one-test system. Thus, the impact of the 2016 rule was
that employers could not use the exemption for certain white-collar
employees who earned between the long and short test salary levels and
would have met the more rigorous long duties test.\101\ In the
challenge to the 2016 rule, the district court expressed concern that
the 2016 rule conferred overtime eligibility based on salary level
alone to a substantial number of employees who would otherwise be
exempt.\102\
---------------------------------------------------------------------------
\100\ 81 FR 32405.
\101\ See 84 FR 10908; 84 FR 51242.
\102\ See Nevada, 275 F.Supp.3d. at 806.
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Having grappled with the different approaches that it has used to
set the standard salary level since switching to a one-test system in
2004, the Department's goal in this rulemaking is not only to update
the single standard salary level to account for earnings growth since
the 2019 rule, but also to build on the lessons learned in its most
recent rulemakings to more effectively define and delimit employees
employed in a bona fide EAP capacity. Consistent with its broad
authority under the statute, the Department is proposing a standard
salary level test that would work effectively with the standard duties
test to help achieve these objectives and would also reasonably
distribute the impact of the switch to a one-test system across white-
collar
[[Page 62159]]
employees earning between the long and short test salary levels and
their employers. In 2004 and 2019, setting the salary level equivalent
to or below the lower long test salary level resulted in the exemption
of lower-salaried employees who perform large amounts of nonexempt
work, in effect significantly broadening the exemption compared to
under the two-test system. This approach included in the exemption
lower-salaried employees whom the Department had long considered not to
be employed in a bona fide EAP capacity because they performed
substantial amounts of nonexempt work. Under the 2016 approach, setting
the salary level equivalent to the low end of the higher short test
salary range would have restored overtime protections to those
employees who perform substantial amounts of nonexempt work and earned
between the long test salary level and the low end of the short test
salary levels. However, it also would have resulted in denying
employers the use of the exemption for many lower-salaried employees
who traditionally were exempt under the long test, which raised
concerns that the Department was in effect narrowing the exemption
compared to the two-test system.\103\ In this rulemaking, the
Department proposes setting a standard salary level that would better
define and delimit the EAP exemption by more effectively accounting for
the switch from a two-test to a one-test system, and reasonably
distribute the impact of the shift by ensuring overtime protection for
some lower-salaried employees without excluding from exemption too many
white-collar employees solely based on their salary level.\104\
---------------------------------------------------------------------------
\103\ See 84 FR 51242.
\104\ See section IV.A.3.
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In addition, consistent with its previously stated intent, the
Department is undertaking this rulemaking to keep the earnings
thresholds up to date. Four years have passed since the 2019 rule,
during which time salaried workers in the U.S. economy have experienced
a rapid growth in their nominal wages, which lessens the effectiveness
of the current salary level threshold. Reapplying the same methodology
that was used to set the standard salary level in 2019 to recent
earnings data would result in a new threshold of $822 per week--a 20.2
percent increase over the current $684 per week standard salary
level.\105\ Applying the long test salary methodology to current data
would result in a salary threshold of $925 per week--a 35.2 percent
increase over the current salary level.
---------------------------------------------------------------------------
\105\ See section VII.C.5 (applying CPS MORG data from calendar
year 2022).
---------------------------------------------------------------------------
The Department is also proposing to increase the HCE total annual
compensation threshold to the annualized weekly earnings amount of the
85th percentile of full-time salaried workers nationally ($143,988).
Reapplying the 2019 methodology (annualized weekly earnings of the 80th
percentile of full-time salaried workers nationally) to current
earnings data results in a threshold of $125,268 per year--a 16.6
percent increase over the current threshold of $107,432. Other data
further supports that the HCE test's current total annual compensation
requirement has become outdated. When it was created in 2004, the HCE
test featured a $100,000 threshold that exceeded the annual earnings of
approximately 93.7 percent of salaried workers nationwide.\106\ More
recently in the 2019 rule, the Department set the HCE test threshold so
it would be equivalent to the annual earnings of the 80th percentile of
full-time salaried workers nationwide. Today, however, the $107,432 HCE
threshold is approximately the 72nd percentile of annual earnings of
full-time salaried workers nationwide. The Department's proposed
increase from the 80th to the 85th percentile is high enough to exclude
employees who are not ``at the very top of [the] economic ladder''
\107\ and would ensure that this test for exemption continues to serve
its intended function.
---------------------------------------------------------------------------
\106\ See 69 FR 22169 (Table 3).
\107\ Id. at 22174.
---------------------------------------------------------------------------
The salary levels applicable to the U.S. territories have not
increased since 2004. In 2004, the Department ended the use of special
salary levels in territories that had become subject to the Federal
minimum wage since the salary levels were last set in 1975, and applied
a special salary level of $380 per week only to employees in American
Samoa, who were subject to special minimum wage rates below the Federal
minimum wage.\108\ In 2019, however, the Department established a
special salary level of $455 per week for employees in Puerto Rico,
Guam, the U.S. Virgin Islands, and the CNMI, for the first time setting
a special salary level in territories that were subject to the Federal
minimum wage.\109\ The Department also maintained the special salary
level for American Samoa at $380 per week, the level set in 2004. There
is thus a compelling need to increase the salary levels applicable to
employees in U.S. territories, particularly employees in those
territories that are subject to the Federal minimum wage.
---------------------------------------------------------------------------
\108\ See id. at 22172.
\109\ See 84 FR 51246.
---------------------------------------------------------------------------
Finally, the Department proposes to adopt a mechanism to
automatically update the earnings thresholds in the part 541
regulations in future years. In its three most recent part 541
rulemakings, the Department has expressed its commitment to keeping the
salary level tests up to date. In its 2004 rule, the Department
conveyed its intent ``in the future to update the salary levels on a
more regular basis.'' \110\ In its 2016 rule, the Department adopted a
mechanism to automatically update the salary level on a triennial
basis. In 2019, after initially proposing to codify its commitment to
updating the threshold every 4 years through rulemaking, the Department
affirmed in its final rule that it ``intends to update these thresholds
more regularly in the future.'' \111\ As noted above, however, the
history of the part 541 regulations shows multiple, significant gaps
during which the salary levels were not updated and their effectiveness
in helping to define the EAP exemption decreased as wages increased.
While the Department increased its part 541 earnings thresholds every 5
to 9 years in the 37 years between 1938 and 1975, more recent decades
have included long periods without raising the salary level, resulting
in significant erosion of the real value of the threshold levels
followed by unpredictable increases. As explained in greater detail in
section IV.D, employees and employers alike would benefit from the
certainty and stability of regularly scheduled updates.
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\110\ 69 FR 22171.
\111\ 84 FR 51251-52.
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IV. Discussion of Proposed Rule
Consistent with its statutory duty to define and delimit the EAP
exemption, the Department is proposing increases to the earnings
thresholds provided in the part 541 regulations. As explained in
greater detail below, the Department proposes to increase the standard
salary level to the 35th percentile of weekly earnings of full-time
salaried workers in the lowest-wage Census Region (currently the
South). The Department also proposes to apply this updated standard
salary level to the four U.S. territories that are subject to the
Federal minimum wage--Puerto Rico, Guam, the U.S. Virgin Islands, and
the CNMI--and to update the special salary levels for American Samoa
and the motion picture industry in relation to the new standard salary
level. The Department additionally proposes raising the HCE test's
total annual compensation
[[Page 62160]]
requirement to the annual equivalent of the 85th percentile of weekly
earnings of full-time salaried workers nationally ($143,988). Finally,
the Department proposes a new mechanism to automatically update the
standard salary level and the HCE total annual compensation threshold
every 3 years to ensure that they remain effective tests for exemption.
While the primary regulatory changes proposed are in Sec. Sec.
541.600, 541.601, 541.709, and newly-added Sec. 541.607, additional
conforming changes are proposed to update references to the salary
level throughout part 541. The Department is not proposing any changes
to the salary basis or duties test requirements in this rulemaking. The
Department welcomes comments on all aspects of this proposal.
A. Standard Salary Level
The salary level test is grounded in the text of section 13(a)(1).
The Secretary's expressly-delegated authority to ``define[]'' and
``delimit[]'' the terms of the EAP exemption includes the authority to
use a salary level test as one criterion for identifying employees who
are employed in a ``bona fide executive, administrative, or
professional capacity.'' The Department has used a salary level test
since the first part 541 regulations in 1938. From the FLSA's earliest
days, stakeholders have generally favored the use of a salary
test,\112\ and the Department's authority to use a salary test has been
repeatedly upheld.\113\
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\112\ See Stein Report at 5, 19.
\113\ See, e.g., Wirtz v. Miss. Publishers Corp., 364 F.2d 603,
608 (5th Cir. 1966); Fanelli v. U.S. Gypsum Co., 141 F.2d 216, 218
(2d Cir. 1944); Walling v. Yeakley, 140 F.2d 830, 832-33 (10th Cir.
1944).
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Despite numerous amendments to the FLSA over the past 85 years,
Congress has not restricted the Department's use of the salary level
tests. Significant regulatory changes involving the salary requirements
since 1938 include adding a separate salary level for professional
employees in 1940, adopting a two-test system with separate short and
long test salary levels in 1949, and creating a single standard salary
level test and establishing a new HCE exemption test in 2004. These
changes were all made through regulations issued pursuant to the
Secretary's authority to define and delimit the exemption. Despite
having amended the FLSA numerous times over the years, Congress has not
amended section 13(a)(1) to alter these regulatory salary requirements.
The FLSA delegates to the Secretary the power to ``define[ ]'' and
``delimit[ ]'' the terms ``bona fide executive, administrative, or
professional capacity'' through regulation. Congress thus ``provided
that employees should be exempt who fell within certain general
classifications''--those employed in a bona fide executive,
administrative, or professional capacity--and authorized the Secretary
``to define and delimit those classifications by reasonable and
rational specific criteria.'' \114\ Therefore, the Department ``is
responsible not only for determining which employees are entitled to
the exemption, but also for drawing the line beyond which the exemption
is not applicable.'' \115\
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\114\ Walling, 140 F.2d at 831-32; see Ellis v. J.R.'s Country
Stores, Inc., 779 F.3d 1184, 1199 (10th Cir. 2015) (approvingly
quoting Walling); see also Auer v. Robins, 519 U.S. 452, 456 (1997)
(``The FLSA grants the Secretary broad authority to `defin[e] and
delimi[t]' the scope of the exemption for executive, administrative,
and professional employees.'').
\115\ Stein Report at 2.
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As the Department stated in its 2019 rule, an employee's salary
level ``is a helpful indicator of the capacity in which an employee is
employed, especially among lower-paid employees.'' \116\ The amount an
employee is paid is also a ``valuable and easily applied index to the
`bona fide' character of employment for which exemption is claimed,''
as well as the ``principal[ ]'' ``delimiting requirement''
``prevent[ing] abuse'' of the exemption.\117\ As the Department has
explained, if an employee ``is of sufficient importance . . . to be
classified as a bona fide'' executive employee, for example, and
``thereby exempt from the protection of the [A]ct, the best single test
of the employer's good faith in attributing importance to the
employee's services is the amount [it] pays for them.'' \118\ Employee
compensation is a relevant indicator of exemption status given that the
EAP exemption is premised on the understanding that individuals who are
employed in a bona fide executive, administrative, or professional
capacity typically earn higher salaries and enjoy other privileges to
compensate them for their long hours of work, setting them apart from
nonexempt employees entitled to overtime pay.\119\
---------------------------------------------------------------------------
\116\ 84 FR 51239 (internal quotation marks omitted).
\117\ Stein Report at 19, 24; see also 81 FR 32422.
\118\ Stein Report at 19, 24; see also 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.'').
\119\ See Report of the Minimum Wage Study Commission, Vol. IV,
at 236, 240; see also, e.g., Stein Report at 19 (explaining that the
``term `executive' implies a certain prestige, status, and
importance'' denoted by pay ``substantially higher than'' the
Federal minimum wage).
---------------------------------------------------------------------------
Consistent with the Department's longstanding approach, the
proposed rule ensures that the salary level test and duties test
continue to complement each other to define and delimit the EAP
exemption and that the salary level does not play an outsized role in
determining whether an individual is employed in a bona fide EAP
capacity.\120\ In part because of the overlap in the salaries earned by
employees who do and do not perform exempt job duties, the salary level
must allow for appropriate examination of duties. As discussed in
section IV.A.4, under the Department's proposed standard salary level,
the duties test will determine the exemption status for most white-
collar employees.
---------------------------------------------------------------------------
\120\ The Department has consistently stated that salary alone
cannot define who is a bona fide EAP employee. See 84 FR 51239; 81
FR 32429; 69 FR 22173.
---------------------------------------------------------------------------
The Department's proposed standard salary level will, in
combination with the standard duties test, better define and delimit
which employees are employed in a bona fide EAP capacity in a one-test
system. By setting a salary level above the equivalent of the long test
salary level, the proposal would (unlike the 2004 and 2019 rules)
ensure that not all lower-paid white-collar employees who perform
significant amounts of nonexempt work, and were historically considered
by the Department not to be employed in a bona fide EAP capacity
because they failed the long duties test, are included in the
exemption. At the same time, by setting it well below the equivalent of
the short test salary level, the proposal would address potential
concerns that the salary level test should not be determinative of EAP
exemption status for too many white-collar employees. The combined
effect would be a more effective test for exemption. The proposed
salary level would also reasonably distribute between employees and
their employers what the Department now understands to be the impact of
the 2004 shift from a two-test to a one-test system on employees
earning between the long and short test salary levels.
1. History of the Salary Level
The first version of the part 541 regulations, issued in 1938, set
a minimum compensation requirement of $30 per week for executive and
administrative employees.\121\ Since then, the Department has increased
the
[[Page 62161]]
salary levels eight times--in 1940, 1949, 1958, 1963, 1970, 1975, 2004,
and 2019.
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\121\ 3 FR 2518.
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In 1940, the Department maintained the $30 per week salary level
for executive employees but established a higher $200 per month salary
level test for administrative and professional employees. In selecting
these thresholds, the Department used salary surveys from Federal and
State Government agencies, experience gained under NIRA, and Federal
Government salaries to determine the salary level that was a reasonable
``dividing line'' between employees performing exempt and nonexempt
work.\122\
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\122\ See Stein Report at 20-21, 31-32.
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In 1949, recognizing that the ``increase in wage rates and salary
levels'' since 1940 had ``gradually weakened the effectiveness of the
present salary tests as a dividing line between exempt and nonexempt
employees,'' the Department calculated the percentage increase in
weekly earnings from 1940 to 1949, and then adopted new salary levels
``at a figure slightly lower than might be indicated by the data'' to
protect small businesses.\123\ In 1949, the Department also established
a short test for exemption, which paired a higher salary level with a
less rigorous duties test. The justification for this short test was
that employees who met the higher salary level were more likely to meet
all the requirements of the exemption (including the 20 percent limit
on nonexempt work), and thus a ``short-cut test of exemption . . .
would facilitate the administration of the regulations without
defeating the purposes of section 13(a)(1).'' \124\ Employees who met
only the lower long test salary level, and not the higher short test
salary level, were still required to satisfy the long duties test,
which included a limit on the amount of nonexempt work that an exempt
employee could perform. The two-test system remained part of the
Department's regulations until 2004.
---------------------------------------------------------------------------
\123\ Weiss Report at 8, 14.
\124\ Id. at 22-23.
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In 1958, the Department reiterated that salary is a ``mark of [the]
status'' of an exempt employee and reinforced the importance of salary
as an enforcement tool, adding that the Department had ``found no
satisfactory substitute for the salary tests.'' \125\ To set the salary
levels, the Department considered data collected during 1955 WHD
investigations on the ``actual salaries paid'' to employees who
``qualified for exemption'' (i.e., met the applicable salary and duties
tests in place at the time) and set the salary levels at $80 per week
for executives and $95 per week for administrative and professional
employees.\126\ The Department set the long test salary levels so that
only a limited number of employees performing EAP duties (about 10
percent) in the lowest-wage regions and industries would fail to meet
the new salary level and therefore become entitled to overtime
pay.\127\ In laying out this methodology, often referred to as the
``Kantor'' methodology and generally referenced in this NPRM as the
``long test'' methodology, the Department echoed its prior comments
stating that the salary tests ``simplify enforcement by providing a
ready method of screening out the obviously nonexempt employees.''
\128\
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\125\ Kantor Report at 2-3.
\126\ Id. at 6, 9.
\127\ Id. at 6-7.
\128\ Id. at 2-3; see Weiss Report at 8.
---------------------------------------------------------------------------
The Department followed a similar methodology when determining the
appropriate long test salary level in 1963, using data regarding
salaries paid to exempt workers collected in a 1961 WHD survey.\129\
The salary level for executive and administrative employees was
increased to $100 per week, and the professional exemption salary level
was increased to $115 per week.\130\ The Department noted that these
salary levels approximated the methodology used in 1958 to set the long
test salary levels.\131\
---------------------------------------------------------------------------
\129\ 28 FR 7002 (July 9, 1963).
\130\ Id. at 7004.
\131\ Id.
---------------------------------------------------------------------------
The Department continued to use a similar methodology when it
updated the salary levels in 1970. After examining data from 1968 WHD
investigations, 1969 BLS wage data, and information provided in a
report issued by the Department in 1969 that included salary data for
executive, administrative, and professional employees,\132\ the
Department increased the long test salary level for executive and
administrative employees to $125 per week and increased the long test
salary level for professional employees to $140 per week.\133\
---------------------------------------------------------------------------
\132\ See 34 FR 9934, 9935 (June 24, 1969).
\133\ 35 FR 885.
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In 1975, instead of following the previous long test methodology,
the Department set the long test salary levels ``slightly below'' the
amount suggested by adjusting the 1970 salary levels for inflation
based on increases in the Consumer Price Index (CPI).\134\ The long
test salary level for executive and administrative employees was set at
$155, while the professional level was set at $170. The salary levels
adopted were intended to be interim levels ``pending the completion and
analysis of a study by [BLS] covering a six month period in 1975[,]''
and were not meant to set a precedent for future salary level
increases.\135\ The envisioned process was never completed, however,
and the ``interim'' salary levels remained unchanged for the next 29
years.
---------------------------------------------------------------------------
\134\ 40 FR 7091.
\135\ Id. at 7091-92.
---------------------------------------------------------------------------
The short test salary level increased in tandem with the long test
level throughout the various rulemakings between 1949 and 2004. Because
the short test was designed to capture only those white-collar
employees whose salary was high enough to indicate a stronger
likelihood of being employed in a bona fide EAP capacity and thus
warrant a less stringent duties requirement, the short test salary
level was always set significantly higher than the long test salary
level.
When the Department updated the part 541 regulations in 2004, it
opted to create a single standard test for exemption instead of
retaining the two-test system from prior rulemakings. The Department
set the new standard salary level at $455 per week and paired it with a
duties test that was substantially equivalent to the less rigorous
short duties test. In setting the new standard salary level, the
Department looked at nonhourly earnings from the CPS MORG data
collected by BLS.\136\ The Department set a salary level that would
exclude from exemption roughly the bottom 20 percent of full-time
salaried employees in each of two subpopulations: (1) the South and (2)
the retail industry nationally. In setting the salary level the
Department looked to earnings data for all white-collar workers--exempt
and nonexempt--and looked to a higher percentile than the long test
methodology (10th percentile of exempt workers in low-wage industries
and areas). The Department acknowledged, however, that the salary
arrived at by this method was, at the time, equivalent to the salary
derived from the long test method using current data.\137\
---------------------------------------------------------------------------
\136\ See 69 FR 22166-67.
\137\ Id. at 22168. The 2004 methodology used the 20th
percentile of a data set of all full-time salaried workers and the
long test methodology looked to the lowest-paid 10 percent of exempt
salaried workers. The two methodologies resulted in equivalent
salary levels because exempt salaried workers generally have higher
earnings than nonexempt salaried workers.
---------------------------------------------------------------------------
In the 2016 rule, the Department again used CPS MORG data but set
the standard salary level equal to the 40th percentile of weekly
earnings of full-time salaried workers in the lowest-wage Census Region
(the South),
[[Page 62162]]
resulting in a standard salary level of $913 per week, which was at the
low end of the historic range of short test salary levels. The
Department explained that the increase in the standard salary level was
needed because the 2004 rule exempted lower-salaried employees
performing large amounts of nonexempt work who should be covered by the
overtime compensation requirement.\138\ Since the standard duties test
was equivalent to the short duties test, the Department asserted that a
salary level in the short test salary range was necessary to address
this effect of the 2004 rule. As explained earlier, the U.S. District
Court for the Eastern District of Texas held the 2016 rule invalid.
---------------------------------------------------------------------------
\138\ 81 FR 32405.
---------------------------------------------------------------------------
In updating the standard salary level in 2019, the Department
reapplied the methodology from the 2004 rule, setting the salary level
equal to the 20th percentile of weekly earnings of full-time salaried
workers in the South and in the retail sector nationwide.\139\ This
methodology addressed concerns that had been raised that the 2016
methodology excluded too many employees from the exemption based on
their salary alone. Unlike in 2004, however, where the 20th percentile
of weekly earnings of full-time salaried workers in the South and
retail nationally was essentially the same as the long test, this
methodology now produced a salary level amount that was lower than the
equivalent of the long test salary level using contemporaneous data.
This methodology produced the current standard salary level of $684 per
week (equivalent to $35,568 per year).\140\
---------------------------------------------------------------------------
\139\ See 84 FR 51260 (Table 4).
\140\ Id. at 51238.
---------------------------------------------------------------------------
2. Salary Level Test Function and Effects
Since 1940, the Department's regulations have consistently looked
at both the duties performed by the employee and the salary paid by the
employer in defining and delimiting who is a bona fide executive,
administrative, or professional employee exempt from the FLSA's minimum
wage and overtime protections. From 1949 to 2004, the Department
determined EAP exemption status using a two-test system comprised of a
long test (a lower salary level paired with a more rigorous duties test
that limited performance of nonexempt work to no more than 20 percent
for most employees) and a short test (a higher salary level paired with
a less rigorous duties test that looked to the employee's primary
duties and did not have a numerical limit on the amount of nonexempt
work). The two-test system facilitated the determination of whether
white-collar workers across the income spectrum were employed in a bona
fide EAP capacity, and employees who met either test could be
classified as EAP exempt.
In a two-test system, the long test salary level screens from the
exemption the lowest-paid white-collar employees, thereby ensuring
their right to overtime compensation. The Department has often referred
to many of the employees who are screened from the exemption by virtue
of their earning below the lower long test salary level as ``
`obviously nonexempt employees[.]' '' \141\ The long test salary level
helped distinguish employees who were not employed in a bona fide EAP
capacity because the Department found that employees who were screened
from exemption by the long test salary level generally did not meet the
other requirements for exemption.\142\ Since 1958, the long test salary
level was generally set to exclude from exemption approximately the
lowest-paid 10 percent of salaried white-collar employees who performed
EAP duties in the lowest-wage regions and industries.\143\ The long
test salary level also served as a line delimiting the population of
white-collar employees for whom the duties test determined their
exemption status. In the two-test system, this duties analysis included
an examination of the amount of nonexempt work performed, which ensured
that employees earning lower salary levels were, in fact, employed in a
bona fide EAP capacity by limiting the amount of time they could spend
on nonexempt work. Thus, the Department long recognized that lower
salaried workers should be subject to a test that placed significant
limits on the amount of nonexempt work they perform. The duties and
salary level tests worked in tandem to properly define and delimit the
exemption: lower-paid workers had to satisfy a more rigorous duties
test with strict limits on nonexempt work; higher paid employees were
subject to a less rigorous duties test because they were more likely to
satisfy all the requirements of the exemption (including the limit on
nonexempt work).\144\
---------------------------------------------------------------------------
\141\ See id. at 51237 (quoting Kantor Report at 2-3).
\142\ See Kantor Report at 2-3; Weiss Report at 8 (``In an
overwhelming majority of cases, it has been found by careful
inspection that personnel who did not meet the salary requirements
would also not qualify under other sections of the
regulations[.]'').
\143\ See 84 FR 51236.
\144\ Weiss Report at 22-23.
---------------------------------------------------------------------------
Because employees who met the short test salary level were paid
well above the long test salary level, the short test salary level did
not perform the same function as the long salary level of screening
obviously nonexempt employees. Instead, the short test salary level was
used to determine whether the full duties test or the short-cut duties
test would be applied to determine EAP exemption status. The exemption
status of employees paid more than the long and less than the short
test salary levels was determined by applying the more rigorous long
duties test that ensured overtime protections for employees who
performed substantial amounts of nonexempt work. The exemption status
of employees paid at or above the higher short test salary level was
determined by the less rigorous short duties test that looked to the
employee's primary duty and did not cap the amount of nonexempt work an
employee could perform. The short test thus provided a faster and more
efficient duties test based on the Department's experience that
employees paid at the higher short test salary level ``almost
invariably'' met the more rigorous long duties test, including its 20
percent limit on nonexempt work, and therefore a shortened analysis of
duties was a more efficient test for exemption status.\145\
---------------------------------------------------------------------------
\145\ Id.
---------------------------------------------------------------------------
In 2004, rather than update the two-test system, the Department
chose to establish a new single-test system for determining exemption
status. The new single standard test for exemption used a duties test
that was substantially equivalent to the less rigorous short duties
test in the two-test system.\146\ Since the creation of the standard
test, the Department has taken two different approaches to set the
standard salary level that pairs with the standard duties test.
---------------------------------------------------------------------------
\146\ 69 FR 22214.
---------------------------------------------------------------------------
In 2004, as noted above, the Department set the new salary level
roughly equivalent to the 20th percentile of weekly earnings of full-
time salaried workers in the South and in the retail industry
nationwide.\147\ The Department acknowledged that the salary level
($455 per week) was, in fact, equivalent to the lower long test salary
level amount under the two-test system using contemporaneous data.\148\
Because it was equivalent to the long test salary level, the standard
salary test continued to perform the same initial screening function as
the long test salary level and employees who historically were entitled
to overtime compensation
[[Page 62163]]
because they earned below the long test salary level remained nonexempt
under the new standard test. Without a higher salary short test,
however, all employees who met the standard salary level were subject
to the same duties test. The single standard duties test was equivalent
to the short duties test, and so some employees who previously did not
meet the long duties test met the standard duties test. As a result,
the shift from a two-test to a one-test system significantly broadened
the EAP exemption because employees who historically had not been
considered bona fide EAP employees--in particular, those lower-paid
employees who did not meet the long duties test because they performed
substantial amounts of nonexempt work--were now defined as falling
within the exemption and would not be eligible for overtime
compensation.
---------------------------------------------------------------------------
\147\ See id. at 22168-69.
\148\ See id.
---------------------------------------------------------------------------
This broadening specifically impacted lower-paid, salaried white-
collar employees who earned between the long and short test salary
levels and performed substantial amounts of nonexempt work. Under the
two-test system, these employees had been entitled to overtime
compensation if their nonexempt duties exceeded the long test's strict
limit on such work. Under the 2004 standard test, these employees
became exempt because they met both the low standard salary level and
the less rigorous standard duties test. The Department's discussion of
the elimination of the long duties test in 2004 focused primarily on
the minimal role played by the long test at that time due to the
erosion of the long salary level, and on the difficulties employers
would face if they were again required to track time spent on nonexempt
work when the dormancy of the long duties test meant that they had
generally not been performing such tracking for many years.\149\ While
asserting that employees who were then subject to the long test would
be better protected under the higher salary level of the new standard
test, the Department did not compare the protection lower salaried
employees would receive under the standard test with the protection
they would have received under an updated long test with a salary level
based on contemporary data and the existing long duties test.
---------------------------------------------------------------------------
\149\ See 69 FR 22126-27.
---------------------------------------------------------------------------
To address the concern that lower-salaried employees performing
large amounts of nonexempt work historically were not considered bona
fide EAP employees and thus should be entitled to overtime
compensation, in 2016 the Department set the standard salary level at
the 40th percentile of weekly earnings of full-time salaried workers in
the lowest-wage Census Region (the South). This methodology produced a
salary level ($913 per week) that was at the low end of the historical
range of short test salary levels.\150\ This approach restored overtime
protection for employees performing substantial amounts of nonexempt
work who earned between the long and short test salary levels, as they
failed the new salary level test. However, this approach generated
potential concerns that the salary level test should not be
determinative of exemption status for too many individuals.
---------------------------------------------------------------------------
\150\ 81 FR 32405.
---------------------------------------------------------------------------
Due to the 2016 rule's narrowing of the exemption, employers were
unable to use the exemption for employees who earned between the long
test salary level and the low end of the short test salary range and
would have met the more rigorous long duties test. Prior to 2004
employers could use the long test to exempt these employees, and under
the 2004 rule these employees remained exempt under the one-test
system. Thus, while the 2016 rule accounted for the absence of the long
duties test by restoring overtime protections to employees earning
between the long test salary level and the low end of the short test
salary range who perform significant amounts of nonexempt work, it also
made a group of employees who had been exempt under the two-test system
newly nonexempt under the one-test system: employees earning between
the long test level and the short test salary range who perform only
limited nonexempt work.
In its 2019 rule, the Department determined that the 2016 rule had
not sufficiently considered the impact of the increased standard salary
level on employers' ability to use the exemption for this group of
employees.\151\ The Department emphasized that ``[f]or most . . .
employees the exemption should turn on an analysis of their actual
functions, not their salaries,'' and that the 2016 rule's effect of
making nonexempt all lower-paid, white-collar employees who
traditionally were exempt under the long test ``deviated from the
Department's longstanding policy of setting a salary level that does
not `disqualify[ ] any substantial number of' bona fide executive,
administrative, and professional employees from exemption.'' \152\ To
address these concerns, the Department simply returned to the 2004
rule's methodology for setting the salary threshold. In responding to
comments that the proposed salary level did not account for the absence
of the more rigorous long duties test, the 2019 rule reiterated the
statements made in the 2004 rule and asserted that the 2016 rule did
not adequately account for the absence of the lower long test salary
level.\153\ Applying the 2004 method to the earnings data available in
2019 produced a standard salary level of $684 per week, which was even
below the equivalent of what the long test salary level would have been
using contemporaneous data ($724 per week).\154\
---------------------------------------------------------------------------
\151\ 84 FR 10908.
\152\ Id. (quoting Kantor Report at 5).
\153\ See 84 FR 51243.
\154\ Id. at 51260.
---------------------------------------------------------------------------
The 2019 rule thus had the same impact as the 2004 rule of
exempting all employees who earned between the long and short test
salary levels and who performed too much nonexempt work to meet the
long duties test, but passed the short duties test. The 2019 rule also
for the first time permitted the exemption of a group of low-paid
white-collar employees (those earning between $684 and $724 per week)
who had always been protected by the salary level test's initial
screening function--either under the long test, or under the 2004 rule
salary level that was equivalent to the long test salary level. The
Department stated that the standard salary level's ``fairly small
difference'' from the long test level did not justify using the long
test methodology to set the salary level, and emphasized that its
approach preserved the salary level's principal function as a tool for
screening from exemption obviously nonexempt employees.\155\ In
response to commenter concerns about the rule exempting employees who
traditionally earned between the long and short test salary levels and
received overtime compensation because they did not meet the long
duties test, the Department cited the legal risks posed by the 2016
methodology (as evidenced by the district court's decisions) and
explained that such employees were already exempt in the years leading
up to 2004 because the Department's outdated salary levels had rendered
the long test with its more rigorous duties requirement largely
dormant.\156\ As in the 2004 rule, the Department did not address the
protection lower salaried employees would have received under the long
test with an updated salary level based on contemporary data.
---------------------------------------------------------------------------
\155\ Id. at 51244.
\156\ Id. at 51243.
---------------------------------------------------------------------------
The Department's experience with a one-test system shows that it is
less nuanced than the two-test system,
[[Page 62164]]
which allowed for finer calibration in defining and delimiting the EAP
exemption. In a two-test system, there are four variables (two salary
levels and two duties tests) that can be adjusted to define and delimit
the exemption. In a one-test system, there are only two variables (one
salary level and one duties test) that can be adjusted, necessarily
yielding less nuanced results. The loss in precision does not impact
the lowest-paid white-collar employees, who were screened from
exemption by the long test salary level, because they maintain their
right to overtime pay so long as the standard salary level is set at
least equivalent to the lower long test salary level--a condition that
was met by the 2004 rule's salary level but not by the 2019 rule's
salary level. Instead, the Department's experience shows that the shift
from a two-test system to a one-test system impacts employees earning
between the long and short test salary levels and, in turn, employers'
ability to use the exemption for these employees.
In the two-test system, employees who earned between the long and
short test salary levels and performed large amounts of nonexempt work
were protected by the long duties test, while bona fide EAP employees
who performed only limited amounts of nonexempt work in that earnings
range were exempt. Meanwhile, the short test provided a time-saving
short-cut test for higher-earning employees who would almost invariably
pass the more rigorous, and thus more time consuming, long duties test.
But the more rigorous long duties test, with its limitation on the
amount of nonexempt work that could be performed, was always core to
the two-test system, with the higher short test salary level and less
rigorous short duties test serving as a time-saving mechanism for
employees who would likely have met the more rigorous long duties test.
Upon reflection and based on its rulemakings over the past 20
years, the Department has determined that a one-test system that uses
the standard duties test, without its limitations on the amount of
nonexempt work, must use a salary level above the long test salary
level in order to ensure that it is effectively identifying bona fide
EAP employees. A single test system cannot fully replicate both the
two-test system's heightened protection for employees performing
substantial amounts of nonexempt work and its increased efficiency for
determining exemption status for employees who are highly likely to
perform EAP duties. One way in a one-test system to protect lower-
salaried employees earning between the long and short test salary
levels who were historically entitled to overtime compensation under
the long test would be to reinstate the long duties test with its
limitation on nonexempt work. A one-test system with a more rigorous
duties test would appropriately emphasize the important role of duties
in determining exemption status. However, for the reasons discussed in
this section, the Department is not proposing in this rulemaking to
replace the standard duties test with the long duties test or to return
to a two-test system with the long duties test. The Department has not
had a one-test system with a limit on nonexempt work other than from
1940 to 1949,\157\ when the Department replaced this approach with its
two-test system, and returning to it would eliminate the benefits of
the current duties test, including having a single test with which
employers and employees are familiar.
---------------------------------------------------------------------------
\157\ See 5 FR 4077.
---------------------------------------------------------------------------
In light of these considerations, the Department's goal in this
rulemaking is not only to update the single standard salary level to
account for earnings growth since the 2019 rule, but also to build on
the lessons learned in its most recent rulemakings to more effectively
define and delimit employees working in a bona fide EAP capacity.
Consistent with its broad authority under section 13(a)(1), the
Department is proposing a single salary level test that will work
effectively with the standard duties test to better define who is
employed in a bona fide EAP capacity and will both perform the initial
screening function that the salary level has always played and also
adjust the salary level to account for the change to a single test
system.
3. Salary Level Methodology
The Department's extensive regulatory history shows that the two-
test system for defining the EAP exemption is an effective method of
determining the exemption status of white-collar employees at both
lower and higher salary levels. With this system, the salary and duties
components of each test balance each other and the two tests work in
combination to efficiently identify exempt employees while protecting
employees who should receive overtime compensation. Although the two-
test system's effectiveness diminished in its later years, this was a
consequence of the Department's failure to update the salary level
tests after 1975, not a flaw with the two-test structure itself. Not
updating the salary levels in a two-test system is particularly
problematic because the real value of the higher short test salary
level will inevitably decrease, expanding the exemption to lower-paid
white-collar employees who previously were not considered bona fide EAP
employees because they did not meet the long duties test and earned
below the short test salary level, and rendering the lower long test
salary level, with its more rigorous duties requirements, less
effective in differentiating between exempt and nonexempt employees.
The Department has considered returning to the two-test system as a
way to define and delimit the EAP exemption without incurring the
precision-related challenges inherent in a one-test system. However,
the Department believes that a one-test system, with a single duties
test, benefits both employers and employees in terms of the increased
efficiency and simplicity in application. As the Department explained
in 2004, a two-test system, with the more rigorous long duties test
determining exemption status for many employees, would make exemption
status determinations more complex and less efficient than retaining a
single-test system with the existing duties test.\158\ The Department
also continues to be mindful of the post-1991 regulatory landscape,
which remains highly relevant given that the two-test system
effectively became a one-test system in 1991 when the Federal minimum
wage equaled or surpassed the long test salary levels.\159\
---------------------------------------------------------------------------
\158\ See 69 FR 22126-27; see also 81 FR 32444-45 (discussing
widespread employer and employee stakeholder opposition to
reinstating a two-test system).
\159\ 84 FR 51243.
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The Department has also considered whether to propose changing the
standard duties test in this rulemaking. A test requiring closer
scrutiny of employee duties would be consistent with the statutory
text, and a credible way to define the exemption.\160\ Indeed, a more
rigorous duties test, which limited the amount of nonexempt work--the
long duties test--was traditionally the core of the EAP exemption in
the two-test system. Experience under the two-test system shows that a
more rigorous duties test helps to ensure that exempt employees are in
fact performing EAP duties and
[[Page 62165]]
are therefore employed in a bona fide EAP capacity.\161\ In this
respect, the duties test allows for finer calibration than the salary
level test when determining who is employed in a bona fide EAP
capacity, with a rigorous duties test that limits the amount of
nonexempt work that can be performed ensuring that employees are
actually performing EAP work and not simply performing nonexempt work
without receiving overtime compensation. Were the Department to lessen
the salary level test's role by adopting a more rigorous duties test,
the number of employees who are nonexempt based on their salary alone
would decrease, helping alleviate concerns about the salary level
``supplanting an analysis of an employee's job duties'' in too many
instances.\162\ The Department could, for instance, return to a duties
test that explicitly limited the amount of nonexempt work that could be
performed. As discussed above, a limitation on nonexempt work was an
integral part of the long duties test that was, for a long time, a
critical component of the test for EAP exemption.
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\160\ See 81 FR 32446 (``The Department continues to believe
that, at some point, a disproportionate amount of time spent on
nonexempt duties may call into question whether an employee is, in
fact, a bona fide EAP employee.''); see also Stein Report at 17
(noting that ``it would be inconsistent with the purposes of the
[FLSA]'' to exempt employees like working foremen). In the 2004
rule, the Department explained that eliminating the salary level
test entirely would require significant changes to the duties test.
See 69 FR 22172.
\161\ The importance of a rigorous duties test was illustrated
by the Department's Burger King litigation in the early 1980s, when
the short and long tests were still actively in use. The Department
brought two actions arguing that Burger King assistant managers were
entitled to overtime protection. Sec'y of Labor v. Burger King
Corp., 675 F.2d 516 (2d Cir. 1982); Sec'y of Labor v. Burger King
Corp., 672 F.2d 221 (1st Cir. 1982). One group of assistant managers
satisfied the higher short test salary level and was therefore
subject to the less rigorous short duties test; the other group was
paid less and was therefore subject to the long duties test with its
limit on nonexempt work. Both appellate courts found that the higher
paid employees were not overtime protected--even though they
performed substantial amounts of nonexempt work--because they
satisfied the short duties test. The lower-paid employees, however,
were not exempt and therefore entitled to overtime compensation
because they did not meet the more rigorous long duties test.
\162\ 275 F. Supp. 3d at 806.
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The Department has ultimately decided, however, not to propose any
changes to the duties test, consistent with its decisions in the 2016
and 2019 rules. This decision was also informed by the Department's
experience when it established the single-test system in 2004. In that
rulemaking, the Department initially considered substantive changes to
the duties test,\163\ but ultimately declined to go through with most
of the proposed changes, stating that the final standard duties test
was substantially the same as the short duties test.\164\ The
Department also considered changing the duties test in both the 2016
and 2019 rulemakings, but ultimately chose not to propose any such
changes.\165\
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\163\ See 68 FR 15564-68.
\164\ 69 FR 22126, 22192-94.
\165\ 84 FR 10904; 82 FR 34618 (July 26, 2017); 80 FR 38543
(July 6, 2015).
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At this time, the Department favors keeping the current duties test
and concludes that, paired with an appropriate salary level
requirement, the test can appropriately distinguish bona fide EAP
employees from nonexempt workers. While comments received in previous
rulemakings and during listening sessions show that the standard duties
test is not universally popular, it is well known to employers,
employees, and the courts, making it easier and more efficient for
employers to implement and for workers to understand. Substantive
changes to the duties test are a possible way to revise the regulatory
test but they would take more time for employers and employees to
adjust to than an increase in the salary level, requiring employers to
reassess their current exemption determinations.
i. Fully Restoring the Salary Level's Screening Function
To determine the appropriate salary level, the Department first
considers whether the present methodology adequately performs the
historical screening function of the long test salary level and next,
the extent to which the salary level must be increased above the long
test salary level to account for the switch to a one-test system in
2004.
The Department first focused on the salary level's historic
function of screening obviously nonexempt employees from the exemption,
a ``principle [that] has been at the heart of the Department's
interpretation of the EAP exemption for over 75 years.'' \166\ Under
the two-test system, the lower long test salary level provided ``a
ready method of screening out the obviously nonexempt employees, making
an analysis of duties in such cases unnecessary.'' \167\ When the
Department updated the long test in 1958, it reaffirmed the long test
salary's function as a screening tool.\168\
---------------------------------------------------------------------------
\166\ See 84 FR 51241.
\167\ Weiss Report at 8.
\168\ Kantor Report at 2-3.
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When the Department moved to a one-test system, the standard salary
test had to perform the initial screening function that the long test
salary level performed in the two-test system. In the 2004 rule, the
Department reaffirmed its historical statements emphasizing the salary
level's critical screening function.\169\ Most significantly, the
Department used the long test methodology to validate its new salary
level of $455 per week. Even though the 2004 rule made certain changes
from that methodology (most significantly, setting the salary level
equivalent to the ``lowest 20% of all salaried employees'' instead of
the ``lowest 10% of exempt salaried employees''), the Department
stressed that both ``approaches are capable of reaching exactly the
same endpoint'' and demonstrated that the new method and the long test
method produced equivalent salary levels at the time.\170\ By setting a
salary level equivalent to the long test level, the Department ensured
that employees earning at levels whereby they were entitled to overtime
compensation under the two-test system because they earned below the
long test salary level remained screened from the exemption by the new
standard salary test, regardless of whether they met the less rigorous
standard duties test. In the 2004 rule, the Department rejected
requests from commenters who supported a salary level that was $30 to
$95 lower than the level the Department ultimately adopted,\171\ thus
maintaining the historic screening function by declining to set a
salary level lower than the long test level.
---------------------------------------------------------------------------
\169\ 69 FR 22165.
\170\ See id. at 22167-71 (showing that for all full-time
salaried employees, $455 in weekly earnings corresponded to just
over the 20th percentile in the South and the 20th percentile in
retail, and that for employees performing EAP duties, $455 in weekly
earnings corresponded to just over the 8th percentile in the South
and the 10th percentile in retail).
\171\ See id. at 22164.
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In its 2019 rule, the Department reemphasized the salary level's
screening function.\172\ The Department distinguished the 2016 rule,
which the Department explained was invalidated because it ``
`untethered the salary level test from its historical justification' of
`[s]etting a dividing line between nonexempt and potentially exempt
employees' by screening out only those employees who, based on their
compensation level, are unlikely to be bona fide executive,
administrative, or professional employees.'' \173\ In contrast, the
Department explained, reapplying the 2004 methodology to current data
was likely to pass muster because the district court that invalidated
the 2016 rule ``endorsed the Department's historical approach to
setting the salary level'' and ``explained that setting `the minimum
salary level as a floor to screen[ ] out the obviously nonexempt
[[Page 62166]]
employees' is `consistent with Congress's intent.' '' \174\
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\172\ 84 FR 51237 (internal quotation marks omitted).
\173\ Id. at 51231 (quoting 84 FR 10901).
\174\ Id. at 51241 (quoting 275 F. Supp.3d at 806).
---------------------------------------------------------------------------
The Department's position remains that a core function of the
salary level test is to screen from the EAP exemption employees who,
based on their low pay, should receive the FLSA's overtime protections.
For decades under the Department's two-test system, the long test
salary level performed this screening function. In the 2004 rule, the
Department used a different approach--setting a single salary level
test that was equivalent to, and thus set the same line of demarcation
as, the long test salary level (although it combined that salary level
with a duties test that was equivalent to the less rigorous short
duties test). The Department deviated from this approach in 2019,
setting a salary level that was $40 per week below the level produced
using the long test methodology.\175\ In doing so, the Department for
the first time expanded the exemption to include employees who were
paid below the long test salary level. As an initial step, the proposed
salary level methodology must fully restore the salary level's
screening function by ensuring that employees who were nonexempt
because they earned less than the long test salary are also nonexempt
under the standard test. Simply restoring the historic screening
function would require a standard salary level amount that is at least
equal to the long test level (which is $925 per week using current
data). Such a salary level would not, however, account for the shift to
a one-test system in 2004.
---------------------------------------------------------------------------
\175\ Id. at 51244.
---------------------------------------------------------------------------
Increasing the standard salary level to at least the long test
level would ensure that the salary level, at a minimum, performs the
historical screening function it would have performed in a two-test
system. From 1938 to 2019, all salaried white-collar employees paid
below the long test salary level were entitled to the FLSA's
protections, regardless of the duties they performed. This was true
from 1938 to 1949 under the salary level test that became the long
test,\176\ from 1949 to 2004 under the long test, and from 2004 to 2019
under the standard salary level test that was set equivalent to the
long test level. Setting the salary level below the long test level as
was done in the 2019 rule--because the 2004 methodology no longer
matched the long test salary level based on contemporaneous data--
departed from this history by enlarging the exemption to newly include
employees who earned less than the long test salary level.
---------------------------------------------------------------------------
\176\ During this period the Department used a one-test system
that paired a lower salary level with a more rigorous duties test.
See, e.g., 5 FR 4077.
---------------------------------------------------------------------------
In the 2019 rule, the Department expressly declined to use the long
test methodology to set the salary level test.\177\ Because the
Department is not using the long test methodology to set the salary
level in this proposal, but is instead using it to inform its selection
of a new salary level methodology, the concerns expressed by the
Department in 2019 do not apply. The Department was in part worried
that the long test method is ``complex to model and thus is less
accessible and transparent.'' \178\ This concern does not arise here
because the Department's proposed methodology uses a publicly available
data set of all full-time nonhourly workers in the South to set the
salary level, as opposed to the long test methodology data set (which
only included exempt workers).\179\ In 2019, the Department also
expressed concern that the long test methodology presents a
``circularity problem'' because this approach ``would determine the
population of exempt salaried employees, while being determined by the
make-up of that population.'' \180\ This concern is similarly not
implicated here because, consistent with its practice since 2004, the
Department is setting the salary level using a data set of all full-
time nonhourly workers, not just exempt workers.
---------------------------------------------------------------------------
\177\ 84 FR 51244, 51260.
\178\ Id. at 51244.
\179\ For the same reason, the Department's approach does not
implicate concerns that applying the long test method ``requires
`uncertain assumptions' '' to compile a dataset set that represents
exempt EAP employees. Id. (quoting 69 FR 22167). Moreover, while it
is true that the Department must apply its probability codes to
determine the group of salaried employees who pass the duties test,
the Department has consistently applied these codes since the 2004
rule. See generally section VII.B.5 (discussing probability codes).
\180\ 84 FR 51244 (quoting 69 FR 22167).
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ii. Selecting the Proposed Salary Level Methodology
Section 13(a)(1)'s broad grant of statutory authority for the
Department to define and delimit the EAP exemption provides the
Department a degree of latitude in determining an appropriate salary
level for identifying individuals who are employed in a bona fide EAP
capacity. The Department believes that the long and short test salary
levels provide useful parameters informed by its historical rulemaking
for determining how to update the salary level test in this rulemaking.
As previously discussed, the long and short test salary levels have
served as the foundation for nearly all of the Department's prior
rulemakings, either directly under the two-test system, or indirectly
as a means of evaluating the Department's salary level methodology
under a one-test system. Based on 2022 data, applying the long test
methodology produces a salary level of $925 per week ($48,100 per year)
and the short test methodology produces a salary level of $1,378 per
week ($71,656 per year).
The long and short test salary levels reflected longstanding
understandings of how an individual's salary level informs the question
of whether an individual is employed in a bona fide EAP capacity. As
noted above, the long test salary level helped distinguish employees
who were not employed in a bona fide EAP capacity and the Department
found that employees who were screened from exemption by the long test
salary level generally did not meet the other requirements for
exemption.\181\ The justification for the short test, on the other
hand, was that employees who met the higher salary level were more
likely to meet all the requirements of the exemption (including the
long test's 20 percent limit on nonexempt work).\182\ Moreover, because
the Department's rulemakings since 2004 have, to varying extents, used
the long and short tests as guideposts for setting the salary level in
a one-test system, maintaining the same orientation in this rulemaking
would enable the Department to calibrate its methodology to better
define and delimit bona fide EAP employees, and evaluate how it impacts
employees who historically have been entitled to overtime compensation
and the ability of employers to use the exemption to exclude from
overtime protection employees who have historically been exempt.
---------------------------------------------------------------------------
\181\ See Kantor Report at 2-3.
\182\ Weiss Report at 22-23.
---------------------------------------------------------------------------
In its almost 20 years of experience with the one-test system, the
Department has never set a standard salary level that falls between the
long test salary level and the short test range. As explained more
fully above, the Department set the standard salary at (or below) the
long test salary level in the 2004 and 2019 rules and set it at the low
end of the historic range of short test salary levels in the 2016 rule.
Setting the salary level at either the long test salary level or
equivalent to a short test salary level in a one-test system with the
standard duties test, however, results in either denying overtime
protection to lower-paid employees who are performing large amounts of
nonexempt work, and thus, were exempt under the Department's historical
view of the EAP
[[Page 62167]]
exemption, or in raising concerns that the salary level is determining
the status of too many employees. An appropriately calibrated salary
level between the long and short test salary levels would better define
and delimit which employees are employed in a bona fide EAP capacity,
and thus better fulfill the Department's duty to define and delimit the
EAP exemption.
Traditionally, the Department considered employees earning between
the long and short test salary levels to be employed in a bona fide EAP
capacity only if they were not performing substantial amounts of
nonexempt work. With the adoption of a duties test based on the less
rigorous short duties test, the shift to a single-test system
eliminated the inquiry into the amount of nonexempt work employees
performed. Following this shift, the Department has taken two
approaches to setting the salary level to pair with the standard duties
test. The approach taken in the 2004 rule permitted the exemption of
all employees earning above the long test salary level who met the
standard duties test--including many employees who performed
substantial amounts of nonexempt work and were protected by the long
duties test. The approach taken in the 2016 rule was challenged and
criticized as making nonexempt employees earning between the long test
salary level and the low end of the short test salary range--including
some employees who may have performed very little nonexempt work and
would have been exempt under the long test. Inevitably, any attempt to
pair a single salary level with the current duties test will result in
some employees who perform substantial amounts of nonexempt work being
exempt, and some employees who perform almost exclusively exempt work
being nonexempt.\183\ But such a result is inherent in setting any
salary level in a one test system--some employees will have EAP status
turn on salary level. The proposed salary level would better identify
which employees are employed in a bona fide EAP capacity--particularly
by restoring overtime eligibility for individuals who perform
substantial amounts of nonexempt work and historically would have been
protected by the long duties test--while at the same time addressing
potential concerns that the salary level test should not be
determinative of exemption status for too many individuals.\184\
---------------------------------------------------------------------------
\183\ See Stein Report at 6 (``In some instances the rate
selected will inevitably deny exemption to a few employees who might
not unreasonably be exempted, but, conversely, in other instances it
will undoubtedly permit the exemption of some persons who should
properly be entitled to benefits of the act.'').
\184\ The Department has repeatedly recognized that increasing
salary level tends to correlate with the performance of bona fide
EAP duties. See section IV.A.2 (discussing role of long test and
short test salary levels); section IV.C (discussing the role of the
HCE total annual compensation threshold). Thus, increasing overtime
protection specifically for workers earning at the lower end of the
range between the long test salary level and short test salary
level--but not those earning at the higher end of that range--is an
especially appropriate approach to balancing these concerns.
---------------------------------------------------------------------------
In setting the salary level, the Department continues to believe
that it is important to use a methodology that is transparent and
easily understood. As in its prior rulemakings, the Department proposes
to set the salary level using a lower-salary regional data set (as
opposed to nationwide data) to accommodate businesses for which
salaries generally are lower due to geographic or industry-specific
reasons.\185\ Specifically, the Department proposes to set the salary
level using the data set of full-time nonhourly \186\ workers in the
lowest-wage Census Region (the South). Like the Department's 2004,
2016, and 2019 rules, this approach would promote transparency because
BLS routinely compiles this data. It would also promote regulatory
simplification because the data set is not limited to exempt EAP
employees and thus does not require the Department to model which
employees pass the duties test.\187\
---------------------------------------------------------------------------
\185\ See 84 FR 51238; 81 FR 32404.
\186\ Consistent with recent rulemakings, in determining
earnings percentiles the Department looked at nonhourly earnings for
full-time workers from the CPS MORG data collected by BLS.
\187\ As discussed in the economic analysis, see section
VII.B.5, this modeling is done using the Department's probability
codes. See 84 FR 51244; 69 FR 22167.
---------------------------------------------------------------------------
For similar reasons, the Department is not proposing to add
nationwide earnings data from specific industries (such as retail) to
the CPS earnings data from the lowest-wage Census Region. The
Department's 2019 rule included such data to faithfully replicate the
2004 methodology which considered earnings of full-time nonhourly
workers in the lowest-wage Census Region and the retail industry
nationally.\188\ The Department's approach nonetheless would yield a
salary level that would be appropriate in low-wage industries because
using earnings data from the lowest-wage Census Region would capture
differences across regional labor markets without attempting to adjust
to specific industry conditions.\189\
---------------------------------------------------------------------------
\188\ See 84 FR 51244 (citing 69 FR 22167).
\189\ See 81 FR 32410.
---------------------------------------------------------------------------
Based on 2022 data, applying the long test methodology produces a
salary level of $925 per week ($48,100 per year), which equates to
between the 26th and 27th percentiles of weekly earnings of full-time,
nonhourly workers in the lowest-wage Census Region (the South).\190\
This figure provides what the Department believes should be the lowest
boundary of a salary level methodology because it would at least
restore the historical screening function that had operated under a
two-test system.
---------------------------------------------------------------------------
\190\ The 26th percentile in this data set corresponds to a
salary level of $918 per week and the 27th percentile corresponds to
a salary level of $933 per week.
---------------------------------------------------------------------------
The Department is not proposing to set the salary level equivalent
to the long test level in part because doing so would perpetuate the
problem that has become evident under the 2004 and 2019 rules: that
setting the single salary level no higher than the long test level
enables employers to exempt employees who were traditionally not
considered bona fide EAP employees because they performed substantial
amounts of nonexempt work and did not meet the long duties test under
the two-test system. Like these earlier rules, this approach would
impact white-collar employees earning between the long and short test
salary levels who perform substantial amounts of nonexempt work--and
thus were entitled to overtime protection under the two-test system--
but meet the less rigorous standard duties test.
As discussed above, the Department could address this issue by
changing the duties test to reinstate the long test's limit on
nonexempt work. Doing so would restore the relationship between the
salary level and duties tests that existed under the two-test system
whereby the Department paired a lower salary level with a more rigorous
duties test. Paired with a long test-equivalent salary level, a
stronger duties test would ensure that lower-paid employees who perform
large amounts of nonexempt work receive overtime protection, while
permitting employers to continue using the exemption for lower-paid
employees performing EAP duties. However, for the reasons previously
discussed, the Department proposes to restore the relationship between
the salary level and duties test by keeping the duties test unchanged
at this time and instead increasing the salary level moderately above
the long test level. This increase in the salary level is necessary for
the Department to effectively fulfill its role of defining and
delimiting the EAP exemption because, without it, the employees who
were not considered bona fide EAPs historically--those earnings between
the long and short test
[[Page 62168]]
salary levels who did not meet the historical long duties test--would
remain exempt from overtime. In other words, the Department's proposed
salary level methodology will better help limit the exemption of lower-
paid employees who historically were not considered bona fide EAP
employees because they perform substantial amounts of nonexempt work,
but who are not receiving overtime protection under the one-test
system.
Although the ``regulations cannot have the precision of a
mathematical formula[,]'' \191\ with only two variables to adjust in a
one-test system, and with the Department deciding to leave one of those
variables (the duties test) unchanged in this rulemaking, the
Department wanted to look more precisely at methods for updating the
salary level test. The Department has therefore looked to employee
earnings ventiles rather than only deciles as it has historically
done.\192\ The earnings ventiles between the long test salary level
(approximately the 26th or 27th percentile) and short test salary level
(approximately the 53rd percentile) are the 30th, 35th, 40th, 45th, and
50th percentiles of weekly earnings of full-time salaried workers in
the lowest-wage Census Region. The Department examined these earnings
ventiles with the goal of more effectively defining and delimiting the
exemption while maintaining the one-test system.
---------------------------------------------------------------------------
\191\ Weiss Report at 9.
\192\ Historically, the Department set the long test salary
level to exclude from exemption approximately the lowest-paid 10
percent of exempt salaried employees in the lowest-wage regions and
industries. In 2004 and 2019, the Department set the standard salary
level test equivalent to the 20th percentile of weekly earnings of
full-time salaried workers in the South Census Region and in the
retail industry nationally. In the 2016 rule, the Department set the
salary level equal to the 40th percentile of weekly earnings of
full-time salaried workers in the lowest-wage Census Region (the
South). See 84 FR 51236-37 (describing prior methodologies).
---------------------------------------------------------------------------
Setting the salary level at the 40th percentile of weekly earnings
of full-time salaried workers in the lowest-wage Census Region would
reduce the impact of a one-test system on lower-paid white-collar
employees who perform significant amounts of nonexempt work. This
percentile is midway between the 30th and 50th percentiles and would
produce a salary level ($1,145 per week) that is roughly the midpoint
between the long and short test salary levels. Of the approximately
10.3 million salaried white-collar employees who earn between the long
and short test salary levels, approximately 47 percent earn between the
long test salary level and $1,145 and would receive overtime protection
by virtue of their salary, while approximately 53 percent earn between
$1,145 and the short test salary level and would have their exemption
status turn on whether they meet the duties test.
The Department remains concerned, however, that courts could find
this approach makes the salary level test determinative of overtime
eligibility for too many employees (i.e., 47 percent of those earning
between the long and short test levels). Setting the salary level equal
to the 45th or 50th percentile of weekly earnings would further amplify
this concern. In contrast, setting the salary level based on a lower
percentile of earnings will (compared to such higher levels) increase
the number of employees for whom duties is determinative of exemption
status, and in turn the ability of employers to use the exemption for
more lower-paid employees who meet the EAP duties requirements. This
outcome is consistent with the important role of the duties test in
identifying bona fide EAP employees and recognizes that the 2016 rule
(which set the salary level equal to the 40th percentile of weekly
earnings of full-time salaried workers in the lowest-wage Census
Region) was held invalid by the U.S. District Court for the Eastern
District of Texas for making too many employees eligible for overtime
based on salary alone.\193\
---------------------------------------------------------------------------
\193\ See Nevada, 275 F.Supp.3d at 806-07.
---------------------------------------------------------------------------
The Department is also responding to concerns that setting the
salary level equal to the 40th percentile of weekly earnings of full-
time salaried workers in the lowest-wage Census Region would foreclose
employers from exempting any white-collar employees who earn less than
$1,145 per week and perform EAP duties, including those who were exempt
under the long test and remained exempt when the Department established
the one-test system in 2004 and set the salary level equivalent to the
long test level.\194\ Litigants challenging the 2016 rule also
emphasized this consequence of setting a salary level above the long
test in a one-test system, and those arguments have contributed to the
Department more fully attempting to account for the impact of the shift
from a two-test to a one-test system on the scope of the exemption.
Although some stakeholders have urged the Department to follow the
methodology from the 2016 rule or set an even higher threshold, the
Department has chosen a salary level that is appreciably lower than the
midpoint between the short and long test salary levels--an approach
that it believes is an appropriate method for identifying bona fide EAP
employees. This approach would also reasonably balance the goal of
ensuring that employees earning above the long test salary level but
performing substantial amounts of nonexempt work are not exempt with
the goal of enabling employers to use the exemption for employees who
do not perform substantial amounts of nonexempt work.
---------------------------------------------------------------------------
\194\ See 84 FR 51242.
---------------------------------------------------------------------------
The Department also examined the 30th and 35th percentiles of
weekly earnings of full-time salaried workers in the lowest-wage Census
Region. The Department did not consider setting the salary level at the
25th percentile of weekly earnings of full-time salaried workers in the
lowest-wage Census Region ($901 per week or $46,852 per year) because
it is lower than the long test salary level ($925 per week or $48,100
per year, which is approximately the 26th or 27th percentile). Setting
the standard salary level at the 30th percentile of weekly earnings of
full-time salaried workers in the lowest-wage Census Region would
result in a salary level of $975 per week ($50,700 per year). This
salary level is roughly the midpoint between the 2004 methodology (the
20th percentile of weekly earnings of full-time salaried workers in the
lowest-wage Census region and in retail nationally, currently $822 per
week or $42,744 per year), and the 2016 methodology (the 40th
percentile of weekly earnings of full-time salaried workers in the
lowest-wage Census Region, currently $1,145 per week or $59,540 per
year). While setting the salary level equal to the 30th percentile of
weekly earnings of full-time salaried workers in the lowest-wage Census
Region would produce a salary level that is above the long test salary
level, it is very close to the long test salary level, and the
Department is concerned it would not sufficiently address the problem
inherent in the 2004 methodology of including in the exemption
employees who perform significant amounts of nonexempt work, including
those earning salaries closer to the long test salary level, and
historically were not considered bona fide EAP employees under the two-
test system. Additionally, only 11 percent of white-collar employees
who earn between the long and short test salary levels earn below the
30th percentile. As noted above, the Department believes that the
standard salary must fulfill the historical screening function of the
long test salary level and account for the shift to a one-test system,
and the
[[Page 62169]]
Department is concerned that this salary level would not fulfill both
objectives.
After careful consideration, the Department concludes that setting
the salary level equal to the 35th percentile--which produces a salary
level of $1,059 per week--will effectively define and delimit the scope
of the EAP exemption. Consistent with the Department's responsibility
to ``not only . . . determin[e] which employees are entitled to the
exemption, but also [to] draw[ ] the line beyond which the exemption is
not applicable[,]'' \195\ the Department's proposed standard salary
level will, in combination with the standard duties test, effectively
calibrate the scope of the exemption to ensure the exemption of bona
fide EAP employees, and do so in a way that distributes across the
population of white-collar employees earning between the long and short
test salary levels the impact of the shift to a one-test system.
---------------------------------------------------------------------------
\195\ Stein Report at 2.
---------------------------------------------------------------------------
The Department stated in the 2019 rule that the primary and modest
purpose of the salary level is to identify potentially exempt employees
by screening out obviously nonexempt employees.\196\ While this initial
screening function is the primary effect of the salary level, as noted
above, each update to the salary level has also had a secondary effect:
it defines the group of white-collar employees for whom the duties test
is determinative of their exemption status. Setting the salary level
equal to the 35th percentile of weekly earnings of full-time salaried
workers in the lowest-wage Census Region produces a salary level high
enough above the long test level to ensure overtime protection for some
lower-paid employees who were traditionally entitled to overtime
compensation under the two-test system by virtue of their performing
large amounts of nonexempt work. The salary level is also low enough,
as compared with higher salary levels, to significantly shrink the
group of employees performing EAP duties who are excluded from the
exemption by virtue of their salary alone. Of the 10.3 million salaried
white-collar employees earning between the equivalent of the long and
short test salary levels, approximately 31 percent earn between $925
(the equivalent of the long test salary level) and $1,059 (the proposed
salary level) and would receive overtime protection by virtue of their
salary, while approximately 69 percent earn between $1,059 and $1,378
(the equivalent of the short test salary level) and would have their
exemption status turn on whether they meet the duties test.
---------------------------------------------------------------------------
\196\ 84 FR 51238.
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Comparing the impact of the new salary level on white-collar
employees earning between the long and short test salary levels and
their employers reinforces the reasonableness of the Department's
proposed salary level. Whereas the 2004 and 2019 rules permitted the
exemption of such employees even if they performed significant amounts
of nonexempt work, and the 2016 rule prevented employers from using the
exemption for such employees earnings below the short test salary range
even if they performed EAP duties, the proposed methodology falls
between these two methodologies and therefore reasonably balances the
effect of the switch to a one-test system in a way that better
differentiates between those who are and are not employed in a bona
fide EAP capacity. Even though the Department's decision to select a
salary level below the midpoint between the long and short tests means
that the effect of the salary level on these employees and employers is
not equal, a higher salary level could disrupt reliance interests of
employers who (due in part to the Department's failure to update the
salary level tests between 1975 and 2004), have been able to use a
lower salary level and more lenient duties test to determine exemption
status since 1991. However, a significantly lower salary level akin to
the long test salary level would avoid disrupting such reliance
interests only by continuing to place the burden of the move to a one-
test system entirely on employees who historically were entitled to the
FLSA's overtime protections because they perform substantial amounts of
nonexempt work. The Department believes that employer reliance
interests should inform where the salary level is set between the long
and short test levels, and that its approach strikes a workable
equilibrium that reasonably balances, between employees' right to
receive overtime compensation and employers' ability to use the
exemption, the impact of a one-test system.
Such reasonable balancing is fully in line with the Department's
authority under the FLSA to ``mak[e] certain by specific definition and
delimitation'' the ``general phrases'' ``bona fide executive,
administrative, and professional employee.'' \197\ This grant of
authority confers discretion upon the Department to reasonably
determine the boundaries of these general categories; any such line-
drawing, as courts have recognized, will ``necessarily'' leave out some
employees ``who might fall within'' these categories.\198\
---------------------------------------------------------------------------
\197\ Walling, 140 F.2d at 831.
\198\ Id.
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The Department recognizes that it stated in its 2016 rule that the
current duties test could not be effectively paired with a salary level
below the short test salary range, and for this reason expressly
rejected setting the salary level at the 35th percentile of weekly
earnings of full-time salaried workers in the South.\199\ But that
rule, which would have prevented employers from using the EAP exemption
for some employees who were considered exempt under the prior two-test
system, was challenged in court, and a return to it would result in
significant legal uncertainty for both workers and the regulated
community. In the 2019 rule, the Department expressly rejected setting
the salary level equal to the long test or higher.\200\ However, as
noted above, the Department did not fully address in that rule the
implications of the switch from a two-test to a single-test system.
Having now grappled with those implications, particularly in light of
the Department's experience in the litigation challenging its 2016
rule, the Department has concluded that not only can it pair the
current duties test with a salary between the long and short test
salary levels, but that doing so appropriately recalibrates the salary
level in a one-test system to ensure that it effectively identifies
bona fide EAP employees.
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\199\ 81 FR 32410.
\200\ See 84 FR 51244.
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The Department is not proposing any changes to how bonuses are
counted toward the salary level requirement. Consistent with the
current regulations, if the salary level is finalized as proposed,
employers could satisfy up to 10 percent of the salary level ($105.90
per week under this proposed rule) through the payment of
nondiscretionary bonuses and incentive pay (including commissions) paid
annually or more frequently.\201\
---------------------------------------------------------------------------
\201\ Sec. 541.602(a)(3).
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4. Assessing the Impact of the Proposed Salary Level
As stated above, the Department believes that the salary level test
should fulfill a ``useful, but limited, role'' in defining and
delimiting the EAP exemption.\202\ In proposing to update the standard
salary level, the Department seeks to: preserve the primary role of an
analysis of employee duties in determining EAP exemption status, fully
restore the initial screening function of the salary level, and more
[[Page 62170]]
effectively identify in a one-test system who is employed in a bona
fide EAP capacity in a manner that reasonably distributes among
employees earning between the long and short test salary levels and
their employers the impact of the Department's move from a two-test to
a one-test system. A closer look at the expected impact of the proposed
salary level shows that it meets these objectives.
---------------------------------------------------------------------------
\202\ 84 FR 51238.
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The Department intentionally chose a salary level methodology that,
if finalized, would ensure that the EAP exemption status of the great
majority of white-collar employees would continue to depend on their
duties. To evaluate whether the proposed methodology meets this
objective, the Department first considered its effect on the population
of all salaried white-collar employees--the universe of employees who
could potentially be impacted by a change in the standard salary level.
This analysis confirmed that the number of white-collar employees who
would be excluded from the EAP exemption as a result of the
Department's proposed standard salary level is greatly exceeded by the
far-larger population of white-collar employees for whom duties would
continue to determine their exemption status.
As illustrated in Figure A below, of the approximately 43.8 million
salaried white-collar employees in the United States subject to the
FLSA,\203\ about 11.7 million earn below the Department's proposed
standard salary level of $1,059 per week and about 32.1 million earn
above the Department's proposed salary level.\204\ Thus, approximately
27 percent of salaried white-collar employees (most of whom, as
discussed below, do not perform EAP duties) earn below the proposed
salary level, whereas approximately 73 percent of salaried white-collar
employees earn above the salary level and would have their exemption
status turn on their job duties.\205\
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\203\ Excluded from this number are workers in named occupations
and those exempt under another non-EAP overtime exemption. The
exemption status of these groups will not be impacted by a change in
the standard salary level.
\204\ As discussed further below, see, e.g., section VII.B.5,
the Department used data representing compensation paid to nonhourly
white-collar workers to estimate compensation paid to salaried
white-collar employees.
\205\ Even this estimate is conservative, as it excludes 8.1
million white-collar employees employed as teachers, attorneys, and
physicians, for whom there is no salary level requirement under the
part 541 regulations and whose exemption status is therefore always
determined by their duties. If these employees in ``named
occupations'' are included, the percentage of white-collar employees
for whom exemption status would depend on duties, rather than
salary, increases to 77 percent. See Sec. Sec. 541.303-304.
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Scrutinizing these figures more closely reinforces the continued
importance of the duties test under the Department's proposal. Of the
approximately 11.7 million salaried white-collar employees who earn
below the Department's proposed standard salary level of $1,059 per
week, about 8.5 million earn below the long test salary level of $925
per week. As explained above, with the exception of the 2019 rule, when
the Department set the salary level slightly lower, the Department has
always set salary levels that screened from exemption employees earning
below the long test salary level. The number of salaried white-collar
employees for whom salary would be determinative of their nonexempt
status and who earn at least the long test salary level--3.2 million--
is nearly ten times smaller than the number of salaried white-collar
employees for whom job duties would continue to be determinative of
their exemption status because they earn at least the proposed standard
salary level--32.1 million.\206\
---------------------------------------------------------------------------
\206\ As noted above, see supra note 205, these figures do not
include the additional 8.1 million white-collar employees in
occupations for which there is no salary level requirement and so
duties is always determinative of exemption status.
[GRAPHIC] [TIFF OMITTED] TP08SE23.000
[[Page 62171]]
In analyzing how the Department's proposed salary level would
impact all salaried white-collar employees, the Department also
considered the extent to which salaried white-collar employees across
the income distribution perform EAP duties. As noted above, the salary
level has historically served as ``a helpful indicator of the capacity
in which an employee is employed, especially among lower-paid
employees;'' \207\ however, it should not eclipse the duties test.\208\
The Department's proposed standard salary level meets this standard
because, according to probability codes the Department has used in all
of its recent part 541 rules,\209\ most salaried white-collar employees
paid less than the proposed standard salary level do not meet the
duties test, whereas a substantial majority of salaried white-collar
employees earning above the proposed standard salary level meet the
duties test.
---------------------------------------------------------------------------
\207\ 84 FR 51239 (quoting 84 FR 10907).
\208\ See id. at 51245.
\209\ See section VII.B.5.
---------------------------------------------------------------------------
As illustrated in Figure B, of the 11.7 million salaried white-
collar employees who earn less than the proposed standard salary level
of $1,059 per week, the Department estimates that only 36 percent--
about 4.2 million employees--meet the standard duties test. In
contrast, of the 32.1 million salaried white-collar employees who earn
at least $1,059 per week, 76 percent--about 24.5 million employees--
meet the standard duties test.\210\ The number of salaried white-collar
workers who meet the standard duties test and earn below the proposed
standard salary level is thus nearly six times smaller than the number
of salaried white-collar workers who meet the standard duties test and
earn at least the proposed standard salary amount. And 85 percent of
all salaried white-collar workers who meet the standard duties test--
24.5 million out of a total of approximately 28.7 million--earn at
least the Department's proposed standard salary level.\211\
---------------------------------------------------------------------------
\210\ As noted above, see supra note 205, these figures exclude
salaried white-collar workers who are not subject to the part 541
salary criteria.
\211\ Note that these numbers refer only to salaried white-
collar employees at all salary levels who meet the standard duties
test, including employees who are nonexempt because they earn below
the current standard salary level.
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BILLING CODE 4510-27-P
[GRAPHIC] [TIFF OMITTED] TP08SE23.001
The Department next evaluated its proposed salary level methodology
by looking at salaried white-collar employees who earn between the long
and short test salary levels. As discussed in section IV.A.3.ii, the
long
[[Page 62172]]
and short test salary levels provide appropriate parameters for
determining how to update the salary level test. Under the Department's
proposal, duties would continue to be determinative of exemption status
for a significant majority of white-collar employees earning between
these thresholds.
As illustrated in Figure C, of the approximately 10.3 million
salaried white-collar employees who earn between the long test salary
level of $925 per week and the short test salary level of $1,378 per
week, about 31 percent (3.2 million) earn below the Department's
proposed standard salary level, and about 69 percent (7.1 million) earn
at or above the Department's proposed standard salary level. Moreover,
of the 3.2 million employees earning between the long test and the
proposed standard salary level, approximately half do not meet the
standard duties test.\212\
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\212\ As discussed further below, about 1.6 million of the
approximately 3.2 million salaried white-collar employees who earn
between the long test salary threshold and the Department's proposed
salary level (about 49 percent of these employees) do not meet the
standard duties test. Thus, in effect, only 16 percent of salaried
white-collar employees who earn between the long and short test
salary levels--1.6 million out of a total of 10.3 million--have
their exemption status determined solely by the proposed standard
salary level.
[GRAPHIC] [TIFF OMITTED] TP08SE23.002
BILLING CODE 4510-27-C
Finally, the Department also looked at the impact of the proposed
salary level on currently exempt EAP employees--those salaried white-
collar employees who meet the standard duties test and earn at least
$684 per week. As with every prior rulemaking to increase the part 541
salary levels, a relatively small percentage of currently exempt
employees would become nonexempt if this proposal were finalized. Of
the approximately 43.8 million salaried white-collar employees in the
United States, approximately 27.9 million currently qualify for the EAP
exemption.\213\ Of these 27.9 million presently-exempt employees, just
3.4 million earn at or above the current $684 per week standard salary
level but less than $1,059 per week and would, without some intervening
action by their employers, become entitled to overtime protection as a
result of the Department increasing the standard salary level to $1,059
per week. A test for exemption that includes a salary level component
will necessarily result in a number of employees who earned at or above
the prior salary level and pass the duties test becoming nonexempt when
the salary level is updated. This is a feature, and not a flaw, of a
salary level test, and as the
[[Page 62173]]
Department has consistently found since 1938, salary is an important
indicator of whether an individual is employed in a bona fide EAP
capacity and therefore a key element in defining the exemption.
---------------------------------------------------------------------------
\213\ Note that the 27.9 million employee figure only refers to
employees who meet the standard EAP exemption and thus differs from
the population of currently exempt EAP workers identified in the
economic analysis (28.4 million), which includes workers who qualify
only for the HCE exemption. As noted above, this is a conservative
estimate because there are also 8.1 million employees in the ``named
occupations'' who, under the Department's regulations, are exempt
based on their duties alone.
---------------------------------------------------------------------------
The Department's proposed standard salary level would impact the
exemption status of two distinct and important, but relatively small,
groups of lower-paid EAP employees. First, the Department's proposal
would restore overtime protections to 1.8 million currently exempt
employees who meet the standard duties test but earn less than the
equivalent of the long test salary level ($925). As previously
explained, such employees were always excluded from the EAP exemption
prior to 2019, either by the long test salary level itself, or under
the 2004 rule salary level, which was equivalent to the long test
salary level. Fully restoring the salary level's initial screening
function requires a salary level that would ensure all employees who
earn below the long test level would be excluded from the exemption.
Second, the proposed standard salary level would result in overtime
protections for an additional 1.6 million currently exempt employees
who meet the standard duties test and earn between the long test salary
level ($925 per week) and the Department's proposed standard salary
level. As explained earlier, the Department believes it is necessary to
set the standard salary level above the long test level to reasonably
distribute the impact of the switch from a two-test system to a one-
test system. The Department's proposal would limit the number of
affected employees by setting a standard salary level towards the lower
end of the range between the long and short test salary levels and by
using earnings data from the lowest-wage Census region (the South).
Even among the 3.4 million affected employees, the fact that a
majority of these employees earn below the long test level underscores
the modest role of the Department's proposed standard salary level.
Beyond these 1.8 million employees earning less than the long test
salary level--to whom this proposal would simply restore overtime
protections that they had under every rule prior to 2019--the
Department's proposed increase in the standard salary level would only
affect the exemption status of 1.6 million employees. This group makes
up less than six percent of all currently exempt, salaried white-collar
employees and less than four percent of all salaried white-collar
employees.\214\ That this group is so small reinforces the conclusion
that the Department's proposed salary level methodology would maintain
the ``useful, but limited, role'' of the salary level in defining and
delimiting the EAP exemption.\215\
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\214\ The 3.4 million employees affected by the Department's
proposed standard salary level represent only 12 percent of the 27.9
million salaried white-collar employees who currently qualify for
the standard EAP exemption.
\215\ 84 FR 51238.
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5. Salary Level Alternatives
In determining which methodology to use to update standard salary
level, the Department considered several alternatives to its proposed
methodology of the 35th percentile of weekly earnings of full-time
salaried workers in the lowest-wage Census Region. As discussed, the
Department believes that the long and short test salary levels provide
appropriate boundaries for assessing potential salary levels,\216\
though it also considered the methodology used in the 2019 rule, which
set the standard salary level below the long test level.\217\ The
Department also looked at earnings ventiles for full-time salaried
workers falling between the long and short test salary levels. The
Department analyzed four alternative salary levels--two methodologies
that would produce a higher salary level than the proposed methodology,
and two that would produce a lower salary level.\218\
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\216\ See section IV.A.3.ii.
\217\ See 84 FR 51260.
\218\ The potential impact of these four alternatives is
discussed in greater detail below. See section VII.C.8.
---------------------------------------------------------------------------
The Department first considered setting the standard salary level
at the historical average short test salary level ($1,378 per week or
$71,656 per year).\219\ This would ensure that all employees who earn
between the long and short test salary levels and perform substantial
amounts of nonexempt work would be entitled to overtime compensation.
However, by making exemption status for all employees who earn between
the long and short test levels depend entirely on the salary paid by
the employer, this approach would also prevent employers from being
able to use the EAP exemption for employees earning between these
salary levels who do not perform substantial amounts of nonexempt work
and thus were historically exempt under the long test. For this reason,
among others, the Department has chosen not to propose the salary level
generated by this methodology.
---------------------------------------------------------------------------
\219\ See section IV.A.3.ii.
---------------------------------------------------------------------------
The Department also considered setting the standard salary level at
the 40th percentile of weekly earnings of full-time salaried workers in
the lowest-wage Census Region ($1,145 per week or $59,540 per year).
This salary level is roughly the midpoint between the long and short
test salary level alternatives ($925 per week and $1,378 per week,
respectively). However, as discussed above, the Department is concerned
that this approach could be seen by courts as making salary
determinative of exemption status for too large a portion of employees,
as this salary level would make the salary paid by the employer
determinative of exemption status for roughly half (47 percent) of
white-collar employees who earn between the long and short test salary
levels.\220\ The Department is also concerned that this approach would
generate the same concerns that led to the district court decision
invalidating the 2016 rule (which adopted the same methodology).\221\
---------------------------------------------------------------------------
\220\ See id.
\221\ See id.
---------------------------------------------------------------------------
The Department also considered using the 2004 methodology (the 20th
percentile of weekly earnings of full-time salaried workers in the
lowest-wage Census region and in retail nationally), which is currently
$822 per week ($42,744 per year). This is also the methodology that the
Department used in the 2019 rule.\222\ However, the salary level
produced by the 2004 methodology is below the equivalent of the long
test salary level ($925 per week). As discussed, the Department
considers the long test to be the lower boundary for an appropriate
salary level since, except for the 2019 rule, employees who earn below
the long test salary level have consistently been excluded from the EAP
exemption by the initial screening function of the salary level.\223\
Accordingly, the Department believes that a standard salary level
produced using the 2004 methodology would be too low to fully
effectuate the salary level's role in defining the EAP exemption.
---------------------------------------------------------------------------
\222\ 84 FR 51260.
\223\ See section IV.A.2; section IV.A.4.
---------------------------------------------------------------------------
The Department also considered setting the standard salary level at
the long test level ($925 per week or $48,100 per year). Doing so would
ensure the initial screening function of the salary level by restoring
overtime protections to those employees who were consistently excluded
from the EAP exemption prior to 2019, either by the long test salary
level itself, or under the 2004 rule salary level, which was set
equivalent to the long test salary
[[Page 62174]]
level.\224\ However, as explained above, setting the standard salary
level at the long test level would perpetuate the problem that has
become evident under the 2004 and 2019 rules. Specifically, this
approach would unduly deny overtime protections to all employees whose
entitlement to overtime compensation was protected by the more rigorous
long duties test.\225\ As noted above, however, the Department believes
that in a one-test system with the current duties test it must set the
salary level above the long test salary level in order to better define
and delimit which employees are employed in a bona fide EAP capacity.
---------------------------------------------------------------------------
\224\ See section IV.A.1.
\225\ See section IV.A.2.
---------------------------------------------------------------------------
While, for the reasons discussed herein, none of these alternatives
were used as a method to establish the proposed salary test level, they
confirm that the proposed salary level of the 35th percentile of weekly
earnings of all full-time salaried employees in the lowest-wage Census
Region (the South) is an appropriate salary level. The Department's
proposed salary level appropriately would account for the shift from a
two-test to a one-test system for determining exemption status,
protecting lower-paid white-collar employees who traditionally have
been entitled to overtime protection, while allowing employers to use
the exemption for EAP employees earning less than the short test salary
level.
The Department welcomes comments on its proposed increase to the
standard salary level. The Department also invites comments on
alternate salary methodologies and specifically how such alternative
methodologies would better define and delimit bona fide EAP employees
than the Department's proposed methodology.
B. Special Salary Levels--U.S. Territories and Motion Picture Industry
1. United States Territories
The FLSA's overtime requirements and the EAP exemption apply to
employees in U.S. territories.\226\ Historically, the Department
generally applied special, lower salary levels to employees in U.S.
territories that were not subject to the Federal minimum wage in
section 6(a)(1) of the FLSA. Consistent with this principle, as the
Department explained in the 2004 rule, the Department applied lower
salary levels to employees in Puerto Rico, the U.S. Virgin Islands, and
American Samoa because, until 1989, the FLSA permitted the
establishment of special minimum wage rates below the Federal minimum
wage in these territories.\227\ The Department did not set a special
salary level for employees in Guam, where the Federal minimum wage has
applied since at least 1957,\228\ or the CNMI.\229\
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\226\ 29 U.S.C. 213(f).
\227\ 69 FR 22172.
\228\ See Sarah A. Donovan, Cong. Rsch. Serv., R42713, The Fair
Labor Standards Act (FLSA): An Overview, 6 (Mar. 8, 2023). In 1957,
Congress amended section 13 of the FLSA to clarify that the Act's
minimum wage and overtime requirements apply to Guam. Public Law 85-
231, 71 Stat. 514 (Aug. 30, 1957) (codified at 29 U.S.C. 213(f)).
\229\ The CNMI was exempted from the FLSA's minimum wage
requirements, but not its overtime requirements, under the 1976
Covenant of Association with the United States, which established
the CNMI as a Commonwealth. Public Law 94-241, sec. 503(c), 90 Stat.
263, 268 (Mar. 24, 1976). Congress applied the FLSA's minimum wage
requirements to the CNMI for the first time in the Fair Minimum Wage
Act of 2007, which was subsequently amended in 2015; pursuant to
this legislation, the minimum wage in the CNMI gradually increased
until it reached the full section 6(a)(1) minimum wage in 2018. See
Public Law 110-28, sec. 8103, 121 Stat. 112, 188 (May 25, 2007);
Public Law 114-61, sec. 1, 129 Stat. 545 (Oct. 7, 2015); Minimum
Wage in the Northern Mariana Islands, WHD, available at: https://www.dol.gov/sites/dolgov/files/WHD/legacy/files/cnmi.pdf.
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In 1989, Congress amended the FLSA to apply the Federal minimum
wage to the U.S. Virgin Islands beginning that same year and to Puerto
Rico beginning in 1996, while maintaining special minimum wage rates
for American Samoa.\230\ When the Department next updated the salary
level tests in 2004, it applied the same salary level to employees in
Puerto Rico and the U.S. Virgin Islands that it applied to employees in
the 50 states and the District of Columbia ($455 per week), explaining
that because these territories were ``now subject to the same minimum
wage as the U.S. mainland, there was no longer a basis for a special
salary level test[.]'' \231\ The Department maintained a special salary
level for employees in American Samoa equal to approximately 84 percent
of the standard level ($380 per week), since American Samoa was not
subject to the Federal minimum wage. This was roughly the same ratio to
the U.S. mainland salary level that existed prior to 2004.\232\ The
Department also continued to apply the same salary level to employees
in Guam and the CNMI that it applied to employees in the U.S. mainland.
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\230\ See Public Law 101-157, sec. 4, 103 Stat. 938, 939-941
(Nov. 17, 1989).
\231\ 69 FR 22172.
\232\ Id.
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The Department followed the same approach in the 2016 rule. Like
the 2004 rule, the 2016 rule would have continued to apply the standard
salary level to employees in all the U.S. territories except for
American Samoa.\233\ It also would have maintained a special salary
level for employees in American Samoa, keeping it at 84 percent of the
standard salary level, since American Samoa was still subject to
special minimum wage rates below the Federal minimum wage.
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\233\ See 81 FR 32444. After the Department published the 2016
rule, Congress passed the Puerto Rico Oversight, Management, and
Economic Stability Act (PROMESA), Public Law 114-187, which
prevented the rule from taking effect in Puerto Rico until the
Comptroller General of the United States produced a report on the
impact of applying the rule to Puerto Rico and the Secretary of
Labor determined, based on the report, that applying the rule to
Puerto Rico would not have a negative impact on its economy. The
Comptroller General published its report in June 2018. See U.S.
Gov't Accountability Off., GAO-18-483, Puerto Rico: Limited Federal
Data Hinder Analysis of Economic Condition and DOL's 2016 Overtime
Rule (June 29, 2018). The 2016 rule was invalidated and so the
Department did not have occasion to further address this issue.
---------------------------------------------------------------------------
In the 2019 rule, the Department elected to preserve the 2004
standard salary level for employees in Puerto Rico, Guam, the U.S.
Virgin Islands, and the CNMI ($455 per week) instead of applying the
$684 per week salary level that applied to employees in the 50 states
and the District of Columbia; \234\ in effect, establishing a special
salary level for employees in territories that were subject to the
Federal minimum wage for the first time. In support of this approach,
the Department pointed to the economic climate in Puerto Rico; stated
that Guam, the U.S. Virgin Islands, and the CNMI, as U.S. territories,
also faced their own economic challenges; and expressed a desire to
promote salary level consistency across the U.S. territories.\235\ The
Department also maintained the 2004 special salary level for employees
in American Samoa ($380 per week).\236\ The Department determined that
a special salary level lower than the other four territories was
warranted for American Samoa because, like in 2004 and 2016, the
territory was subject to special minimum wage rates below the Federal
minimum wage.\237\
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\234\ 84 FR 51246.
\235\ Id. In the 2019 rule, the Department explained that while
PROMESA did not apply to rulemakings other than the 2016 rule, the
considerations that motivated PROMESA's adoption supported setting a
special salary level in Puerto Rico. See id. As in 2019, the
Department continues to believe that PROMESA does not constrain the
Department's authority to set a salary level for Puerto Rico in this
rulemaking.
\236\ Id.
\237\ Id.
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In Sec. 541.600, the Department proposes to return to its
longstanding pre-2019 approach of only setting special salary levels
for employees in those U.S. territories that are not subject to the
Federal minimum wage. Accordingly, the Department proposes to apply the
[[Page 62175]]
standard salary level ($1,059 per week) to employees in Puerto Rico,
where the Federal minimum wage has applied since 1996; Guam, where the
Federal minimum wage has applied since at least 1957; the U.S. Virgin
Islands, where the Federal minimum wage has applied since 1989; and the
CNMI, where the Federal minimum wage has applied since 2018. The
Department proposes to set a special salary level for employees in
American Samoa equal to 84 percent of the standard salary level ($890
per week, based on a proposed standard salary level of $1,059 per
month), since American Samoa remains subject to special minimum wage
rates below the Federal minimum wage.\238\ This is the same ratio to
the standard salary level that the Department used in the 2004 and 2016
rules, as well as the same ratio to the salary level in the other four
U.S. territories that the Department used in the 2019 rule.\239\
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\238\ Special wage rates by industry in American Samoa currently
range from $5.38 per hour to $6.79 per hour. See Federal Minimum
Wage in American Samoa, available at: https://www.dol.gov/sites/dolgov/files/WHD/legacy/files/ASminwagePoster.pdf.
\239\ As noted above, the Department set the special salary
level for American Samoa in the 2004 rule at $380 per week, which is
approximately 84 percent of the standard salary level of $455 per
week. 69 FR 22172. The 2016 rule would have set the special salary
level for American Samoa at $767 per week, which is 84 percent of
the standard salary level of $913 per week. 81 FR 32444. The 2019
rule preserved the 2004 salary level of $455 per week for employees
in Puerto Rico, Guam, the U.S. Virgin Islands, and the CNMI, as well
as the 2004 salary level of $380 per week (approximately 84 percent
of $455) for employees in American Samoa. 84 FR 51246.
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Pursuant to the Fair Minimum Wage Act of 2007, as amended,
industry-specific special minimum wage rates in American Samoa are
scheduled to be gradually eliminated. Under this legislation, barring
further Congressional action, special wage rates in American Samoa will
increase by $0.40 on September 30, 2024 and every 3 years thereafter
until they equal the Federal minimum wage.\240\ As such, the Department
also proposes that 90 days after the highest industry minimum wage for
American Samoa equals the Federal minimum wage, the full standard
salary level will apply for all EAP employees in all industries in
American Samoa.
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\240\ See Public Law 114-61, sec. 1, 129 Stat. 545 (Oct. 7,
2015).
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The Department recognizes that the salary levels for the U.S.
territories have not changed since 2004, and it understands that U.S.
territories face their own economic challenges. However, the FLSA's EAP
exemption should apply equally to employees subject to the Federal
minimum wage in section 6(a)(1) of the FLSA--including in the U.S.
territories, to which this provision explicitly applies--absent a
special minimum wage for the territory, which the Department has
interpreted as an indication of Congressional intent to treat employees
in the territory differently. As noted above, except for the 2019 rule,
the Department has taken the position that a special, lower salary
level should only be set for employees in those U.S. territories that
are not subject to the Federal minimum wage, a group which is currently
limited to employees in American Samoa.\241\ This approach provides a
clear and objective standard by which to determine whether to apply the
standard salary level or a special, lower salary level. Thus, in
accordance with the Department's longstanding practice, and in the
interest of applying the FLSA uniformly to all employees subject to the
Federal minimum wage, the Department proposes to apply the standard
salary level to employees in Puerto Rico, Guam, the U.S. Virgin
Islands, and the CNMI, and to maintain a special salary level for
employees in American Samoa equal to 84 percent of the standard salary
level until the highest industry minimum wage rate applicable in the
territory equals the Federal minimum wage.\242\
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\241\ Three U.S. territories have a local minimum wage higher
than the Federal minimum wage. The local minimum wage in Puerto Rico
is currently $9.50 per hour; the local minimum wage in Guam is
currently $9.25 per hour; and the local minimum wage in the U.S.
Virgin Islands is currently $10.50 per hour. See State Minimum Wage
Laws, WHD, available at: https://www.dol.gov/agencies/whd/minimum-wage/state.
\242\ It is the Department's intent that the proposal to apply
the standard salary level to employees in territories that are
subject to the Federal minimum wage is severable from the proposal
to raise the standard salary level from the current amount ($684 per
week) to the 35th percentile of weekly earnings of full-time
salaried workers in the lowest-wage Census Region ($1,059 per week
using current data). The Department also intends that the proposal
to set the special salary level for employees in American Samoa
equal to 84 percent of the standard salary level, and to eliminate
the special salary level for American Samoa when the highest
industry minimum wage equals the Federal minimum wage, be severable
from the proposal to raise the standard salary level. The Department
has an interest in the uniform application of the EAP exemption to
all employees subject to the Federal minimum wage and in adopting a
clear and objective standard by which to determine whether to apply
a special salary level to any U.S. territory. Accordingly, the
Department's intent is to apply the standard salary level to
employees in those territories that are subject to the Federal
minimum wage and set a special salary for American Samoa equal to 84
percent of the standard salary level until the highest minimum wage
in the territory reaches the Federal minimum wage even if the
standard salary level amount proposed in this rule does not take
effect.
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The Department seeks comments on the proposed salary levels for the
U.S. territories.
2. Motion Picture Producing Industry
The Department permits employers to classify as exempt employees in
the motion picture producing industry who are paid a specified base
rate per week (or a proportionate amount based on the number of days
worked), so long as they meet the duties tests for the EAP
exemption.\243\ This exception from the salary basis requirement was
created in 1953 to address the ``peculiar employment conditions
existing in the [motion picture producing] industry,'' and applies, for
example, when a motion picture producing industry employee works less
than a full workweek and is paid a daily base rate that would yield the
weekly base rate if 6 days were worked.\244\ Consistent with its
practice since the 2004 rule, the Department proposes in Sec. 541.709
to increase the required base rate in proportion to the Department's
proposed increase in the standard salary level test, resulting in a
proposed base rate of $1,617 per week (or a proportionate amount based
on the number of days worked).\245\
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\243\ Sec. 541.709.
\244\ 18 FR 2881 (May 19, 1953).
\245\ The Department calculated this figure by dividing the
proposed standard salary level ($1,059 per week) by the current
standard salary level ($684 per week), and then multiplying this
result (rounded to the nearest hundredth) by the base rate set in
the 2019 rule ($1,043 per week). This produces a new base rate of
$1,617 (per week), when rounded to the nearest whole dollar.
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The Department seeks comments on the proposed base rate for the
motion picture industry.
C. Highly Compensated Employees
In the 2004 rule, the Department created the HCE test for certain
highly compensated employees. Combining a much higher compensation
requirement with a minimal duties test, the HCE test is based on the
rationale that employees who earn at least a certain amount annually--
an amount substantially higher than the annual equivalent of the weekly
standard salary level--will almost invariably pass the standard duties
test.\246\ The HCE test's primary purpose is thus to serve as a
streamlined alternative for very highly compensated employees because a
very high level of compensation is a strong indicator of an employee's
exempt status, thus eliminating the need for a detailed duties
analysis.\247\
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\246\ 84 FR 51249; see also Sec. 541.601(c) (``A high level of
compensation is a strong indicator of an employee's exempt status,
thus eliminating the need for a detailed analysis of the employee's
job duties.'').
\247\ See 69 FR 22173-74.
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As outlined in Sec. 541.601, to be exempt under the HCE test, an
employee must
[[Page 62176]]
earn at least the amount specified in the regulations in total annual
compensation, of which at least the standard salary amount per week
must be paid on a salary or fee basis,\248\ and must customarily and
regularly perform any one or more of the exempt duties or
responsibilities of an executive, administrative, or professional
employee. The HCE test applies only to employees whose primary duty
includes performing office or non-manual work. Employees qualifying for
exemption under the HCE test must receive at least the standard salary
level per week on a salary or fee basis, while the remainder of the
employee's total annual compensation may include commissions,
nondiscretionary bonuses, and other nondiscretionary compensation.\249\
Total annual compensation does not include board, lodging, or other
facilities, and does not include payments for medical insurance, life
insurance, retirement plans, or other fringe benefits. An employer is
permitted to make a final ``catch-up'' payment during the last pay
period or within one month after the end of the 52-week period to bring
an employee's compensation up to the required level.
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\248\ Although Sec. 541.602(a)(3) allows employers to use
nondiscretionary bonuses to satisfy up to 10 percent of the weekly
standard salary level when applying the standard salary and duties
tests, the Department's regulation at Sec. 541.601(b)(1) does not
permit employers to use nondiscretionary bonuses to satisfy the
weekly standard salary level requirement for HCE workers. Employers
may use commissions, nondiscretionary bonuses, and other
nondiscretionary compensation to satisfy the remaining portion of
the HCE total annual compensation amount. See 84 FR 51249.
\249\ Sec. 541.601(b)(1). The criteria for determining if an
employee is paid on a ``salary basis'' are identical under the
standard exemption criteria and the HCE test. See Helix Energy
Solutions, 143 S.Ct. at 683.
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The 2004 rule set the HCE total annual compensation amount at
$100,000,\250\ which exceeded the annual earnings of approximately 93.7
percent of salaried workers.\251\ In the 2016 rule, the Department set
the total annual compensation requirement for the HCE test at the
annualized weekly earnings of the 90th percentile of full-time salaried
workers nationally, which was $134,004.\252\ As previously noted,
however, the 2016 rule was enjoined before its effective date and was
subsequently invalidated in litigation.\253\ In 2019, the Department
set the HCE total annual compensation threshold at the 80th percentile
of full-time salaried worker earnings nationwide, resulting in a HCE
threshold of $107,432 per year.\254\
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\250\ 69 FR 22269 (Sec. 541.601(a)).
\251\ See id. at 22169 (Table 3).
\252\ See 81 FR 32429.
\253\ See Nevada, 275 F. Supp. 3d at 808. The district court's
decision did not specifically discuss the HCE test; however, the
decision invalidated the entire 2016 rule.
\254\ See 84 FR 51307 (Sec. 541.601(a)(1)); see also id. at
51249-50.
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The Department continues to believe that the HCE test is a useful
alternative to the standard salary level and duties tests for highly
compensated employees. However, as with the standard salary level, the
HCE total annual compensation level must be updated to ensure that it
remains a meaningful and appropriate standard to pair with the minimal
HCE duties test. To maintain the HCE test's role as a streamlined
alternative for those employees most likely to qualify as EAPs, the HCE
total annual compensation level must be high enough to exclude all but
those employees ``at the very top of [the] economic ladder.'' \255\
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\255\ 69 FR 22174.
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Accordingly, the Department proposes to update the HCE test by
setting the total compensation amount equal to the annualized weekly
earnings of the 85th percentile of full-time salaried workers
nationwide. Consistent with its prior rules, the Department is setting
the HCE test level using nationwide data, rather than a regional data
set. This approach results in a HCE threshold of $143,988, of which at
least $1,059 per week (the proposed standard salary level) must be paid
on a salary or fee basis.\256\
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\256\ It is the Department's intent that the increase in the HCE
total annual compensation threshold is independent of, and severable
from, the proposed increase in the standard salary level to the 35th
percentile of weekly earnings of full-time salaried employees in the
lowest-wage Census Region (the South).
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The Department considered updating the current HCE threshold (the
80th percentile) with current data (which would result in a
compensation level of $125,268), but is concerned that repeating the
2019 rule's methodology now would not produce a threshold high enough
to reserve the HCE test for employees at the top of today's economic
ladder and could risk the unintended exemption of large numbers of
employees in high-wage regions.\257\ The Department also considered
setting the HCE threshold at the 90th percentile, like in its 2016
rule. However, the Department is concerned that the resulting
compensation level ($172,796) could unduly restrict the use of the HCE
exemption for employers in lower-wage regions and industries.\258\ In
contrast, setting the HCE compensation level at the 85th percentile
would be a reasonable increase, particularly in comparison to the HCE
threshold initially adopted in 2004, which covered 93.7 percent of all
full-time salaried workers.\259\ The Department believes that setting
the HCE threshold at the annualized weekly earnings of the 85th
percentile of full-time salaried workers nationwide would be sufficient
to guard against the unintended exemption of workers who are not bona
fide executive, administrative, or professional employees, including
those in higher-income regions and industries.
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\257\ See 69 FR 22174 (explaining the need to avoid the
unintended exemption 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.'').
\258\ See 84 FR 51250.
\259\ See 69 FR 22169-70 (Tables 3 and 4).
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Under the proposed rule, employers that are currently using the HCE
test to exempt more highly paid employees would instead need to apply
the standard salary and duties test for employees earning between the
current HCE threshold ($107,432) and the annualized weekly earnings of
the 85th percentile of full-time salaried workers nationwide. The
Department estimates that there are approximately 248,900 salaried
white-collar workers earning between $107,432 and the proposed HCE
total annual compensation level ($143,988) who meet the HCE duties test
but do not meet the standard duties test, and who therefore would
become nonexempt without some intervening action by their employers.
As with other earning thresholds in the part 541 regulations, the
Department is proposing to automatically update the HCE total
compensation amount every 3 years to reflect current earnings data, as
discussed in greater detail in section IV.D.4. Automatic updates to the
HCE threshold would ensure that the threshold remains at an appropriate
level in future years.
The Department welcomes comment on its proposed increase to the HCE
threshold.
D. Automatic Updates to the Salary and Total Annual Compensation Levels
In each of its part 541 rulemakings since 2004, the Department
recognized the need to regularly update the earnings thresholds to
ensure that they remain effective in helping differentiate between
exempt and nonexempt employees. As the Department observed in these
rulemakings, even a well-calibrated salary level that is not kept up to
date becomes obsolete as wages for nonexempt workers increase over
time.\260\ Long intervals between
[[Page 62177]]
rulemakings have resulted in eroded earnings thresholds based on
outdated earnings data that were ill-equipped to help identify bona
fide executive, administrative, and professional employees. This
problem was clearly illustrated by the stagnant salary levels in the
regulations from 1975 to 2004, during which period increases in the
Federal minimum wage meant that earnings of a worker paid the Federal
minimum wage exceeded the long test salary level for a 40-hour week and
came close to equaling the short test salary level.\261\
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\260\ 84 FR 51250-51; 81 FR 32430; see also 69 FR 22122, 22164.
\261\ The Federal minimum wage was increased to $4.25 on April
1, 1991, equaling $170 for a 40-hour week, the same amount as the
higher long test salary level for professional employees. On
September 1, 1997, the Federal minimum wage was increased to $5.15,
equaling $206 for a 40-hour week, which was close to the $250 short
test salary level. See History of Federal Minimum Wage Rates Under
the Fair Labor Standards Act, 1938-2009, WHD, available at: https://www.dol.gov/agencies/whd/minimum-wage/history/chart; 40 FR 7091-92.
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To address this problem, in the 2004 and 2019 rules the Department
expressed its commitment to regularly updating the salary levels, and
in the 2016 rule it included a regulatory provision to automatically
update the salary levels.\262\ Based on the Department's experience
with updating the salary levels, as well as additional considerations
discussed below, the Department has concluded that adopting a
regulatory provision for automatically updating the standard salary
level and the HCE total annual compensation requirement to reflect
current wage data, with the ability to pause future updates under
certain conditions, would be the most viable and efficient way to
ensure the EAP exemption salary levels remain up to date.
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\262\ 69 FR 22171; 84 FR 51251-52; 81 FR 32430.
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1. Background
The Department introduced a regulatory provision for automatically
updating the salary level tests in its 2016 rulemaking. Prior to the
2016 rule, the Department addressed the subject of automatic updating
twice in response to comments by some stakeholders calling for its
adoption. In its 1970 rulemaking, the Department stated that a comment
``propos[ing] to institute a provision calling for an annual review and
adjustment of the salary tests . . . appears to have some merit,
particularly since past practice has indicated that approximately 7
years elapse between amendment of the salary level requirements.''
\263\ Despite recognizing the potential value of this approach, the
Department ultimately determined that ``such a proposal will require
further study.'' \264\ Later, in its 2004 rule, the Department declined
to adopt commenter requests for automatic increases to the salary
level, reasoning in part that ``the salary levels should be adjusted
when wage survey data and other policy concerns support such a change''
and that ``the Department finds nothing in the legislative or
regulatory history that would support indexing or automatic
increases.'' \265\ In remarking on the lack of historical guidance
related to the automatic updating of salary levels, the Department did
not otherwise discuss its authority to promulgate such an approach
through notice-and-comment rulemaking. Instead, the Department
expressed its intent ``in the future to update the salary levels on a
more regular basis, as it did prior to 1975.'' \266\ Despite its best
intentions, the Department's next rulemaking to update the salary
levels did not occur for over a decade. The difficulty in achieving its
goal of regularly updating the salary levels caused the Department to
examine in greater detail in its 2016 rulemaking the possibility of
automatically updating the salary levels.
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\263\ 35 FR 884.
\264\ Id.
\265\ 69 FR 22171.
\266\ Id.
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In the 2016 rule, the Department introduced a new regulatory
provision establishing a mechanism for automatically updating the
standard salary test, the total annual compensation requirement for
highly compensated employees, and the special salary levels for
American Samoa and the motion picture industry.\267\ Under this
provision, future automatic updates would have occurred triennially,
using the same methodologies that were used to initially set these
earnings thresholds in the 2016 rule. The Department explained that the
adopted automatic updating mechanism would ``ensure that the salary
level test is based on the best available data (and thus would remain a
meaningful, bright-line test), produce more predictable and incremental
changes in the salary required for the EAP exemption, and therefore
provide certainty to employers and promote government efficiency.''
\268\ The district court decision invalidating the 2016 rule did not
separately examine the merits of the automatic updating provision or
the Department's authority to automatically update the salary levels.
Rather, the court stated, ``Having determined the [2016] Final Rule is
unlawful . . ., the Court similarly determines the automatic updating
mechanism is unlawful.'' \269\
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\267\ 81 FR 32430, 32443.
\268\ Id. at 32430.
\269\ Nevada, 275 F. Supp.3d at 808.
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In its 2019 rulemaking, the Department reaffirmed that ``the need
to update the part 541 earnings thresholds on a regular basis is
clear.'' \270\ The Department elaborated that ``[a]s employees'
earnings rise over time, they begin surpassing the earnings thresholds
set in the past'' and make the thresholds ``a less useful measure of
employees' relative earnings, and a less useful method for identifying
exempt employees.'' \271\ Rather than adopt an automatic updating
mechanism, the Department initially proposed to keep the earnings
thresholds up to date by publishing an NPRM in the Federal Register
every 4 years seeking comment on whether to update the earnings
thresholds using the existing methodology, with the understanding that
the Department could forestall issuing such a proposal due to economic
or other factors.\272\ However, the Department declined to codify this
approach in its final rule \273\ or implement a mechanism for
automatically updating the salary levels as suggested by some
commenters, stating that doing so could deprive the Department of
flexibility to adapt to unanticipated circumstances.\274\ Instead, the
Department reaffirmed its intention to update the salary levels more
regularly through notice-and-comment rulemaking.\275\
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\270\ 84 FR 10914.
\271\ Id.
\272\ Id. at 10914-15.
\273\ See id. at 10915 n.140 (explaining how the Department
could codify its proposed approach).
\274\ 84 FR 51252.
\275\ Id.
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2. The Department's Authority To Automatically Update the Salary Level
Tests
The Department's authority to automatically update the salary level
tests for the EAP exemption is grounded in section 13(a)(1), which
expressly gives the Secretary broad authority to define and delimit the
scope of the exemption. During the 2016 and 2019 rulemakings, some
stakeholders questioned the Department's authority to automatically
update the salary levels, asserting, among other points, that unlike
other statutes that expressly provide for indexing, section 13(a)(1)'s
silence indicates that Congress did not intend the salary level to be
automatically updated, and that an automatic updating mechanism would
[[Page 62178]]
circumvent the Administrative Procedure Act (APA).\276\
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\276\ See 81 FR 32430, 32432; 84 FR 51251.
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As the Department has previously explained, Congress did not
specifically set forth precise criteria for defining the EAP exemption,
but instead authorized the Secretary to define and delimit the terms of
the exemption.\277\ Using this broad authority, the Department
established the first salary level tests by regulation in 1938. Despite
numerous amendments to the FLSA over the past 85 years, Congress has
not restricted the Department's use of the salary level tests.
Significant changes involving the salary requirements made through
regulations issued pursuant to the Secretary's authority to define and
delimit the exemption include adding a separate salary level for
professional employees in 1940, adopting the two-test system in 1949,
and switching to the single standard test and adding the new HCE test
in 2004.\278\ Despite having amended the FLSA numerous times over the
years, Congress has not amended section 13(a)(1) to alter these
regulatory salary requirements.
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\277\ 29 U.S.C. 213(a)(1).
\278\ See section II.B.1-2.
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Other than directing the Department in 1990 to include in the EAP
regulations certain computer employees paid at least six-and-a-half
times the Federal minimum wage on an hourly basis,\279\ Congress has
never amended the FLSA in a manner that limits the use of the salary
level tests.\280\ Just as the Department has authority under section
13(a)(1) to establish and update the salary level tests, it likewise
has authority to adopt a regulatory mechanism for automatically
updating the salary levels to ensure that the tests remain effective.
This interpretation is consistent with the well-settled principle that
agencies have authority to ```fill any gap left, implicitly or
explicitly, by Congress.''' \281\ Further, the Department has
determined that an automatic updating mechanism would better fulfill
its statutory duty to define and delimit the EAP exemption because it
will maintain the effectiveness of the salary levels, which have
previously become eroded during large gaps between regulatory updates.
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\279\ See Public Law 101-583, sec. 2, 104 Stat. 2871 (Nov. 15,
1990) (directing the Secretary to promulgate regulations that permit
computer systems analysts, computer programmers, software engineers,
and other similarly skilled professional workers as defined in the
regulations to qualify as EAP exempt employees under section
13(a)(1), including those paid on an hourly basis if paid at least
6-and-a-half times the Federal minimum wage).
\280\ Despite what some commenters asserted in the 2016
rulemaking, the Department's automatic updating mechanism does not
conflict with section 13(a)(1)'s ``time to time'' language. See 81
FR 32431. Adopting a mechanism to ensure that the part 541 earnings
thresholds continue screening out the same percentage of salaried
workers over time would in no way preclude the Department from
revisiting this methodology from ``time to time'' should cumulative
changes in job duties, compensation practices, and other relevant
working conditions indicate that changes to the proposed earnings
thresholds are warranted.
\281\ Long Island Care at Home, Ltd. v. Coke, 551 U.S. 158, 165
(2007) (quoting Chevron, U.S.A., Inc. v. Natural Res. Def. Council,
Inc., 467 U.S. 837, 843 (1984)).
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The Department's decision not to institute an automatic updating
mechanism in its 2004 and 2019 rulemakings in no way suggests that it
lacks authority to do so. In its 2004 rule, the Department stated that
it found nothing in the legislative or regulatory history that would
support indexing or automatic increases.\282\ As the Department
elaborated in its 2016 rulemaking, there was likewise no such authority
disfavoring automatic updating.\283\ The 2004 rule did not discuss the
Department's authority to promulgate an automatic updating mechanism
through notice-and-comment rulemaking or explore in detail whether
automatic updates to the salary levels posed a viable solution to
problems created by lapses between rulemakings. Similarly, the
Department declined to adopt automatic updating in the 2019 rule
because it ``believe[d] that it is important to preserve the
Department's flexibility to adapt to different types of
circumstances,'' \284\ and not because it lacked authority to do so.
While the Department decided not to institute an automatic updating
mechanism in its 2019 rule, the Department did not assert that it
lacked the legal authority for such a mechanism. And, as noted above,
in its 2019 rule the Department reaffirmed its intention to update the
salary levels more regularly. Consistent with this stated objective,
and upon further consideration, the Department has concluded that the
best method to ensure the standard salary level and HCE total
compensation threshold remain up to date is an automatic updating
mechanism that maintains the Department's flexibility to adapt to
different circumstances and change course as necessary.
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\282\ 69 FR 22171.
\283\ See 81 FR 32432-33 (noting that ``instituting an automatic
updating mechanism . . . is an appropriate modernization and within
the Department's authority.'').
\284\ 84 FR 51252.
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3. Rationale for Automatically Updating the Salary Level Tests
A regulatory mechanism for automatically updating the part 541
earnings thresholds would ensure that the levels keep pace with changes
in employee earnings and thus remain effective in helping determine
exemption status. As the Department's long experience has shown,
earnings thresholds are only a strong measure of exempt status if they
are kept up to date, and if left unchanged, such thresholds become
substantially less effective in identifying exempt EAP employees as
wages for workers increase over time. The Department's regulatory
history, marked in many instances by lengthy gaps between rulemakings,
underscores the difficulty with updating the earnings thresholds as
quickly and regularly as necessary to keep pace with changing employee
earnings and to maintain the full effectiveness of the test. Through
the proposed automatic updating mechanism, the Department can timely
and efficiently update the standard salary level and the HCE total
annual compensation requirement by using the same methodologies as
initially proposed and adopted through notice-and-comment rulemaking to
set these thresholds, while a change to those methodologies would be
effectuated through new notice-and-comment rulemaking. The proposed
automatic updating mechanism would allow for regular and more
predictable updates to the earnings thresholds, which would benefit
both employers and employees and better fulfill the Department's
statutory duty to define and delimit the EAP exemption by preventing
the erosion of those levels over time.
As the Department explained in the 2016 rule, automatically
updating the part 541 earnings thresholds would also prevent the more
drastic and unpredictable threshold increases associated with less
frequent updates. For example, between 1940 and 2019, the time between
salary level updates ranged from 5 to 29 years. In part as a result of
these breaks, long test salary level increases between 1940 and 1975
ranged from roughly 5 to 50 percent, the 2004 standard salary level
test represented a 180 percent increase from the 1975 long test salary
levels, and the 2019 standard salary level test represented an
approximately 50 percent increase from the 2004 standard salary level.
Automatically updating the part 541 earnings thresholds at a
predetermined frequency using the same methodology would ensure that
future salary level increases occur at a
[[Page 62179]]
known interval and in more gradual increments.
The Department is proposing for automatic updates to occur
triennially (i.e., every 3 years). The Department realizes that because
employee earnings are constantly changing, annual or biennial automatic
updates would keep the salary level more up to date and thereby may
better serve the purpose of using earnings thresholds to help identify
exempt employees. However, the Department is concerned about the
potential burden that possible changes to the tests for exemption on an
annual or biennial basis would impose on employers and believes that
triennial updates are frequent enough to ensure that the part 541
earnings thresholds fulfill their purpose. This frequency is also
consistent with the interval chosen in the 2016 rule following
extensive public comment on this issue.\285\
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\285\ See 81 FR 32438.
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In proposing to automatically update the earnings thresholds, the
Department is mindful of previous statements from stakeholders, and the
Department's own prior statements, about the need to preserve
flexibility to adapt to unanticipated circumstances and prevailing
economic conditions when setting the salary level.\286\ Events since
the Department's 2019 rule, including the COVID pandemic and its
widespread impact on workplaces, have served to further validate these
concerns. To address these concerns, the Department proposes to include
in the regulatory provision the ability for the Department to
temporarily delay a scheduled automatic update where unforeseen
economic or other conditions warrant. This feature, which is a
refinement of the automatic updating mechanism in the 2016 rule, would
afford the Department added flexibility to adapt to unforeseen
circumstances without sacrificing the benefits provided by automatic
updating.
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\286\ See, e.g., 84 FR 51251-52.
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4. Proposal for Automatically Updating the Salary Level Tests
The Department proposes to add a new Sec. 541.607 that would
establish a mechanism for automatically updating the standard salary
level and the HCE total annual compensation requirement. Specifically,
the Department proposes to automatically update the standard salary
level and the total annual compensation requirement for highly
compensated employees every 3 years to reflect current earnings data.
Under this proposal, the Department would automatically update the
standard salary level by adjusting it to remain at the 35th percentile
of weekly earnings of full-time nonhourly workers in the lowest-wage
Census Region (currently the South), as set out in section IV.A.3. The
HCE test's total annual compensation requirement would be reset
triennially at the annualized weekly earnings of the 85th percentile of
full-time nonhourly workers nationally, as discussed in section IV.C.
This approach, as opposed to other methods such as indexing these
thresholds for inflation, would eliminate the risk that future levels
will deviate from the underlying salary setting methodology established
through rulemaking.\287\ The Department proposes to update both
thresholds using the most recent available four quarters of data, as
published by BLS, preceding the publication of the Department's notice
to automatically update the thresholds. Although the 2016 rule called
for automatic updates based on a quarter of data,\288\ relying on a
full year of data would be consistent with the approach used to set the
salary level in this proposal. Furthermore, relying on a year of data,
rather than a quarter, would balance the Department's goal of
accounting for current economic conditions with avoiding variations
based on short-term fluctuations.
---------------------------------------------------------------------------
\287\ During the 2016 rulemaking, the Department extensively
considered whether to update the thresholds based on changes in the
Consumer Price Index for All Urban Consumers (CPI-U)--a commonly
used economic indicator for measuring inflation. See 81 FR 32438-41.
The Department chose to update the thresholds using the same
methodology used to initially set them in that rulemaking (i.e., a
fixed percentile of weekly earnings of full-time salaried workers),
observing that the objectives that justify setting the salary level
using a fixed percentile methodology also supported updating the
thresholds using the same methodology. See id. at 32440. For this
and other reasons discussed in detail in the 2016 rule, the
Department concludes that updating the earnings thresholds by
applying the same methodology used to set the initial levels instead
of indexing them for inflation best ensures that the earnings
thresholds continue to fulfill their objective of effectively
differentiating between bona fide EAP employees and those who are
entitled to overtime pay, and work appropriately with the duties
test.
\288\ Id. at 32551.
---------------------------------------------------------------------------
Under the proposed regulation, automatic updates would occur every
3 years, computed from the last day of the month in which this
rulemaking take effect. Because under proposed Sec. Sec. 541.600 and
541.709 both the special salary level for American Samoa and the base
rate for the motion picture industry are set in relation to the
standard salary level, those earnings thresholds would also reset at
the time the standard salary level is updated. At least 150 days before
the date of the update of the standard salary level and the HCE total
annual compensation requirement, the Department would publish in the
Federal Register and on WHD's website a notice with the new earnings
levels described above. Consistent with the 2016 rule, the Department
is proposing this interval to provide employers ample notice and
sufficient time to make any necessary adjustments. A period
substantially longer than 150 days could hinder the Department's
ability to ensure that the thresholds that take effect are based on the
most up to date data.
Finally, the Department's proposal includes a provision delaying a
scheduled automatic update while the Department engages in notice-and-
comment rulemaking to change the earnings requirements and/or updating
mechanism, where economic or other conditions merit. The delay occurs
only if the Department publishes an NPRM proposing to change the salary
level methodology (for example, changing the earnings percentile) and/
or modify the automatic updating mechanism (for example, changing the
updating frequency) before the date on which it publishes the notice of
the revised salary and compensation levels under the regulations. The
notice must state, in addition to the updated levels, that the
automatic update will be paused for 120 days from the day the update
was set to occur while the Department engages in rulemaking, and that
the pause will be lifted on the 121st day unless by that time the
Department finalizes a rule changing the salary level methodology and/
or automatic updating mechanism. Accordingly, this proposal provides
for 270 days--150 days before, and 120 days after, the effective date
for the scheduled automatic update--to complete this process. The
Department chose this interval to provide time for a public comment
period and to issue a final rule. If the Department does not issue a
final rule by the prescribed deadline, the pause on the scheduled
automatic update would be lifted and the new salary levels would take
effect on the 121st day after they were originally scheduled to take
effect. So as not to disrupt the automatic updating schedule and given
the relative shortness of the delay, the 120-day pause would not affect
the date for the next scheduled automatic update. The next automatic
update, therefore, would occur 3 years from the date the delayed
automatic update would have been originally effective.
As discussed in section V below, the Department intends for the
proposed automatic updating mechanism to be severable from the
increases to the earnings thresholds proposed in this
[[Page 62180]]
rulemaking. Regardless of the methodology used to set the standard
salary level and HCE total compensation requirement, the utility of
these thresholds as a means of distinguishing exempt from nonexempt
employees necessarily erodes over time unless they are regularly
updated. Automatically updating the standard salary level and HCE total
compensation requirement based on current earnings data and on a set
schedule would ensure that the thresholds remain effective into the
future and thus better fulfill the Department's statutory duty to
define and delimit the EAP exemption. Therefore, even if the increases
to the standard salary level and the HCE total annual compensation
threshold in this proposal are determined to be invalid, the Department
intends for the automatic updating mechanism to apply to the existing
compensation thresholds. For example, it is the Department's intent
that if the proposed increase to the standard salary level to the 35th
percentile of weekly earnings of salaried white collar workers in the
lowest-wage Census region is invalidated, the automatic update to the
standard salary level would occur using the same methodology that is in
effect on the date the Department publishes the required notice of the
revised salary and compensation levels--which, as noted above, must be
no less than 150 days before the scheduled update.
The Department welcomes comments on all aspects of the proposed
automatic updating mechanism.
E. Effective Date
The Department is proposing that all aspects of this proposed rule
would become effective 60 days after publication of a final rule. This
proposed effective date is consistent with the 60 days mandated for a
``major rule'' under the Congressional Review Act and exceeds the 30-
day minimum required under the APA.\289\ The Department recognizes that
the 60-day proposed effective date is shorter than the effective dates
for the 2004, 2016, and 2019 rules, which were between approximately 90
and 180 days. The Department believes that a 60-day effective date is
appropriate, however, in part because employers and employees are
familiar with the procedures in the current regulations from the 2019
rulemaking and changed economic circumstances have caused a strong need
to update the standard salary level. The Department seeks comments on
the proposed effective date. It also seeks comments on whether to apply
different effective dates to different provisions of the proposed rule.
---------------------------------------------------------------------------
\289\ See 5 U.S.C. 801(a)(3)(A); 5 U.S.C. 553(d).
---------------------------------------------------------------------------
As discussed in detail below in sections VII.B-C, the Department's
proposal to increase the HCE total annual compensation threshold to the
annualized weekly earnings of the 85th percentile of full-time salaried
workers nationwide would result in employers applying the standard
duties test to some employees who are currently subject to the
streamlined HCE duties test. However, employers are familiar with the
standard duties test and only approximately 248,900 employees who earn
between the current and proposed HCE compensation thresholds would not
meet the standard duties test and be affected by this change.
Accordingly, the Department believes the proposed 60-day effective date
for the proposed increase to the HCE total compensation threshold would
provide sufficient time for stakeholders to adjust. The Department
seeks comments on the proposed effective date for the HCE compensation
threshold increase.
As discussed below in sections VII.B.C, the Department's proposed
standard salary level--the 35th percentile of weekly earnings of full-
time nonhourly workers in the lowest-wage Census Region--would affect
3.4 million employees who earn between the current salary threshold of
$684 per week and the proposed threshold of $1,059 per week. As
discussed above, the Department believes it is important to update the
standard salary level, both to account for earnings growth since the
Department last updated the salary level in the 2019 rule and to build
on the lessons learned in the Department's most recent rulemakings to
better define and delimit employees working in a bona fide EAP
capacity. The Department has also deliberately selected a proposed
standard salary level that would ensure that duties remain
determinative of exemption status for a significant majority of
salaried white-collar employees and that would affect the exemption
status of a relatively small group of currently exempt employees, more
than half of whom earn below the long test salary level using
contemporary data. At the same time, the Department recognizes that it
updated the regulations approximately 4 years ago, economic conditions
have changed significantly since then, and its proposed standard salary
level would be a meaningful increase from the current standard salary
level.
The Department seeks comments on whether the effective date for the
increase of the standard salary level to the 35th percentile of weekly
earnings of full-time salaried workers in the lowest-wage Census Region
should be 60 days after publication as proposed or if the increase
should be made effective at some later date, such as 6 months or a year
after publication of a final rule. If the effective date were longer
than 60 days, the Department seeks comments on whether it should
initially adjust the salary level to reflect recent wage growth (for
example, making an initial adjustment for wage growth 60 days after
publication of a final rule and having the final rule standard salary
level be effective 6 months or a year after publication). Additionally,
the Department seeks comments on the methodology it could use for such
an initial update, were it to follow such an approach. In particular,
the Department invites comments on whether to implement an initial
update to the standard salary level, effective 60 days after
publication of a final rule, that uses the current salary level
methodology (the 20th percentile of weekly earnings of full-time
nonhourly workers in the lowest-wage Census region and retail
nationally) and applies it to the most recent data available ($822 per
week based on current data).
The Department also seeks comments on whether its proposed
application of the standard salary level to employees in Puerto Rico,
Guam, the U.S. Virgin Islands, and the CNMI, its proposed update to the
special salary level for employees in American Samoa, and its proposed
update to the special salary level for employees in the motion picture
production industry, should also go into effect 60 days after a final
rule as proposed, or if any of these changes should instead go into
effect at a later date, such as 6 months or a year after publication.
If the effective date for these provisions were longer than 60 days,
the Department seeks comments on whether it should make an initial
adjustment to these levels 60 days after publication of a final rule
and, if so, what methodology should be used for the initial adjustment.
Finally, the Department is proposing that the first automatic
update to the proposed compensation levels be effective 3 years after
the proposed 60-day effective date. The Department seeks comments on
whether the date for the first automatic update should be adjusted if
it were to make an initial adjustment to any of these levels as
discussed above.
V. Severability
The Department proposes to include a severability provision in part
541 so that if one or more of the provisions of part 541 is held
invalid or stayed pending
[[Page 62181]]
further agency action, the remaining provisions would remain effective
and operative. The Department proposes to add this provision as Sec.
541.5.
It is the Department's intent that any final rule following from
this proposal apply to its greatest extent even if one or more
provisions of such rule are invalidated or stayed. For example, as
noted above, it is the Department's intent that the proposed automatic
updating mechanism be effective even if the proposed increase in the
standard salary level is invalidated. Similarly, it is the Department's
intent that the increase in the HCE total annual compensation
requirement be effective even if the increase in the standard salary
level is invalidated. It is also the Department's intent that the
standard salary level apply in territories subject to the Federal
minimum wage even if the increase in the standard salary level in this
rulemaking is invalidated. Additionally, it is the Department's intent
that the earnings thresholds set in this rulemaking apply even if the
mechanism for automatically updating them in the future is determined
to be invalid. In all circumstances, whether or not specifically
discussed, it is the Department's intent that the provisions of any
final rule be construed to give the maximum effect to the provisions
permitted by law, and that any invalidated provisions be considered
severable from part 541 and not affect the remainder of a final rule.
VI. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA), 44 U.S.C. 3501 et seq.,
and its attendant regulations, 5 CFR part 1320, require the Department
to consider the agency's need for its information collections, their
practical utility, the impact of paperwork and other information
collection burdens imposed on the public, and how to minimize those
burdens. The PRA typically requires an agency to provide notice and
seek public comments on any proposed collection of information
contained in a proposed rule. See 44 U.S.C. 3506(c)(2)(B); 5 CFR
1320.8.
This rulemaking would revise the burdens for the existing
information collection previously approved under OMB control number
1235-0018, Records to be kept by Employers--Fair Labor Standards Act
and under OMB control number 1235-0021, Employment Information Form.
The information collection approved under OMB control number 1235-0021
is currently encumbered by another rulemaking. As a result, the
Department has created a duplicate information collection under OMB
control number 1235-0NEW to allow the public to comment on the burden
estimates associated with this collection. The Department anticipates
that at the time of publication of any potential final rule associated
with this NPRM, no encumbrance will exist. Should a final rule be
published, the Department will revert to the collection currently
approved under OMB control number 1235-0021. As required by the PRA,
the Department has submitted information collections as revisions to
existing collections to OMB for review to reflect changes to existing
burdens that will result from the implementation of this rulemaking.
The Department has incorporated the increased universe of employers and
employees (from Figure 1 and Table 32 of this NPRM) since the last PRA
submission as well as the number of affected workers from Table 4 into
the PRA burden analysis found in the supporting statements referenced
below.
Summary: FLSA section 11(c) requires all employers covered by the
FLSA to make, keep, and preserve records of employees and of wages,
hours, and conditions of employment. An FLSA-covered employer must
maintain the records for such period of time as prescribed by
regulations issued by the Secretary. The Department has promulgated
regulations at 29 CFR part 516 establishing the basic FLSA
recordkeeping requirements. This NPRM, if finalized, would not impose
any new information collection requirements; rather burdens under
existing requirements would change as more employees become entitled to
minimum wage and overtime protections.
Purpose and use: This proposed rule, which would revise 29 CFR part
541, affects the following provisions that could be considered to
entail collections of information: (1) disclosure and recordkeeping
requirements for covered employers; and (2) the complaint process under
which employees may file a complaint with the Department to investigate
potential violations of the FLSA. The proposed rule could potentially
affect the number of employees for whom employers may need to maintain
records and could potentially affect the number of complaints the
Department receives from employees.
WHD obtains PRA clearance under OMB control number 1235-0018 for an
information collection with respect to recordkeeping. An Information
Collection Request (ICR) has been submitted to revise the approval and
adjust the burdens for this collection. WHD obtains PRA clearance under
control number 1235-0021 for an information collection covering
complaints alleging violations of various labor standards that the
agency already administers and enforces. As noted, for the purpose of
this NPRM, the Department has created a duplicate ICR (1235-0NEW) to
allow the public to comment. An ICR has been submitted to revise the
approval to revise the burdens applicable to complaints in this
proposed rule.
Information and technology: There is no particular order or form of
records prescribed in the current regulations or in the proposed rule.
An employer may meet the requirements of this proposed rule using paper
or electronic means. WHD, to reduce the burden caused by the filing of
complaints that are not actionable by the agency, uses a complaint
filing process in which complainants discuss their concerns with WHD
professional staff. This process allows agency staff to refer
complainants raising concerns that are not actionable under Federal
wage and hour laws and regulations to an agency that may be able to
offer assistance. WHD uses employer records to determine compliance
with various FLSA requirements. Employers use the records to document
compliance with the FLSA, including demonstrating qualification for
various exemptions. WHD uses the Employment Information Form (1235-
0021) to document allegations of non-compliance with labor standards
the agency administers. To allow the public to comment, the Department
has created duplicate ICR 1235-0NEW.
Minimizing Small Entity Burden: Although the FLSA recordkeeping
requirements involve small entities, including small state and local
government agencies, the Department minimizes respondent burden by
requiring no specific order or form of records in responding to this
information collection. Burden is reduced on complainants by providing
a template to guide answers.
Public comments: As part of its continuing effort to reduce
paperwork and respondent burden, the Department conducts a preclearance
consultation program to provide the general public and Federal agencies
with an opportunity to comment on proposed and continuing collections
of information in accordance with the PRA. This program helps to ensure
that requested data can be provided in the desired format, reporting
burden (time and financial resources) is minimized, collection
instruments are clearly understood, and the impact of collection
requirements on respondents can be
[[Page 62182]]
properly assessed. The Department seeks comments on its analysis
(contained in the supporting statements referenced below) that this
NPRM creates a slight increase in paperwork burden associated with ICR
1235-0021, Employment Information Form (reflected in duplicate ICR
1235-0NEW), and affects the recordkeeping requirements and burdens on
the regulated community in ICR 1235-0018, Records to be kept by
Employers--Fair Labor Standards Act. Commenters may send their views on
the Department's PRA analysis in the same way they send comments in
response to the NPRM as a whole (e.g., through the www.regulations.gov
website), including as part of a comment responding to the broader
NPRM. Alternatively, commenters may submit a comment specific to this
PRA analysis by sending an email to [email protected]. While much
of the information provided to OMB in support of the information
collection request appears in the preamble, interested parties may
obtain a copy of the supporting statements for the affected ICRs by
sending a written request to the mail address shown in the ADDRESSES
section at the beginning of this preamble. Alternatively, a copy of the
ICR applicable supporting documentation, including a description of the
likely respondents, proposed frequency of response, and estimated total
burden, may be obtained free of charge from the RegInfo.gov website.
Similarly, the complaint process ICR is available by visiting http://www.reginfo.gov/public/do/PRAMain.
OMB and the Department are particularly interested in comments
that:
Evaluate whether the proposed collections of information
are necessary for the proper performance of the functions of the
agency, including whether the information will have practical utility;
Evaluate the accuracy of the agency's estimate of the
burden of the proposed collection of information, including the
validity of the methodology and assumptions used;
Enhance the quality, utility, and clarity of the
information to be collected; and
Minimize the burden of the collection of information on
those who are to respond, including through the use of appropriate
automated, electronic, mechanical, or other technological collection
techniques or other forms of information technology, e.g., permitting
electronic submission of responses.
Total burden for the recordkeeping and complaint process
information collections, including the burdens that will be affected by
this proposed rule and any changes, are summarized below. For the
complaint ICR, the Department used actual data from FY22 and added
additional burden related to this rulemaking using the number of
affected workers from Table 4 of the RIA and multiplying by .05%. This
is an approximate estimate of potential new complaints should the rule
become final (please see the draft supporting statements referenced
above for an explanation of how these estimates were derived). With
respect to the FLSA recordkeeping ICR, the Department first revised the
overall burden for the collection as the baseline number of employers
and employees within the U.S. economy has changed since the collection
was last submitted to OMB. The Department then added the newly affected
workers described in the NPRM (see Table 4 of the RIA) to account for
additional burden employers could potentially be subject to when a
final rule is published.
Type of review: New collection (duplicate ICR to allow for public
comment revising a currently approved information collection).
Agency: Wage and Hour Division, Department of Labor.
Title: Employment Information Form.
OMB Control Number: 1235-0NEW.
Affected public: Private sector, businesses or other for-profits
and Individuals or Households.
Estimated number of respondents: 28,824 (1,824 from this
rulemaking).
Estimated number of responses: 28,824 (1,824 from this rulemaking).
Frequency of response: On occasion.
Estimated annual burden hours: 9,608 (608 burden hours due to this
NPRM).
Estimated annual burden costs (capital/startup): $0 ($0 from this
rulemaking).
Estimated annual burden costs (operations/maintenance): $0 ($0 from
this rulemaking).
Estimated annual burden costs: $0 ($0 from this rulemaking).
Type of Review: Revision to a currently approved information
collection.
Title: Records to be kept by Employers--Fair Labor Standards Act.
OMB Control Number: 1235-0018.
Affected public: Private sector, businesses or other for-profits
and Individuals or Households.
Estimated number of respondents: 4,068,419.
Estimated number of responses: 41,160,4 07 (8,971,488 from this
NPRM).
Frequency of response: Various.
Estimated annual burden hours: 1,105,833 (299,050 from this NPRM).
Estimated annual burden costs: $51,277,476.
VII. Analysis Conducted in Accordance With Executive Order 12866,
Regulatory Planning and Review, and Executive Order 13563, Improving
Regulation and Regulatory Review
Under Executive Order 12866, OMB's Office of Information and
Regulatory Affairs (OIRA) determines whether a regulatory action is
significant and, therefore, subject to the requirements of the
Executive Order and OMB review. As amended by Executive Order 14094,
section 3(f) of Executive Order 12866 defines a ``significant
regulatory action'' as a regulatory action that is likely to result in
a rule that may: (1) have an annual effect on the economy of $200
million or more; or adversely affect in a material way the economy, a
sector of the economy, productivity, competition, jobs, the
environment, public health or safety, or state, local, territorial, or
tribal governments or communities; (2) create a serious inconsistency
or otherwise interfere with an action taken or planned by another
agency; (3) materially alter the budgetary impact of entitlements,
grants, user fees or loan programs or the rights and obligations of
recipients thereof; or (4) raise legal or policy issues for which
centralized review would meaningfully further the President's
priorities or the principles set forth in the Executive Order. OIRA has
determined that this proposed rule is a ``significant regulatory
action'' within the scope of section 3(f)(1) of Executive Order 12866.
Executive Order 13563 directs agencies to, among other things,
propose or adopt a regulation only upon a reasoned determination that
its benefits justify its costs; that it is tailored to impose the least
burden on society, consistent with obtaining the regulatory objectives;
and that, in choosing among alternative regulatory approaches, the
agency has selected those approaches that maximize net benefits.
Executive Order 13563 recognizes that some costs and benefits are
difficult to quantify and provides that, when appropriate and permitted
by law, agencies may consider and discuss qualitatively values that are
difficult or impossible to quantify, including equity, human dignity,
fairness, and distributive impacts. The analysis below outlines the
impacts that the Department of Labor (Department) anticipates may
result from this proposed rule, if finalized, and was prepared pursuant
to the above-mentioned executive orders.
[[Page 62183]]
A. Introduction
1. Background
The Fair Labor Standards Act (FLSA or Act) requires covered
employers to: (1) pay employees who are covered and not exempt from the
Act's requirements not less than the Federal minimum wage for all hours
worked and overtime premium pay at a rate of not less than one and one-
half times the employee's regular rate of pay for all hours worked over
40 in a workweek, and (2) make, keep, and preserve records of their
employees and of the wages, hours, and other conditions and practices
of employment.
The FLSA provides a number of exemptions from the Act's minimum
wage and overtime pay provisions, including one for bona fide
executive, administrative, and professional (EAP) employees. The
exemption applies to employees employed in a bona fide executive,
administrative, or professional capacity, as those terms are ``defined
and delimited'' by the Department.\290\ The Department's regulations
implementing these ``white-collar'' exemptions are codified at 29 CFR
part 541. Since 1940, the regulations implementing the exemption have
generally required each of the following three tests to be met: (1) the
employee must be paid a predetermined and fixed salary that is not
subject to reduction because of variations in the quality or quantity
of work performed (the salary basis test); (2) the amount of salary
paid must meet a minimum specified amount (the salary level test); and
(3) the employee's job duties must primarily involve executive,
administrative, or professional duties as defined by the regulations
(the duties test).
---------------------------------------------------------------------------
\290\ 29 U.S.C. 213(a)(1).
---------------------------------------------------------------------------
The Department has updated the salary level test many times since
its implementation in 1938. Table 1 presents the weekly salary levels
associated with the EAP exemptions since 1938, organized by exemption
and long/short/standard duties tests. From 1949 to 2004, the Department
determined exemption status using a two-test system comprised of a long
test (a lower salary level paired with a more rigorous duties test that
limited performance of nonexempt work to no more than 20 percent for
most employees) and a short test (a higher salary level paired with a
less rigorous primary duties requirement that did not have a numerical
limit on the amount of nonexempt work). In 2004, rather than update the
two-test system, the Department chose to establish a new single-test
system for determining exemption status, setting the standard salary
level test at $455 a week, which was equivalent to the long test salary
level, and pairing it with a standard duties test that was
substantially equivalent to the more lenient short duties test. Because
the single standard duties test was equivalent to the short duties
test, employees who met the long test salary level and previously
passed either the more rigorous long, or less rigorous short, duties
test passed the standard duties test. The Department also added a new
highly compensated employee (HCE) test, which used a very minimal
duties test and a very high total compensation test set at $100,000 per
year (see section II.B.2. for further discussion). In 2016, to address
the concern that the standard test exempted lower-paid salaried
employees performing large amounts of nonexempt work who had previously
been protected by the more rigorous long duties test, the Department
published a final rule setting the standard salary level at $913 per
week, which was equivalent to the low end of the historic range of
short test salary levels, and the HCE annual compensation level at
$134,004. This approach restored overtime protection for employees
performing substantial amounts of nonexempt work who earned between the
long test salary level and the low end of the short test salary range,
as they failed the new standard salary level test. As previously
discussed, the U.S. District Court for Eastern District of Texas held
the 2016 rule invalid. In 2019, in part to address the concern raised
in the litigation that the approach taken in the 2016 rulemaking would
have prevented employers from using the exemption for employees who
earned between the long test salary level and the low end of the short
test salary range and met the more rigorous long duties test, the
Department returned to the methodology used in the 2004 rule and set
the salary level at the 20th percentile of weekly earnings of full-time
salaried workers in the South and in the retail industry nationally.
Applying this method to the earnings data available in 2019 produced a
standard salary level that was below the long test salary level. The
current earnings thresholds, as published in 2019, are $684 a week for
the standard salary test and $107,432 per year for the HCE test.
Table 1--Historical Salary Levels for the EAP Exemptions
--------------------------------------------------------------------------------------------------------------------------------------------------------
Long duties test
Date enacted ----------------------------------------------------------------------------------------------- Short duties
Executive Administrative Professional test
--------------------------------------------------------------------------------------------------------------------------------------------------------
1938..................................... * $30 $30................................. .................................... ..............
1940..................................... 30 $200 (per month).................... $200 (per month).................... ..............
1949..................................... 55 $75................................. $75................................. $100
1958..................................... 80 $95................................. $95................................. 125
1963..................................... 100 $100................................ $115................................ 150
1970..................................... 125 $125................................ $140................................ 200
1975..................................... 155 $155................................ $170................................ 250
--------------------------------------------------------------------------------------------------------------
Standard duties test
--------------------------------------------------------------------------------------------------------------
2004..................................... $455
2019..................................... $684
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Unless otherwise specified, all figures are dollars per week.
[[Page 62184]]
2. Need for Rulemaking
The goal of this rulemaking is not only to update the single
standard salary level to account for earnings growth since the 2019
rule, but also to build on the lessons learned in the Department's most
recent rulemakings to more effectively define and delimit employees
working in a bona fide EAP capacity. Specifically, the Department is
proposing to update the standard salary level by setting it equal to
the 35th percentile of weekly earnings of full-time salaried workers in
the lowest-wage Census Region (currently the South), based on the most
recent Current Population Survey (CPS) data.\291\ Using 2022 CPS Merged
Outgoing Rotation Group (MORG) \292\ data, the salary level would be
set at $1,059 per week.
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\291\ The Department uses the terms salaried and nonhourly
interchangeably in this rule because, consistent with its 2004,
2016, and 2019 rules, the Department considered data representing
compensation paid to nonhourly workers to be an appropriate proxy
for compensation paid to salaried workers. The Department also notes
that the terms employee and worker are used interchangeably
throughout this analysis.
\292\ MORG is a supplement to the CPS and is conducted on
approximately one-fourth of the CPS sample monthly to obtain
information on weekly hours worked and earnings. The Department
relied on CPS MORG data for calendar year 2022 to develop this NPRM.
The Department will update the data used in any final rule resulting
from this proposal.
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The Department's proposed standard salary level will, in
combination with the standard duties test, better define and delimit
which employees are employed in a bona fide EAP capacity in a one-test
system. As explained in greater detail in sections III and IV.A.,
above, setting the standard salary level at or below the long test
salary level, as the 2004 and 2019 rules did, results in the exemption
of lower-salaried employees who traditionally were entitled to overtime
protection under the long test either because of their low salary or
because they perform large amounts of nonexempt work, in effect
significantly broadening the exemption compared to the two-test system.
Setting the salary level at the low end of the historic range of short
test salary levels, as the 2016 rule did, would have restored overtime
protections to those employees who perform substantial amounts of
nonexempt work and earned between the long test salary level and the
low end of the short test salary range. However, it also would have
resulted in denying employers the use of the exemption for lower-
salaried employees who traditionally were not entitled to overtime
compensation under the long test, which raised concerns that the
Department was in effect narrowing the exemption. By setting a salary
level above what would currently be the equivalent of the long test
salary level, the proposal would restore the right to overtime pay for
salaried white-collar employees who prior to the 2019 rule were always
considered nonexempt if they earned below the long test (or long test-
equivalent) salary level. And it would ensure that fewer lower paid
white-collar employees who perform significant amounts of nonexempt
work are included in the exemption. At the same time, by setting it
well below what would currently be the equivalent of the short test
salary level, the proposal would allow employers to continue to use the
exemption for many lower paid white-collar employees who were made
exempt under the 2004 standard duties test. The proposed salary level
would also more reasonably distribute between employees and their
employers what the Department now understands to be the impact of the
shift from a two-test to a one-test system on employees earning between
the long and short test salary levels.
As the Department has previously noted, the amount paid to an
employee is ``a valuable and easily applied index to the `bona fide'
character of the employment for which exemption is claimed, as well as
the ``principal[ ]'' ``delimiting requirement'' ``prevent[ing] abuse''
of the exemption.'' \293\ Additionally, the salary level test
facilitates application of the exemption by saving employees and
employers from having to apply the more time-consuming duties analysis
to a large group of employees who will not pass it. For these reasons,
the salary level test has been a key part of how the Department defines
and delimits the EAP exemption since the beginning of its rulemaking on
the EAP exemption.\294\ At the same time, the salary test's role in
defining and delimiting the scope of the EAP exemption must allow for
appropriate examination of employee duties.\295\ Under the Department's
proposal, duties would continue to determine the exemption status for
most salaried white-collar employees, addressing the legal concerns
that have been raised about excluding from the EAP exemption too many
white-collar employees solely based on their salary level.
---------------------------------------------------------------------------
\293\ Stein Report at 19, 24; see also 81 FR 32422.
\294\ See 84 FR 51237.
\295\ See 84 FR 51238.
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The Department also proposes to update the HCE total annual
compensation requirement to the annualized weekly earnings of the 85th
percentile of full-time salaried workers nationally ($143,988 in 2022).
Though not as high a percentile as the HCE threshold initially adopted
in 2004, which covered 93.7 percent of all full-time salaried
workers,\296\ the Department's proposed increase to the HCE threshold
would ensure it continues to serve its intended function, because the
HCE total annual compensation level would be high enough to exclude all
but those employees at the very top of the economic ladder.
---------------------------------------------------------------------------
\296\ See 69 FR 22169 (Table 3).
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In accordance with the Department's traditional practice, and in
the interest of applying the FLSA uniformly to areas subject to the
Federal minimum wage, the Department is also proposing to apply the
standard salary level to all territories that are subject to the
Federal minimum wage and to update the special salary levels for
American Samoa and the motion picture industry in relation to the new
standard salary level. Having not increased these levels since 2004,
there is a need to increase the salary levels in U.S. territories,
particularly for employees in those territories that are subject to the
Federal minimum wage.
In its three most recent part 541 rulemakings, the Department has
expressed its commitment to keeping the earnings thresholds up to date
to ensure that they remain effective in helping differentiate between
exempt and nonexempt employees. Long intervals between rulemakings have
resulted in eroded earnings thresholds based on outdated earnings data
that were ill-equipped to help identify bona fide EAP employees. This
rulemaking is motivated in part by the need to keep the part 541
earnings thresholds up to date. Based on its long experience with
updating the salary levels, the Department has determined that adopting
a regulatory provision for automatically updating the salary levels,
with an exception for pausing future updates under certain conditions,
is the most viable and efficient way to ensure the EAP exemption
earnings thresholds keep pace with changes in employee pay and thus
remain effective in helping determine exemption status. Accordingly,
the Department is including in this proposed rule a mechanism for
automatically updating the salary and compensation levels every 3
years. As explained in greater detail in section IV.D., employees and
employers alike would benefit from the
[[Page 62185]]
certainty and stability of regularly scheduled updates.
3. Summary of Affected Workers, Costs, Benefits, and Transfers
The Department estimated the number of affected workers and
quantified costs and transfer payments associated with this proposed
rule using pooled CPS MORG data. See section VII.B.2. The Department
estimates in the first year after implementation, there would be 3.6
million affected workers.\297\ This includes 3.4 million workers who
meet the standard duties test and earn at least $684 per week but less
than $1,059 per week and would either become eligible for overtime or
have their salary increased to at least $1,059 per week (Table 2).\298\
An estimated 248,900 workers would be affected by the proposed increase
in the HCE compensation test from $107,432 per year to $143,988 per
year. In Year 10, with automatic updating, the Department estimates
that 4.3 million workers would be affected by the proposed change in
the standard salary level test and 768,700 workers would be affected by
the proposed change in the HCE total annual compensation test.\299\
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\297\ The term ``affected workers'' refers to the population of
potentially affected EAP workers who either pass the standard duties
test and earn at least $684 but less than the new salary level of
$1,059 per week, or pass only the HCE duties test and earn at least
$107,432 but less than the new HCE compensation level of $143,988
per year.
\298\ Here and elsewhere in this analysis, numbers are reported
at varying levels of aggregation, and are generally rounded to a
single decimal point. However, calculations are performed using
exact numbers. Therefore, some numbers may not match the reported
totals or the calculations shown due to rounding of components.
\299\ In later years, earnings growth will cause some initially
affected workers to no longer be affected because their earnings
will exceed the new salary or compensation threshold. This is
possible in both non-update and update years but is much more likely
to occur in non-update years. Additionally, some workers will become
newly affected because their earnings will reach at least $684 per
week, and in the absence of this proposed rule they would have lost
their overtime protections. To estimate the total number of affected
workers over time, the Department accounts for both of these
effects.
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This analysis quantifies three direct costs to employers: (1)
regulatory familiarization costs; (2) adjustment costs; and (3)
managerial costs (see section VII.C.3). Total annualized direct
employer costs over the first 10 years were estimated to be $663.6
million, assuming a 7 percent discount rate.\300\ This proposed rule
would also transfer income from employers to employees in the form of
increased wages. The Department estimated annualized transfers would be
$1.3 billion. Most of these transfers would be attributable to wages
paid under the FLSA's overtime provision; a smaller share would be
attributable to the FLSA's minimum wage requirement. These transfers
also account for employers who may choose to increase the salary of
some affected workers to at least the new threshold so that they can
continue to use the EAP exemption.
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\300\ Hereafter, unless otherwise specified, annualized values
will be presented using the 7 percent real discount rate.
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The Department also provides a qualitative discussion of the
potential benefits of this proposed rule, including strengthened
overtime protections for some workers, increased worker productivity,
increased personal time for workers, and reduced reliance on social
assistance programs. See section VII.C.5.
Table 2--Summary of Regulatory Costs and Transfers, Standard and HCE Salary Levels
----------------------------------------------------------------------------------------------------------------
Future years \a\ Annualized value
---------------------------------------------------------------
Impact Year 1 3% Real 7% Real
Year 2 Year 10 discount rate discount rate
----------------------------------------------------------------------------------------------------------------
Affected Workers (1,000s)
----------------------------------------------------------------------------------------------------------------
Standard........................ 3,399 2,999 4,288 (\b\) (\b\)
HCE............................. 249 269 769 (\b\) (\b\)
------------------------------------------------
Total....................... 3,648 3,268 5,057 (\b\) (\b\)
----------------------------------------------------------------------------------------------------------------
Costs and Transfers (Millions in $2022) \c\
----------------------------------------------------------------------------------------------------------------
Direct employer costs........... $1,202.8 $508.3 $748.0 $656.4 $663.6
Transfers [d]................... 1,234.2 949.0 1,981.2 1,318.1 1,294.3
----------------------------------------------------------------------------------------------------------------
\a\ These cost and transfer figures represent a range over the nine-year span.
\b\ Not annualized.
\c\ Costs and transfers for affected workers passing the standard and HCE tests are combined.
\d\ This is the net transfer from employers to workers. There may also be transfers of hours and income from
some workers to others.
B. Number of Affected EAP Workers
1. Overview
This section explains the methodology used to estimate the number
of workers who would be affected by the proposed rule. Workers who are
currently EAP exempt are potentially affected by the proposed rule. In
this proposed rule, as in previous rules, the Department estimated the
current number of EAP exempt workers because there is no data source
that identifies workers as EAP exempt. Employers are not required to
report EAP exempt workers to any central agency or as part of any
employee or establishment survey. The methodology described here is
consistent with the approach the Department used in the 2004, 2016, and
2019 final rules.\301\ To estimate the number of workers who would be
affected by the rule, the proposed standard salary level and proposed
HCE total annual compensation threshold are applied to the earnings of
current EAP exempt workers.
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\301\ See 69 FR 22196-209; 81 FR 32453-60; 84 FR 51255-60. Where
the proposal follows the methodology used to determine affected
workers in the 2004, 2016, and 2019 final rules, citations to these
rules are not always included.
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[[Page 62186]]
2. Data
All estimates of numbers of workers used in this analysis were
based on data from the CPS MORG, which is sponsored jointly by the U.S.
Census Bureau and Bureau of Labor Statistics (BLS).\302\ The CPS is a
large, nationally representative sample. Households are surveyed for 4
months, excluded from the survey for 8 months, surveyed for an
additional 4 months, then permanently dropped from the sample. During
the last month of each rotation in the sample (month 4 and month 16),
employed respondents complete a supplementary questionnaire in addition
to the regular survey.\303\ This supplement contains the detailed
information on earnings necessary to estimate a worker's exemption
status. Responses are based on the reference week, which is always the
week that includes the 12th day of the month.
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\302\ In 2015, RAND released results from a survey conducted to
estimate EAP exempt workers. However, this survey does not have the
variables or sample size necessary for the Department to base its
regulatory impact analysis (RIA) on this analysis. Rohwedder, S. and
Wenger, J.B. (2015). The Fair Labor Standards Act: Worker
Misclassification and the Hours and Earnings Effects of Expanded
Coverage. RAND Labor and Population.
\303\ This is the outgoing rotation group (ORG); however, this
analysis uses the data merged over 12 months and thus it is referred
to as MORG.
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Although the CPS MORG is a large-scale survey, administered to
approximately 15,000 households monthly representing the entire nation,
it is still possible to have relatively few observations when looking
at subsets of employees, such as workers in a specific occupation
employed in a specific industry, or workers in a specific geographic
location. To increase the sample size, the Department pooled 3 years of
CPS MORG data (2020-2022). Earnings for each observation from 2020 and
2021 were inflated to 2022 dollars using the Consumer Price Index for
All Urban Consumers (CPI-U).\304\ The weight of each observation was
adjusted so that the total number of potentially affected EAP workers
in the pooled sample remained the same as the number for the 2022 CPS
MORG. Thus, the pooled CPS MORG sample uses roughly three times as many
observations to represent the same total number of workers in 2022. The
additional observations allow the Department to better characterize
certain attributes of the potentially affected labor force. This pooled
dataset is used to estimate all impacts of the proposed rulemaking.
---------------------------------------------------------------------------
\304\ Previous rulemakings also adjusted salaries in the pooled
data using the CPI-U, but the Department recognizes that the
relationship between wage growth and inflation between 2020 and 2022
may not be consistent. During the pandemic, large employment losses
in low-wage industries resulted in stronger wage growth at the
aggregate level. In the latter part of the 2020-2022 period, high
inflation outpaced wage growth. Given these mixed effects, the
Department decided to continue its prior practice of adjusting these
observations using CPI-U.
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Some assumptions and adjustments were necessary to use these data
as the basis for the analysis. For example, the Department eliminated
workers who reported that their weekly hours vary and who provided no
additional information on hours worked. This was done because the
Department cannot estimate effects for these workers since it is
unknown whether they work overtime and therefore unknown whether there
would be any need to pay for overtime if their status changed from
exempt to nonexempt. The Department reweighted the rest of the sample
to account for this change (i.e., to keep the same total employment
estimates).\305\ This adjustment assumes that the distribution of hours
worked by workers whose hours do not vary is representative of hours
worked by workers whose hours vary. The Department believes that
without more information this is an appropriate assumption.\306\
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\305\ The Department also reweighted for workers reporting zero
earnings. In addition, the Department eliminated, without
reweighting, workers who reported both usually working zero hours
and working zero hours in the past week.
\306\ This is justifiable because demographic and employment
characteristics are similar across these two populations (e.g., age,
gender, education, distribution across industries, share paid
nonhourly). The share of all workers who stated that their hours
vary (but provided no additional information) is 4.5 percent. To the
extent these excluded workers are exempt, if they tend to work more
overtime than other workers, then transfer payments and costs may be
underestimated. Conversely, if they work fewer overtime hours, then
transfer payments and costs may be overestimated.
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3. Number of Workers Subject to the FLSA and the Department's Part 541
Regulations
As a starting point for the analysis, based on the CPS MORG data,
the Department estimates that there would be 166.2 million wage and
salary workers in Year 1. Figure 1 illustrates how the Department
analyzed the U.S. civilian workforce through successive stages to
estimate the number of affected workers.
BILLING CODE 4510-27-P
[[Page 62187]]
[GRAPHIC] [TIFF OMITTED] TP08SE23.003
BILLING CODE 4510-27-C
The Department first excluded workers who are unemployed, not
subject to its regulations, or not covered by the FLSA from the overall
total number of wage and salary workers. Excluded workers include
military personnel, unpaid volunteers, self-employed individuals,
clergy and other religious workers, and Federal employees (with a few
exceptions described below).
Many of these workers are excluded from the CPS MORG, including
members of the military on active duty and unpaid volunteers. Self-
employed and unpaid workers are included in the CPS MORG, but have no
earnings data reported and thus are excluded from the analysis. The
Department identified religious workers by their occupation codes:
`clergy' (Census occupational code 2040), `directors, religious
activities and education' (2050), and `religious workers, all other'
(2060). Most employees of the Federal Government are covered by the
FLSA but not the Department's part 541 regulations because the Office
of Personnel Management (OPM) regulates their entitlement to minimum
wage and overtime pay.\307\ Exceptions exist for U.S. Postal Service
employees, Tennessee Valley Authority employees, and Library of
Congress employees.\308\ The analysis identified and included these
covered Federal workers using occupation and/or industry codes and
removed other Federal employees.\309\
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\307\ See 29 U.S.C. 204(f). Federal workers are identified in
the CPS MORG with the class of worker variable PEIO1COW.
\308\ See id.
\309\ Postal Service employees were identified with the Census
industry classification for postal service (6370). Tennessee Valley
Authority employees were identified as Federal workers employed in
the electric power generation, transmission, and distribution
industry (570) and in Kentucky, Tennessee, Mississippi, Alabama,
Georgia, North Carolina, or Virginia. Library of Congress employees
were identified as Federal workers under Census industry `libraries
and archives' (6770) and residing in Washington DC.
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The FLSA also does not cover employees of firms that have annual
revenue of less than $500,000 and who are not engaged in interstate
commerce. The Department does not exclude them from the analysis,
however, because there is no data set that would adequately inform an
estimate of the size of this worker population, although the Department
believes it is a small percentage of workers. The 2004, 2016, and 2019
final rules similarly did not adjust for these workers.
Of the 166.2 million wage and salary workers in the United States,
the Department estimates that 139.4 million are covered by the FLSA and
subject to the Department's regulations (83.9 percent). The remaining
26.8 million workers are excluded from FLSA coverage for the reasons
described above.
4. Number of Workers Who Are White-Collar, Salaried, Not Eligible for
Another (Non-EAP) Overtime Exemption
After limiting the analysis to workers covered by the FLSA and
subject to the Department's part 541 regulations,
[[Page 62188]]
several other groups of workers were identified and excluded from
further analysis since this proposed rule is unlikely to affect them.
These include blue-collar workers,\310\ workers paid on an hourly
basis, and workers who are exempt under certain other (non-EAP)
exemptions.
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\310\ ``The section 13(a)(1) exemptions and the regulations in
[Part 541] do not apply to manual laborers or other `blue collar'
workers who perform work involving repetitive operations with their
hands, physical skill and energy.'' Sec. 541.3(a).
---------------------------------------------------------------------------
The Department excluded a total of 87.5 million workers from the
analysis for one or more of these reasons, which often overlapped
(e.g., many blue-collar workers are also paid hourly). For example, the
Department estimated that there are 47.5 million blue-collar workers.
These workers were identified in the CPS MORG data following the
methodology from the U.S. Government Accountability Office's (GAO) 1999
white-collar exemptions report \311\ and the Department's 2004, 2016,
and 2019 regulatory impact analyses.\312\ Supervisors in traditionally
blue-collar industries were classified as white-collar workers because
their duties are generally managerial or administrative, and therefore
they were not excluded as blue-collar workers. Using the CPS variable
indicating a respondent's hourly wage status, the Department determined
that 77.8 million workers were paid on an hourly basis in 2022.\313\
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\311\ GAO/HEHS. (1999). Fair Labor Standards Act: White Collar
Exemptions in the Modern Work Place. GAO/HEHS-99-164, 40-41, https://www.gao.gov/assets/230/228036.pdf.
\312\ See 69 FR 22240-44.
\313\ CPS MORG variable PEERNHRY.
---------------------------------------------------------------------------
Also excluded from further analysis were workers who are exempt
under certain other (non-EAP) exemptions. Although some of these
workers may also be exempt under the EAP exemptions, they would
independently remain exempt from the FLSA's minimum wage and/or
overtime pay provisions based on the non-EAP exemptions. The Department
excluded an estimated 3.8 million workers, including some agricultural
and transportation workers, from further analysis because they are
subject to another (non-EAP) overtime exemption. See Appendix A:
Methodology for Estimating Exemption Status, contained in the
rulemaking docket, for details on how this population was identified.
Agricultural and transportation workers are two of the largest
groups of workers excluded from the population of potentially affected
EAP workers in the current analysis, and with some exceptions, they
were similarly excluded in other recent rulemakings. The 2004 rule
excluded all workers in agricultural industries from the analysis,\314\
while more recent analyses only excluded agricultural workers from
specified occupational-industry combinations since not all workers in
agricultural industries qualify for the agricultural overtime pay
exemptions. This proposed rule followed the more recent analyses and
only excluded agricultural workers in certain occupation-industry
combinations. The exclusion of transportation workers matched the
method for the 2004, 2016, and 2019 final rules. Transportation workers
are defined as those who are subject to the following FLSA exemptions:
section 13(b)(1), section 13(b)(2), section 13(b)(3), section 13(b)(6),
or section 13(b)(10). The Department excluded 1.1 million agricultural
workers and 2.0 million transportation workers from the analysis.
---------------------------------------------------------------------------
\314\ 69 FR 22197.
---------------------------------------------------------------------------
In addition, the Department excluded another 21,800 workers who
qualify for one or more other FLSA minimum wage and overtime exemptions
(and are not either blue-collar or hourly). The criteria for
determining exemption status for these workers are detailed in Appendix
A.
After excluding workers not subject to the Department's FLSA
regulations and workers who are unlikely to be affected by this
proposed rule (i.e., blue-collar workers, workers paid hourly, workers
who are subject to another (non-EAP) overtime exemption), the
Department estimated there are 51.9 million salaried white-collar
workers for whom employers might claim either the standard EAP
exemption or the HCE exemption.
5. Number of Current EAP Exempt Workers
To determine the number of workers for whom employers might
currently claim the EAP exemption, the standard EAP test and HCE test
were applied. Both tests include earnings thresholds and duties tests.
Aside from workers in named occupations (which are not subject to an
earnings requirement and are discussed in the next subsection), to be
exempt under the standard EAP test, the employee generally must:
be paid a predetermined and fixed salary that is not
subject to reduction because of variations in the quality or quantity
of work performed (the salary basis test); \315\
---------------------------------------------------------------------------
\315\ Some computer employees may be exempt even if they are not
paid on a salary basis. Hourly computer employees who earn at least
$27.63 per hour and perform certain duties are exempt under section
13(a)(17) of the FLSA. These workers are considered part of the EAP
exemptions but were excluded from the analysis because they are paid
hourly and will not be affected by this proposed rule (these workers
were similarly excluded in the 2004, 2016, and 2019 analyses).
Salaried computer workers are exempt if they meet the salary and
duties tests applicable to the EAP exemptions, and are included in
the analysis since they will be impacted by this proposed rule.
Additionally, administrative and professional employees may be paid
on a fee basis, as opposed to a salary basis. Sec. 541.605(a).
Although the CPS MORG does not identify workers paid on a fee basis,
they are considered nonhourly workers in the CPS and consequently
are correctly classified as ``salaried'' (as was done in previous
rules).
---------------------------------------------------------------------------
earn at least a designated salary amount (the standard
salary level test, currently $684 per week); and
primarily perform exempt work, as defined by the
regulations (the standard duties test).
The HCE test allows certain highly paid employees to qualify for
exemption if they customarily and regularly perform one or more exempt
job duties (the HCE duties test). The current HCE annual compensation
level is $107,432, including at least $684 per week paid on a salary or
fee basis.
i. Salary Basis
The Department included only nonhourly workers in the analysis
based on CPS data.\316\ For this NPRM, the Department considered data
representing compensation paid to nonhourly workers to be an
appropriate proxy for compensation paid to salaried workers. The
Department notes that it made the same assumption regarding nonhourly
workers in the 2004, 2016, and 2019 final rules.\317\
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\316\ The CPS variable PEERNHRY identifies workers as either
hourly or nonhourly.
\317\ See 69 FR 22197; 81 FR 32414; 84 FR 51258.
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The CPS population of ``nonhourly'' workers includes salaried
workers along with those who are paid on a piece-rate, a day-rate, or
largely on bonuses or commissions. Data in the CPS are not available to
distinguish between salaried workers and these other nonhourly workers.
However, the Panel Study of Income Dynamics (PSID) provides additional
information on how nonhourly workers are paid.\318\ In the PSID,
respondents are asked how they are paid on their main job and are also
asked for more detail if their response is other than salaried or
hourly. Possible responses include piecework, commission, self-
employed/farmer/profits, and by the job/day/mile. The Department
analyzed the PSID data and found that relatively few nonhourly workers
were paid by methods other than salaried. The Department is not aware
of any statistically robust source
[[Page 62189]]
that more closely reflects salary as defined in its regulations.
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\318\ University of Michigan, Institute for Social Research.
2019 PSID. Data available at: https://simba.isr.umich.edu/data/data.aspx.
---------------------------------------------------------------------------
ii. Salary Level
Weekly earnings are available in the CPS MORG data, which allowed
the Department to estimate how many nonhourly workers pass the
compensation thresholds.\319\ However, the CPS earnings variable does
not perfectly reflect the Department's definition of earnings. First,
the CPS includes all nondiscretionary bonuses and commissions if they
are part of usual weekly earnings. However, the regulation allows
nondiscretionary bonuses and commissions to satisfy up to 10 percent of
the standard salary level. This discrepancy between the earnings
variable used and the regulatory definition of salary may cause a
slight overestimation or underestimation of the number of workers
estimated to meet the standard salary level and HCE compensation
tests.\320\ Second, CPS earnings data include overtime pay. The
Department notes that employers may factor into an employee's salary a
premium for expected overtime hours worked. To the extent they do so,
that premium would be reflected accurately in the data. Third, the
earnings measure includes tips and discretionary commissions which do
not qualify towards the required salary. The Department believes tips
are an uncommon form of payment for these white-collar workers.
Discretionary commissions tend to be paid irregularly and hence are
unlikely to be counted as ``usual earning.'' Additionally, as noted
above, most salaried workers do not receive commissions.
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\319\ The CPS MORG variable PRERNWA, which measures weekly
earnings, is used to identify weekly salary.
\320\ In some instances, this may include too much
nondiscretionary bonuses and commissions (i.e., when it is more than
10 percent of usual earnings). But in other instances, it may not
include enough nondiscretionary bonuses and commissions (i.e., when
the respondent does not count them as usual earnings).
---------------------------------------------------------------------------
Lastly, the CPS annual earnings variable is topcoded at $150,000.
Topcoding refers to how data sets handle observations at the top of the
distribution. For the CPS annual earnings variable, workers earning
above $2,884.61 ($150,000 / 52 weeks) per week are reported as earning
$2,884.61 per week. The Department imputed earnings for topcoded
workers in the CPS data to adequately estimate impacts.\321\
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\321\ The Department used the standard Pareto distribution
approach to impute earnings above the topcoded value as described in
Armour, P. and Burkhauser, R (2013). Using the Pareto Distribution
to Improve Estimates of Topcoded Earnings. Center for Economic
Studies (CES).
---------------------------------------------------------------------------
iii. Duties
The CPS MORG data do not capture information about job duties.
Therefore, the Department used probability estimates of passing the
duties test by occupational title to estimate the number of workers
passing the duties test. This is the same methodology used in recent
part 541 rulemakings, and the Department believes it continues to be
the best available methodology. The probabilities of passing the duties
test are from an analysis performed by WHD in 1998 in response to a
request from the GAO. Because WHD enforces the FLSA's overtime
requirements and regularly assesses workers' exempt status, WHD was
uniquely qualified to provide the analysis. The analysis was originally
published in the GAO's 1999 white-collar exemptions report.\322\
---------------------------------------------------------------------------
\322\ Fair Labor Standards Act: White Collar Exemptions in the
Modern Work Place, supra note 311, at 40-41.
---------------------------------------------------------------------------
WHD examined 499 occupational codes and determined that 251
occupational codes likely included EAP exempt workers.\323\ For each,
WHD assigned one of four probability codes reflecting the estimated
likelihood, expressed as ranges, that a worker in that occupation would
perform duties required to meet the EAP duties tests (Table 3). All
occupations and their associated probability codes are listed in
Appendix A. Just as in the 2004, 2016, and 2019 final rules, the
Department has supplemented this analysis to account for the HCE
exemption. The Department modified the four probability codes to
reflect probabilities of passing the HCE duties test based on its
analysis of the provisions of the highly compensated test relative to
the standard duties test. To illustrate, WHD assigned exempt
probability code 4 to the occupation ``first-line supervisors/managers
of construction trades and extraction workers'' (Census code 6200),
which indicates that a worker in this occupation has a 0 to 10 percent
likelihood of meeting the standard EAP duties test. However, if that
worker earned at least $100,000 annually (now $107,432 annually), they
were assigned a 15 percent probability of passing the more lenient HCE
duties test.\324\
---------------------------------------------------------------------------
\323\ WHD excluded nine that were not relevant to the analysis
for various reasons. For example, one code was assigned to
unemployed persons whose last job was in the Armed Forces, some
codes were assigned to workers who are not FLSA covered, others had
no observations.
\324\ The HCE duties test is used in conjunction with the HCE
total annual compensation requirement to determine eligibility for
the HCE exemption. It is much less stringent than the standard and
short duties tests to reflect that very highly paid employees are
much more likely to be properly classified as exempt.
Table 3--Probability Worker in Category Passes the Duties Tests
----------------------------------------------------------------------------------------------------------------
The standard EAP test The HCE test
---------------------------------------------------------------
Probability code Lower bound Upper bound Lower bound Upper bound
(%) (%) (%) (%)
----------------------------------------------------------------------------------------------------------------
0............................................... 0 0 0 0
1............................................... 90 100 100 100
2............................................... 50 90 94 96
3............................................... 10 50 58.4 60
4............................................... 0 10 15 15
----------------------------------------------------------------------------------------------------------------
The occupations identified in GAO's 1999 report map to an earlier
occupational classification scheme (the 1990 Census occupational
codes).\325\ For this proposed rule, the Department used occupational
crosswalks to map the previous occupational codes to the 2018 Census
occupational codes, which are used in the CPS MORG 2020 through 2022
data. If a new occupation comprises more than one previous occupation,
then the new occupation's probability code is the weighted average of
the previous occupations' probability
[[Page 62190]]
codes, rounded to the closest probability code.
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\325\ Census occupation codes were also updated in 2002 and
2010. References to occupational codes in this analysis refer to the
2002 Census occupational codes. Crosswalks and methodology available
at: https://www.census.gov/topics/employment/industry-occupation/guidance/code-lists.html.
---------------------------------------------------------------------------
These codes provide information on the likelihood that an employee
met the duties tests, but they do not identify the workers in the CPS
MORG who passed the test. For example, for every ten public relations
managers, between five and nine are assumed to pass the standard duties
test (based on probability category 2). However, it is unknown which of
these ten workers are exempt; therefore, for the purposes of producing
an estimate, the Department must assign a status to these workers.
Exemption status could be randomly assigned with equal probability, but
this would ignore the earnings of the worker as a factor in determining
the probability of exemption. The probability of qualifying for the
exemption increases with earnings because higher paid workers are more
likely to perform the required duties.\326\
---------------------------------------------------------------------------
\326\ For the standard exemption, the relationship between
earnings and exemption status is not linear and is better
represented with a gamma distribution. For the HCE exemption, the
relationship between earnings and exemption can be well represented
with a linear function because the relationship is linear at high
salary levels (as determined by the Department in the 2004 rule).
Therefore, the gamma model and the linear model would produce
similar results for highly compensated workers. See 69 FR 22204-08,
22215-16.
---------------------------------------------------------------------------
The Department estimated the probability of qualifying for the
standard exemption for each worker as a function of both earnings and
the occupation's exempt probability category using a gamma
distribution.\327\ Based on these revised probabilities, each worker
was assigned exempt or nonexempt status based on a random draw from a
binomial distribution using the worker's revised probability as the
probability of success. Thus, if this method is applied to ten workers
who each have a 60 percent probability of being exempt, six workers
would be expected to be designated as exempt.\328\ For details, see
Appendix A (in the rulemaking docket).
---------------------------------------------------------------------------
\327\ The gamma distribution was chosen because, during the 2004
revision, this non-linear distribution best fit the data compared to
the other non-linear distributions considered (i.e., normal and
lognormal). A gamma distribution is a general type of statistical
distribution that is based on two parameters that control the scale
(alpha) and shape (in this context, called the rate parameter,
beta).
\328\ A binominal distribution is frequently used for a
dichotomous variable where there are two possible outcomes; for
example, whether one owns a home (outcome of 1) or does not own a
home (outcome of 0). Taking a random draw from a binomial
distribution results in either a zero or a one based on a
probability of ``success'' (outcome of 1). This methodology assigns
exempt status to the appropriate share of workers without biasing
the results with manual assignment.
---------------------------------------------------------------------------
The Department acknowledges that the probability codes used to
determine the share of workers in an occupation who are EAP exempt are
25 years old. However, the Department believes the probability codes
continue to estimate exemption status accurately given the fact that
the standard duties test is not substantively different from the former
short duties tests reflected in the codes. For the 2016 rulemaking, the
Department reviewed O*NET \329\ to determine the extent to which the
1998 probability codes reflected current occupational duties. The
Department's review of O*NET verified the continued appropriateness of
the 1998 probability codes.\330\
---------------------------------------------------------------------------
\329\ The O*NET database contains hundreds of standardized and
occupation-specific descriptors. See http://www.onetcenter.org.
\330\ 81 FR 32459.
---------------------------------------------------------------------------
The Department estimates that of the existing 51.9 million salaried
white-collar workers considered in the analysis, 36.4 million currently
qualify for the EAP exemption.
6. Potentially Affected Exempt EAP Workers
The Department excluded some of the current EAP exempt workers from
further analysis because the proposed rule would not affect them.
Specifically, the Department excluded workers in named occupations who
are not required to pass the salary requirements (although they must
still pass a duties test) and therefore whose exemption status does not
depend on their earnings. These occupations include physicians
(identified with Census occupation codes 3010, 3040, 3060, 3120),
lawyers (2100), teachers (occupations 2200-2550 and industries 7860 or
7870), academic administrative personnel (school counselors (occupation
2000 and industries 7860 or 7870) and educational administrators
(occupation 0230 and industries 7860 or 7870)), and outside sales
workers (a subset of occupation 4950). Out of the 36.4 million workers
who were EAP exempt, 8.1 million, or 22.1 percent, were expected to be
in named occupations. Thus, the proposed changes to the standard salary
level and HCE compensation tests would not affect these workers. The
28.4 million EAP exempt workers remaining in the analysis are referred
to in this proposed rule as ``potentially affected'' (17.1 percent of
all workers).
Based on analysis of the occupational codes and CPS earnings data
(described above), the Department has concluded there are 28.4 million
potentially affected EAP workers.\331\
---------------------------------------------------------------------------
\331\ Of these workers, approximately 16.0 million pass only the
standard test, 11.9 million pass both the standard and the HCE
tests, and 420,000 pass only the HCE test.
---------------------------------------------------------------------------
BILLING CODE 4510-27-P
[[Page 62191]]
[GRAPHIC] [TIFF OMITTED] TP08SE23.004
As shown in Figure 2 above, 8.1 million of the 51.9 million
salaried white-collar workers are in named occupations and will not be
affected by a change in the earnings requirements. The Department also
estimates that of the remaining 43.8 million salaried white-collar
workers, about 11.7 million earn below the Department's proposed
standard salary level of $1,059 per week and about 32.1 million earn
above the Department's proposed salary level. Thus, approximately 27
percent of salaried white-collar employees earn below the proposed
salary level, whereas approximately 73 percent of salaried white-collar
employees earn above the salary level and would have their exemption
status turn on their job duties.
---------------------------------------------------------------------------
\332\ See section VII.C.8 (Alternative 2). As discuss in section
IV.A, such employees were always excluded from the EAP exemption
prior to 2019, either by the long test salary level itself, or under
the 2004 rule salary level, which was equivalent to the long test
salary level. The remaining 1.6 million of these affected employees
earn between the long test salary level and the Department's
proposed standard salary level.
\333\ This group includes workers who may currently be nonexempt
under more protective state EAP laws and regulations, such as some
workers in Alaska, California, Colorado, Maine, New York,
Washington, and Wisconsin.
---------------------------------------------------------------------------
7. Number of Affected EAP Workers
The Department estimated that the proposed increase in the standard
salary level from $684 per week to $1,059 per week would affect 3.4
million workers in Year 1 (of these 3.4 million affected employees, 1.8
million earn less than the long test salary level ($925)).\332\ The
Department estimated that the proposed increase in the HCE annual
compensation level from $107,432 to $143,988 would impact 248,900
workers (Figure 3).\333\ In total, the Department expects that 3.6
million workers out of the 28.4 million potentially affected workers
would be affected in Year 1.
[[Page 62192]]
[GRAPHIC] [TIFF OMITTED] TP08SE23.005
BILLING CODE 4510-27-C
8. Supplemental Analysis on the Number of Affected Workers in the
Territories
The Department is proposing to apply the standard salary level to
all territories that are subject to the Federal minimum wage, including
the Commonwealth of the Northern Mariana Islands (CNMI), Guam, Puerto
Rico, and the U.S. Virgin Islands, and to update the special salary
level for American Samoa in relation to the new standard salary level.
In American Samoa, the salary level would be set at 84 percent of the
new standard salary level, or $890 per week ($1,059 x 84 percent). In
the other territories, the salary level would be set at the proposed
standard salary level of the 35th percentile of weekly nonhourly
earnings in the lowest wage Census region (currently the South), or
$1,059 per week. The salary levels in the territories have not been
updated since 2004, when the salary level for Puerto Rico, Guam, the
U.S. Virgin Islands, and the CNMI was set to $455 per week and the
salary level for American Samoa was set to $380 per week. Therefore,
the increases in those salary levels will be more pronounced than in
the 50 states and the District of Columbia. This may lead to larger
impacts resulting from the increased standard salary level in the
territories. Unfortunately, data are not available to conduct a full
analysis of impacts in the territories. Therefore, the Department
applied reasonable assumptions to the available data to estimate the
number of affected workers in the territories.\334\
---------------------------------------------------------------------------
\334\ The Department was unable to estimate transfer payments in
the territories because of the additional assumptions that would be
necessary.
---------------------------------------------------------------------------
The CPS data used for the impact analysis does not include data for
the territories, and no other data source provides individual level
data on earnings, occupation, and pay basis (i.e., hourly or salaried).
The Department identified several data sources with pertinent
information on the territories:
BLS Occupational Employment and Wage Statistics (OEWS)
The Puerto Rico Community Survey
The Census of Island Areas
The Economic Census
County Business Patterns (CBP)
For Puerto Rico, Guam, and the U.S. Virgin Islands the Department
used OEWS data.\335\ The OEWS does not include American Samoa or the
CNMI; the Department used CBP (discussed below) data on the number of
workers for these territories. The Department believes OEWS is more
appropriate for this analysis than CBP because it provides the number
of white-collar workers and information about earnings, which CBP does
not.\336\ The Puerto Rico Community Survey provides individual-level
earnings information for Puerto Rico that is not available in the
OEWS.\337\ However, the Department chose to use OEWS because it
includes data on additional territories, and to limit the number of
data sets used for consistency. The Department welcomes comments on the
choice of data set for this analysis, and the overall methodology for
estimating the impact on territories. The Department also welcomes
recommendations for additional sources of data on workers in the
territories.
---------------------------------------------------------------------------
\335\ OEWS 2022. https://www.bls.gov/oes/tables.htm.
\336\ CBP includes total quarterly payroll and the number of
employees, but no information about the distribution of these
earnings.
\337\ The Government Accountability Office assessed the impacts
of the 2016 rulemaking in Puerto Rico using the Puerto Rico
Community Survey. GAO. (2018). Limited Federal Data Hinder Analysis
of Economic Condition and DOL's 2016 Overtime Rule. https://www.gao.gov/assets/700/693309.pdf.
---------------------------------------------------------------------------
The OEWS reports the number of workers by detailed occupation, to
which the Department applied the
[[Page 62193]]
probability codes to estimate the number of white-collar workers who
meet the duties test requirements for the EAP exemption. The OEWS does
not have information on the share of employees in each occupation who
are salaried. In order to estimate this share, the Department
calculated the share of workers in the 50 states and DC who meet the
duties requirement in the CPS data who are salaried, controlling for
the distribution of workers across occupations in each of the three
territories.\338\ The Department then multiplied the share of workers
who meet the duties requirement who are salaried in each occupation by
the number of workers who meet the duties requirements in that
territory.
---------------------------------------------------------------------------
\338\ The Department also excluded workers who are unlikely to
be affected by this rulemaking, including workers in named
occupations and workers exempt under another non-EAP overtime
exemption.
---------------------------------------------------------------------------
The OEWS also reports select percentiles of the earnings
distribution for each occupation (10th, 25th, 50th, 75th, and 90th).
This allows the Department to estimate an earnings distribution for
each occupation and approximate the number of workers who earn between
the old and new salary levels.\339\ These calculations are summarized
in Table 4.
---------------------------------------------------------------------------
\339\ The Department interpolated values between the reported
percentiles by assuming a uniform distribution for each segment
(e.g., between the 10th and the 25th percentiles the Department
assumed the earnings distribution is linear). The Department assumed
a minimum value of $100 and a maximum value of three times the 90th
percentile.
Table 4--Estimated Number of Affected Workers in Territories Using OEWS
----------------------------------------------------------------------------------------------------------------
U.S. Virgin
Population or parameter Puerto Rico Guam Islands
----------------------------------------------------------------------------------------------------------------
Workers \a\..................................................... 907,930 51,340 27,860
Workers who meet duties requirements............................ 169,241 10,413 5,808
Share of workers meeting duties requirements who are salaried 54% 60% 57%
\b\ \c\........................................................
Salaried workers meeting duties requirements.................... 91,919 6,285 3,333
Share between salary thresholds ($455-$1,059)................... 49% 38% 32%
Salaried workers meeting duties requirements between thresholds 44,881 2,407 1,071
(i.e., affected workers).......................................
----------------------------------------------------------------------------------------------------------------
\a\ Limited to wage and salary workers in nonfarm establishments.
\b\ Also removes workers unlikely to be impacted by this rulemaking such as workers in named occupations and
workers exempt under another non-EAP overtime exemption.
\c\ Ratio calculated from CPS data for employees in the 50 states and the District of Columbia while controlling
for occupation distribution.
There are several reasons why the estimated number of workers
calculated from the OEWS may over or underestimate the true number of
affected workers. The Department does not know the size of the biases
and so does not know which dominate. First, the share of workers who
are salaried in the territories may differ from in the 50 states and
the District of Columbia. If the share is higher in the territories
than the states, then the Department's approach will underestimate the
number of affected workers but overestimate the number if the share is
lower. Second, the OEWS is limited to wage and salary workers in
nonfarm establishments which may lead to an undercount of affected
workers.\340\
---------------------------------------------------------------------------
\340\ In particular, ``The OEWS survey excludes the majority of
the agricultural sector, with the exception of logging (NAICS
113310), support activities for crop production (NAICS 1151), and
support activities for animal production (NAICS 1152). Private
households (NAICS 814) also are excluded. OEWS Federal Government
data include the U.S. Postal Service and the Federal executive
branch only. All other industries, including state and local
government, are covered by the survey.'' See https://www.bls.gov/oes/current/oes_tec.htm.
---------------------------------------------------------------------------
The Department used 2021 CBP data to estimate the number of
affected workers in American Samoa and the CNMI. The methodology is
largely the same as for the analysis using OEWS data. Table 5 shows
estimates using CBP data for all five territories to facilitate a
comparison of OEWS and CBP results for Puerto Rico, Guam, and the U.S.
Virgin Islands.
CBP provides employment data for each territory. To estimate the
number of workers who may be exempt, the Department calculated the
share of workers in the OEWS analysis who meet the duties requirements
and are salaried in each of the other three territories and applied
that weighted average to American Samoa and the CNMI. The Department
also calculated the share of exempt workers who earn between the
current and proposed salary thresholds in the three territories covered
by the OEWS data and applied them to American Samoa and the CNMI. The
Department then multiplied the number of workers by these two shares to
estimate the number of affected workers.\341\
---------------------------------------------------------------------------
\341\ American Samoa has lower current and proposed salary
thresholds. However, earnings are also lower in American Samoa.
Therefore, the Department believes to estimate American Samoa
impacts, it is more appropriate to use the salary thresholds in the
other territories when applied to wage data for those territories,
rather than using the lower American Samoa thresholds combined with
the higher earnings data for other territories.
Table 5--Estimated Number of Affected Workers in Territories Using CBP
----------------------------------------------------------------------------------------------------------------
U.S. Virgin
Population or parameter Puerto Rico Guam Islands American Samoa CNMI
----------------------------------------------------------------------------------------------------------------
Workers......................... 660,654 49,876 25,652 7,808 12,763
Share who are salaried and meet 10% 12% 12% 10% 10%
duties requirements \a\........
Salaried workers meeting duties 66,885 6,106 3,069 803 1,313
requirements...................
Share between salary thresholds 49% 38% 32% 48% 48%
\b\............................
Salaried workers meeting duties 32,657 2,339 986 383 625
requirements between thresholds
(i.e., affected workers).......
----------------------------------------------------------------------------------------------------------------
\a\ Ratio calculated from OEWS data for Puerto Rico, Guam, and U.S. Virgin Islands. Average used for American
Samoa and the CNMI. Excludes workers unlikely to be impacted by this rulemaking such as workers in named
occupations and workers exempt under another non-EAP overtime exemption.
\b\ ``Excludes workers unlikely to be impacted by this rulemaking such as workers in named occupations and
workers exempt under another non-EAP overtime exemption.
[[Page 62194]]
In general, the same potential biases apply here as with the OEWS
analysis. However, employment coverage differs slightly between the
OEWS and CBP. The CBP excludes government workers (including state and
local workers) and covered workers in a few select NAICS, resulting in
a downward bias in the number of affected workers.\342\ Additionally,
the estimates for American Samoa and the CNMI assume the share of
workers in these territories who meet the duties requirements and are
salaried, and the share of these workers who earn between the current
and proposed salary thresholds, are similar to those shares in Puerto
Rico, Guam, and the U.S. Virgin Islands.
---------------------------------------------------------------------------
\342\ In particular, ``CBP covers most NAICS industries
excluding crop and animal production; rail transportation; Postal
Service; pension, health, welfare, and vacation funds; trusts,
estates, and agency accounts; office of notaries; private
households; and public administration. CBP also excludes most
establishments reporting government employees.'' See https://www.census.gov/programs-surveys/cbp/about.html.
---------------------------------------------------------------------------
As a sensitivity analysis, the Department compared the results from
the CBP analysis to the OEWS analysis for Puerto Rico, Guam, and the
U.S. Virgin Islands. The two estimates of the number of affected
workers are within 10 percent for both Guam and the U.S. Virgin
Islands. The Puerto Rico estimates differ by a larger amount because
the CBP number of workers in Puerto Rico is smaller than the OEWS
number due to differences in the covered population.
Table 6 includes the estimated number of affected workers by area
using the preferred data source for each (i.e., OEWS for Puerto Rico,
Guam, and U.S. Virgin Islands and CBP for American Samoa and the CNMI).
The share of workers affected by the rule ranges from 3.8 to 4.9
percent for each territory, with an average of 4.9 percent over all
territories, which is higher than the average of 2.2 percent estimated
for the 50 states and the District of Columbia. The effect is larger in
the territories than the states for two reasons. First, the increase in
salary level will be larger since the salary level wasn't increased for
these territories in the 2019 rulemaking. Second, earnings tend to be
lower in the territories, and so more workers may fall within the
impacted salary range.
Table 6--Summary of Number of Affected Workers by Territory
----------------------------------------------------------------------------------------------------------------
Number of Affected as
Territory All workers affected share of all
workers workers (%)
----------------------------------------------------------------------------------------------------------------
Puerto Rico..................................................... 907,930 44,881 4.9
Guam............................................................ 51,340 2,407 4.7
U.S. Virgin Islands............................................. 27,860 1,071 3.8
American Samoa.................................................. 7,808 383 4.9
CNMI............................................................ 12,763 625 4.9
-----------------------------------------------
Total....................................................... 1,007,701 49,367 4.9
----------------------------------------------------------------------------------------------------------------
Although the share of affected workers to total workers in the
territories is larger, these workers still comprise only a fraction of
the workforce. As is true for the mainland U.S., the Department
believes that many of these workers are unlikely to work regular
overtime. The Department welcomes comments and data on the prevalence
of overtime work in the territories.
The Department has not included this supplemental estimate of
affected workers in the territories in the larger analysis of affected
workers due to the limitations of the estimates and the inability to
estimate transfers. Even if this supplemental estimate were to be
included in the broader analysis, the total number of affected workers
would be little changed, as the number of affected workers in the
territories (49,367) is less than 1.5% of our affected workers estimate
(3.6 million).
C. Effects of Revised Salary and Compensation Levels
1. Overview and Summary of Quantified Effects
The Department is proposing to set the standard salary level using
the 35th percentile of earnings of full-time salaried workers in the
lowest-wage Census region (currently the South) and to set the HCE
compensation level at the annualized weekly earnings of the 85th
percentile of full-time salaried workers nationwide. In both cases the
Department used 2022 CPS data to calculate the levels.\343\ The levels
presented in this analysis are likely lower than the corresponding
levels would be at the time a final rule is published, given that the
Department would use the most recent data available. However, the
economic impacts estimated here are an appropriate proxy for the
effects likely to occur at the time of implementation if the proposal
is finalized.
---------------------------------------------------------------------------
\343\ Full-time is defined as 35 or more hours per week.
---------------------------------------------------------------------------
Both transfers from employers to employees and between employees,
and direct employer costs, would depend on how employers respond to
this rulemaking. Employer response is expected to vary by the
characteristics of the affected EAP workers. Assumptions related to
employer responses are discussed below.
Table 7 presents the estimated number of affected workers, costs,
and transfers associated with increasing the standard salary and HCE
compensation levels. The Department estimated that the direct employer
costs of this proposed rule, if finalized, would total $1.2 billion in
the first year, with 10-year annualized direct costs of $664 million
per year using a 7 percent discount rate.
In addition to these direct costs, this proposed rule would
transfer income from employers to employees. Estimated Year 1 transfers
would equal $1.2 billion, with annualized transfers of $1.3 billion per
year using both the 3 percent and 7 percent real discount rates.
Potential employer costs due to reduced profits and additional hiring
were not quantified but are discussed in section VII.C.3.v.
[[Page 62195]]
Table 7--Summary of Affected Workers and Regulatory Costs and Transfers
----------------------------------------------------------------------------------------------------------------
Future years \b\ Annualized value
---------------------------------------------------------------
Impact \a\ Year 1 3% Real 7% Real
Year 2 Year 10 discount rate discount rate
----------------------------------------------------------------------------------------------------------------
Affected Workers (1,000s)
----------------------------------------------------------------------------------------------------------------
Standard........................ 3,399 2,999 4,288 (\c\) (\c\)
HCE............................. 249 269 769 (\c\) (\c\)
-------------------------------------------------------------------------------
Total....................... 3,648 3,268 5,057 (\c\) (\c\)
----------------------------------------------------------------------------------------------------------------
Direct Employer Costs (Millions in $2022)
----------------------------------------------------------------------------------------------------------------
Regulatory familiarization...... $427.2 $0.0 $65.1 $67.9 $75.0
Adjustment \c\.................. $240.8 $8.1 $15.0 $35.7 $40.0
Managerial...................... $534.9 $500.2 $667.9 $552.8 $548.5
-------------------------------------------------------------------------------
Total direct costs \d\...... $1,202.8 $508.3 $748.0 $656.4 $663.6
----------------------------------------------------------------------------------------------------------------
Transfers from Employers to Workers (Millions in $2022) \e\
----------------------------------------------------------------------------------------------------------------
Due to minimum wage............. $48.6 $27.1 $17.2 $25.2 $25.9
Due to overtime pay............. $1,185.6 $921.8 $1,963.9 $1,292.9 $1,268.5
-------------------------------------------------------------------------------
Total transfers \f\......... $1,234.2 $949.0 $1,981.2 $1,318.1 $1,294.3
----------------------------------------------------------------------------------------------------------------
\a\ Additional costs and benefits of the rule that could not be quantified or monetized are discussed in the
text.
\b\ These costs/transfers represent a range over the nine-year span.
\c\ Not annualized.
\d\ Adjustment costs occur in all years when there are newly affected workers. Adjustment costs may occur in
years without updated earnings thresholds because some workers' projected earnings are estimated using
negative earnings growth.
\e\ Components may not add to total due to rounding.
\f\ This is the net transfer from employers to workers. There may also be transfers between workers.
2. Characteristics of Affected EAP Workers
Table 8 presents the number of affected EAP workers, the mean
number of overtime hours they work per week, and their average weekly
earnings. The Department considered two types of overtime workers in
this analysis: regular overtime workers and occasional overtime
workers.\344\ Regular overtime workers typically worked more than 40
hours per week. Occasional overtime workers typically worked 40 hours
or less per week, but they worked more than 40 hours in the week they
were surveyed. The Department considered these two populations
separately in the analysis because labor market responses to overtime
pay requirements may differ for these two types of workers.
---------------------------------------------------------------------------
\344\ Regular overtime workers were identified in the CPS MORG
with variable PEHRUSL1. Occasional overtime workers were identified
with variables PEHRUSL1 and PEHRACT1.
---------------------------------------------------------------------------
The 3.4 million workers affected by the increase in the standard
salary level work on average 1.6 usual hours of overtime per week and
earn on average $914 per week.\345\ However, most of these workers
(about 85 percent) usually do not work overtime. The 15 percent of
affected workers who usually work overtime average 11.0 hours of
overtime per week. In a representative week, roughly 121,000 (or 3.6%)
of the 3.4 million affected workers occasionally work overtime; they
averaged 8.7 hours of overtime in the weeks they worked overtime.\346\
Finally, 8,000 (or 0.2%) of all workers affected by the increase in the
salary level earn less than the minimum wage.
---------------------------------------------------------------------------
\345\ CPS defines ``usual hours'' as hours worked 50 percent or
more of the time.
\346\ This group represents the number of workers with
occasional overtime hours in the week the CPS MORG survey was
conducted. Because the survey week is a representative week, the
Department believes the prevalence of occasional overtime in the
survey week and the characteristics of these workers are
representative of other weeks (even though a different group of
workers would be identified as occasional overtime workers in a
different week).
---------------------------------------------------------------------------
The 248,900 workers affected by the change in the HCE compensation
level average 3.1 hours of overtime per week and earn an average of
$2,355 per week ($122,460 per year). About 72 percent of these workers
do not usually work overtime, while the 28 percent who usually work
overtime average 11.1 hours of overtime per week. Among the 3.8% who
occasionally work overtime, they averaged 12.7 hours in the weeks that
they worked overtime.
Although most affected workers who typically do not work overtime
would be unlikely to experience significant changes in their daily work
routine, those who regularly work overtime may experience significant
changes. Moreover, affected EAP workers who routinely work overtime and
earn less than the minimum wage would be most likely to experience
significant changes.\347\
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\347\ A small proportion (0.2 percent) of affected EAP workers
earn implicit hourly wages that are less than the applicable minimum
wage (the higher of the state or Federal minimum wage). The implicit
hourly wage is calculated as total weekly earnings divided by total
weekly hours worked. For example, workers earning the $684 per week
standard salary level would earn less than the Federal minimum wage
if they work 95 or more hours in a week ($684 / 95 hours = $7.20 per
hour).
---------------------------------------------------------------------------
Employers might respond by paying overtime premiums; reducing or
eliminating overtime hours; reducing employees' regular wage rates to
keep overall compensation consistent (provided that the reduced rates
still exceed the minimum wage); increasing employees' salaries to the
updated earnings threshold to preserve their exempt status); \348\ or
using some combination of these responses.
---------------------------------------------------------------------------
\348\ Increasing employees' salaries to the updated salary level
would be less common for affected workers earning below the minimum
wage and more generally would be inversely correlated with baseline
salary and compensation.
[[Page 62196]]
Table 8--Number of Affected EAP Workers, Mean Overtime Hours, and Mean Weekly Earnings, Year 1
----------------------------------------------------------------------------------------------------------------
Affected EAP workers \a\
-------------------------------- Mean overtime Mean usual
Type of affected EAP worker Number hours weekly
(1,000s) % of total earnings
----------------------------------------------------------------------------------------------------------------
Standard Salary Level
----------------------------------------------------------------------------------------------------------------
All affected EAP workers........................ 3,399 100 1.6 $914
Earn less than the minimum wage \b\............. 8 0.2 33.2 809
Regularly work overtime......................... 494 14.5 11.0 917
Occasionally work overtime \c\.................. 121 3.6 8.7 914
----------------------------------------------------------------------------------------------------------------
HCE Compensation Level
----------------------------------------------------------------------------------------------------------------
All affected EAP workers........................ 249 100 3.1 2,355
Earn less than the minimum wage \b\............. .............. .............. .............. ..............
Regularly work overtime......................... 70 28.3 11.1 2,332
Occasionally work overtime \c\.................. 9 3.8 12.7 2,347
----------------------------------------------------------------------------------------------------------------
Note: Pooled CPS data for 2020-2022 adjusted to reflect 2022.
\a\ Estimated number of workers exempt under the EAP exemptions who will be entitled to overtime protection
under the updated salary levels (if their weekly earnings do not increase to the new salary levels).
\b\ The applicable minimum wage is the higher of the Federal minimum wage and the state minimum wage. These
workers all regularly work overtime and are also included in that row. HCE workers will not be affected by the
minimum wage provision.
\c\ Workers who do not usually work overtime but did in the CPS reference week. Mean overtime hours are actual
overtime hours in the reference week. Other workers may occasionally work overtime in other weeks.
This section characterizes the population of affected workers by
industry, occupation, employer type, location of residence, and
demographics. The Department chose to provide as much detail as
possible while maintaining adequate sample sizes.
Table 9 presents the distribution of affected EAP workers by
industry and occupation, using Census industry and occupation codes.
The industry with the most affected EAP workers is professional and
business services (687,000), while the industry with the highest
percentage of EAP workers affected is agriculture, forestry, fishing,
and hunting (about 22 percent). The occupational category with the most
affected EAP workers is management, business, and financial (1.6
million), while the occupation category with the highest percentage of
EAP workers affected is services (about 31 percent).
Potentially affected workers in private-sector nonprofits are more
likely to be affected than workers in private-sector for-profit firms
(16.8 percent compared with 12.0 percent). However, as discussed in
section VII.B.3, the estimates of workers subject to the FLSA include
workers employed by enterprises that are not subject to the FLSA under
the law's enterprise coverage requirements because there is no data set
that would adequately inform an estimate of the size of this worker
population in order to exclude them from these estimates. Although
failing to exclude workers who work for non-covered enterprises would
only affect a small percentage of workers generally, it may have a
larger effect (and result in a larger overestimate) for workers in
nonprofits because when determining FLSA enterprise coverage only
revenue derived from business operations, not charitable activities, is
included.
Table 9--Estimated Number of Exempt Workers With the Current and Proposed Salary Levels, by Industry and
Occupation, Year 1
----------------------------------------------------------------------------------------------------------------
Workers Potentially Affected as
subject to affected EAP Not-affected Affected share of
Industry/occupation/nonprofit FLSA workers (millions) \b\ (millions) \c\ potentially
(millions) (millions) \a\ affected (%)
----------------------------------------------------------------------------------------------------------------
Total........................... 139.40 28.36 24.71 3.65 12.9
----------------------------------------------------------------------------------------------------------------
By Industry \d\
----------------------------------------------------------------------------------------------------------------
Agriculture, forestry, fishing, 1.33 0.06 0.04 0.01 22.1
& hunting......................
Mining.......................... 0.62 0.17 0.16 0.01 7.3
Construction.................... 8.91 1.19 1.03 0.15 13.0
Manufacturing................... 15.13 3.90 3.58 0.32 8.1
Wholesale trade................. 3.23 0.85 0.75 0.10 12.2
Retail trade.................... 15.38 1.85 1.54 0.31 16.7
Transportation & utilities...... 8.51 1.03 0.91 0.12 11.5
Information..................... 2.56 0.96 0.84 0.12 12.3
Financial activities............ 9.85 4.25 3.77 0.48 11.3
Professional & business services 16.78 6.75 6.07 0.69 10.2
Education....................... 14.02 1.12 0.92 0.202 18.0
Healthcare & social services.... 20.53 3.60 2.97 0.627 17.4
Leisure & hospitality........... 11.60 0.87 0.69 0.18 21.1
Other services.................. 5.31 0.74 0.60 0.14 18.9
[[Page 62197]]
Public administration........... 5.63 1.01 0.83 0.18 18.0
----------------------------------------------------------------------------------------------------------------
By Occupation \d\
----------------------------------------------------------------------------------------------------------------
Management, business, & 23.57 14.56 12.91 1.65 11.3
financial......................
Professional & related.......... 34.77 10.18 8.92 1.26 12.4
Services........................ 21.84 0.13 0.09 0.04 31.0
Sales and related............... 12.63 2.36 1.95 0.41 17.5
Office & administrative support. 15.81 0.93 0.67 0.26 28.1
Farming, fishing, & forestry.... 0.93 0.00 0.00 0.00 0.00
Construction & extraction....... 6.72 0.03 0.02 0.01 19.6
Installation, maintenance, & 4.53 0.04 0.04 0.00 6.4
repair.........................
Production...................... 7.98 0.09 0.08 0.01 12.3
Transportation & material moving 10.60 0.04 0.04 0.01 13.5
----------------------------------------------------------------------------------------------------------------
By Nonprofit and Government Status
----------------------------------------------------------------------------------------------------------------
Nonprofit, private.............. 9.80 2.27 1.89 0.38 16.8
For profit, private............. 110.90 23.90 21.03 2.87 12.0
Government (state, local, and 18.70 2.20 1.80 0.40 18.1
Federal).......................
----------------------------------------------------------------------------------------------------------------
Note: Pooled CPS data for 2020-2022 adjusted to reflect 2022.
\a\ Exempt workers who are white-collar, salaried, not eligible for another (non-EAP) overtime exemption, and
not in a named occupation.
\b\ Workers who continue to be exempt after the increases in the salary levels (assuming affected workers
earning below the new salary level do not have their weekly earnings increased to the new level).
\c\ Estimated number of workers exempt under the EAP exemptions who will be entitled to overtime protection
under the updated salary levels (if their weekly earnings do not increase to the new salary levels).
\d\ Census industry and occupation categories.
Table 10 presents the distribution of affected EAP workers based on
Census Regions and Divisions, and metropolitan statistical area (MSA)
status. The region with the most affected workers will be the South
(1.5 million), but the South's percentage of potentially affected
workers who are estimated to be affected is relatively small (15.2
percent). Although 90 percent of affected EAP workers will reside in
MSAs (3.28 of 3.65 million), so do a corresponding 88 percent of all
workers subject to the FLSA.\349\
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\349\ Identified with CPS MORG variable GTMETSTA.
---------------------------------------------------------------------------
Employers in low-wage industries, regions, and in non-metropolitan
areas may be more affected because they typically pay lower wages and
salaries. The Department believes the salary level included in this
proposed rule is appropriate for these lower-wage sectors, in part
because the proposed methodology uses earnings data from the lowest-
wage census region. Moreover, the duties test would continue to
determine exemption status for the vast majority of workers in low-wage
regions and industries under the proposed rule. For example, as
displayed in Table 10, 84.8 percent of potentially affected EAP workers
in the South Census Region earn more than the proposed salary level and
thus would not be affected by the proposed rule (8.39 / 9.89). Effects
by region and industry are considered in section VII.C.7.
Table 10--Estimated Number of Exempt Workers With the Current and Proposed Salary Levels, by Region, Division,
and MSA Status,Year 1
----------------------------------------------------------------------------------------------------------------
Workers Potentially Affected as
Region/division/metropolitan subject to affected EAP Not-affected Affected share of
status FLSA workers (millions) \b\ (millions) \c\ potentially
(millions) (millions) \a\ affected (%)
----------------------------------------------------------------------------------------------------------------
Total........................... 139.40 28.36 24.71 3.65 12.9
----------------------------------------------------------------------------------------------------------------
By Region/Division
----------------------------------------------------------------------------------------------------------------
Northeast....................... 24.75 5.74 5.10 0.64 11.1
New England................. 6.83 1.71 1.54 0.17 9.9
Middle Atlantic............. 17.92 4.03 3.56 0.47 11.6
Midwest......................... 30.39 5.87 5.07 0.80 13.7
East North Central.......... 20.47 4.01 3.48 0.53 13.3
West North Central.......... 9.92 1.86 1.59 0.27 14.6
South........................... 51.42 9.89 8.39 1.50 15.2
[[Page 62198]]
South Atlantic.............. 26.76 5.50 4.68 0.81 14.8
East South Central.......... 7.69 1.22 1.00 0.22 18.3
West South Central.......... 16.97 3.18 2.71 0.47 14.7
West............................ 32.83 6.86 6.15 0.70 10.3
Mountain.................... 10.73 2.07 1.79 0.28 13.7
Pacific..................... 22.10 4.78 4.36 0.42 8.8
----------------------------------------------------------------------------------------------------------------
By Metropolitan Status
----------------------------------------------------------------------------------------------------------------
Metropolitan.................... 122.92 26.61 23.33 3.28 12.3
Non-metropolitan................ 15.47 1.62 1.28 0.34 20.8
Not identified.................. 1.01 0.13 0.10 0.03 22.1
----------------------------------------------------------------------------------------------------------------
Note: Pooled CPS data for 2020-2022 adjusted to reflect 2022.
\a\ Exempt workers who are white-collar, salaried, not eligible for another (non-EAP) overtime exemption, and
not in a named occupation.
\b\ Workers who continue to be exempt after the increases in the salary levels (assuming affected workers
earning below the new salary level do not have their weekly earnings increased to the new level).
\c\ Estimated number of workers exempt under the EAP exemptions who will be entitled to overtime protection
under the updated salary levels (if their weekly earnings do not increase to the new salary levels).
Table 11 presents the distribution of affected EAP workers by
demographics. Potentially affected women, Black workers, Hispanic
workers, young workers, and workers with less education are all more
likely to be affected than other worker types. This is because EAP
exempt workers with these characteristics are more likely to earn
within the affected standard salary range than EAP exempt workers
without these characteristics. For example, of potentially affected
workers, women tend to have lower salaries and are therefore more
likely to be in the affected range. Median weekly earnings for
potentially affected women are $1,649 compared to $2,074 for men.
Among potentially affected workers, certain demographic groups--
women, Black workers, Hispanic workers, young workers, and workers with
less education--have an increased likelihood of being affected by this
rulemaking, even though workers in these demographic groups are less
likely to be EAP exempt in the first place. Therefore, as a share of
all workers, not just potentially affected workers, workers in these
demographic groups may not be more likely to be affected. For example,
when looking at potentially affected workers, 19.7 percent of
potentially affected Black workers are affected, while only 12.7
percent of potentially affected white workers are affected. However,
when looking at total workers, about the same shares of total Black and
total white workers would be affected (2.5 percent of Black workers and
2.6 percent of white workers).
Table 11--Estimated Number of Exempt Workers With the Current and Proposed Salary Levels, by Demographics, Year 1
--------------------------------------------------------------------------------------------------------------------------------------------------------
Workers Potentially Affected as
subject to Affected EAP Not-Affected Affected Affected as share of
Demographic FLSA Workers (millions) \b\ (millions) \c\ share of all potentially
(millions) (millions) \a\ workers (%) affected (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total................................................... 139.40 28.36 24.71 3.65 2.6 12.9
--------------------------------------------------------------------------------------------------------------------------------------------------------
By Sex
--------------------------------------------------------------------------------------------------------------------------------------------------------
Male.................................................... 72.15 16.62 15.04 1.57 2.2 9.5
Female.................................................. 67.25 11.74 9.67 2.08 3.1 17.7
--------------------------------------------------------------------------------------------------------------------------------------------------------
By Race
--------------------------------------------------------------------------------------------------------------------------------------------------------
White only.............................................. 107.29 22.05 19.25 2.80 2.6 12.7
Black only.............................................. 17.66 2.26 1.82 0.44 2.5 19.7
All others.............................................. 14.45 4.05 3.65 0.40 2.8 9.9
--------------------------------------------------------------------------------------------------------------------------------------------------------
By Ethnicity
--------------------------------------------------------------------------------------------------------------------------------------------------------
Hispanic................................................ 25.66 2.57 2.15 0.42 1.6 16.3
Not Hispanic............................................ 113.74 25.79 22.56 3.23 2.8 12.5
--------------------------------------------------------------------------------------------------------------------------------------------------------
By Age
--------------------------------------------------------------------------------------------------------------------------------------------------------
16-25................................................... 21.21 1.28 0.92 0.36 1.7 28.3
26-35................................................... 33.47 7.17 6.06 1.11 3.3 15.5
[[Page 62199]]
36-45................................................... 29.84 7.49 6.68 0.81 2.7 10.9
46-55................................................... 27.37 6.73 6.02 0.72 2.6 10.6
56+..................................................... 27.50 5.69 5.04 0.65 2.4 11.4
--------------------------------------------------------------------------------------------------------------------------------------------------------
By Education
--------------------------------------------------------------------------------------------------------------------------------------------------------
No degree............................................... 10.35 0.13 0.09 0.05 0.4 35.1
High school diploma..................................... 58.01 4.56 3.58 0.98 1.7 21.4
Associate's degree...................................... 14.70 1.91 1.54 0.37 2.5 19.6
Bachelor's degree....................................... 35.80 13.61 12.02 1.59 4.4 11.7
Master's degree......................................... 15.52 6.80 6.24 0.56 3.6 8.3
Professional degree..................................... 2.03 0.38 0.35 0.04 1.8 9.3
PhD..................................................... 2.98 0.98 0.91 0.07 2.3 7.2
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Pooled CPS data for 2020-2022 adjusted to reflect 2022.
\a\ Exempt workers who are white-collar, salaried, not eligible for another (non-EAP) overtime exemption, and not in a named occupation.
\b\ Workers who continue to be exempt after the increases in the salary level (assuming affected workers' weekly earnings do not increase to the new
salary level).
\c\ Estimated number of workers exempt under the EAP exemptions who would be entitled to overtime protection under the updated salary levels (if their
weekly earnings do not increase to the new salary level).
3. Costs
i. Summary
The Department quantified three direct costs to employers in this
analysis: (1) regulatory familiarization costs; (2) adjustment costs;
and (3) managerial costs. These are the same costs quantified in the
2016 and 2019 rulemakings. The Department estimated that in Year 1,
regulatory familiarization costs would be $427.2 million, adjustment
costs would be $240.8 million, and managerial costs would be $534.9
million (Table 12). Total direct employer costs in Year 1 would be $1.2
billion. Recurring costs are projected in section VII.C.10. The
Department discusses costs that are not quantified in section
VII.C.3.v. The Department welcomes comments on its cost estimates.
Table 12--Summary of Year 1 Direct Employer Costs
[millions]
----------------------------------------------------------------------------------------------------------------
HCE
Direct employer costs Standard compensation Total
salary level level
----------------------------------------------------------------------------------------------------------------
Regulatory familiarization \a\.................................. .............. .............. $427.2
Adjustment...................................................... $224.4 $16.4 240.8
Managerial...................................................... 485.5 49.4 534.9
Total direct costs.............................................. 709.8 65.9 1,202.8
----------------------------------------------------------------------------------------------------------------
\a\ Regulatory familiarization costs are assessed jointly for the proposed change in the standard salary level
and the HCE compensation level.
ii. Regulatory Familiarization Costs
This rulemaking would impose direct costs on firms by requiring
them to review the regulation. To estimate these ``regulatory
familiarization costs,'' three pieces of information must be estimated:
(1) the number of affected establishments; (2) a wage level for the
employees reviewing the rule; and (3) the amount of time spent
reviewing the rule. The Department generally used the same methodology
for calculating regulatory familiarization costs that it used in recent
rulemakings.
Regulatory familiarization costs can be calculated at an
establishment level or at a firm level. The Department assumed that
regulatory familiarization occurs at a decentralized level and used the
number of establishments in its cost estimate; this results in a higher
estimate than would result from using the number of firms. The most
recent data on private sector establishments and firms at the time this
proposed rule was drafted are from the 2020 Statistics of U.S.
Businesses (SUSB), which reports 8.00 million establishments with paid
employees.\350\ Additionally, there were an estimated 90,126 state and
local governments in 2017, the most recent data available.\351\ The
Department thus estimated 8.09 million entities (the term entity is
used to refer to the combination of establishments and governments).
---------------------------------------------------------------------------
\350\ Statistics of U.S. Businesses 2020, https://www.census.gov/programs-surveys/susb.html.
\351\ 2017 Census of Governments. Table 1, https://www.census.gov/data/tables/2017/econ/gus/2017-governments.html.
---------------------------------------------------------------------------
The Department assumes that all entities would incur some
regulatory familiarization costs, even if they do not employ exempt
workers, because all entities would need to confirm whether this
rulemaking affects their employees. Entities with more affected EAP
workers would likely spend more time reviewing the regulation than
entities with fewer or no affected EAP workers (since a more careful
reading of the regulation will probably follow the initial decision
that the entity is affected). However, the Department did not know the
distribution of affected EAP workers across entities, so it used an
average cost per entity.
The Department believes an average of one hour per entity is
appropriate because the regulated community is
[[Page 62200]]
likely to be familiar with the content of this rulemaking. EAP
exemptions have existed in one form or another since 1938, and a final
rule was published as recently as 2019. Furthermore, employers who use
the exemptions must apply them every time they hire an employee whom
they seek to classify as exempt. Thus, employers should be familiar
with the exemptions. The most significant changes in this proposed
rulemaking are setting a new standard salary level and a new HCE
compensation level for exempt workers and establishing a mechanism for
keeping these thresholds up to date. The changed regulatory text is
only a few pages, and the Department will provide summaries and other
compliance assistance materials that will help inform employers that
are implementing the final rule. The Department thus believes,
consistent with its approach in the 2016 and 2019 rules, that one hour
is an appropriate average estimate for the time each entity would spend
reviewing the changes made by this rulemaking. Additionally, the
estimated 1 hour for regulatory familiarization represents an
assumption about the average for all entities in the U.S., even those
without any affected or exempt workers, which are unlikely to spend
much time reviewing the rulemaking. Some businesses, of course, would
spend more than 1 hour, and some would spend less.
The Department's analysis assumes that compensation, benefits, and
job analysis specialists (SOC 13-1141) with a median wage of $32.59 per
hour would review the rulemaking.352 353 The Department also
assumed that benefits are paid at a rate of 45 percent of the base wage
\354\ and overhead costs are paid at a rate of 17 percent of the base
wage,\355\ resulting in an hourly rate of $52.80. The Department thus
estimates regulatory familiarization costs in Year 1 would be $427.2
million ($52.80 per hour x 1 hour x 8.09 million entities).
---------------------------------------------------------------------------
\352\ OEWS 2022. Available at: https://www.bls.gov/oes/current/oes131141.htm.
\353\ Previous related rulemakings used the CPS to estimate wage
rates. The Department is using OEWS data now to conform with
standard practice for the Department's economic analyses.
\354\ The benefits-earnings ratio is derived from BLS's Employer
Costs for Employee Compensation data using variables
CMU1020000000000D and CMU1030000000000D. This fringe benefit rate
includes some fixed costs such as health insurance.
\355\ The Department believes that the overhead costs associated
with this rulemaking are small because existing systems maintained
by employers to track currently hourly employees can be used for
newly overtime-eligible workers. However, acknowledging that there
might be additional overhead costs, the Department has included an
overhead rate of 17 percent.
---------------------------------------------------------------------------
The Department also conducted a sensitivity analysis. First, as
previously noted, the Department used the number of establishments
rather than the number of firms, which results in a higher estimate of
the regulatory familiarization cost. Using the number of firms, 6.2
million, would result in a reduced regulatory familiarization cost
estimate of $329.0 million in Year 1.
iii. Adjustment Costs
This rulemaking would also impose direct costs on establishments by
requiring them to evaluate the exemption status of employees, update
and adapt overtime policies, notify employees of policy changes, and
adjust their payroll systems. The Department believes the size of these
``adjustment costs'' would depend on the number of affected EAP workers
and would occur in any year when exemption status is changed for any
workers. To estimate adjustment costs, three pieces of information must
be estimated: (1) a wage level for the employees making the
adjustments; (2) the amount of time spent making the adjustments; and
(3) the estimated number of newly affected EAP workers. The Department
again estimated that the average wage with benefits and overhead costs
for a mid-level human resource worker is $52.80 per hour (as explained
above).
The Department estimated that it would take establishments an
average of 75 minutes per affected worker to make the necessary
adjustments. This is the same time estimate as used in the 2016 and
2019 rulemakings. Little applicable data were identified from which to
estimate the amount of time required to make these adjustments. The
estimated number of affected EAP workers in Year 1 is 3.6 million (as
discussed in section VII.B.7). Therefore, total estimated Year 1
adjustment costs would be $240.8 million ($52.80 x 1.25 hours x 3.6
million workers).
The Department notes that the 75-minute-per-worker average time
estimate is an assumption about the average across all workers. This
estimate assumes that the time is focused on analyzing more complicated
situations. For example, employers are likely to incur relatively low
adjustment costs for some workers, such as those who work no overtime
(described below as Type 1 workers). This leaves more time for
employers to spend on adjustment costs for workers who work overtime
either occasionally or regularly. To demonstrate, if the aggregate time
spent on adjustments (75 min x 3.6 million workers) was spread out over
only workers who regularly work overtime, then the time estimate is 4.4
hours per worker.
The Department used a time estimate per affected worker, rather
than per establishment, because the distribution of affected workers
across establishments is unknown. However, it may be helpful to present
the total time estimate per establishment based on a range of affected
workers. If an establishment has five affected workers, the time
estimate for adjustment costs is 6.25 hours. If an establishment has 25
affected workers, the time estimate for adjustment costs is 31.25
hours. And if an establishment has 50 affected workers, the time
estimate for adjustment costs is 62.5 hours.
A reduction in the cost to employers of determining employees'
exemption status may partially offset adjustment costs. Currently, to
determine whether an employee is exempt, employers must apply the
duties test to salaried workers who earn $684 or more per week.
However, when the rule takes effect, firms would no longer be required
to apply the duties test to employees earning less than the new
standard salary level. While this would be a clear cost savings to
employers for these employees, the Department did not estimate the
potential size of this cost savings.
iv. Managerial Costs
If an employee becomes nonexempt due to the changes in the salary
levels, then firms may incur ongoing managerial costs because the
employer may spend more time developing work schedules and closely
monitoring an employee's hours to minimize or avoid paying that
employee overtime. For example, the manager of a newly nonexempt worker
may have to assess whether the marginal benefit of scheduling the
worker for more than 40 hours exceeds the marginal cost of paying the
overtime premium. Additionally, the manager may have to spend more time
monitoring the employee's work and productivity since the marginal cost
of employing the worker per hour has increased. Unlike regulatory
familiarization and adjustment costs, which occur primarily in Year 1,
managerial costs are incurred more uniformly every year.
The Department applied managerial costs to workers who (1) become
nonexempt, overtime-protected and (2) either regularly work overtime or
occasionally work overtime, but on a predictable basis--an estimated
738,000 workers (see Table 16 and accompanying explanation). Consistent
with its approach in its 2019 rule, the Department assumed that
management
[[Page 62201]]
would spend an additional ten minutes per week scheduling and
monitoring each affected worker expected to become nonexempt, overtime-
eligible as a result of this rule, and whose hours would be adjusted.
There was little precedent or data to aid in evaluating managerial
costs. Prior to the 2016 rulemaking, earlier part 541 rulemakings did
not estimate managerial costs. The Department likewise found no
estimates of managerial costs after reviewing the literature. Thus, the
Department used the same methodology as the 2019 rule.
The Department believes these additional managerial costs would not
be prohibitive. Currently, EAP exempt employees account for about 22
percent of the U.S. labor force; as such, the Department expects that
most employers of EAP exempt workers also employ nonexempt workers.
Those employers already have in place recordkeeping systems and
standard operating procedures for ensuring employees only work overtime
under employer-prescribed circumstances. Thus, such systems generally
do not need to be invented for managing formerly exempt EAP employees.
The Department also notes that under the FLSA recordkeeping regulations
in part 516, employers determine how to make and keep an accurate
record of hours worked by employees. For example, employers may tell
their workers to write their own time records and any timekeeping plan
is acceptable if it is complete and accurate. Additionally, if the
nonexempt employee works a fixed schedule, e.g., 9:00 a.m.-5:30 p.m.
Monday-Friday, the employer may keep a record showing the exact
schedule of daily and weekly hours and merely indicate exceptions to
that schedule.\356\
---------------------------------------------------------------------------
\356\ See Fact Sheet #21: Recordkeeping Requirements under the
Fair Labor Standards Act, available at: https://www.dol.gov/whd/regs/compliance/whdfs21.pdf.
---------------------------------------------------------------------------
As discussed in detail below, most affected workers do not
currently work overtime, and there is no reason to expect their hours
worked to change when their status changes from exempt to nonexempt.
For that group of workers, management would have little or no need to
increase their monitoring of hours worked; therefore, these workers are
not included in the managerial cost calculation. Under these
assumptions, the additional managerial hours worked per week would be
123,000 hours ((10 minutes / 60 minutes) x 738,000 workers).
The median hourly wage in 2022 for a manager was $51.62.\357\
Together with a 45 percent benefits rate and a 17 percent overhead
cost, this totals $83.63 per hour.\358\ Thus, the estimated Year 1
managerial costs total $534.9 million (123,000 hours per week x 52
weeks x $83.63/hour). Although the exact magnitude would vary each year
with the number of affected EAP workers, the Department anticipates
that employers would incur managerial costs annually.
---------------------------------------------------------------------------
\357\ OEWS 2022. Available at: https://www.bls.gov/oes/current/oes110000.htm. This may be an overestimate of the wage rate for
managers who monitor workers' hours because (1) it includes very
highly paid employees such as CEOs, and (2) some lower-level
supervisors are not counted as managers in the data.
\358\ The benefits ratio is derived from BLS' 2022 Employer
Costs for Employee Compensation data using variables
CMU1020000000000D and CMU1030000000000D.
---------------------------------------------------------------------------
v. Other Potential Costs
In addition to the costs discussed above, the Department notes that
the 2016 and 2019 final rules discussed other potential costs that
could not be quantified. These potential costs are discussed
qualitatively below. The Department welcomes comments on the potential
costs associated with this proposed rule and any data that could help
to quantify them.
(a) Reduced Scheduling Flexibility
To the extent that some employers spend more time monitoring
nonexempt workers' hours, the proposed rule could impose costs on newly
nonexempt, overtime eligible workers who could have a more limited
ability to adjust their schedules. However, the proposed rule does not
require employers to reduce scheduling flexibility. Employers can
continue to offer flexible schedules and require workers to monitor
their own hours and to follow the employers' timekeeping rules.
Additionally, some exempt workers already monitor their hours for
billing purposes. A study by Lonnie Golden found, using data from the
General Social Survey (GSS), that ``[i]n general, salaried workers at
the lower (less than $50,000) income levels don't have noticeably
greater levels of work flexibility that they would `lose' if they
become more like their hourly counterparts.'' \359\ Because there is
little data or literature on these potential costs, the Department did
not quantify potential costs regarding scheduling flexibility.
---------------------------------------------------------------------------
\359\ Golden, L. (2014). Flexibility and Overtime Among Hourly
and Salaried Workers. Economic Policy Institute. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2597174.
---------------------------------------------------------------------------
(b) Preference for Salaried Status
Some of the workers who would become nonexempt as a result of the
proposed rule could have their pay changed from salaried to hourly
status despite preferring to remain salaried. Research has shown that
salaried workers are more likely than hourly workers to receive
benefits such as paid vacation time and health insurance \360\ and are
more satisfied with their benefits.\361\ Additionally, when employer
demand for labor decreases, hourly workers tend to see their hours cut
before salaried workers, making earnings for hourly workers less
predictable.\362\ However, this literature generally does not control
for differences between salaried and hourly workers such as education,
job title, or earnings; therefore, this correlation is not necessarily
attributable to hourly status.
---------------------------------------------------------------------------
\360\ Lambert, S. J. (2007). Making a Difference for Hourly
Employees. In A. Booth, & A. C. Crouter, Work-Life Policies that
Make a Real Difference for Individuals, Families, and Communities.
Washington, DC: Urban Institute Press.
\361\ Balkin, D. B., & Griffeth, R. W. (1993). The Determinants
of Employee Benefits Satisfaction. Journal of Business and
Psychology, 7(3), 323-339.
\362\ Lambert, S. J., & Henly, J. R. (2009). Scheduling in
Hourly Jobs: Promising Practices for the Twenty-First Century
Economy. The Mobility Agenda. Lambert, S. J. (2007). Making a
Difference for Hourly Employees. In A. Booth, & A. C. Crouter, Work-
Life Policies that Make a Real Difference for Individuals, Families,
and Communities. Washington, DC: Urban Institute Press.
---------------------------------------------------------------------------
If workers become nonexempt and the employer chooses to pay them on
an hourly rather than salary basis, this may result in the employer
reducing the workers' benefits. But the Department notes that this
rulemaking would not require employers to reduce workers' benefits.
These newly nonexempt workers may continue to be paid a salary, as long
as that salary is equivalent to a base wage at least equal to the
minimum wage rate for every hour worked, and the employee receives a 50
percent premium on that employee's regular rate for any overtime hours
each week.\363\ Similarly, employers may continue to provide these
workers with the same level of benefits as before, whether paid on an
hourly or salary basis. Lastly, the nature of the market mechanism may
be such that employers cannot reduce benefits without risking workers
leaving, resulting in turnover costs to employers. The Department did
not quantify potential costs regarding reduction in workers' benefits.
---------------------------------------------------------------------------
\363\ 29 CFR 778.113-.114.
---------------------------------------------------------------------------
(c) Increased Prices
As discussed in the transfers section below, businesses may be able
to help mitigate increased labor costs following this rulemaking by
rebalancing the hours that their employees are working. Businesses that
are unable to rebalance these hours and do incur increased
[[Page 62202]]
labor costs might pass along these increased labor costs to consumers
through higher prices. The Department anticipates that some firms could
offset part of the additional labor costs through charging higher
prices for the firms' goods and services. However, because costs and
transfers would be, on average, small relative to payroll and revenues,
the Department does not expect the proposed rule to have a significant
effect on prices. The Department estimated that, on average, costs and
transfers make up less than 0.03 percent of payroll and 0.005 percent
of revenues, although for specific industries and firms this percentage
may be larger (see Table 27). Therefore, any potential change in prices
related to costs and transfers from this rulemaking would be modest.
Further, any significant price increases would not represent a separate
category of effects from those estimated in this economic analysis.
Rather, such price increases (where they occur) would be the channel
through which consumers, rather than employers or employees, bear rule-
induced costs (including transfers).
While economic theory suggests that an increase in labor costs in
excess of productivity gains would lead to increases in prices, much of
the empirical literature has found that wage inflation does not predict
price inflation.\364\ For example, Peneva et al. (2015) explore the
relationship between labor costs and price inflation between 1965 and
2012, finding that the influence of labor costs on prices has decreased
over the past several decades and have made a relatively small
contribution to price inflation in recent years.\365\
---------------------------------------------------------------------------
\364\ Church, J.D. and Akin, B. (2017). ``Examining price
transmission across labor compensation costs, consumer prices, and
finished-goods prices,'' Monthly Labor Review, U.S. Bureau of Labor
Statistics; Emery, K. & Chang, C. (1996). Do Wages Help Predict
Inflation?, Federal Reserve Bank of Dallas, Economic Review First
Quarter 1996. https://www.dallasfed.org/~/media/documents/research/
er/1996/er9601a.pdf; Jonsson, M. & Palmqvist, S. (2004). Do Higher
Wages Cause Inflation? Sveriges Riksbank Working Paper Series 159.
http://archive.riksbank.se/Upload/WorkingPapers/WP_159.pdf.
\365\ Pevena, E. V. and Rudd, J. B. (2015). ``The Passthrough of
Labor Costs to Price Inflation,'' Finance and Economics Discussion
Series 2015-042. Washington: Board of Governors of the Federal
Reserve System. http://dx.doi.org/10.17016/FEDS.2015.042.
---------------------------------------------------------------------------
(d) Reduced Profits
The increase in workers' earnings resulting from the proposed
salary levels would be a transfer of income from firms to workers, not
a cost. However, there are potential secondary effects (both costs and
benefits) of the transfer due to the potential difference in the
marginal utility of income and the marginal propensity to consume or
save between workers and businesses. Thus, the Department acknowledges
that the increased employer costs and transfer payments as a result of
this proposed rule may reduce the profits of business firms, although
(1) some firms may offset some of these costs and transfers by making
payroll adjustments, and (2) some firms may mitigate their reduced
profits due to these costs and transfers through increased prices.
Because costs and transfers are, on average, small relative to payroll
revenues, the Department does not expect this rulemaking to have a
significant effect on profits.
(e) Hiring Costs
To the extent that firms respond to this proposed rule by reducing
overtime hours, they may do so by spreading hours to other workers,
including current workers employed for fewer than 40 hours per week by
that employer, current workers who remain nonexempt, and newly hired
workers. If new workers are hired to absorb these transferred hours,
then the associated hiring costs would be a cost of this proposed rule.
However, new employees would likely only be hired if their wages,
onboarding costs, and training costs are less than the cost of overtime
pay for the newly affected workers. The Department does not know how
many new employees would be hired and thus did not estimate this cost.
(f) Hours-Related Worker Effects
Following the implementation of this rulemaking, some workers may
see an increase in hours worked. For some affected workers, if their
employers respond to the rule by increasing their salary to keep their
exemption status, the change may also be accompanied by an increase in
assigned hours. Additionally, some employers might respond to this
regulation by reducing the overtime hours of affected workers and
transferring these hours to other workers who remain exempt. This
increase in hours could result in reduced personal time for these
workers.
4. Transfers
i. Overview
Transfer payments occur when income is redistributed from one party
to another. The Department has quantified two transfers from employers
to employees that would result from the proposed rule: (1) transfers to
ensure compliance with the FLSA minimum wage provision; and (2)
transfers to ensure compliance with the FLSA overtime pay provision.
Transfers in Year 1 due to the minimum wage provision were estimated to
be $48.6 million. The increase in the HCE compensation level does not
affect minimum wage transfers because workers eligible for the HCE
exemption earn well above the minimum wage. The Department estimates
that transfers due to the applicability of the FLSA's overtime pay
provision would be $1.2 billion: $932.1 million from the increased
standard salary level and $253.5 million from the increased HCE
compensation level. Total Year 1 transfers are estimated at $1.2
billion (Table 13).
Table 13--Total Annual Change in Earnings for Affected EAP Workers by Provision, Year 1
[Millions]
----------------------------------------------------------------------------------------------------------------
HCE
Provision Total Standard compensation
salary level level
----------------------------------------------------------------------------------------------------------------
Total........................................................... $1,234.2 $980.7 $253.5
Minimum wage only............................................... 48.6 48.6 ..............
Overtime pay only \a\........................................... 1,185.6 932.1 253.5
----------------------------------------------------------------------------------------------------------------
[[Page 62203]]
Because the overtime premium depends on the employee's regular rate
of pay, the estimates of minimum wage transfers and overtime transfers
are linked. This can be considered a two-step approach. The Department
first identified affected EAP workers with an implicit regular hourly
wage lower than the minimum wage, and then calculated the wage increase
necessary to reach the minimum wage. Then, the Department estimated
overtime payments.
ii. Transfers Due to the Minimum Wage Provision
For this analysis, the hourly rate of pay was calculated as usual
weekly earnings divided by usual weekly hours worked. To earn less than
the Federal or most state minimum wages, this set of workers must work
many hours per week. For example, a worker paid $684 per week must work
94.3 hours per week to earn less than the Federal minimum wage of $7.25
per hour ($684 / $7.25 = 94.3).\366\ The applicable minimum wage is the
higher of the Federal minimum wage and the state minimum wage as of
January 1, 2022. Most affected EAP workers already receive at least the
minimum wage; only an estimated 0.2 percent (8,200 in total) earn an
implicit hourly rate of pay less than the Federal minimum wage. The
Department estimated transfers due to payment of the minimum wage by
calculating the change in earnings if wages rose to the minimum wage
for workers who become nonexempt.\367\
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\366\ The Federal minimum wage has not increased since 2009.
Workers in states with minimum wages higher than the Federal minimum
wage could earn less than the state minimum wage working fewer
hours.
\367\ Because these workers' hourly wages will be set at the
minimum wage after this proposed rule, their employers will not be
able to adjust their wages downward to offset part of the cost of
paying the overtime pay premium (which will be discussed in the
following section). Therefore, these workers will generally receive
larger transfers attributed to the overtime pay provision than other
workers.
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In response to an increase in the regular rate of pay to the
minimum wage, employers may reduce the workers' hours. In theory, since
the quantity of labor hours demanded is inversely related to wages, a
higher mandated wage would, all things being equal, result in fewer
hours of labor demanded. However, the weight of the empirical evidence
finds that increases in the minimum wage that are similar in magnitude
to what would be caused by this regulatory provision have caused little
or no significant job loss.\368\ Thus, in the case of this proposed
regulation, the Department believes that any disemployment effect due
to the minimum wage provision would be negligible. This is partially
due to the small number of workers affected by this provision.
According to the Wolfson and Belman (2016) meta-analysis cited above,
the consensus range for labor demand elasticity was -0.05 to -0.12.
However for Year 1 of this analysis, the Department estimated the
potential disemployment effects (i.e., the estimated reduction in
hours) of the transfer attributed to the minimum wage by multiplying
the percent change in the regular rate of pay by a labor demand
elasticity of -0.2 (years 2-10 use a long run elasticity of -
0.4).369 370 The Department chose this labor demand
elasticity because it was used in the 2019 final rule and is consistent
with the labor demand elasticity estimates used when estimating other
transfers further below.
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\368\ Wolfson, Paul J. and Belman, Dale, 15 Years of Research on
U.S. Employment and the Minimum Wage (December 10, 2016). Tuck
School of Business Working Paper No. 2705499. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2705499. Dube,
Arindrajit, Impacts of Minimum Wages: Review of the International
Evidence (November 2019). https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/844350/impacts_of_minimum_wages_review_of_the_international_evidence_Arindrajit_Dube_web.pdf.
\369\ Labor demand elasticity is the percentage change in labor
hours demanded in response to a one percent change in wages.
\370\ This elasticity estimate represents a short run demand
elasticity for general labor, and is based on the Department's
analysis of Lichter, A., Peichl, A. & Siegloch, A. (2014). The Own-
Wage Elasticity of Labor Demand: A Meta-Regression Analysis. IZA DP
No. 7958.
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At the new standard salary level, the Department estimated that
8,200 affected EAP workers would, on average, see an hourly wage
increase of $1.99, work 3.2 fewer hours per week and receive an
increase in weekly earnings of $113.88 as a result of coverage by the
minimum wage provisions (Table 14). The total change in weekly earnings
due to the payment of the minimum wage was estimated to be $0.9 million
per week ($113.88 x 8,200) or $48.6 million in Year 1.
Table 14--Minimum Wage Only: Mean Hourly Wages, Usual Weekly Hours and Weekly Earnings for Affected EAP Workers,
Year 1
----------------------------------------------------------------------------------------------------------------
Total weekly
Time period Hourly wage Usual weekly Usual weekly transfer
\a\ hours earnings (1,000s)
----------------------------------------------------------------------------------------------------------------
Before rule..................................... $11.35 73.2 $808.60 ..............
After rule...................................... 13.34 69.9 922.48 ..............
Change.......................................... 1.99 -3.2 113.88 $934
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for 2020-2022 adjusted to reflect 2022.
\a\ The applicable minimum wage is the higher of the Federal minimum wage and the state minimum wage.
iii. Transfers Due to the Overtime Pay Provision
(a) Introduction
The FLSA requires covered employers to pay an overtime premium to
nonexempt covered workers who work in excess of 40 hours per week. For
workers who become nonexempt, the rulemaking would result in a transfer
of income to the affected workers, increasing the marginal cost of
labor, which employers would likely try to offset by adjusting the
wages and/or hours of affected workers. The size of the transfer would
depend largely on how employers choose to respond to the updated salary
levels. Employers may respond by: (1) paying overtime premiums to
affected workers; (2) reducing overtime hours of affected workers and
potentially transferring some of these hours to other workers; (3)
reducing the regular rate of pay for affected workers working overtime
(provided that the reduced rates still exceed the minimum wage); (4)
increasing affected workers' salaries to the updated salary or
compensation level to preserve their exempt status; or (5) using some
combination of these responses. How employers would respond depends on
many factors, including the relative costs of each of these
alternatives. In turn, the relative costs of each of these alternatives
are a function of workers' earnings and hours worked.
[[Page 62204]]
(b) Literature on Employer Adjustments
Two conceptual models are useful for thinking about how employers
may respond to when certain employees become eligible for overtime: (1)
the ``fixed-wage'' or ``labor demand'' model, and (2) the ``fixed-job''
or ``employment contract'' model.\371\ These models make different
assumptions about the demand for overtime hours and the structure of
the employment agreement, which result in different implications for
predicting employer responses.
---------------------------------------------------------------------------
\371\ See Trejo, S.J. (1991). The Effects of Overtime Pay
Regulation on Worker Compensation. American Economic Review, 81(4),
719-740, and Barkume, A. (2010). The Structure of Labor Costs with
Overtime Work in U.S. Jobs. Industrial and Labor Relations Review,
64(1), 128-142.
---------------------------------------------------------------------------
The fixed-wage model assumes that the standard hourly wage is
independent of the statutory overtime premium. Under the fixed-wage
model, a transition of workers from overtime exempt to overtime
nonexempt would cause a reduction in overtime hours for affected
workers, an increase in the prevalence of a 40-hour workweek among
affected workers, and an increase in the earnings of affected workers
who continue to work overtime.
In contrast, the fixed-job model assumes that the standard hourly
wage is affected by the statutory overtime premium. Thus, employers can
neutralize any transition of workers from overtime exempt to overtime
nonexempt by reducing the standard hourly wage of affected workers so
that their weekly earnings and hours worked are unchanged, except when
minimum wage laws prevent employers from lowering the standard hourly
wage below the minimum wage. Under the fixed-job model, a transition of
workers from overtime exempt to overtime nonexempt would have different
effects on minimum-wage workers and above-minimum-wage workers. Similar
to the fixed-wage model, minimum-wage workers would experience a
reduction in overtime hours, an increase in the prevalence of a 40-hour
workweek at a given employer (though not necessarily overall), and an
increase in earnings for the portion of minimum-wage workers who
continue to work overtime for a given employer. Unlike the fixed-wage
model, however, above-minimum-wage workers would experience no change.
The Department conducted a literature review to evaluate studies of
how labor markets adjust to a change in the requirement to pay
overtime. These studies are generally supportive of the fixed-job model
of labor market adjustment, in that wages adjust to offset the
requirement to pay an overtime premium as predicted by the fixed-job
model, but do not adjust enough to completely offset the overtime
premium as predicted by the model.
As in the 2016 and 2019 rules, the Department believes the two most
important papers in this literature are the studies by Trejo (1991) and
Barkume (2010). Analyzing the economic effects of the overtime pay
provisions of the FLSA, Trejo (1991) found ``the data analyzed here
suggest the wage adjustments occur to mitigate the purely demand-driven
effects predicted by the fixed-wage model, but these adjustments are
not large enough to neutralize the overtime pay regulations
completely.'' Trejo noted, ``In accordance with the fixed job model,
the overtime law appears to have a greater impact on minimum-wage
workers.'' He also stated, ``[T]he finding that overtime-pay coverage
status systematically influences the hours-of-work distribution for
nonminimum-wage workers is supportive of the fixed-wage model. No
significant differences in weekly earnings were discovered between the
covered and non-covered sectors, which is consistent with the fixed-job
model.'' However, ``overtime pay compliance is higher for union than
for nonunion workers, a result that is more easily reconciled with the
fixed wage model.'' Trejo's findings are supportive of the fixed-wage
model whose adjustment is incomplete largely due to the minimum-wage
requirement.\372\
---------------------------------------------------------------------------
\372\ Trejo, S.J. (1991). The Effects of Overtime Pay Regulation
on Worker Compensation. American Economic Review, 81(4), 719-740.
---------------------------------------------------------------------------
A second paper by Trejo (2003) took a different approach to testing
the consistency of the fixed-wage adjustment models with overtime
coverage and data on hours worked.\373\ In this paper, he examined
time-series data on employee hours by industry. After controlling for
underlying trends in hours worked over 20 years, he found changes in
overtime coverage had no impact on the prevalence of overtime hours
worked. This result supports the fixed-job model. Unlike the 1991
paper, however, he did not examine impacts of overtime coverage on
employees' weekly or hourly earnings, so this finding in support of the
fixed-job model only analyzes one implication of the model.
---------------------------------------------------------------------------
\373\ Trejo, S.J. (2003). Does the Statutory Overtime Premium
Discourage Long Workweeks? Industrial and Labor Relations Review,
56(3), 375-392.
---------------------------------------------------------------------------
Barkume (2010) built on the analytic method used in Trejo
(1991).\374\ However, Barkume observed that Trejo did not account for
``quasi-fixed'' employment costs (e.g., benefits) that do not vary with
hours worked, and therefore affect employers' decisions on overtime
hours worked. After incorporating these quasi-fixed costs in the model,
Barkume found results consistent with those of Trejo (1991): ``though
wage rates in otherwise similar jobs declined with greater overtime
hours, they were not enough to prevent the FLSA overtime provisions
from increasing labor costs.'' Barkume also determined that the 1991
model did not account for evidence that in the absence of regulation
some employers may voluntarily pay workers some overtime premium to
entice them to work longer hours, to compensate workers for unexpected
changes in their schedules, or as a result of collective bargaining.
Barkume found that how much wages and hours worked adjusted in response
to the overtime pay requirement depended on what overtime pay would be
in absence of regulation.
---------------------------------------------------------------------------
\374\ Barkume, A. (2010). The Structure of Labor Costs with
Overtime Work in U.S. Jobs. Industrial and Labor Relations Review,
64(1), 128-142.
---------------------------------------------------------------------------
In addition, Bell and Hart (2003) examined the standard hourly
wage, average hourly earnings (including overtime), the overtime
premium, and overtime hours worked in Britain.\375\ Unlike the United
States, Britain does not have national labor laws regulating overtime
compensation. Bell and Hart found that after accounting for overtime,
average hourly earnings are generally uniform in an industry because
firms paying below-market level straight-time wages tend to pay above-
market overtime premiums and firms paying above-market level straight-
time wages tend to pay below-market overtime premiums. Bell and Hart
concluded ``this is consistent with a model in which workers and firms
enter into an implicit contract that specifies total hours at a
constant, market-determined, hourly wage rate. Their research is also
consistent with studies showing that employers may pay overtime
premiums either in the absence of a regulatory mandate (e.g., Britain),
or when the mandate exists but the requirements are not met (e.g.,
United States).\376\
---------------------------------------------------------------------------
\375\ Bell, D.N.F. and Hart, R.A. (2003). Wages, Hours, and
Overtime Premia: Evidence from the British Labor Market, Industrial
and Labor Relations Review, 56(3), 470-480.
\376\ Hart, R.A. and Yue, M. (2000). Why Do Firms Pay an
Overtime Premium? IZA Discussion Paper No. 163.
---------------------------------------------------------------------------
On balance, consistent with its 2016 and 2019 rulemakings, the
Department
[[Page 62205]]
finds strong support for the fixed-job model as the best approximation
for the likely effects of a transition of above-minimum-wage workers
from overtime exempt to overtime nonexempt and the fixed-wage model as
the best approximation of the likely effects of a transition of
minimum-wage workers from overtime exempt to overtime nonexempt. In
addition, the studies suggest that although observed wage adjustment
patterns are consistent with the fixed-job model, this evidence also
suggests that the actual wage adjustment might, especially in the short
run, be less than 100 percent as predicted by the fixed-job model.
Thus, the hybrid model used in this analysis may be described as an
incomplete fixed-job adjustment model.
To determine the magnitude of the adjustment, the Department
accounted for the following findings. Earlier research had demonstrated
that in the absence of regulation some employers may voluntarily pay
workers some overtime premium to entice them to work longer hours, to
compensate workers for unexpected changes in their schedules, or as a
result of collective bargaining.\377\ Barkume (2010) found that the
measured adjustment of wages and hours to overtime premium requirements
depended on what overtime premium might be paid in absence of any
requirement to do so. Thus, when Barkume assumed that workers would
receive an average voluntary overtime pay premium of 28 percent in the
absence of an overtime pay regulation, which is the average overtime
premium that Bell and Hart (2003) found British employers paid in the
absence of any overtime regulations, the straight-time hourly wage
adjusted downward by 80 percent of the amount that would occur with the
fixed-job model.\378\ When Barkume assumed workers would receive no
voluntary overtime pay premium in the absence of an overtime pay
regulation, the results were more consistent with Trejo's (1991)
findings that the adjustment was a smaller percentage. The Department
modeled an adjustment process between these two findings. Although it
seemed reasonable that some premium was paid for overtime in the
absence of regulation, Barkume's assumption of a 28 percent initial
overtime premium is likely too high for the salaried workers
potentially affected by a change in the salary and compensation level
requirements for the EAP exemptions because this assumption is based on
a study of workers in Britain. British workers were likely paid a
larger voluntary overtime premium than American workers because Britain
did not have a required overtime pay regulation and so collective
bargaining played a larger role in implementing overtime pay.\379\ In
the sections that follow, the Department uses a method between these
two papers to model transfers.
---------------------------------------------------------------------------
\377\ Barzel, Y. (1973). The Determination of Daily Hours and
Wages. The Quarterly Journal of Economics, 87(2), 220-238,
demonstrated that modest fluctuations in labor demand could justify
substantial overtime premiums in the employment contract model.
Hart, R.A. and Yue, M. (2000). Why Do Firms Pay an Overtime Premium?
IZA Discussion Paper No. 163, showed that establishing an overtime
premium in an employment contract can reduce inefficiencies.
\378\ Barkume, A. (2010). The Structure of Labor Costs with
Overtime Work in U.S. Jobs. Industrial and Labor Relations Review,
64(1), 128-142.
\379\ Bell, D.N.F. and Hart, R.A. (2003). Wages, Hours, and
Overtime Premia: Evidence from the British Labor Market, Industrial
and Labor Relations Review, 56(3), 470-480.
---------------------------------------------------------------------------
(c) Identifying Types of Affected Workers
The Department identified four types of workers whose work
characteristics affect how it modeled employers' responses to the
changes in both the standard salary level and HCE compensation level:
Type 1: Workers who do not work overtime.
Type 2: Workers who do not regularly work overtime but
occasionally work overtime.
Type 3: Workers who regularly work overtime and become
overtime eligible (nonexempt).
Type 4: Workers who regularly work overtime and remain
exempt, because it is less expensive for the employer to pay the
updated salary level than to pay overtime and incur additional
managerial costs.
The Department began by identifying the number of workers in each
type. After modeling employer adjustments, it estimated transfer
payments. Type 3 and 4 workers were identified as those who regularly
work overtime (CPS variable PEHRUSL1 greater than 40). To distinguish
Type 3 workers from Type 4 workers, the Department first estimated each
worker's weekly earnings if they became nonexempt, to which it added
weekly managerial costs for each affected worker of $13.94 ($83.63 per
hour x (10 minutes / 60 minutes)).\380\ Then, the Department identified
as Type 4 those workers whose expected nonexempt earnings plus weekly
managerial costs exceeds the updated standard salary level, and,
conversely, as Type 3 those whose expected nonexempt earnings plus
weekly managerial costs are less than the new standard salary. The
Department assumed that firms would include incremental managerial
costs in their determination of whether to treat an affected employee
as a Type 3 or Type 4 worker because those costs are only incurred if
the employee is a Type 3 worker.
---------------------------------------------------------------------------
\380\ See section VII.C.3.iv (managerial costs).
---------------------------------------------------------------------------
Identifying Type 2 workers involved two steps. First, using CPS
MORG data, the Department identified those who do not usually work
overtime but did work overtime in the survey week (the week referred to
in the CPS questionnaire, variable PEHRACT1 greater than 40). Next, the
Department supplemented the CPS data with data from the Survey of
Income and Program Participation (SIPP) to look at likelihood of
working some overtime during the year. Based on 2021 data, the most
recent available, the Department found that 31.3 percent of non-hourly
workers worked overtime at some point in a year. Therefore, the
Department classified a share of workers who reported they do not
usually work overtime, and did not work overtime in the reference week,
as Type 2 workers such that a total of approximately 31.3 percent of
affected workers were Type 2, 3, or 4. Type 2 workers are subdivided
into Types 2A and 2B later in the analysis (Table 15).
Table 15--Types of Affected Workers
------------------------------------------------------------------------
Percent of
Type of worker total
------------------------------------------------------------------------
Type 1.................................................. 69
Type 2A................................................. 8
Type 2B................................................. 8
Type 3.................................................. 12
Type 4.................................................. 3
------------------------------------------------------------------------
Note: Pooled CPS data for 2020-2022 adjusted to reflect 2022.
* Type 1: Workers who do not work overtime and gain overtime protection.
* Type 2: Workers who work occasional overtime and gain overtime
protection.
Type 2A: Those who work unexpected overtime hours.
Type 2B: Those who work expected overtime.
* Type 3: Workers who work regular overtime and gain overtime
protection.
* Type 4: Workers who work regular overtime and remain exempt (i.e.,
earnings increase to the updated salary or compensation level).
(d) Modeling Changes in Wages and Hours
The incomplete fixed-job model predicts that employers would adjust
wages of regular overtime workers but not to the full extent indicated
by the fixed-job model, and thus some employees would receive a small
increase in weekly earnings due to overtime pay coverage. The
Department
[[Page 62206]]
used the average of two estimates of the incomplete fixed-job model
adjustments to model impacts of this proposed rule: \381\
---------------------------------------------------------------------------
\381\ Both studies considered a population that included hourly
workers. Evidence is not available on how the adjustment towards the
fixed-job model differs between salaried and hourly workers. The
fixed-job model may be more likely to hold for salaried workers than
for hourly workers since salaried workers directly observe their
weekly total earnings, not their implicit equivalent hourly wage.
Thus, applying the partial adjustment to the fixed-job model as
estimated by these studies may overestimate the transfers from
employers to salaried workers. The Department does not attempt to
quantify the magnitude of this potential overestimate, but welcomes
comments on how to refine the quantitative approach.
---------------------------------------------------------------------------
Trejo's (1991) estimate that the overtime-induced wage
change is 40 percent of the adjustment toward the amount predicted by
the fixed-job model, assuming an initial zero overtime pay premium, and
Barkume's (2010) estimate that the wage change is 80
percent of the predicted adjustment assuming an initial 28 percent
overtime pay premium.
This is approximately equivalent to assuming that salaried overtime
workers implicitly receive the equivalent of a 14 percent overtime
premium in the absence of regulation (the midpoint between 0 and 28
percent).
Modeling changes in hourly wages, hours, and earnings for Type 1
and Type 4 workers was relatively straightforward. Type 1 affected EAP
workers would become overtime-eligible, but because they do not work
overtime, they would see no change in their wages, hours, or weekly
earnings. Type 4 workers would remain exempt because their earnings
would be raised to at least the updated EAP level (either the standard
salary level or HCE compensation level). These workers' earnings would
increase by the difference between their current earnings and the
amount necessary to satisfy the new salary or compensation level. It is
possible employers would increase these workers' hours in response to
paying them a higher salary, but the Department did not have enough
information to model this potential change.\382\
---------------------------------------------------------------------------
\382\ Cherry, Monica, ``Are Salaried Workers Compensated for
Overtime Hours?'' Journal of Labor Research 25(3): 485-494,
September 2004, found that exempt full-time salaried employees earn
more when they work more hours, but her results do not lend
themselves to the quantification of the effect on hours of an
increase in earnings.
---------------------------------------------------------------------------
Modeling changes in wages, hours, and earnings for Type 2 and Type
3 workers was more complex. The Department distinguished those who
regularly work overtime (Type 3 workers) from those who occasionally
work overtime (Type 2 workers) because employer adjustment to the rule
may differ accordingly. Employers are more likely to adjust hours
worked and wages for regular overtime workers because their hours are
predictable. Conversely, in response to a transient, perhaps
unpredicted, shift in market demand for the good or service such
employers provide, employers are more likely to pay for occasional
overtime rather than adjust hours worked and pay.
The Department treated Type 2 affected workers in two ways due to
the uncertainty of the nature of these occasional overtime hours. The
Department assumed that 50 percent of these occasional overtime workers
worked unexpected overtime hours (Type 2A) and the other 50 percent
worked expected overtime (Type 2B). Workers were randomly assigned to
these two groups. Workers with expected occasional overtime hours were
treated like Type 3 affected workers (incomplete fixed-job model
adjustments). Workers with unexpected occasional overtime hours were
assumed to receive a 50 percent pay premium for the overtime hours
worked and receive no change in base wage or hours (full overtime
premium model).\383\ When modeling Type 2 workers' hour and wage
adjustments, the Department treated those identified as Type 2 using
the CPS data as representative of all Type 2 workers.\384\ The
Department estimated employer adjustments and transfers assuming that
the patterns observed in the CPS reference week are representative of
an average week in the year. Thus, the Department assumes total
transfers for the year are equal to 52 times the transfers estimated
for a representative week for which the Department has CPS data.
However, these transfers are spread over a larger group including those
who occasionally work overtime but did not do so in the CPS reference
week.\385\
---------------------------------------------------------------------------
\383\ The Department uses the term ``full overtime premium'' to
describe the adjustment process as modeled. The full overtime
premium model is a special case of the general fixed-wage model in
that the Department assumes the demand for labor under these
circumstances is completely inelastic. That is, employers make no
changes to employees' hours in response to these temporary,
unanticipated changes in demand.
\384\ As explained in the previous section, to estimate the
population of Type 2 workers, the Department supplemented workers
who report working overtime in the CPS reference week with some
workers who do not work overtime in the reference week to reflect
the fact that different workers work occasional overtime in
different weeks.
\385\ If a different week was chosen as the survey week, then
some of these workers would not have worked overtime. However,
because the data are representative of both the population and all
twelve months in a year, the Department believes the share of Type 2
workers identified in the CPS data in the given week is
representative of an average week in the year.
---------------------------------------------------------------------------
Since employers would pay more for the same number of labor hours,
for Type 2 and Type 3 EAP workers, the quantity of labor hours demanded
by employers would decrease. The reduction in hours is calculated using
the elasticity of labor demand with respect to wages. The Department
used a short-term demand elasticity of -0.20 to estimate the percentage
decrease in hours worked in Year 1 and a long-term elasticity of -0.4
to estimate the percentage decrease in hours worked in Years 2-10.
These elasticity estimates are based on the Department's analysis of
Lichter et al. (2014).386 387 Brown and Hamermesh (2019)
estimated the elasticity of overtime hours for EAP-exempt workers.\388\
This estimate is based on a difference-in-differences in hours for two
groups of workers between two time periods. However, some groups of
workers are incorrectly defined, so the Department has not used these
estimates.\389\
---------------------------------------------------------------------------
\386\ Lichter, A., Peichl, A. & Siegloch, A. (2014). The Own-
Wage Elasticity of Labor Demand: A Meta-Regression Analysis. IZA DP
No. 7958.
\387\ Some researchers have estimated larger impacts on the
number of overtime hours worked. For example, Hamermesh and Trejo
(2000) conclude the price elasticity of demand for overtime hours is
at least -0.5. The Department decided to use a general measure of
elasticity applied to the average change in wages since the increase
in the overtime wage is somewhat offset by a decrease in the non-
overtime wage as indicated in the fixed-job model. Hamermesh, D. and
S. Trejo. (2000)). The Demand for Hours of Labor: Direct Evidence
from California. The Review of Economics and Statistics, 82(1), 38-
47.
\388\ Brown, Charles C., and Daniel S. Hamermesh. (2019).
``Wages and Hours Laws: What Do We Know? What Can Be Done?'' RSF:
The Russell Sage Foundation Journal of the Social Sciences 5(5): 68-
87. DOI: 10.7758/RSF.2019.5.5.04.
\389\ For example, the authors defined the ``non-exempt 1987-
1989'' group as workers earning above $223 but below $455 during
this period. Because the salary level for the long test was $155 or
$170 and was $250 for the short test, see section VII.A.1 (Table 1),
some of these workers would be exempt.
---------------------------------------------------------------------------
For Type 3 affected workers, and the 50 percent of Type 2 affected
workers who worked expected overtime, the Department estimated adjusted
total hours worked after making wage adjustments using the incomplete
fixed-job model. To estimate adjusted hours worked, the Department set
the percent change in total hours worked equal to the percent change in
average wages multiplied by the wage elasticity of labor demand.\390\
Figure 4 is a flow
[[Page 62207]]
chart summarizing the four types of affected EAP workers. Also shown
are the effects on exempt status, weekly earnings, and hours worked for
each type of affected worker.
---------------------------------------------------------------------------
\390\ In this equation, the only unknown is adjusted total hours
worked. Since adjusted total hours worked is in the denominator of
the left side of the equation and is also in the numerator of the
right side of the equation, solving for adjusted total hours worked
requires solving a quadratic equation.
---------------------------------------------------------------------------
BILLING CODE 4510-27-P
[[Page 62208]]
[GRAPHIC] [TIFF OMITTED] TP08SE23.006
[[Page 62209]]
[GRAPHIC] [TIFF OMITTED] TP08SE23.007
BILLING CODE 4510-27-C
(e) Estimated Number of and Effects on Affected EAP Workers
The Department estimated the proposed rule would affect 3.6 million
workers (Table 16), of which 2.5 million are Type 1 workers (68.7
percent of all affected EAP workers), 579,200 were estimated to be Type
2 workers (15.9 percent), 448,400 were Type 3 workers (12.3 percent),
and 115,700 were estimated to be Type 4 workers (3.2 percent).
Table 16--Affected EAP Workers by Type (1,000s), Year 1
----------------------------------------------------------------------------------------------------------------
Regular overtime
No overtime Occasional -------------------------------
EAP test Total (T1) overtime (T2) Newly Remain exempt
nonexempt (T3) (T4)
----------------------------------------------------------------------------------------------------------------
Standard salary level........... 3,399.4 2,335.7 569.9 384.9 108.9
HCE compensation level.......... 248.9 169.2 9.3 63.5 6.8
-------------------------------------------------------------------------------
Total....................... 3,648.3 2,504.9 579.2 448.4 115.7
----------------------------------------------------------------------------------------------------------------
Note: Pooled CPS data for 2020-2022 adjusted to reflect 2022.
* Type 1: Workers who do not work overtime and gain overtime protection.
* Type 2: Workers who work occasional overtime and gain overtime protection.
* Type 3: Workers who work regular overtime and gain overtime protection.
* Type 4: Workers who work regular overtime and remain exempt (i.e., earnings increase to the updated salary
level).
The proposed rule would affect some affected workers' hourly wages,
hours, and weekly earnings. Predicted changes in implicit wage rates
are outlined in Table 17, changes in hours in Table 18, and changes in
weekly earnings in Table 19. How these would change depends on the type
of worker, but on average the Department projects that weekly earnings
would be unchanged or increase while hours worked would be unchanged or
decrease.
Type 1 workers would have no change in wages, hours, or earnings
due to the overtime pay provision because these workers do not work
overtime.\391\ Some Type 1 workers who earn less than the Federal or
state minimum wage would see an increase in wages, a decrease in hours,
and an increase in weekly earnings.
---------------------------------------------------------------------------
\391\ It is possible that these workers may experience an
increase in hours and weekly earnings because of transfers of hours
from other newly nonexempt workers who do usually work overtime. Due
to the high level of uncertainty in employers' responses regarding
the transfer of hours, the Department did not have credible evidence
to support an estimation of the number of hours transferred to other
workers.
---------------------------------------------------------------------------
For Type 2A workers, the Department assumed employers would be
unable to adjust the hours or regular rate of pay for these occasional
overtime workers whose overtime is irregularly scheduled and
unpredictable. These workers would receive a 50 percent premium on
their regular hourly wage for each hour worked in excess of 40 hours
per week, and so average weekly earnings would increase.\392\
---------------------------------------------------------------------------
\392\ Type 2 workers will not see increases in regular earnings
to the new salary or compensation levels (as Type 4 workers do) even
if their new earnings in this week exceed those new levels. This is
because the estimated new earnings only reflect their earnings in
those weeks when overtime is worked; their earnings in typical weeks
when they do not work overtime do not exceed the salary or
compensation level.
---------------------------------------------------------------------------
For Type 3 workers and Type 2B workers (the 50 percent of Type 2
workers who regularly work occasional overtime, an estimated 738,000
workers), the Department used the incomplete fixed-job model to
estimate changes in the regular rate of pay. These workers would see a
decrease in their average regular hourly wage and a small decrease in
hours. However, because these workers would receive a 50 percent
premium on their regular hourly wage for each hour worked in excess of
40 hours per week, their average weekly earnings would increase. The
reduction in hours is relatively small and is due to a decrease in
labor demand from the increase in the average hourly wage as predicted
by the incomplete fixed-job model (Table 18).
Type 4 workers' implicit hourly rates of pay and weekly earnings
would increase to meet the updated standard salary level or HCE annual
[[Page 62210]]
compensation level. Type 4 workers' hours may increase to offset the
additional earnings, but due to lack of data, the Department assumed
hours would not change.
Table 17--Average Regular Rate of Pay by Type of Affected EAP Worker, Year 1
----------------------------------------------------------------------------------------------------------------
Regular overtime
No overtime Occasional -------------------------------
Time period Total (T1) overtime (T2) Newly Remain exempt
nonexempt (T3) (T4)
----------------------------------------------------------------------------------------------------------------
Standard Salary Level
----------------------------------------------------------------------------------------------------------------
Before rule..................... $23.55 $24.18 $25.48 $17.82 $20.07
After rule...................... $23.43 $24.18 $25.36 $16.90 $20.42
Change ($)...................... -$0.11 $0.00 -$0.12 -$0.92 $0.34
Change (%)...................... -0.5% 0.0% -0.5% -5.2% 1.7%
----------------------------------------------------------------------------------------------------------------
HCE Compensation Level
----------------------------------------------------------------------------------------------------------------
Before rule..................... $56.10 $60.07 $58.90 $45.92 $48.63
After rule...................... $55.31 $60.07 $54.99 $43.31 $49.78
Change ($)...................... -$0.79 $0.00 -$3.91 -$2.61 $1.15
Change (%)...................... -1.4% 0.0% -6.6% -5.7% 2.4%
----------------------------------------------------------------------------------------------------------------
Note: Pooled CPS data for 2020-2022 adjusted to reflect 2022.
*Type 1: Workers who do not work overtime and gain overtime protection.
*Type 2: Workers who work occasional overtime and gain overtime protection.
*Type 3: Workers who work regular overtime and gain overtime protection.
*Type 4: Workers who work regular overtime and remain exempt (i.e., earnings increase to the updated salary
level).
Table 18--Average Weekly Hours by Type of Affected EAP Worker, Year 1
----------------------------------------------------------------------------------------------------------------
Regular OT
No overtime Occasional OT -------------------------------
Time period Total worked (T1) (T2) Newly Remain exempt
nonexempt (T3) (T4)
----------------------------------------------------------------------------------------------------------------
Standard Salary Level \a\
----------------------------------------------------------------------------------------------------------------
Before rule..................... 41.0 38.9 40.9 50.4 52.9
After rule...................... 41.0 38.9 40.9 50.0 52.9
Change (hours).................. 0.0 0.0 0.0 -0.4 0.0
Change (%)...................... -0.1% 0.0% -0.1% -0.8% 0.0%
----------------------------------------------------------------------------------------------------------------
HCE Compensation Level \a\
----------------------------------------------------------------------------------------------------------------
Before rule..................... 43.3 39.5 52.7 50.6 56.0
After rule...................... 43.2 39.5 52.3 50.3 56.0
Change (hours).................. -0.1 0.0 -0.4 -0.3 0.0
Change (%)...................... -0.2% 0.0% -0.7% -0.7% 0.0%
----------------------------------------------------------------------------------------------------------------
Note: Pooled CPS data for 2020-2022 adjusted to reflect 2022.
\a\ Usual hours for Types 1, 3, and 4 but actual hours for Type 2 workers identified in the CPS MORG.
*Type 1: Workers who do not work overtime and gain overtime protection.
*Type 2: Workers who work occasional overtime and gain overtime protection.
*Type 3: Workers who work regular overtime and gain overtime protection.
*Type 4: Workers who work regular overtime and remain exempt (i.e., earnings increase to the updated salary
level).
Table 19--Average Weekly Earnings by Type of Affected EAP Worker, Year 1
----------------------------------------------------------------------------------------------------------------
Regular overtime
No overtime Occasional -------------------------------
Time period Total (T1) overtime (T2) Newly Remain exempt
nonexempt (T3) (T4)
----------------------------------------------------------------------------------------------------------------
Standard Salary Level \a\
----------------------------------------------------------------------------------------------------------------
Before rule..................... $913.71 $904.82 $947.26 $882.62 $1,038.69
After rule...................... $919.26 $904.82 $960.66 $906.04 $1,059.00
Change ($)...................... $5.55 $0.00 $13.39 $23.42 $20.31
Change (%)...................... 0.6% 0.0% 1.4% 2.7% 2.0%
----------------------------------------------------------------------------------------------------------------
HCE Compensation Level \a\
----------------------------------------------------------------------------------------------------------------
Before rule..................... $2,354.99 $2,323.22 $3,101.59 $2,292.51 $2,704.08
[[Page 62211]]
After rule...................... $2,374.58 $2,323.22 $3,193.44 $2,348.79 $2,769.00
Change ($)...................... $19.59 $0.00 $91.85 $56.28 $64.92
Change (%)...................... 0.8% 0.0% 3.0% 2.5% 2.4%
----------------------------------------------------------------------------------------------------------------
Note: Pooled CPS data for 2020-2022 adjusted to reflect 2022.
\a\ The mean of the hourly wage multiplied by the mean of the hours does not necessarily equal the mean of the
weekly earnings because the product of two averages is not necessarily equal to the average of the product.
*Type 1: Workers who do not work overtime and gain overtime protection.
*Type 2: Workers who work occasional overtime and gain overtime protection.
*Type 3: Workers who work regular overtime and gain overtime protection.
*Type 4: Workers who work regular overtime and remain exempt (i.e., earnings increase to the updated salary
level).
At the new standard salary level, the average weekly earnings of
affected workers would increase $5.55 (0.6 percent), from $913.71 to
$919.26. Multiplying the average change of $5.55 by the 3.4 million EAP
workers affected by the change in the standard salary level and 52
weeks equals an increase in earnings of $1.0 billion in the first year.
For workers affected by the change in the HCE compensation level,
average weekly earnings would increase by $19.59. When multiplied by
248,900 affected workers and 52 weeks, the national increase would be
$253.5 million in the first year. Thus, total Year 1 transfer payments
attributable to this proposed rule would total $1.2 billion.
The Department is only aware of one paper that modeled the impacts
of the 2019 rule's increases in the salary and compensation levels.
Quach (2021) \393\ used administrative payroll data from May 2008 to
January 2020 to estimate the impacts of the rescinded 2016 rule and the
2019 rule on employment, earnings, and salary status.\394\ The paper
has not been published in a peer-reviewed journal and has significant
limitations, including that its use of administrative payroll data from
ADP means that the findings are not representative as ADP customers do
not represent a random sample of the workplace. Furthermore, the
paper's analysis only includes the 22 states that have not updated
their state or local minimum wages since 2014.\395\
---------------------------------------------------------------------------
\393\ Quach, S. (2022). The Labor Market Effects of Expanding
Overtime Coverage. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3608506.
\394\ The Department notes that the effective date of the 2019
final rule was in January 2020, so using data from this month may
not fully capture the effects of the 2019 rule.
\395\ This is a reasonable restriction to minimize the influence
of exogenous factors. However, it makes the sample unrepresentative
of the U.S.
---------------------------------------------------------------------------
In terms of its findings, concerning employment, the author did not
find the impact to be statistically different from zero for either
rule, although he did find a significant decrease in employment when
state overtime exemption laws were incorporated. Concerning earnings,
he found an increase in base weekly earnings and an increase in
overtime pay for both rules. The percent change in total pay that he
estimates, around 1 to 2 percent depending on the rule, is not vastly
different than the Department's estimate of 0.6 percent. Concerning
salary status, he found an increase in the number of hourly jobs after
the 2016 rule but not after the 2019 rule. His analysis of both rules
showed a shift in the number of salaried workers from below to above
the threshold (as does the Department's analysis).
The Department has not adjusted its methodology in response to this
paper given the concerns listed above, but remains interested in
further peer-reviewed research that may provide relevant findings.
Additionally, it can be informative to look at papers which predict
the impact of rulemakings. For example, Rohwedder and Wenger (2015)
analyzed the effects of increasing the standard salary level from the
then baseline level of $455 per week.\396\ They compared hourly and
salaried workers in the CPS using quantile treatment effects. This
methodology estimates the effect of a worker becoming nonexempt by
comparing similar workers who are hourly and salaried. They found no
statistically significant change in hours or wages on average. However,
their point estimates, averaged across all affected workers, show small
increases in earnings and decreases in hours, similar to the
Department's analysis. For example, using a salary level of $750, they
estimated weekly earnings may increase between $2 and $22 and weekly
hours may decrease by approximately 0.4 hours.
---------------------------------------------------------------------------
\396\ Rohwedder, S. and Wenger, J.B. (2015). The Fair Labor
Standards Act: Worker Misclassification and the Hours and Earnings
Effects of Expanded Coverage. RAND Labor and Population.
---------------------------------------------------------------------------
iv. Potential Transfers Not Quantified
This proposed rule could lead to additional transfers that the
Department is unable to quantify. For example, in response to this
proposed rule, some employers may decrease the hours of newly nonexempt
workers who usually work overtime. These hours may be transferred to
other workers, such as non-overtime workers and exempt workers who are
not affected by the rule. Depending on how these hours are transferred,
it could lead to either a reduction or increase in earnings for other
workers. Employers may also offset increased labor costs by reducing
bonuses or benefits instead of reducing base wages or hours worked. If
this occurs, an employee's overall compensation may not be affected.
The rule could also reduce reliance on social assistance programs
for some workers who may receive a transfer of income resulting from
this proposed rule if finalized. For low-income workers, this transfer
could result in a reduced need for social assistance programs such as
Medicaid, the Earned Income Tax Credit (EITC), the Supplemental
Nutrition Assistance Program (SNAP), the Temporary Assistance for Needy
Families (TANF) program, the Special Supplemental Nutrition Program for
Women, Infants, and Children (WIC), and school breakfasts and lunches.
A worker earning the current salary level of $684 per week earns
$35,568 annually, which is roughly equivalent to the Federal poverty
level for a family of five and makes the family eligible for many
social assistance programs.\397\ Thus, transferring income to these
workers
[[Page 62212]]
could reduce eligibility for government social assistance programs and
could therefore also reduce government expenditures.
---------------------------------------------------------------------------
\397\ Department of Health and Human Services (2023). Federal
Poverty Level. https://www.healthcare.gov/glossary/Federal-poverty-level-fpl/.
---------------------------------------------------------------------------
The Department requests comments and data on additional transfers
that could occur if this rule were finalized as proposed.
5. Benefits and Cost Savings
The Department expects that this proposed rule could lead to
multiple benefits, which are discussed qualitatively below. The
Department welcomes comments on the potential benefits associated with
this proposed rule and any data that could help to quantify them.
First, the updated salary level would strengthen the overtime
protection of salaried, white-collar employees who do not pass the
standard duties test and who earn between the current salary standard
salary level and the proposed salary level. These employees are
nonexempt but, because they satisfy the current salary level threshold,
employers must apply the duties test to determine their exemption
status. At the proposed salary level, the number of white-collar
salaried employees who fail the duties test but earn at or above the
salary level would decrease by 4.1 million. Because these nonexempt
employees would not meet the proposed salary level, employers would be
able to determine their exemption status based solely on the salary
test. If any of these employers previously spent significant time
evaluating the duties of these workers to determine exemption status,
the change to determining exemption status based on the salary level
could lead to some cost savings.
As the Department has noted in prior EAP rulemakings, some
salaried, white-collar employees who meet the salary level threshold
but do not meet the duties test may be misclassified as exempt from
overtime protection due to misapplication of the duties test.\398\ To
the extent that some of the 4.1 million salaried, white-collar
employees who do not meet the duties test and earn between the current
$684 per week salary level and the proposed $1,059 per week salary
level are misclassified as exempt, the proposed salary level would make
it more clear for workers and employers that such workers are not EAP
exempt.\399\
---------------------------------------------------------------------------
\398\ See 84 FR 51279-80; 81 FR 32463; 69 FR 22213.
\399\ See Rohwedder, S. and Wenger, J.B. (2015). The Fair Labor
Standards Act: Worker Misclassification and the Hours and Earnings
Effects of Expanded Coverage. RAND Labor and Population. RAND
conducted a survey to identify the number of workers who may have
failed the standards duties test and yet are classified as EAP
exempt. The survey, a special module to the American Life Panel,
asked respondents: (1) their hours worked, (2) whether they are paid
on an hourly or salary basis, (3) their typical earnings, (4)
whether they perform certain job responsibilities that are treated
as proxies for whether they would justify exempt status, and (5)
whether they receive any overtime pay. Using these data, Rohwedder
and Wenger found that ``11.5 percent of salaried workers were
classified as exempt by their employer although they did not meet
the criteria for being so.'' This survey was conducted when the
salary level was $455. The exact percentage may no longer be
applicable, but the concern that in some instances the duties test
may be misapplied remains.
---------------------------------------------------------------------------
Second, this proposed rule could potentially lead to increased
worker productivity if workers receive an increase in compensation.
Increased productivity could occur through numerous channels, such as
employee retention and level of effort. A strand of economic research,
commonly referred to as ``efficiency wage'' theory, considers how an
increase in compensation may be met with greater productivity.\400\
Efficiency wages may elicit greater effort on the part of workers,
making them more effective on the job.\401\ Other research on increases
in the minimum wage have demonstrated a positive relationship between
increased compensation and worker productivity. For example, Kim and
Jang (2019) showed that wage raises increase productivity for up to two
years after the wage increase.\402\ They found that in both full and
limited-service restaurants productivity increased due to improved
worker morale after a wage increase.
---------------------------------------------------------------------------
\400\ Akerlof, G.A. (1982). Labor Contracts as Partial Gift
Exchange. The Quarterly Journal of Economics, 97(4), 543-569.
\401\ Another model of efficiency wages, which is less
applicable here, is the adverse selection model in which higher
wages raise the quality of the pool of applicants.
\402\ Kim, H.S., & Jang, S. (2019). Minimum Wage Increase and
Firm Productivity: Evidence from the Restaurant Industry. Tourism
Management 71, 378-388. https://doi.org/10.1016/j.tourman.2018.10.029.
---------------------------------------------------------------------------
Additionally, research demonstrates a correlation between increased
earnings and reduced employee turnover.403 404 Reducing
turnover, in turn, may increase productivity because new employees have
less firm-specific skills and knowledge and thus could be less
productive and require additional supervision and training.\405\
Reduced turnover could also reduce firms' hiring and training costs. As
a result, even though marginal labor costs rise, they may rise by less
than the amount of the wage change because the higher wages may be
offset by increased productivity and reduced hiring costs for firms.
---------------------------------------------------------------------------
\403\ Howes, Candace. (2005). Living Wages and Retention of
Homecare Workers in San Francisco. Industrial Relations, 44(1), 139-
163. Dube, A., Lester,T.W., & Reich, M.. (2014). Minimum Wage
Shocks, Employment Flows and Labor Market Frictions. IRLE Working
Paper #149-13.
\404\ This literature tends to focus on changes in earnings for
a specific sector or subset of the labor force. The impact on
turnover when earnings increase across sectors (as would be the case
with this regulation) may be smaller.
\405\ Argote, L., Insko, C. A., Yovetich, N., & Romero, A. A.
(1995). Group Learning Curves: The Effects of Turnover and Task
Complexity on Group Performance. Journal of Applied Social
Psychology, 25(6), 512-529. Shaw, J. D. (2011). Turnover Rates and
Organizational Performance: Review, Critique, and Research Agenda.
Organizational Psychology Review, 1(3), 187-213.
---------------------------------------------------------------------------
Third, this rulemaking could result in an increase in personal time
for some workers. Due to the increase in marginal cost for overtime
hours for newly overtime-eligible workers, employers could demand fewer
hours from some of the workers affected by this rulemaking. If these
workers' pay remains the same, they could benefit from increased
personal time and improved work-life balance. Empirical evidence shows
that workers in the United States typically work more than workers in
other comparatively wealthy countries.\406\ Although estimates of the
actual level of overwork vary considerably, workers in executive,
administrative, and professional occupations tend to work longer
hours.\407\ They also have the highest percentage of workers who would
prefer to work fewer hours compared to other occupational
categories.\408\ Therefore, the Department believes that this proposed
rule may result in reduced time spent working for a group of workers,
some of whom may prefer such an outcome.
---------------------------------------------------------------------------
\406\ For more information, see OECD series, average annual
hours actually worked per worker, available at: http://stats.oecd.org/index.aspx?DataSetCode=ANHRS.
\407\ Boushey, H. and Ansel, B. (2016). Overworked America, The
economic causes and consequences of long work hours. Washington
Center for Equitable Growth. https://equitablegrowth.org/research-paper/overworked-america/?longform=true.
\408\ Hamermesh, D.S., Kawaguchi, D., Lee, J. (2014). Does Labor
Legislation Benefit Workers? Well-Being after an Hours Reduction.
IZA DP No. 8077.
Golden, L., & Gebreselassie, T. (2007). Overemployment
Mismatches: The Preference for Fewer Work Hours. Monthly Labor
Review, 130(4), 18-37.
Hamermesh, D.S. (2014). Not Enough Time? American Economist,
59(2).
---------------------------------------------------------------------------
6. Sensitivity Analysis of Transfer Payments
Because the Department cannot predict employers' precise reactions
to the proposed rule, the Department calculated bounds on the size of
the estimated transfers from employers to workers, relative to the
primary estimates in this RIA. For the upper bound, the Department
assumed that the
[[Page 62213]]
full overtime premium model is more likely to occur than in the primary
model. For the lower bound, the Department assumed that the complete
fixed-job model is more likely to occur than in the primary model.
Based on these assumptions, estimated transfers may range from $557.3
million to $2.4 billion, with the primary estimate equal to $1.2
billion.
For a reasonable upper bound on transfer payments, the Department
assumed that all occasional overtime workers and half of regular
overtime workers would receive the full overtime premium (i.e., such
workers will work the same number of hours but be paid 1.5 times their
implicit initial hourly wage for all overtime hours) (Table 20). The
full overtime premium model is a special case of the fixed-wage model
where there is no change in hours. For the other half of regular
overtime workers, the Department assumed in the upper-bound method that
they would have their implicit hourly wage adjusted as predicted by the
incomplete fixed-job model (wage rates fall and hours are reduced but
total earnings continue to increase, as in the primary method). In the
primary model, the Department assumed that only 50 percent of
occasional overtime workers and no regular overtime workers would
receive the full overtime premium.
The plausible lower bound on transfer payments also depends on
whether employees work regular overtime or occasional overtime. For
those who regularly work overtime hours and half of those who work
occasional overtime, the Department assumed the employees' wages would
fully adjust as predicted by the fixed-job model.\409\ For the other
half of employees with occasional overtime hours, the lower bound
assumes they would be paid one and one-half times their implicit hourly
wage for overtime hours worked (full overtime premium).
---------------------------------------------------------------------------
\409\ The straight-time wage adjusts to a level that keeps
weekly earnings constant when overtime hours are paid at 1.5 times
the straight-time wage. In cases where adjusting the straight-time
wage results in a wage less than the minimum wage, the straight-time
wage is set to the minimum wage.
Table 20--Summary of the Assumptions Used to Calculate the Lower
Estimate, Primary Estimate, and Upper Estimate of Transfers
------------------------------------------------------------------------
Upper transfer
Lower transfer estimate Primary estimate estimate
------------------------------------------------------------------------
Occasional Overtime Workers (Type 2)
------------------------------------------------------------------------
50% fixed-job model............. 50% incomplete 100% full overtime
fixed-job model. premium.
-----------------------------------------------------
50% full overtime premium....... 50% full overtime ..................
premium.
------------------------------------------------------------------------
Regular Overtime Workers (Type 3)
------------------------------------------------------------------------
100% fixed-job model............ 100% incomplete 50% incomplete
fixed-job model. fixed-job model.
50% full overtime
premium.
------------------------------------------------------------------------
* Full overtime premium model: Regular rate of pay equals the implicit
hourly wage prior to the regulation (with no adjustments); workers are
paid 1.5 times this base wage for the same number of overtime hours
worked prior to the regulation.
* Fixed-job model: Base wages are set at the higher of: (1) a rate such
that total earnings and hours remain the same before and after the
regulation; thus the base wage falls, and workers are paid 1.5 times
the new base wage for overtime hours (the fixed-job model) or (2) the
minimum wage.
* Incomplete fixed-job model: Regular rates of pay are partially
adjusted to the wage implied by the fixed-job model.
7. Effects by Regions and Industries
This section compares the number of affected workers, costs, and
transfers across regions and industries. Although impacts would be more
pronounced in some regions or industries, the Department has concluded
that in no region or industry are the costs overly burdensome. The
proportion of total costs and transfers in each region would be fairly
consistent with the proportion of total workers in each region.
Affected workers are overrepresented in some industries, but costs and
transfers would still be manageable as a share of payroll and of total
revenue (See Table 24 for regions and Table 27 for industries).
The Department also compared costs and transfers relative to total
payrolls and revenues. This provides a common method of assessing the
relative effects of the rule on different regions or industries, and
the magnitude of adjustments the rule may require on the part of
enterprises in each region or industry. The relative costs and
transfers expressed as a percentage of payroll are particularly useful
measures of the relative size of adjustment faced by organizations in a
region or industry because they benchmark against the cost category
directly associated with the labor force. Average estimated costs and
transfers from this proposed rule are very small relative to current
payroll or current revenue--less than a tenth of a percent of payroll
and of revenue in each region and in each industry.
Salaries vary across the U.S. geographically. To ensure the
proposed standard salary level would not be too high in any region of
the country, the Department has used only wages in the lowest-wage
region, the South, to set the salary level. However, because wages are
lower in the South and the Midwest than the Northeast and the West,
impacts may be larger in these two lower-wage regions. This section
considers impacts across the four Census regions to ensure the impacts
in the lower-wage regions would be manageable. The South has by far the
most affected workers (1.5 million), though it also has the most
workers of any Census region (Table 21). As a share of potentially
affected workers in the region, the South would have somewhat more
affected workers relative to other regions (15.2 percent are affected
compared with 10.3 to 13.7 percent in other regions). However, as a
share of all workers in the region, the South would not be particularly
affected relative to other regions (2.9 percent are affected compared
with 2.1 to 2.6 percent in other regions).
[[Page 62214]]
Table 21--Potentially Affected and Affected Workers, by Region, Year 1
----------------------------------------------------------------------------------------------------------------
Affected
Workers Potentially workers as a Affected
subject to affected Affected precent of workers as a
Region FLSA workers workers potentially percent of all
(millions) (millions) \a\ (millions) \b\ affected workers %
workers %
----------------------------------------------------------------------------------------------------------------
All............................. 139.4 28.4 3.6 12.9 2.6
Northeast....................... 24.8 5.7 0.6 11.1 2.6
Midwest......................... 30.4 5.9 0.8 13.7 2.6
South........................... 51.4 9.9 1.5 15.2 2.9
West............................ 32.8 6.9 0.7 10.3 2.1
----------------------------------------------------------------------------------------------------------------
Note: Pooled CPS data for 2020-2022 adjusted to reflect 2022.
\a\ EAP exempt workers who are white-collar, salaried, not eligible for another (non-EAP) overtime exemption,
and not in a named occupation.
\b\ Currently EAP exempt workers who will be entitled to overtime protection under the updated earnings levels
or whose weekly earnings will increase to the new earnings levels to remain exempt.
Total transfers in the first year were estimated to be $1.2 billion
(Table 22). As expected, the transfers in the South would be the
largest portion because the largest number of affected workers would be
in the South. However, transfers per affected worker would be on the
low-end in the South. Annual transfers per worker would be $328 in the
South, and between $332 and $357 in other regions.
Table 22--Annual Transfers by Region, Year 1
----------------------------------------------------------------------------------------------------------------
Total annual Annual Percent of
change in transfer per Annual total
Region earnings affected transfers per transfers by
(millions) worker entity region (%)
----------------------------------------------------------------------------------------------------------------
All............................................. $1,234.2 $338 $153 100.0
----------------------------------------------------------------------------------------------------------------
Northeast....................................... 211.2 332 143 17.1
Midwest......................................... 279.1 347 166 22.6
South........................................... 492.8 328 169 39.9
West............................................ 251.1 357 125 20.3
----------------------------------------------------------------------------------------------------------------
Note: Pooled CPS data for 2020-2022 adjusted to reflect 2022.
Table 23--Annual Costs by Region, Year 1
----------------------------------------------------------------------------------------------------------------
Percent of
Total direct Total direct total direct
Region costs costs per costs by
(millions) entity region (%)
----------------------------------------------------------------------------------------------------------------
All............................................................. $1,202.8 $149 100.0
----------------------------------------------------------------------------------------------------------------
Northeast....................................................... 202.8 137 16.9
Midwest......................................................... 278.5 165 23.2
South........................................................... 470.5 161 39.1
West............................................................ 251.1 125 20.9
----------------------------------------------------------------------------------------------------------------
Note: Pooled CPS data for 2020-2022 adjusted to reflect 2022.
Direct employer costs are composed of regulatory familiarization
costs, adjustment costs, and managerial costs. The Department estimates
that total direct employer costs would be the highest in the South
($470.5 million) and lowest in the Northeast ($202.8 million).
Transfers and direct employer costs in each region, as a percentage of
the total transfers and direct costs, would range from 17.0 percent in
the Northeast to 39.5 percent in the South. These proportions are
almost the same as the proportions of the total workforce in each
region: 17.8 percent in the Northeast and 36.9 percent in the South.
Costs and transfers per establishment would be slightly higher in the
South ($330) than on average, but still small (Table 24).
Another way to compare the relative effects of this proposed rule
by region is to consider the transfers and costs as a proportion of
payroll and revenues (Table 24).\410\ Nationally, employer costs and
transfers would be approximately 0.027 percent of payroll. By region,
direct employer costs and transfers as a percent of payroll would be
approximately the same (between 0.021 and 0.032 percent of payroll).
Employer costs and transfers as a percent of revenue would be 0.005
percent nationally and range between 0.004 and 0.006 percent in each
region.
---------------------------------------------------------------------------
\410\ The Department uses 2017 data here because although
payroll data are available for 2021, the most recent revenue data
are for 2017.
[[Page 62215]]
Table 24--Annual Transfers and Costs as Percent of Payroll and of Revenue by Region, Year 1
----------------------------------------------------------------------------------------------------------------
Costs and transfers
Transfers and Payroll Revenue -------------------------------
Region costs per (billions) \a\ (billions) \a\ As percent of As percent of
entity payroll (%) revenue (%)
----------------------------------------------------------------------------------------------------------------
All............................. $301 $9,141 $48,894 0.027 0.005
Northeast....................... 279 1,940 9,557 0.021 0.004
Midwest......................... 331 1,879 10,884 0.030 0.005
South........................... 330 3,028 17,193 0.032 0.006
West............................ 250 2,295 11,260 0.022 0.004
----------------------------------------------------------------------------------------------------------------
\a\ Payroll and revenue data exclude the Federal Government.
Sources: Costs and transfers based on pooled CPS data for 2020-2022 adjusted to reflect 2022. Private sector
payroll and revenue data from 2017 SUSB. State and local payroll and revenue data from State and Local
Government Finances 2020. Inflated to $2022 using GDP deflator.
Impacts may be more pronounced in some industries. In particular,
lower-wage industries where more workers may earn between $684 and the
proposed new salary level may be impacted more. Additionally,
industries where EAP workers are more prevalent may experience larger
impacts. To gauge the effect of the proposed rule on industries, the
Department estimated affected workers, costs, and transfers for the 13
major industry groups. The Department also compared estimates of
combined costs and transfers as a percent of payroll and revenue across
industries.
Table 25 presents the number of affected workers by industry. The
industry with the most affected workers is professional and business
services (687,400). The industry with the largest share of workers
affected is financial activities (4.9 percent). This is because the
financial activities industry is heavily composed of salaried white-
collar workers. As a share of potentially affected workers, the
industry with the highest share affected is agriculture, forestry,
fishing, & hunting (22.1 percent), followed by leisure and hospitality
(21.1 percent).
Table 25--Potentially Affected and Affected Workers, by Industry, Year 1
----------------------------------------------------------------------------------------------------------------
Affected
Potentially workers as a Affected
Workers affected Affected percent of workers as a
Industry subject to workers workers potentially percent of all
FLSA (1,000s) (1,000s) \a\ (1,000s) \b\ affected workers (%)
workers (%)
----------------------------------------------------------------------------------------------------------------
All............................. 139,397.0 28,359.5 3,648.3 12.9 2.6
Agriculture, forestry, fishing, 1,331.5 55.6 12.3 22.1 0.9
& hunting......................
Mining.......................... 619.5 171.1 12.5 7.3 2.0
Construction.................... 8,914.6 1,188.4 154.4 13.0 1.7
Manufacturing................... 15,129.2 3,900.8 317.1 8.1 2.1
Wholesale trade................. 3,226.4 850.5 103.9 12.2 3.2
Retail trade.................... 15,381.2 1,853.1 308.7 16.7 2.0
Transportation & utilities...... 8,507.1 1,033.5 118.9 11.5 1.4
Information..................... 2,559.2 962.4 118.6 12.3 4.6
Financial activities............ 9,851.4 4,250.7 480.7 11.3 4.9
Professional & business services 16,784.2 6,754.2 687.4 10.2 4.1
Education....................... 14,017.6 1,121.0 201.8 18.0 1.4
Healthcare & social services.... 20,534.6 3,599.7 626.9 17.4 3.1
Leisure & hospitality........... 11,597.6 869.1 183.5 21.1 1.6
Other services.................. 5,314.5 736.5 139.2 18.9 2.6
Public administration........... 5,628.3 1,012.9 182.4 18.0 3.2
----------------------------------------------------------------------------------------------------------------
Note: Pooled CPS data for 2020-2022 adjusted to reflect 2022.
\a\ EAP exempt workers who are white-collar, salaried, not eligible for another (non-EAP) overtime exemption,
and not in a named occupation.
\b\ Currently EAP exempt workers who will be entitled to overtime protection under the updated earnings levels
or whose weekly earnings will increase to the new earnings levels to remain exempt.
Both transfers and costs would be the largest in the professional
and business services industry because this industry is large and
heavily composed of salaried white-collar workers (Table 26). Combined,
in Year 1, these total $471.7 million and represent 19.4 percent of
nationwide transfers and costs. Transfers and costs are also large in
the healthcare and social services industry, at least partially due to
the large size of this industry. However, transfers per affected worker
would be relatively low in this industry, $251 in the first year
compared with $338 nationally. A third industry with relatively large
total transfers and costs is the financial activities industry.
[[Page 62216]]
Table 26--Annual Transfers and Costs by Industry, Year 1
----------------------------------------------------------------------------------------------------------------
Percent of
Transfer per Transfers and total
Industry Transfers affected Direct costs costs transfers and
(millions) worker (millions) \a\ (millions) costs by
industry (%)
----------------------------------------------------------------------------------------------------------------
All............................. $1,234.2 $338 $1,202.1 $2,436.3 100.0
Agriculture, forestry, fishing, 4.2 341 3.2 7.4 0.3
& hunting......................
Mining.......................... 2.9 234 2.6 5.6 0.2
Construction.................... 49.1 318 74.0 123.2 5.1
Manufacturing................... 114.0 360 91.9 205.9 8.5
Wholesale trade................. 42.9 413 46.3 89.2 3.7
Retail trade.................... 148.8 482 138.7 287.6 11.8
Transportation & utilities...... 46.3 389 37.0 83.3 3.4
Information..................... 34.5 290 32.3 66.7 2.7
Financial activities............ 144.3 300 143.2 287.5 11.8
Professional & business services 250.7 365 221.0 471.7 19.4
Education....................... 54.3 269 42.2 96.5 4.0
Healthcare & social services.... 157.5 251 164.0 321.5 13.2
Leisure & hospitality........... 86.8 473 99.2 186.1 7.6
Other services.................. 35.6 256 69.5 105.1 4.3
Public administration........... 62.2 341 37.0 99.2 4.1
----------------------------------------------------------------------------------------------------------------
Sources: Pooled CPS data for 2020-2022 adjusted to reflect 2022.
\a\ Regulatory familiarization costs exclude 13,981 establishments whose industry is ``not classified.''
To measure the impact on businesses, a comparison of transfers and
costs to payroll, revenue, or profit is more helpful than looking at
the absolute size of transfers and costs per industry. As a percent of
payroll, transfers and costs would be highest in agriculture, forestry,
fishing, and hunting; education; and retail trade (Table 27). However,
the magnitude of the relative shares would be small, representing less
than 0.1 percent of payroll costs in all industries. The Department's
estimates of transfers and costs as a percent of revenue by industry
also indicated a very small effect of less than 0.02 percent of
revenues in any industry. The industries with the largest transfers and
costs as a percent of revenue would be education; agriculture,
forestry, fishing, and hunting; and professional and business services.
Table 27 illustrates that the differences in costs and transfers
relative to revenues would be quite small across industry groupings.
The overall magnitude of costs and transfers as a percentage of
profits represents less than 1.0 percent of overall profits in each
industry.411 412 By industry, the value of total costs and
transfers as a percent of profits ranges from a low of .02 percent
(wholesale trade) to a high of 0.71 percent (agriculture, forestry,
fishing, and hunting). Benchmarking against profits is potentially
helpful in the sense that it provides a measure of the proposed rule's
effect against returns to investment. However, this metric must be
interpreted carefully as it does not account for differences across
industries in risk-adjusted rates of return which are not readily
available for this analysis. The ratio of costs and transfers to
profits also does not reflect differences in the firm-level adjustment
to profit impacts reflecting cross-industry variation in market
structure.\413\
---------------------------------------------------------------------------
\411\ Internal Revenue Service. (2023). SOI Tax Stats--
Corporation Income Tax Returns Complete Report (Publication 16).
Available at: https://www.irs.gov/statistics/soi-tax-stats-corporation-income-tax-returns-complete-report-publication-16.
\412\ Table 1 of the IRS report provides total receipts, net
income, and deficits by industry. For each industry, the Department
calculated the profit-to-revenue ratio as net income (column (7))
less any deficit (column (8)) divided by total receipts (column
(3)). Profits were then calculated as revenues multiplied by profit-
to-revenue ratios. Profits could not be used directly because they
are limited to only active corporations.
\413\ In particular, a basic model of competitive product
markets would predict that highly competitive industries with lower
rates of return would adjust to increases in the marginal cost of
labor arising from the rule through an overall, industry-level
increase in prices and a reduction in quantity demanded based on the
relative elasticities of supply and demand. Alternatively, more
concentrated markets with higher rates of return would be more
likely to adjust through some combination of price increases and
profit reductions based on elasticities as well as interfirm pricing
responses.
Table 27--Annual Transfers, Total Costs, and Transfers and Costs as Percent of Payroll, Revenue, and Profit by Industry, Year 1
--------------------------------------------------------------------------------------------------------------------------------------------------------
Costs and Costs and transfers as percent of:
Industry transfers per Payroll Revenue -----------------------------------------------
entity (billions) \a\ (billions) \a\ Payroll \a\ Revenue \a\ Profit \a\
--------------------------------------------------------------------------------------------------------------------------------------------------------
All..................................................... $301.7 $9,140.5 $48,894.1 0.027 0.005 0.052
Agriculture, forestry, fishing, & hunting............... 323.5 8.3 41.0 0.089 0.018 0.709
Mining.................................................. 233.0 59.7 476.5 0.009 0.001 \b\
Construction............................................ 163.5 471.2 2,346.7 0.026 0.005 0.090
Manufacturing........................................... 726.1 805.8 6,522.0 0.026 0.003 0.030
Wholesale trade......................................... 228.1 512.7 10,287.6 0.017 0.001 0.020
Retail trade............................................ 277.4 524.6 5,773.6 0.055 0.005 0.154
Transportation & utilities.............................. 300.4 369.0 1,719.9 0.023 0.005 0.257
Information............................................. 414.6 421.2 1,860.4 0.016 0.004 0.022
[[Page 62217]]
Financial activities.................................... 314.4 896.4 5,881.0 0.032 0.005 0.023
Professional & business services........................ 330.6 1,888.7 3,451.6 0.025 0.014 0.122
Education............................................... 876.2 168.8 484.3 0.057 0.020 0.310
Healthcare & social services............................ 346.4 1,175.4 2,986.5 0.027 0.011 0.144
Leisure & hospitality................................... 210.1 423.4 1,429.5 0.044 0.013 0.158
Other services.......................................... 136.3 213.5 850.6 0.049 0.012 0.183
Public administration................................... 1,100.1 1,201.8 4,782.8 0.008 0.002 \c\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sources: Pooled CPS data for 2020-2022 adjusted to reflect 2022. Private sector payroll and revenue data from 2017 SUSB. State and local payroll and
revenue data from State and Local Government Finances 2020 are used for the Public Administration industry. Profit-to-revenue data from the Internal
Revenue Service 2019. Inflated to $2022 using GDP deflator.
\a\ Payroll and revenue data exclude the Federal Government. Profit-to-revenue data limited to active corporations. Regulatory familiarization costs,
payrolls, and revenues exclude 13,981 establishments whose industry is ``not classified.'' Because transfer payments include all workers, the
estimates of costs and transfers as a share of payroll or revenue are slightly overestimated.
\b\ Profits were negative in this industry in this year.
\c\ Profit is not applicable for public administration.
8. Regulatory Alternatives
The Department considered a range of alternatives before selecting
its methods for updating the standard salary level and the HCE
compensation level (see section IV.A.5). As seen in Table 28, the
Department has calculated the salary/compensation levels, the number of
affected workers, and the associated costs and transfers for these
alternative levels.
The Department proposes to update the standard salary level using
earnings for the 35th percentile of full-time salaried workers in the
South Census region, $1,059 per week. The alternative methods
considered for setting the standard salary level are:
Alternative 1: 2004/2019 method--$822 per week--20th
percentile of earnings of nonhourly full-time workers in the South
Census region and in the retail industry nationally.
Alternative 2: Kantor long test method--$925 per week--
10th percentile of earnings of likely exempt workers.
Alternative 3: 2016 method--$1,145 per week--40th
percentile of earnings of nonhourly full-time workers in the South
Census region
Alternative 4: Kantor short test method--$1,378 per week--
Kantor long test level multiplied by 149 percent (the historical
average relationship between the long and short test levels).
The Department considered using the 2004 methodology (the 20th
percentile of full-time salaried white-collar workers in the lowest-
wage Census region (currently the South) and in retail nationally),
which is currently $822 per week ($42,744 per year). This is also the
methodology that the Department used in the 2019 rule.\414\ However,
the salary level produced by the 2004 methodology is below the current
equivalent long test salary level ($925 per week), which the Department
considers to be the lower boundary for an appropriate salary level.
---------------------------------------------------------------------------
\414\ 84 FR 51260.
---------------------------------------------------------------------------
The Department also considered setting the standard salary level at
the long test level ($925 per week or $48,100 per year). Doing so would
ensure the initial screening function of the salary level by restoring
overtime protections to those employees who were consistently excluded
from the EAP exemption under each iteration of the regulations prior to
2019, either by the long test salary level itself, or under the 2004
rule salary level, which was set equivalent to the long test salary
level.\415\ However, as explained above, setting the standard salary
level at the long test level would perpetuate the problems that have
become evident under the 2004 and 2019 rules.
---------------------------------------------------------------------------
\415\ See section IV.A.1.
---------------------------------------------------------------------------
The Department also considered setting the standard salary level at
the 40th earnings percentile of salaried white-collar workers in the
lowest-wage Census Region (currently the South) ($1,145 per week or
$59,540 per year). This salary level is roughly the midpoint between
the long and short test salary level alternatives ($925 per week and
$1,378 per week, respectively). However, the Department is concerned
that this approach could be seen by courts as making salary level
determinative of exemption status for too large a portion of employees,
as this salary level would make the salary paid by the employer
determinative of exemption status for roughly half (47%) of white-
collar employees who earn between the long and short test salary
levels. The Department is also concerned that this approach would
generate the same concerns that led to the district court decision
invalidating the 2016 rule (which adopted the same methodology).
Finally, the Department considered setting the standard salary
level at the current equivalent of the short test salary level ($1,378
per week or $71,656 per year).\416\ This would ensure that all
employees who earn between the long and short test salary levels and
perform substantial amounts of nonexempt work would be entitled to
overtime compensation. However, by making exemption status for all
employees who earn between the long and short test levels depend on the
salary paid by the employer, this approach would prevent employers from
being able to use the EAP exemption for employees earning between these
salary levels who do not perform substantial amounts of nonexempt work
and thus were historically exempt under the long test.
---------------------------------------------------------------------------
\416\ See id.
---------------------------------------------------------------------------
As described above, the Department proposes to update the HCE
compensation level using earnings for the 85th percentile of all full-
time salaried workers nationally, $143,988 per year. The Department
also evaluated the following alternative methods to set the HCE
compensation levels:
HCE alternative 1: 2019 method \417\--$125,268 annually--
80th percentile of earnings of nonhourly full-time workers nationally.
---------------------------------------------------------------------------
\417\ See 81 FR 32429.
---------------------------------------------------------------------------
HCE alternative 2: 2016 method \418\--$172,796 annually--
90th percentile of earnings of nonhourly full-time workers nationally.
---------------------------------------------------------------------------
\418\ See 84 FR 51250.
---------------------------------------------------------------------------
The Department believes that HCE alternative 1 would not produce a
[[Page 62218]]
threshold high enough to reserve the HCE test for employees at the top
of today's economic ladder and ensure that the HCE threshold continues
to appropriately complement the minimal HCE duties test. The Department
also considered setting the HCE threshold at the 90th percentile;
however, the Department is concerned that the resulting level
($172,796) would restrict the use of the HCE exemption for employers in
low-wage regions and industries. The Department believes its proposal
to adjust the HCE total annual compensation threshold to reflect the
85th percentile of earnings of nonhourly full-time workers nationally
strikes the appropriate balance and ensures that the HCE test continues
to serve its intended function as a streamlined alternative for
employees who are highly likely to pass the standard duties test.
Table 28--Updated Standard Salary and HCE Compensation Levels and Alternatives, Affected EAP Workers, Costs, and
Transfers, Year 1
----------------------------------------------------------------------------------------------------------------
Year 1 effects (millions)
Affected EAP -------------------------------
Alternative Salary level workers Adj. &
(1,000s) managerial Transfers
costs
----------------------------------------------------------------------------------------------------------------
Standard Salary Level (Weekly)
----------------------------------------------------------------------------------------------------------------
Alt. #1: 2004/2019 method \a\................... $822 825 $159.0 $170.8
Alt #2: Kantor long test \b\.................... 925 1,773 367.4 456.8
Proposed rule: 35th percentile South \c\........ 1,059 3,399 709.8 980.7
Alt. #3: 2016 method--40th percentile South \c\. 1,145 4,312 955.2 1,415.9
Alt. #4: Kantor short test \d\.................. 1,378 7,640 1,728.3 3,136.6
----------------------------------------------------------------------------------------------------------------
HCE Compensation Level (Annually)
----------------------------------------------------------------------------------------------------------------
HCE alt. #1: 2019 method--80th percentile \e\... 125,268 166 43.1 151.6
Proposed rule: 85th percentile \e\.............. 143,988 249 65.9 253.5
HCE alt. #2: 2016 method--90th percentile \e\... 172,796 295 84.0 330.0
----------------------------------------------------------------------------------------------------------------
Note: Regulatory familiarization costs are excluded because they do not vary based on the selected values of the
salary levels. Additionally, they cannot be disaggregated by exemption type (i.e., standard versus HCE). The
Department requests comment on how to refine familiarization cost estimates in a manner that distinguishes
among regulatory alternatives.
\a\ 20th percentile earnings of nonhourly full-time workers in the South Census region and retail industry
(excludes workers not subject to the FLSA, not subject to the salary level test, and in agriculture or
transportation). Pooled CPS data for 2020-2022 adjusted to reflect 2022.
\b\ 10th percentile earnings of likely exempt workers. Pooled CPS data for 2020-2022 adjusted to reflect 2022.
\c\ Designated percentile of earnings of nonhourly full-time workers in the South Census region (excludes
workers not subject to the FLSA, not subject to the salary level test, and in agriculture or transportation).
CPS 2022 data.
\d\ Kantor short test is set as the long test level multiplied by 149 percent. This is the historical average
relationship between the two levels.
\e\ Designated percentile of earnings of nonhourly full-time workers nationally (excludes workers not subject to
the FLSA, not subject to the salary level test, and in agriculture or transportation). CPS 2022 data.
9. Automatic Updates
Between updates to the standard salary and HCE compensation levels,
nominal wages typically increase, resulting in an increase in the
number of workers qualifying for the EAP exemption, even if there has
been no change in their duties or real earnings. Thus, workers whom
Congress intended to be covered by the minimum wage and overtime pay
provisions of the FLSA may lose those protections. Automatically
updating the salary and compensation levels allows these thresholds to
keep pace with changes in earnings and continue to serve as an
effective dividing line between potentially exempt and nonexempt
workers. Furthermore, automatically updating the salary and
compensation levels will provide employers more certainty in knowing
that these levels will change by smaller amounts on a regular basis,
rather than the more disruptive increases caused by much larger changes
after longer, uncertain increments of time. This would allow firms to
better predict short- and long-term costs and employment needs.
The Department is including in this proposed rule a mechanism for
automatically updating the salary and compensation levels every 3 years
to reflect current earnings. For purposes of this analysis, the
Department assumes that the standard salary would be updated using the
same methodology that the Department proposes to use to set the
standard salary level: the 35th percentile of weekly earnings of full-
time salaried workers in the lowest-wage Census Region (currently the
South). Likewise, the Department assumes that the HCE annual
compensation level would be updated using the same methodology the
Department proposes to use to set this earnings threshold: the 85th
percentile of weekly earnings of full-time salaried workers nationally.
As previously discussed, future automatic updates will set the
earnings thresholds using the most recent 12 months of CPS data
preceding the Department's notice to automatically update the
thresholds. To estimate future thresholds in years when the salary and
compensation levels will be updated, the Department used the historic
geometric growth rate between 2011 and 2021 in (1) the 35th earnings
percentile of full-time salaried workers in the South for the standard
salary level and (2) the 85th earnings percentile of full-time salaried
workers nationally for the HCE compensation level. For example, between
2011 and 2021, the annual growth rate in the 35th percentile of full-
time salaried workers in the South has increased by 2.72 percent. To
estimate the first automatic update salary level of $1,148, the
Department multiplied $1,059 by 1.0272 to the power of three. Figure 5
shows the projected automatic update levels for the first 10 years.
Note that these projections are illustrative estimates based on past
wage growth; the actual level at the time of the update will depend on
the wage growth that occurs between now and the update date. Figure 6
shows the standard salary levels in both nominal and 2022 dollars.
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10. Projections
The Department estimated that in Year 1, 3.6 million EAP workers
would be affected, with about 248,900 of these attributable to the
revised HCE compensation level (Table 29). In Year 10, the number of
affected EAP workers was estimated to equal 5.1 million with 768,700
attributable to the updated HCE compensation level. Average annualized
costs are $664 million and transfers are $1.3 billion using a 7 percent
real discount rate. These projections involved several steps.
1. Use past growth in the earnings distribution to estimate future
salary and compensation levels (see section VII.C.9).
2. Predict workers' earnings, absent a change in the salary levels.
3. Compare workers' predicted earnings to the predicted salary and
compensation levels to estimate affected workers.
4. Project future employment levels.
5. Estimate employer adjustments to hours and pay.
6. Calculate costs and transfers.
[[Page 62221]]
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[[Page 62222]]
Table 29--Projected Costs and Transfers, Standard Salary and HCE Compensation Levels
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Costs (millions $2022) Transfers (millions $2022)
Affected EAP ----------------------------------------------------------------------------------------------------------------
Year workers Regulatory
(millions) familiarization Adjustment \a\ Managerial Total Due to MW Due to OT Total
\a\
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Year 1......................................................... 3.6 $427.2 $240.8 $534.9 $1,202.8 $48.6 $1,185.6 $1,234.2
Year 2......................................................... 3.3 0.0 8.1 500.2 508.3 27.1 921.8 949.0
Year 3......................................................... 3.2 0.0 7.7 470.5 478.2 23.6 891.5 915.1
Year 4......................................................... 4.0 69.1 11.1 561.5 641.6 20.5 1,382.0 1,402.5
Year 5......................................................... 3.8 0.0 8.2 534.0 542.2 23.2 1,212.2 1,235.4
Year 6......................................................... 3.6 0.0 7.2 524.6 531.8 23.0 1,107.3 1,130.3
Year 7......................................................... 4.5 67.1 12.2 620.1 699.3 23.6 1,661.2 1,684.8
Year 8......................................................... 4.3 0.0 7.1 583.1 590.2 19.8 1,467.4 1,487.2
Year 9......................................................... 4.1 0.0 7.9 566.5 574.4 20.1 1,332.6 1,352.8
Year 10........................................................ 5.1 65.1 15.0 667.9 748.0 17.2 1,963.9 1,981.2
Annualized (3% real discount rate)............................. .............. 67.9 35.7 552.8 656.4 25.2 1,292.9 1,318.1
Annualized (7% real discount rate)............................. .............. 75.0 40.0 548.5 663.6 25.9 1,268.5 1,294.3
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ Regulatory familiarization costs occur in years when the salary and compensation levels are updated. Adjustment costs occur in all years when there are newly affected workers.
The Department calculated workers' earnings in future years by
applying the historical wage growth rate in the workers' industry-
occupation to current earnings. The wage growth rate was calculated as
the geometric growth rate in median wages using CPS MORG data for
occupation-industry categories from 2010-2022.\419\ The geometric
growth rate is the constant annual growth rate that when compounded
(applied to the first year's wage, then to the resulting second year's
wage, etc.) yields the last historical year's wage. This rate only
depends on the wage values in the first and last year.\420\
---------------------------------------------------------------------------
\419\ To maximize the number of observations used in calculating
the median wage for each occupation-industry category, 3 years of
data were pooled for each of the endpoint years. Specifically, data
from 2010, 2011, and 2012 (converted to 2011 dollars) were used to
calculate the 2011 median wage and data from 2020, 2021, and 2022
(converted to 2021 dollars) were used to calculate the 2021 median
wage.
\420\ The geometric growth rate may be a flawed measure if
either or both of the endpoint years were atypical; however, in this
instance these values seem typical. An alternative method would be
to use the time series of median wage data to estimate the linear
trend in the values and continue this to project future median
wages. This method may be preferred if either or both of the
endpoint years are outliers, since the trend will be less influenced
by them. However, the linear trend may be flawed if there are
outliers in the interim years. The Department chose to use the
geometric mean because individual year fluctuations are difficult to
predict and applying the geometric growth rate to each year provides
a better estimate of the long-term growth in wages.
---------------------------------------------------------------------------
The geometric wage growth rates per industry-occupation combination
were also calculated from the BLS' Occupational Employment and Wage
Statistics (OEWS) survey. In occupation-industry categories where the
CPS MORG data had an insufficient number of observations to reliably
calculate median wages, the Department used the growth rate in median
wages calculated from the OEWS data.\421\ Any remaining occupation-
industry combinations without sufficient data in either data source
were assigned the median of the growth rates in median wages from the
CPS MORG data.
---------------------------------------------------------------------------
\421\ To lessen small sample bias in the estimation of the
median growth rate, this rate was only calculated using CPS MORG
data when these data contained at least 10 observations in each time
period.
---------------------------------------------------------------------------
The Department compared workers' counter-factual earnings (i.e.,
absent the rulemaking) to the predicted salary levels. If the counter-
factual earnings are below the relevant salary level (i.e., standard or
HCE) then the worker is considered affected. In other words, in each
year affected EAP workers were identified as those who would be exempt
absent the rule change (e.g., would earn at least $684 if exempt under
standard salary level) but have projected earnings in the future year
that are less than the relevant salary level. The projected number of
affected workers also includes workers who were not EAP exempt in the
base year but would have become exempt in the absence of this proposed
rule in Years 2 through 10. For example, a worker who passes the
standard duties test may earn less than $684 in Year 1 but between $684
and the new salary level in subsequent years; such a worker will be
counted as an affected worker in those subsequent years. Additionally,
the number of affected workers is not limited to newly affected
workers. Workers who are affected in a given year may remain affected
in subsequent years (e.g., because they earn between $684 and $1,059 in
years 1, 2, and 3), and continue to be counted as affected.
The projected number of affected workers also accounts for
anticipated employment growth. Employment growth was estimated as the
geometric annual growth rate based on the 10-year employment projection
from BLS' National Employment Matrix (NEM) for 2021 to 2031 within an
occupation-industry category.422 423 The Department applied
these growth rates to the sample weights of the workers to estimate
increased employment levels over time. This is because the Department
cannot introduce new observations to the CPS MORG data to represent the
newly employed.
---------------------------------------------------------------------------
\422\ Bureau of Labor Statistics, Employment Projections
Program. 2021-31 National Employment Matrix. https://www.bls.gov/emp/ind-occ-matrix/matrix.xlsx.
\423\ An alternative method is to spread the total change in the
level of employment over the ten years evenly (constant change in
the number employed). The Department believes that on average
employment is more likely to grow at a constant percentage rate
rather than by a constant level (a decreasing percentage rate).
---------------------------------------------------------------------------
For workers newly affected in Year 2 through Year 10, employers'
wage and hour adjustments due to the rulemaking are generally estimated
as described in section VII.C.4. The only difference is the hours
adjustment now uses a long-run elasticity of labor demand of -0.4.\424\
Employer adjustments are made in the first year the worker is affected
and then applied to all future years in which the worker continues to
be affected (unless the worker switches to a Type 4 worker). Workers'
earnings in predicted years are earnings post employer adjustments,
with overtime pay, and with ongoing wage growth based on historical
growth rates (as described above).
---------------------------------------------------------------------------
\424\ Based on the Department's analysis of the following paper:
Lichter, A., Peichl, A. & Siegloch, A. (2014). The Own-Wage
Elasticity of Labor Demand: A Meta-Regression Analysis. IZA DP No.
7958.
---------------------------------------------------------------------------
The Department quantified three types of direct employer costs in
the 10-
[[Page 62223]]
year projections: (1) regulatory familiarization costs; (2) adjustment
costs; and (3) managerial costs. Section VII.C.3. provides details on
the methodology for estimating these costs. This section only discusses
the aspects specific to projections. Projected costs and transfers were
deflated to 2022 dollars using the Congressional Budget Office's
projections for the CPI-U.\425\
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\425\ Congressional Budget Office. 2023. The Budget and Economic
Outlook: 2023 To 2033. See https://www.cbo.gov/system/files/2023-02/58848-Outlook.pdf.
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Regulatory familiarization costs occur in years when the salary and
compensation levels are updated. Thus, in addition to Year 1, some
regulatory familiarization costs are expected to occur in Year 4, Year
7, and Year 10. The Department assumed 10 minutes per establishment for
time to access and read the published notice in the Federal Register
with the updated standard salary level and HCE compensation level. This
time estimate is low because the majority of establishments will not
have newly affected workers. The time estimate has been increased from
5 minutes in the 2016 rulemaking. In each of these 3 years regulatory
familiarization costs are between $65 and $70 million. Although start-
up firms must become familiar with the FLSA, the difference between the
time necessary for familiarization with the current part 541 exemptions
and those exemptions as modified by this rulemaking is essentially
zero. Therefore, projected regulatory familiarization costs for new
entrants over the next 9 years are zero (although these new entrants
will incur regulatory familiarization costs in years when the salary
and compensation levels are updated).
Adjustment costs are a function of the number of newly affected EAP
workers and would occur in any year in which workers are newly
affected. Adjustment costs would be largest in Year 1, of moderate size
in automatic update years, and smaller in other years. Management costs
would recur each year for all affected EAP workers whose hours are
adjusted. Therefore, managerial costs increase in automatic update
years and then modestly decrease between updates since earnings growth
will cause some workers to no longer be affected in those years.
The Department projected transfers from employers to employees due
to the minimum wage provision and the overtime pay provision. Transfers
to workers from employers due to the minimum wage provision would
decline from $48.6 million in Year 1 to $17.2 million in Year 10 as
increased earnings over time move workers' regular rates of pay above
the minimum wage.\426\ Transfers due to overtime pay should grow
slightly over time because the number of affected workers would
increase, although transfers fall in years between automatic updates.
Transfers to workers from employers due to the overtime pay provision
would increase from $1.2 billion in Year 1 to $2.0 billion in Year 10.
---------------------------------------------------------------------------
\426\ State minimum wages above the Federal level as of January
1, 2022 were incorporated and used for projected years. Increases in
minimum wages were not projected. If state or Federal minimum wages
increase over the next 10 years, then estimated projected minimum
wage transfers would be underestimated.
---------------------------------------------------------------------------
The Department compared projected impacts with and without
automatic updating (Table 30). Projections without automatic updating
are shown so impacts of the initial increase and subsequent increases
can be disaggregated. With triennial automatic updating, the number of
affected EAP workers would increase from 3.6 million to 5.1 million
over 10 years. Conversely, in the absence of automatic updating, the
number of affected EAP workers is projected to decline from 3.6 million
in Year 1 to 2.3 million in Year 10. As shown in Figure 9, the number
of affected workers decreases from year to year between automatic
updates as the real value of the salary and compensation levels
decrease, and then increases in update years.
Regarding costs, regulatory familiarization costs are lower without
automatic updating because, in the absence of automatic updating,
employers would not need to familiarize themselves with updated salary
and compensation levels every 3 years. Adjustment costs and managerial
costs are a function of the number of affected EAP workers and so will
be higher with automatic updating. Average annualized direct costs
would be $663.6 million with automatic updating and $520.4 million
without automatic updating. Transfers are also a function of the number
of affected workers and hence are lower without automatic updating.
Average annualized transfers would be $1.3 billion with automatic
updating and $868.2 million without automatic updating. Table 30 shows
aggregated costs and transfers over the 10-year horizon.
BILLING CODE 4510-27-P
[[Page 62224]]
[GRAPHIC] [TIFF OMITTED] TP08SE23.012
BILLING CODE 4510-27-C
Table 30--Comparison of Projected Costs and Transfers With and Without Automatic Updating
--------------------------------------------------------------------------------------------------------------------------------------------------------
Affected EAP workers Costs (millions $2022) Transfers (millions $2022)
(millions) ---------------------------------------------------------------
Year --------------------------------
Without With updates Without With updates Without
With updates updates updates updates
--------------------------------------------------------------------------------------------------------------------------------------------------------
Year 1.................................................. 3.6 3.6 $1,202.8 $1,202.8 $1,234.2 $1,234.2
Year 2.................................................. 3.3 3.3 508.3 508.3 949.0 949.0
Year 3.................................................. 3.2 3.2 478.2 478.2 915.1 915.1
Year 4.................................................. 4.0 3.0 641.6 442.4 1,402.5 860.7
Year 5.................................................. 3.8 2.8 542.2 421.7 1,235.4 823.4
Year 6.................................................. 3.6 2.7 531.8 400.5 1,130.3 800.9
Year 7.................................................. 4.5 2.5 699.3 374.3 1,684.8 769.9
Year 8.................................................. 4.3 2.4 590.2 357.6 1,487.2 711.3
Year 9.................................................. 4.1 2.4 574.4 343.4 1,352.8 677.9
Year 10................................................. 5.1 2.3 748.0 322.5 1,981.2 646.8
Annualized (3% real discount rate)...................... .............. .............. 656.4 500.2 1,318.1 851.6
Annualized (7% real discount rate)...................... .............. .............. 663.6 520.4 1,294.3 868.2
--------------------------------------------------------------------------------------------------------------------------------------------------------
VIII. Initial Regulatory Flexibility Analysis (IRFA)
The Regulatory Flexibility Act of 1980 (RFA) as amended by the
Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA),
hereafter jointly referred to as the RFA, requires that an agency
prepare an initial regulatory flexibility analysis (IRFA) when
proposing, and a final regulatory flexibility analysis (FRFA) when
issuing, regulations that will have a significant economic impact on a
substantial number of small entities. The Department has determined
that this rulemaking is economically significant. This section (1)
provides an overview of the objectives of this proposed rule; (2)
estimates the number of affected small entities and employees; (3)
discusses reporting, recordkeeping, and other compliance requirements;
(4) presents the steps the Department took to minimize the significant
economic impact on small entities; and (5) declares that it is unaware
of any relevant Federal rules that may duplicate, overlap, or conflict
with this proposed rule.
A. Objectives of, and Need for, the Proposed Rule
The FLSA requires covered employers to: (1) pay employees who are
covered and not exempt from the Act's requirements not less than the
Federal
[[Page 62225]]
minimum wage for all hours worked and overtime premium pay at a rate of
not less than one and one-half times the employee's regular rate of pay
for all hours worked over 40 in a workweek, and (2) make, keep, and
preserve records of the persons employed by the employer and of the
wages, hours, and other conditions and practices of employment. The
FLSA provides exemptions from the Act's minimum wage and overtime pay
provisions, including one for bona fide executive, administrative, and
professional employees, as those terms are ``defined and delimited'' by
the Department.\427\ The Department's regulations implementing this
white-collar exemption are codified at 29 CFR part 541.
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\427\ 29 U.S.C. 213(a)(1).
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To qualify for the EAP exemption under the Department's
regulations, the employee generally must meet three criteria: (1) the
employee must be paid a predetermined and fixed salary that is not
subject to reduction because of variations in the quality or quantity
of work performed (the salary basis test); (2) the amount of salary
paid must meet a minimum specified amount (the salary level test); and
(3) the employee's job duties must primarily involve executive,
administrative, or professional duties as defined by the regulations
(the duties test). In 2004, the Department revised its regulations to
include a highly compensated employee test with a higher salary
threshold and a minimal duties test.\428\ The Department has
periodically updated the regulations governing the white-collar
exemptions since the FLSA's enactment in 1938. Most recently, the 2019
rule updated the standard salary level test to $684 per week and the
HCE compensation level to $107,432 annually.
---------------------------------------------------------------------------
\428\ Sec. 541.601.
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The goal of this rulemaking is not only to update the single
standard salary level to account for earnings growth since the 2019
rule, but also to build on lessons learned in the Department's most
recent rulemakings to more effectively define and delimit employees
working in a bona fide EAP capacity. As explained in greater detail in
sections III and IV.A., above, setting the standard salary level at or
below the long test salary level, as the 2004 and 2019 rules did,
results in the exemption of lower-salaried employees who traditionally
were entitled to overtime protection under the long test either because
of their low salary or because they perform large amounts of nonexempt
work, in effect significantly broadening the exemption compared to the
two-test system. Setting the salary level at the lower end of the
historic range of short test salary levels, as the 2016 rule did, would
have restored overtime protections to those employees who perform
substantial amounts of nonexempt work and earned between the long test
salary level and the low end of the short test salary range. However,
it would also have resulted in denying employers the use of the
exemption for lower-salaried employees who traditionally were not
entitled to overtime compensation under the long test, which raised
concerns that the Department was in effect narrowing the exemption. By
setting a salary level above what would currently be the equivalent of
the long test salary level, the proposal would restore the right to
overtime pay for salaried white-collar employees who prior to the 2019
rule were always considered nonexempt if they earned below the long
test (or long test-equivalent) salary level and ensure that fewer lower
paid white-collar employees who perform significant amounts of
nonexempt work are included in the exemption. At the same time, by
setting it below what would currently be the equivalent of the short
test salary level, the proposal would allow employers to continue to
use the exemption for many lower paid white-collar employees who were
made exempt under the 2004 standard duties test. As such, the proposed
salary level would also more reasonably distribute between employees
and their employers what the Department now understands to be the
impact of the shift from a two-test to a one-test system on employees
earning between the long and short test salary levels.
As the Department has previously noted, the amount paid to an
employee is ``a valuable and easily applied index to the `bona fide'
character of the employment for which the exemption is claimed,'' as
well as the ``principal[ ]'' ``delimiting requirement'' ``prevent[ing]
abuse'' of the exemption.\429\ Additionally, the salary level test
facilitates application of the exemption by saving employees and
employers from having to apply the more time-consuming duties analysis
to a large group of employees who will not pass it. For these reasons,
the salary level test has been a key part of how the Department defines
and delimits the EAP exemption since the beginning of its rulemaking on
the EAP exemption.\430\ At the same time, the salary test's role in
defining and delimiting the scope of the EAP exemption must allow for
appropriate examination of employee duties.\431\ Under the Department's
proposal, duties would continue to determine the exemption status for
most salaried white-collar employees, addressing the legal concerns
that have been raised about excluding from the EAP exemption too many
white-collar employees solely based on their salary level.
---------------------------------------------------------------------------
\429\ Stein Report at 19, 24; see also 81 FR 32422.
\430\ See 84 FR 51237.
\431\ See id. at 51238.
---------------------------------------------------------------------------
The Department also proposes to update the HCE total annual
compensation requirement to the annualized weekly earnings for the 85th
percentile of full-time salaried workers nationally ($143,988 in 2022).
Though not as high a percentile as the HCE threshold initially adopted
in 2004, which covered 93.7 percent of all full-time salaried
workers,\432\ the Department's proposed increase to the HCE threshold
would ensure it continues to serve its intended function, because the
HCE total annual compensation level would be high enough to exclude all
but those employees at the very top of the economic ladder.
---------------------------------------------------------------------------
\432\ See 69 FR 22169 (Table 3).
---------------------------------------------------------------------------
The Department is also proposing to apply the standard salary level
to all territories that are subject to the Federal minimum wage, and to
update the special salary levels for American Samoa and the motion
picture industry in relation to the new standard salary level. Having
not increased these levels since 2004, there is a need to increase the
salary levels in U.S. territories, particularly for employees in those
territories that are subject to the Federal minimum wage.
In its three most recent part 541 rulemakings, the Department has
expressed its commitment to keeping the earnings thresholds up to date
to ensure that they remain effective in helping differentiate between
exempt and nonexempt employees. Long intervals between rulemakings have
resulted in eroded earnings thresholds based on outdated earnings data
that were ill-equipped to help identify bona fide EAP employees. This
rulemaking is motivated in part by the need to keep the part 541
earnings thresholds up to date. Based on its long experience with
updating the salary levels, the Department has determined that adopting
a regulatory provision for automatically updating the salary levels,
with an exception for pausing future updates under certain conditions,
is the most viable and efficient way to ensure the EAP exemption
earnings thresholds keep pace with changes in employee
[[Page 62226]]
pay and thus remain effective in helping determine exemption status.
Accordingly, the Department is including in this proposed rule a
mechanism for automatically updating the salary and compensation levels
every 3 years to reflect current earnings. As explained in greater
detail in section IV.D., employees and employers alike would benefit
from the certainty and stability of regularly scheduled updates using a
set methodology.
B. Number of Affected Small Entities
1. Definition of Small Entity
The RFA defines a ``small entity'' as (1) a small not-for-profit
organization, (2) a small governmental jurisdiction, or (3) a small
business. The Department used the entity size standards defined by SBA
and in effect as of 2019, to classify entities as small or large.\433\
The most recent size standards were released in 2022 and use the 2022
NAICS. However, because the data used by the Department to estimate the
number of small entities uses the 2017 NAICS, the Department used the
2019 standards instead of the 2022 standards.\434\
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\433\ See https://www.sba.gov/sites/default/files/2019-08/SBA%20Table%20of%20Size%20Standards_Effective%20Aug%2019%2C%202019_Rev.pdf.
\434\ The SBA size standard changes in 2022 primarily adjusted
the standards to the 2022 NAICS, these changes were not substantive.
https://www.govinfo.gov/content/pkg/FR-2022-09-29/pdf/2022-20513.pdf.
---------------------------------------------------------------------------
SBA establishes standards for 6-digit NAICS industry codes, and
standard size cutoffs are typically based on either the average number
of employees, or average annual receipts. However, some exceptions
exist, the most notable being that depository institutions (including
credit unions, commercial banks, and non-commercial banks) are
classified by total assets and small governmental jurisdictions are
defined as areas with populations of less than 50,000.\435\
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\435\ See http://www.sba.gov/advocacy/regulatory-flexibility-act
for details.
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2. Number of Small Entities and Employees
The primary data source used to estimate the number of small
entities and employment in these entities is the Statistics of U.S.
Businesses (SUSB). Alternative sources were used for industries with
asset thresholds (credit unions,\436\ commercial banks and savings
institutions,\437\ agriculture \438\), and public administration.\439\
The Department used 2017 data, when possible, to align with the use of
2017 SUSB data. Private households are excluded from the analysis due
to lack of data.
---------------------------------------------------------------------------
\436\ National Credit Union Association. (2018). 2018 Year End
Statistics for Federally Insured Credit Unions. Available at:
https://www.cuna.org/advocacy/credit-union_-economic-data/data_-
statistics/credit-union-profile-reports.html.
\437\ Federal Depository Insurance Corporation. (2018).
Quarterly Financial Reports-Statistics On Depository Institutions
(SDI). Available at: https://www.fdic.gov/foia/ris/id-sdi/index.html. Data are from 12/31/17.
\438\ United States Department of Agriculture. (2019). 2017
Census of Agriculture: United States Summary and State Data: Volume
1, Geographic Area Series, Part 51. Available at: https://www.nass.usda.gov/Publications/AgCensus/2017/Full_Report/Volume_1,_Chapter_1_US/usv1.pdf.
\439\ Census of Governments. 2017. Available at: https://www.census.gov/data/tables/2017/econ/gus/2017-governments.html.
---------------------------------------------------------------------------
For each industry, the SUSB 2017 tabulates employment,
establishment, and firm counts by both enterprise employment size
(e.g., 0-4 employees, 5-9 employees) and receipt size (e.g., less than
$100,000, $100,000-$499,999).\440\ Although 2020 SUSB data are
available, these data do not disaggregate entities by revenue sizes.
The Department combined these data with the SBA size standards to
estimate the proportion of firms and establishments in each industry
that are considered small, and the proportion of workers employed by a
small entity. The Department classified all firms and establishments
and their employees in categories below the SBA cutoff as small.\441\
If a cutoff fell in the middle of a category, the Department assumed a
uniform distribution of employees across that bracket to determine what
proportion of establishments should be classified as small.\442\ The
estimated share of establishments that were small in 2017 was applied
to the more recent 2020 SUSB data on the number of small establishments
to determine the number of small entities.\443\
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\440\ The SUSB defines employment as of March 12th.
\441\ The Department's estimates of the numbers of affected
small entities and affected workers who are employees of small
entities includes entities not covered by the FLSA and thus are
likely overestimates. The Department had no credible way to estimate
which enterprises with annual revenues below $500,000 also did not
engage in interstate commerce and hence are not subject to the FLSA.
\442\ The Department assumed that the small entity share of
credit card issuing and other depository credit intermediation
institutions (which were not separately represented in FDIC asset
data), is similar to that of commercial banking and savings
institutions.
\443\ Statistics of U.S. Businesses 2020, https://www.census.gov/programs-surveys/susb.html.
---------------------------------------------------------------------------
The Department also estimated the number of small establishments
and their employees by employer type (nonprofit, for-profit,
government). This calculation is similar to the calculation of the
number of establishments by industry but with different data. Instead
of using data by industry, the Department used SUSB data by Legal Form
of Organization for nonprofit and for-profit establishments. The
estimated share of establishments that were calculated as small with
the 2017 data was then applied to the 2020 SUSB counts. For
governments, the Department used the number of governments reported in
the 2017 Census of Governments.\444\
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\444\ Census of Governments 2017. Available at https://www.census.gov/programs-surveys/cog.html.
---------------------------------------------------------------------------
Table 31 presents the estimated number of establishments/
governments and small establishments/governments in the U.S.
(hereafter, referred to as ``entities'').\445\ The numbers in the
following tables are for Year 1; projected impacts are considered
later. The Department found that of the 8.1 million entities, 80
percent (6.5 million) are small by SBA standards. These small entities
employ 53.6 million workers, about 37 percent of workers (excluding
self-employed, unpaid workers, and members of the armed forces). They
also account for roughly 35 percent of total payroll ($3.5 trillion of
$10.1 trillion).\446\
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\445\ SUSB reports data by ``enterprise'' size designations (a
business organization consisting of one or more domestic
establishments that were specified under common ownership or
control). However, the number of enterprises is not reported for the
size designations. Instead, SUSB reports the number of
``establishments'' (individual plants, regardless of ownership) and
``firms'' (a collection of establishments with a single owner within
a given state and industry) associated with enterprises size
categories. Therefore, numbers in this analysis are for the number
of establishments associated with small enterprises, which may
exceed the number of small enterprises. The Department based the
analysis on the number of establishments rather than firms for a
more conservative estimate (potential overestimate) of the number of
small businesses.
\446\ Since information is not available on employer size in the
CPS MORG, respondents were randomly assigned as working in a small
business based on the SUSB probability of employment in a small
business by detailed Census industry. Annual payroll was estimated
based on the CPS weekly earnings of workers by industry size.
---------------------------------------------------------------------------
Although the Department used 6-digit NAICS to determine the number
of small entities and the associated number of employees, the following
tables aggregate findings to 27 industry categories. This was the most
detailed level available while maintaining adequate sample sizes.\447\
The Department started with the 51-industry breakdown and aggregated
where necessary to obtain adequate sample sizes.
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\447\ The Department required at least 15 affected workers
(i.e., observations) in small entities in Year 1.
[[Page 62227]]
Table 31--Number of Entities and Employees by SBA Size Standards, by Industry and Employer Type
--------------------------------------------------------------------------------------------------------------------------------------------------------
Entities (1,000s) Workers (1,000s) \a\ Annual payroll (billions)
-----------------------------------------------------------------------------------------------
Industry/employer type Small business
Total Small Total employed Total Small
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total............................................... 8,090.3 6,459.6 143,444.4 53,585.6 $10,054.5 $3,535.6
--------------------------------------------------------------------------------------------------------------------------------------------------------
Industry \b\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Agriculture, forestry, fishing, and hunting............. 22.7 18.9 1,364.4 724.4 62.7 34.6
Mining.................................................. 23.9 19.2 620.8 285.4 66.0 30.6
Construction............................................ 753.3 726.7 8,957.5 5,415.9 608.9 369.2
Manufacturing--durable goods............................ 175.2 160.4 9,694.4 4,506.7 785.7 350.4
Manufacturing--non-durable goods........................ 108.3 96.4 5,522.6 2,649.3 416.7 187.9
Wholesale trade......................................... 391.1 301.5 3,231.4 1,354.8 249.6 101.8
Retail trade............................................ 1,036.8 661.3 15,430.8 4,804.9 769.4 258.8
Transportation and warehousing.......................... 257.8 203.2 7,152.0 1,746.5 439.5 106.7
Utilities............................................... 19.5 7.8 1,455.4 310.6 137.3 28.3
Information............................................. 160.9 93.2 2,570.4 691.7 254.6 67.5
Finance................................................. 295.5 132.0 4,865.2 902.9 514.9 97.1
Insurance............................................... 181.3 139.7 2,765.4 585.4 $245.3 $51.6
Real estate and rental and leasing...................... 437.7 339.0 2,308.4 1,223.1 173.0 92.7
Professional and technical services..................... 943.2 841.5 11,575.6 5,104.8 1,291.5 555.8
Management, administrative and waste management services 483.5 397.8 5,377.8 2,338.5 284.0 111.6
Educational services.................................... 110.1 97.6 14,093.6 3,546.7 955.6 223.2
Hospitals............................................... 7.1 1.4 7,820.6 282.1 632.3 21.2
Health care services, except hospitals.................. 736.1 567.4 10,187.6 4,466.2 631.5 271.6
Social assistance....................................... 185.0 149.8 2,938.8 1,590.5 138.0 71.4
Arts, entertainment, and recreation..................... 151.9 138.4 2,381.3 1,185.8 120.8 59.7
Accommodation........................................... 69.2 58.1 1,048.8 408.3 49.3 19.2
Food services and drinking places....................... 664.7 516.6 8,222.4 4,697.9 263.8 151.3
Repair and maintenance.................................. 216.1 198.6 1,655.6 1,171.9 90.0 63.3
Personal and laundry services........................... 248.6 221.5 1,520.5 1,184.7 62.4 47.7
Membership associations and organizations............... 306.6 294.4 2,019.0 1,399.8 138.0 93.6
Public administration \c\............................... 90.1 65.7 8,032.3 1,006.6 654.4 68.5
--------------------------------------------------------------------------------------------------------------------------------------------------------
Employer Type
--------------------------------------------------------------------------------------------------------------------------------------------------------
Nonprofit, private...................................... 596.3 504.5 10,318.0 3,876.8 741.4 249.6
For profit, private..................................... 7,403.9 5,874.3 110,919.2 46,388.3 7,688.9 3,072.6
Government (state and local)............................ 90.1 65.7 18,041.2 3,320.6 1,241.3 213.3
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Establishment data are from SUSB 2020; worker and payroll data from pooled CPS MORG data for 2020-2022 adjusted to reflect 2022.
\a\ Excludes the self-employed, unpaid workers, and workers in private households.
\b\ Summation across industries may not add to the totals reported due to suppressed values and some entities not reporting an industry.
\c\ Entity number represents the total number of governments, including state and local. Data from Census of Governments, 2017.
Estimates are not limited to entities subject to the FLSA because
the Department cannot estimate which enterprises do not meet the
enterprise coverage requirements because of data limitations. Although
not excluding such entities and associated workers only affects a small
percentage of workers generally, it may have a larger effect (and
result in a larger overestimate) for non-profits, because revenue from
charitable activities is not included when determining enterprise
coverage.
3. Number of Affected Small Entities and Employees
The calculation of the number of affected EAP workers was explained
in detail in section VII.B. Here, the Department focuses on how these
workers were allocated to either small or large entities. To estimate
the probability that an exempt EAP worker in the CPS data is employed
by a small entity, the Department assumed this probability is equal to
the proportion of all workers employed by small entities in the
corresponding industry. That is, if 50 percent of workers in an
industry are employed in small entities, then on average small entities
are expected to employ one out of every two exempt EAP workers in this
industry.\448\ The Department applied these probabilities to the
population of exempt EAP workers to find the number of workers (total
exempt EAP workers and total affected by the rule) that small entities
employ. No data are available to determine whether small businesses (or
small businesses in specific industries) are more or less likely than
non-small businesses to employ exempt EAP workers or affected EAP
workers. Therefore, the best assumption available is to assign the same
rates to all small and non-small businesses.\449\ \450\
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\448\ The Department used CPS microdata to estimate the number
of affected workers. This was done individually for each observation
in the relevant sample by randomly assigning them a small business
status based on the best available estimate of the probability of a
worker to be employed in a small business in their respective
industry.
\449\ A strand of literature indicates that small businesses
tend to pay lower wages than larger businesses. This may imply that
workers in small businesses are more likely to be affected than
workers in large businesses; however, the literature does not make
clear what the appropriate alternative rate for small businesses
should be.
\450\ Workers are designated as employed in a small business
based on their industry of employment. The share of workers
considered small in nonprofit, for profit, and government entities
is therefore the weighted average of the shares for the industries
that compose these categories.
---------------------------------------------------------------------------
The Department estimated that small entities employ 1.3 million of
the 3.6 million affected workers (36.8 percent) (Table 32). This
composes 2.5 percent of the 53.6 million workers that small entities
employ. The sectors with the highest total number of affected workers
employed by small entities are professional and technical services
(238,000); health care services, except hospitals (120,000); and retail
trade (103,000). The sectors with the largest percent of workers
employed by small entities who are affected include:
[[Page 62228]]
insurance (6.8 percent); finance (5.4 percent); and information (4.9
percent).
Table 32--Number of Affected Workers Employed by Small Entities, by Industry and Employer Type
----------------------------------------------------------------------------------------------------------------
Workers (1,000s) Affected workers (1,000s) \a\
---------------------------------------------------------------
Industry Small business Small business
Total employed Total employed
----------------------------------------------------------------------------------------------------------------
Total....................................... 143,444.4 53,585.6 3,648.3 1,341.1
----------------------------------------------------------------------------------------------------------------
Industry
----------------------------------------------------------------------------------------------------------------
Agriculture, forestry, fishing, and hunting..... 1,364.4 724.4 12.3 6.8
Mining.......................................... 620.8 285.4 12.5 5.1
Construction.................................... 8,957.5 5,415.9 154.4 93.4
Manufacturing--durable goods.................... 9,694.4 4,506.7 203.8 94.0
Manufacturing--non-durable goods................ 5,522.6 2,649.3 113.3 53.6
Wholesale trade................................. 3,231.4 1,354.8 103.9 50.4
Retail trade.................................... 15,430.8 4,804.9 308.7 103.1
Transportation and warehousing.................. 7,152.0 1,746.5 87.8 29.1
Utilities....................................... 1,455.4 310.6 31.1 6.0
Information..................................... 2,570.4 691.7 118.6 33.9
Finance......................................... 4,865.2 902.9 241.6 49.1
Insurance....................................... 2,765.4 585.4 170.7 39.9
Real estate and rental and leasing.............. 2,308.4 1,223.1 68.3 34.7
Professional and technical services............. 11,575.6 5,104.8 572.2 238.2
Management, administrative and waste management 5,377.8 2,338.5 115.2 42.1
services.......................................
Educational services............................ 14,093.6 3,546.7 201.8 44.2
Hospitals....................................... 7,820.6 282.1 212.6 5.6
Health care services, except hospitals.......... 10,187.6 4,466.2 290.8 120.4
Social assistance............................... 2,938.8 1,590.5 123.5 72.3
Arts, entertainment, and recreation............. 2,381.3 1,185.8 92.9 48.6
Accommodation................................... 1,048.8 408.3 15.5 6.1
Food services and drinking places............... 8,222.4 4,697.9 75.1 42.4
Repair and maintenance.......................... 1,655.6 1,171.9 19.8 14.2
Personal and laundry services................... 1,520.5 1,184.7 19.6 12.5
Membership associations and organizations....... 2,019.0 1,399.8 99.4 66.0
Public administration........................... 8,032.3 1,006.6 182.4 29.5
----------------------------------------------------------------------------------------------------------------
Employer Type
----------------------------------------------------------------------------------------------------------------
Nonprofit, private.............................. 10,318.0 3,876.8 381.5 162.1
For profit, private............................. 110,919.2 46,388.3 2,868.4 1,119.4
Government (state and local).................... 18,041.2 3,320.6 398.3 59.7
----------------------------------------------------------------------------------------------------------------
Note: Worker data are from pooled CPS MORG data for 2020-2022 adjusted to reflect 2022.
\a\ Estimation of affected workers employed by small entities was done at the most detailed industry level
available. Therefore, at the more aggregated industry level shown in this table, the ratio of small business
employed to total employed does not equal the ratio of affected small business employed to total affected for
each industry, nor does it equal the ratio for the national total because relative industry size, employment,
and small business employment differs from industry to industry.
Because no information is available on how affected workers would
be distributed among small entities, the Department estimated a range
of effects. At one end of this range, the Department assumed that each
small entity employs no more than one affected worker, meaning that at
most 1.3 million of the 6.5 million small entities will employ an
affected worker. Thus, these assumptions provide an upper-end estimate
of the number of affected small entities. (However, it provides a
lower-end estimate of the effect per small entity because costs are
spread over a larger number of entities; the impacts experienced by an
entity would increase as the share of its workers that are affected
increases.) For the purpose of estimating a lower-range number of
affected small entities, the Department used the average size of a
small entity as the typical size of an affected small entity, and
assumed all workers are affected. This can be considered an
approximation of all employees at an entity affected.\451\ The average
number of employees in a small entity is the number of workers that
small entities employ divided by the total number of small
establishments in that industry. The number of affected employees at
small businesses is then divided by this average number of employees to
calculate 179,700 affected small entities.
---------------------------------------------------------------------------
\451\ This is not the true lower bound estimate of the number of
affected entities. Strictly speaking, a true lower bound estimate of
the number of affected small entities would be calculated by
assuming all employees in the largest small entity are affected. For
example, if the SBA standard is that entities with 500 employees are
``small,'' and 1,350 affected workers are employed by small entities
in that industry, then the smallest number of entities that could be
affected in that industry (the true lower bound) would be three.
However, because such an outcome appears implausible, the Department
determined a more reasonable lower estimate would be based on
average establishment size.
---------------------------------------------------------------------------
Table 33 summarizes the estimated number of affected workers that
small entities employ and the expected range for the number of affected
small entities by industry. The Department estimated that the rule
would affect 1.3 million workers who are employed by somewhere between
179,700 and 1.3
[[Page 62229]]
million small entities; this comprises from 2.8 percent to 20.8 percent
of all small entities. It also means that from 5.1 million to 6.3
million small entities would incur no more than minimal regulatory
familiarization costs (i.e., 6.5 million minus 1.3 million equals 5.1
million; 6.5 million minus 179,700 equals 6.3 million, using rounded
values). The table also presents the average number of affected
employees per establishment using the method in which all employees at
the establishment would be affected. For the other method, by
definition, there would always be one affected employee per
establishment. Also displayed is the average payroll per small
establishment by industry (based on both affected and non-affected
small entities), calculated by dividing total payroll of small
businesses by the number of small businesses (Table 31) (applicable to
both methods).
Table 33--Number of Small Affected Entities and Employees by Industry and Employer Type
----------------------------------------------------------------------------------------------------------------
Number of small affected Per entity
Affected entities (1,000s) \a\ -------------------------------
workers in --------------------------------
Industry small entities One affected All employees Affected Average annual
(1,000s) employee per at entity employees \a\ payroll
entity \b\ affected \c\ ($1,000s)
----------------------------------------------------------------------------------------------------------------
Total....................... 1,341.1 1,341.1 179.7 7.5 $547.3
----------------------------------------------------------------------------------------------------------------
Industry
----------------------------------------------------------------------------------------------------------------
Agriculture, forestry, fishing, 6.8 6.8 0.2 38.4 1,833.6
and hunting....................
Mining.......................... 5.1 5.1 0.3 14.9 1,594.3
Construction.................... 93.4 93.4 12.5 7.5 508.1
Manufacturing--durable goods.... 94.0 94.0 3.3 28.1 2,184.4
Manufacturing--non-durable goods 53.6 53.6 2.0 27.5 1,949.1
Wholesale trade................. 50.4 50.4 11.2 4.5 337.7
Retail trade.................... 103.1 103.1 14.2 7.3 391.3
Transportation and warehousing.. 29.1 29.1 3.4 8.6 525.0
Utilities....................... 6.0 6.0 0.2 39.9 3,634.2
Information..................... 33.9 33.9 4.6 7.4 723.9
Finance......................... 49.1 49.1 7.2 6.8 735.5
Insurance....................... 39.9 39.9 9.5 4.2 369.4
Real estate and rental and 34.7 34.7 9.6 3.6 273.6
leasing........................
Professional and technical 238.2 238.2 39.3 6.1 660.5
services.......................
Management, administrative and 42.1 42.1 7.2 5.9 280.5
waste management services......
Educational services............ 44.2 44.2 1.2 36.3 2,286.8
Hospitals....................... 5.6 \d\ 4.2 0.0 201.6 15,137.3
Health care services, except 120.4 120.4 15.3 7.9 478.7
hospitals......................
Social assistance............... 72.3 72.3 6.8 10.6 476.7
Arts, entertainment, and 48.6 48.6 5.7 8.6 431.4
recreation.....................
Accommodation................... 6.1 6.1 0.9 7.0 330.8
Food services and drinking 42.4 42.4 4.7 9.1 292.9
places.........................
I Repair and maintenance........ 14.2 14.2 2.4 5.9 318.8
Personal and laundry services... 12.5 12.5 2.3 5.3 215.3
Membership associations and 66.0 66.0 13.9 4.8 318.1
organizations..................
Public administration \e\....... 29.5 29.5 1.9 15.3 1,042.9
----------------------------------------------------------------------------------------------------------------
Employer Type
----------------------------------------------------------------------------------------------------------------
Nonprofit, private.............. 162.1 162.1 21.1 7.7 494.8
For profit, private............. 1,119.4 1,119.4 141.8 7.9 523.1
Government (state and local).... 59.7 59.7 1.2 50.5 3,246.6
----------------------------------------------------------------------------------------------------------------
Note: Establishment data are from SUSB 2020; worker and payroll data from pooled CPS MORG data for 2020-2022
adjusted to reflect 2022.
\a\ Estimation of both affected small entity employees and affected small entities was done at the most detailed
industry level available. Therefore, the ratio of affected small entities employees to total small entity
employees for each industry may not match the ratio of small affected entities to total small entities at the
more aggregated industry level presented in the table, nor will it equal the ratio at the national level
because relative industry size, employment, and small business employment differs from industry to industry.
\b\ This method may overestimate the number of affected entities and therefore the ratio of affected workers to
affected entities may be greater than 1-to-1. However, the Department addresses this issue by also calculating
effects based on the assumption that 100 percent of workers at an entity are affected.
\c\ For example, on average, a small entity in the construction industry employs 7.5 workers (5.4 million
employees divided by 726,700 small entities). This method assumes if an entity is affected then all 7.5
workers are affected. Therefore, in the construction industry this method estimates there are 12,500 small
affected entities (93,400 affected small entity workers divided by 7.5).
\d\ Number of entities is smaller than number of affected employees; thus, total number of entities is reported.
\e\ Entity number represents the total number of state and local governments.
4. Impacts to Affected Small Entities
For small entities, the Department estimated various types of
effects, including regulatory familiarization costs, adjustment costs,
managerial costs, and payroll increases borne by employers. The
Department estimated a range for the number of affected small entities
and the impacts they incur. While the upper and lower bounds are likely
over- and under-estimates, respectively, of effects per small entity,
the Department believes that this range of costs and payroll increases
provides
[[Page 62230]]
the most accurate characterization of the effects of the rule on small
employers.\452\ Furthermore, the smaller estimate of the number of
affected entities (i.e., where all employees at each affected employer
are assumed to be affected) will result in the largest costs and
payroll increases per entity as a percent of establishment payroll and
revenue, and the Department expects that many, if not most, entities
will incur smaller costs, payroll increases, and effects relative to
entity size.
---------------------------------------------------------------------------
\452\ As noted previously, these are not the true lower and
upper bounds. The values presented are the highest and lowest
estimates the Department believes are plausible.
---------------------------------------------------------------------------
Parameters that are used in the small business cost analysis for
Year 1 are provided in Table 34, along with summary data of the
impacts. See section C.3 of the Regulatory Impact Analysis for a more
fulsome discussion on these costs.
Table 34--Overview of Parameters Used for Costs to Small Businesses and
the Impacts on Small Businesses
------------------------------------------------------------------------
Small business costs Cost
------------------------------------------------------------------------
Direct and Payroll Costs
------------------------------------------------------------------------
Average total cost per affected entity $4,323.
\a\.
Range of total costs per affected $1,833-$146,781.
entity \a\.
Average percent of revenue per affected 0.16%.
entity.
Average percent of payroll per affected 0.79%.
entity.
------------------------------------------------------------------------
Direct Costs
------------------------------------------------------------------------
Regulatory familiarization: ...............................
Time (first year).................. 1 hour per entity.
Time (update years)................ 10 minutes per entity.
Hourly wage........................ $52.80.
Adjustment: ...............................
Time (first year affected)......... 75 minutes per newly affected
worker.
Hourly wage........................ $52.80.
Managerial: ...............................
Time (weekly)...................... 10 minutes per affected worker
whose hours change.
Hourly wage........................ $83.63.
------------------------------------------------------------------------
Payroll Increases
------------------------------------------------------------------------
Average payroll increase per affected $2,638.
entity \a\.
Range of payroll increases per affected $769-$103,871.
entity \a\.
------------------------------------------------------------------------
\a\ Using the methodology where all employees at an affected small firm
are affected. This assumption generates upper-end estimates. Lower-end
cost estimates are significantly smaller.
The Department expects total direct employer costs would range from
$294.6 million to $356.0 million for affected small entities (i.e.,
those with affected employees) in the first year (an average cost of
between $265 to $1,640 per entity) (Table 35). Small entities that do
not employ affected workers would incur $270.2 million to $331.6
million in regulatory familiarization costs (an average cost of $52.80
per entity). The three industries with the highest costs (professional
and technical services; health care services, except hospitals; and
retail trade) account for about 35 percent of the costs. Hospitals are
expected to incur the largest cost per establishment ($42,900 using the
method where all employees are affected), although the costs are not
expected to exceed 0.3 percent of payroll. The food services and
drinking places industry is expected to experience the largest effect
as a share of payroll (estimated direct costs compose 0.68 percent of
average entity payroll).
Table 35--Year 1 Small Establishment Direct Costs, Total and per Establishment, by Industry and Employer Type
--------------------------------------------------------------------------------------------------------------------------------------------------------
Direct cost to small entities in year 1 \a\
-----------------------------------------------------------------------------------------------
One affected employee All employees affected
Industry -----------------------------------------------------------------------------------------------
Cost per Cost per
Total affected Percent of Total affected Percent of
(millions) \a\ entity annual payroll (millions) \b\ entity annual payroll
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total............................................... $356.0 $265 0.05 $294.6 $1,640 0.30
--------------------------------------------------------------------------------------------------------------------------------------------------------
Industry
--------------------------------------------------------------------------------------------------------------------------------------------------------
Agriculture, forestry, fishing, and hunting............. 1.8 265 0.01 1.5 8,221 0.45
Mining.................................................. 1.4 265 0.02 1.1 3,219 0.20
Construction............................................ 24.8 265 0.05 20.5 1,637 0.32
Manufacturing--durable goods............................ 25.0 265 0.01 20.2 6,025 0.28
Manufacturing--non-durable goods........................ 14.2 265 0.01 11.5 5,895 0.30
Wholesale trade......................................... 13.4 265 0.08 11.3 1,008 0.30
Retail trade............................................ 27.4 265 0.07 22.7 1,598 0.41
Transportation and warehousing.......................... 7.7 265 0.05 6.4 1,880 0.36
[[Page 62231]]
Utilities............................................... 1.6 265 0.01 1.3 8,527 0.23
Information............................................. 9.0 265 0.04 7.4 1,630 0.23
Finance................................................. 13.0 265 0.04 10.8 1,507 0.20
Insurance............................................... 10.6 265 0.07 9.0 943 0.26
Real estate and rental and leasing...................... 9.2 265 0.10 7.9 820 0.30
Professional and technical services..................... 63.2 265 0.04 52.7 1,343 0.20
Management, administrative and waste management services 11.2 265 0.10 9.3 1,303 0.46
Educational services.................................... 11.7 265 0.01 9.5 7,777 0.34
Hospitals............................................... 1.5 265 0.00 1.2 42,910 0.28
Health care services, except hospitals.................. 32.0 265 0.06 26.4 1,726 0.36
Social assistance....................................... 19.2 265 0.06 15.7 2,311 0.48
Arts, entertainment, and recreation..................... 12.9 265 0.06 10.6 1,874 0.43
Accommodation........................................... 1.6 265 0.08 1.3 1,547 0.47
Food services and drinking places....................... 11.2 265 0.09 9.3 1,986 0.68
Repair and maintenance.................................. 3.8 265 0.08 3.1 1,307 0.41
Personal and laundry services........................... 3.3 265 0.13 2.8 1,190 0.55
Membership associations and organizations............... 17.5 265 0.08 14.8 1,064 0.33
Public administration................................... 7.8 265 0.03 6.4 3,311 0.32
--------------------------------------------------------------------------------------------------------------------------------------------------------
Employer Type
--------------------------------------------------------------------------------------------------------------------------------------------------------
Nonprofit, private...................................... 42.6 263 0.05 35.2 1,669 0.34
For profit, private..................................... 344.8 308 0.06 293.1 2,068 0.40
Government (state and local)............................ 16.2 272 0.01 13.1 11,119 0.34
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Pooled CPS data for 2020-2022 adjusted to reflect 2022.
\a\ Direct costs include regulatory familiarization, adjustment, and managerial costs.
\b\ The range of costs per entity depends on the number of affected entities. The minimum assumes that each affected entity has one affected worker
(therefore, the number of affected entities is equal to the number of affected workers). The maximum assumes the share of workers in small entities
who are affected is also the share of small entity entities that are affected.
It is possible that the costs of the proposed rule may be
disproportionately large for small entities, especially because small
entities often have limited human resources personnel on staff.
However, the Department expects that small entities would rely on
compliance assistance materials provided by the Department or industry
associations to become familiar with the final rule once issued.
Additionally, the Department notes that the proposed rule is quite
limited in scope because the changes all relate to the salary component
of the part 541 regulations. Finally, the Department believes that most
entities have at least some nonexempt employees and, therefore, already
have policies and systems in place for monitoring and recording their
hours. The Department believes that applying those same policies and
systems to the workers whose exemption status changes would not be an
unreasonable burden on small businesses.
Average weekly earnings for affected EAP workers in small entities
are expected to increase by about $6.91 per week per affected worker,
using the incomplete fixed-job model \453\ described in section
VII.C.4.iii.\454\ This would lead to $482.2 million in additional
annual wage payments to employees in small entities (less than 0.5
percent of aggregate affected establishment payroll; Table 36). The
largest payroll increases per establishment are expected in hospitals
(up to $103,900 per entity); utilities (up to $20,900 per entity); and
non-durable goods manufacturing (up to $11,700 per entity). However,
average payroll increases per entity would exceed one percent of
average annual payroll in only three sectors: food services and
drinking places (2.5 percent); management, administrative and waste
management services (1.2 percent); and transportation and warehousing
(1.1 percent).
---------------------------------------------------------------------------
\453\ The incomplete fixed-job model reflects the Department's
determination that an appropriate estimate of the impact on the
implicit hourly rate of pay for regular overtime workers should be
determined using the average of Barkume's and Trejo's two estimates
of the incomplete fixed-job model adjustments: a wage change that is
40 percent of the adjustment toward the amount predicted by the
fixed-job model, assuming an initial zero overtime pay premium, and
a wage change that is 80 percent of the adjustment assuming an
initial 28 percent overtime pay premium.
\454\ This is an average increase for all affected workers (both
standard test and HCE), and reconciles to the weighted average of
individual salary changes discussed in the Transfers section.
Table 36--Year 1 Small Establishment Payroll Increases, Total and Per Establishment, by Industry and Employer
Type
----------------------------------------------------------------------------------------------------------------
Increased payroll for small entities in year 1 \a\
-------------------------------------------------------------------------------
One affected employee All employees affected
Industry Total ---------------------------------------------------------------
(millions) Percent of Percent of
Per entity annual payroll Per entity annual payroll
----------------------------------------------------------------------------------------------------------------
Total....................... $482.2 $360 0.07% $2,683 0.49%
----------------------------------------------------------------------------------------------------------------
[[Page 62232]]
Industry
----------------------------------------------------------------------------------------------------------------
Agriculture, forestry, fishing, 0.9 126 0.01 4,837 0.26
and hunting....................
Mining.......................... 1.7 330 0.02 4,918 0.31
Construction.................... 30.0 321 0.07 2,391 0.47
Manufacturing--durable goods.... 31.5 335 0.02 9,423 0.43
Manufacturing--non-durable goods 22.8 426 0.02 11,707 0.60
Wholesale trade................. 24.7 491 0.15 2,206 0.65
Retail trade.................... 51.3 497 0.13 3,613 0.92
Transportation and warehousing.. 20.0 687 0.14 5,907 1.13
Utilities....................... 3.1 524 0.01 20,888 0.57
Information..................... 12.0 353 0.05 2,622 0.36
Finance......................... 15.9 324 0.04 2,214 0.30
Insurance....................... 11.8 297 0.08 1,244 0.34
Real estate and rental and 15.8 456 0.17 1,646 0.60
leasing........................
Professional and technical 77.5 326 0.05 1,975 0.30
services.......................
Management, administrative and 24.4 580 0.21 3,407 1.21
waste management services......
Educational services............ 9.0 204 0.01 7,417 0.32
Hospitals....................... 2.9 515 0.00 103,871 0.69
Health care services, except 38.3 318 0.07 2,502 0.52
hospitals......................
Social assistance............... 10.5 145 0.03 1,539 0.32
Arts, entertainment, and 14.3 295 0.07 2,523 0.58
recreation.....................
Accommodation................... 1.7 279 0.09 1,959 0.59
Food services and drinking 34.2 808 0.28 7,345 2.51
places.........................
Repair and maintenance.......... 7.0 490 0.16 2,893 0.91
Personal and laundry services... 2.8 221 0.11 1,183 0.55
Membership associations and 10.7 162 0.05 769 0.24
organizations..................
Public administration........... 7.3 249 0.02 3,810 0.37
----------------------------------------------------------------------------------------------------------------
Employer Type
----------------------------------------------------------------------------------------------------------------
Nonprofit, private.............. 49.3 304 0.06 2,336 0.47
For profit, private............. 421.3 376 0.07 2,972 0.57
Government (state and local).... 11.6 194 0.01 9,816 0.30
----------------------------------------------------------------------------------------------------------------
Note: Pooled CPS data for 2020-2022 adjusted to reflect 2022.
\a\ Aggregate change in total annual payroll experienced by small entities under the updated salary levels after
labor market adjustments. This amount represents the total amount of (wage) transfers from employers to
employees.
Table 37 presents estimated first year direct costs and payroll
increases combined per entity and the costs and payroll increases as a
percent of average entity payroll. The Department presents only the
results for the upper bound scenario where all workers employed by the
entity are affected. Combined costs and payroll increases per
establishment range from $1,800 in membership associations to $146,800
in hospitals. Combined costs and payroll increases compose more than
two percent of average annual payroll in one sector, food services and
drinking places (3.2 percent).
However, comparing costs and payroll increases to payrolls
overstates the effects on entities because payroll represents only a
fraction of the financial resources available to an establishment. The
Department approximated revenue per affected small establishment by
calculating the ratio of small business revenues to payroll by industry
from the 2017 SUSB data then multiplying that ratio by average small
entity payroll.\455\ Using this approximation of annual revenues as a
benchmark, only one sector would have costs and payroll increases
amounting to close to one percent of revenues, food services and
drinking places (1.0 percent).
---------------------------------------------------------------------------
\455\ The Department used this estimate of revenue, instead of
small business revenue reported directly from the 2017 SUSB so
revenue aligned with payrolls in 2022.
[[Page 62233]]
Table 37--Year 1 Small Establishment Direct Costs and Payroll Increases, Total and Per Entity, by Industry and
Employer Type, Using All Employees in Entity Affected Method
----------------------------------------------------------------------------------------------------------------
Costs and payroll increases for small affected entities, all
employees affected
---------------------------------------------------------------
Industry Percent of
Total Per entity \a\ Percent of estimated
(millions) annual payroll revenues \b\
----------------------------------------------------------------------------------------------------------------
Total....................................... $776.8 $4,323 0.79% 0.16%
----------------------------------------------------------------------------------------------------------------
Industry
----------------------------------------------------------------------------------------------------------------
Agriculture, forestry, fishing, and hunting..... 2.3 13,058 0.71 0.14
Mining.......................................... 2.8 8,136 0.51 0.07
Construction.................................... 50.5 4,028 0.79 0.18
Manufacturing--durable goods.................... 51.7 15,448 0.71 0.15
Manufacturing--non-durable goods................ 34.3 17,601 0.90 0.12
Wholesale trade................................. 36.1 3,214 0.95 0.07
Retail trade.................................... 73.9 5,210 1.33 0.13
Transportation and warehousing.................. 26.4 7,786 1.48 0.35
Utilities....................................... 4.4 29,415 0.81 0.06
Information..................................... 19.4 4,252 0.59 0.17
Finance......................................... 26.7 3,721 0.51 0.15
Insurance....................................... 20.8 2,187 0.59 0.13
Real estate and rental and leasing.............. 23.7 2,466 0.90 0.20
Professional and technical services............. 130.2 3,317 0.50 0.20
Management, administrative and waste management 33.7 4,710 1.68 0.68
services.......................................
Educational services............................ 18.5 15,194 0.66 0.27
Hospitals....................................... 4.1 146,781 0.97 0.41
Health care services, except hospitals.......... 64.7 4,228 0.88 0.37
Social assistance............................... 26.2 3,850 0.81 0.38
Arts, entertainment, and recreation............. 24.9 4,397 1.02 0.33
Accommodation................................... 3.0 3,506 1.06 0.26
Food services and drinking places............... 43.5 9,332 3.19 1.00
Repair and maintenance.......................... 10.1 4,200 1.32 0.37
Personal and laundry services................... 5.5 2,373 1.10 0.39
Membership associations and organizations....... 25.4 1,833 0.58 0.14
Public administration........................... 13.7 7,122 0.68 0.17
----------------------------------------------------------------------------------------------------------------
Employer Type
----------------------------------------------------------------------------------------------------------------
Nonprofit, private.............................. 94.40 3,570 1.00 0.30
For profit, private............................. 585.30 3,532 1.00 0.20
Government (state and local).................... 12.20 9,264 0.60 0.20
----------------------------------------------------------------------------------------------------------------
Note: Pooled CPS data for 2020-2022 adjusted to reflect 2022.
\a\ Total direct costs and transfers for small entities in which all employees are affected. Impacts to small
entities in which one employee is affected will be a fraction of the impacts presented in this table.
\b\ Revenues estimated by calculating the ratio of estimated small business revenues to payroll from the 2017
SUSB, and multiplying by payroll per small entity. For the public administration sector, the ratio was
calculated using revenues and payroll from the 2017 Census of Governments.
5. Projected Effects to Affected Small Entities in Year 2 Through Year
10
To determine how small businesses would be affected in future
years, the Department projected costs to small businesses for 9 years
after Year 1 of the rule. Projected employment and earnings were
calculated using the same methodology described in section VII.B.3.
Affected employees in small firms follow a similar pattern to affected
workers in all entities: the number decreases gradually between
automatic update years, and then increases. There are 1.3 million
affected workers in small entities in Year 1 and 1.9 million in Year
10. Table 38 reports affected workers in these 2 years only.
Table 38--Projected Number of Affected Workers in Small Entities, by
Industry
------------------------------------------------------------------------
Affected workers in small
entities (1,000s)
Industry -------------------------------
Year 1 Year 10
------------------------------------------------------------------------
Total............................... 1,341.1 1,872.1
------------------------------------------------------------------------
Agriculture, forestry, fishing, and 6.8 7.6
hunting................................
Mining.................................. 5.1 7.1
Construction............................ 93.4 127.3
Manufacturing--durable goods............ 94.0 125.3
Manufacturing--non-durable goods........ 53.6 78.5
[[Page 62234]]
Wholesale trade......................... 50.4 73.3
Retail trade............................ 103.1 125.6
Transportation and warehousing.......... 29.1 40.2
Utilities............................... 6.0 7.2
Information............................. 33.9 39.6
Finance................................. 49.1 59.2
Insurance............................... 39.9 60.2
Real estate and rental and leasing...... 34.7 55.4
Professional and technical services..... 238.2 342.6
Management, administrative and waste 42.1 56.3
management services....................
Educational services.................... 44.2 62.1
Hospitals............................... 5.6 8.8
Health care services, except hospitals.. 120.4 172.0
Social assistance....................... 72.3 118.6
Arts, entertainment, and recreation..... 48.6 78.9
Accommodation........................... 6.1 10.6
Food services and drinking places....... 42.4 56.4
Repair and maintenance.................. 14.2 21.2
Personal and laundry services........... 12.5 15.1
Membership associations and 66.0 80.8
organizations..........................
Public administration................... 29.5 42.4
------------------------------------------------------------------------
Note: Worker data are from Pooled CPS data for 2020-2022 adjusted to
reflect 2022.
Direct costs and payroll increases for small entities vary by year
but generally decrease between automatic updates as the real value of
the salary and compensation levels decrease and the number of affected
workers consequently decreases. In automatic updating years, costs
would increase due to newly affected workers and some regulatory
familiarization costs. Direct costs and payroll increases for small
businesses would be fairly close in Year 10 (an automatic update year)
and Year 1, $0.8 billion in Year 1 and $1.0 billion in Year 10 (Table
39 and Figure 10).
Table 39--Projected Direct Costs and Payroll Increases for Affected
Small Entities, by Industry, Using All Employees in Entity Affected
Method
------------------------------------------------------------------------
Costs and payroll increases
for small affected entities,
all employees affected
Industry (millions $2022)
-------------------------------
Year 1 Year 10
------------------------------------------------------------------------
Total............................... $776.8 $1,015.9
------------------------------------------------------------------------
Agriculture, forestry, fishing, and 2.3 5.6
hunting................................
Mining.................................. 2.8 3.3
Construction............................ 50.5 65.1
Manufacturing--durable goods............ 51.7 64.3
Manufacturing--non-durable goods........ 34.3 43.8
Wholesale trade......................... 36.1 62.7
Retail trade............................ 73.9 74.6
Transportation and warehousing.......... 26.4 70.4
Utilities............................... 4.4 3.7
Information............................. 19.4 15.9
Finance................................. 26.7 33.0
Insurance............................... 20.8 25.1
Real estate and rental and leasing...... 23.7 29.7
Professional and technical services..... 130.2 166.8
Management, administrative and waste 33.7 29.0
management services....................
Educational services.................... 18.5 24.3
Hospitals............................... 4.1 15.7
Health care services, except hospitals.. 64.7 70.4
Social assistance....................... 26.2 37.3
Arts, entertainment, and recreation..... 24.9 39.7
Accommodation........................... 3.0 5.0
Food services and drinking places....... 43.5 51.3
Repair and maintenance.................. 10.1 17.4
Personal and laundry services........... 5.5 2.3
[[Page 62235]]
Membership associations and 25.4 28.0
organizations..........................
Public administration................... 13.7 31.4
------------------------------------------------------------------------
Note: Pooled CPS data for 2020-2022 adjusted to reflect 2022.
[GRAPHIC] [TIFF OMITTED] TP08SE23.013
C. Projected Reporting, Recordkeeping, and Other Compliance
Requirements of the Proposed Rule
The FLSA sets minimum wage, overtime pay, and recordkeeping
requirements for employment subject to its provisions. Unless exempt,
covered employees must be paid at least the minimum wage and not less
than one and one-half times their regular rates of pay for overtime
hours worked.
Pursuant to section 11(c) of the FLSA, the Department's regulations
at part 516 require covered employers to maintain certain records about
their employees. Bona fide EAP workers are subject to some of these
recordkeeping requirements but exempt from others related to pay and
worktime.\456\ Thus, although this rulemaking would not introduce any
new recordkeeping requirements, employers would need to keep some
additional records for affected employees who become newly nonexempt if
they do not presently record such information. As indicated in this
analysis, this proposed rule expands minimum wage and overtime pay
coverage to 3.6 million affected EAP workers, of which 1.3 million are
employed by a small entity. This would result in an increase in
employer burden and was estimated in the PRA portion (section VI) of
this proposed rule. Note that the burdens reported for the PRA section
of this proposed rule include the entire information collection and not
merely the additional burden estimated as a result of this proposed
rule.
---------------------------------------------------------------------------
\456\ See 29 CFR 516.3 (providing that employers need not
maintain the records required by 29 CFR 516.2(a)(6) through (10) for
their EAP workers).
---------------------------------------------------------------------------
D. Steps the Agency Has Taken To Minimize the Significant Economic
Impact on Small Entities
This section describes the steps the agency has taken to minimize
the economic impact on small entities, consistent with the stated
objectives of the FLSA. It includes a statement of the factual, policy,
and legal reasons for the selected standard and HCE levels adopted in
the proposed rule and why alternatives were rejected.
In this proposed rule, the Department sets the standard salary
level equal to the 35th percentile of earnings of full-time salaried
workers in the lowest-wage Census Region (currently the South). Based
on 2022 data, this results in a salary level of $1,059 per week. By
setting a salary level above the long test salary level, the proposal
would ensure that fewer lower paid white-collar employees who perform
significant amounts of nonexempt work are
[[Page 62236]]
included in the exemption. At the same time, by setting it below the
short test salary level, the proposal would allow employers to continue
to use the exemption for many lower paid white-collar employees who
were made exempt under the 2004 standard duties test. Thus, the
Department believes that the proposed salary level would also more
reasonably distribute between employees and their employers the impact
of the shift from a two-test to a one-test system on employees earning
between the long and short test salary levels. As in prior rulemakings,
the Department has not proposed to establish multiple salary levels
based on region, industry, employer size, or any other factor, which
stakeholders have generally agreed would significantly complicate the
regulations.\457\ Instead, the Department has again proposed to set the
standard salary level using earnings data from the lowest-income Census
Region, in part to accommodate small employers and employers in low-
income industries.\458\
---------------------------------------------------------------------------
\457\ See 84 FR 51239; 81 FR 32411; 69 FR 22171.
\458\ See 84 FR 51238; 81 FR 32527; 69 FR 22237.
---------------------------------------------------------------------------
The Department has proposed to set the HCE total annual
compensation level equal to the 85th percentile of earnings of full-
time salaried workers nationally ($143,988 annually based on 2022
data). The Department believes that this level avoids costs associated
with evaluating, under the standard duties test, the exemption statuses
of large numbers of highly-paid white-collar employees, many of whom
would have remained exempt even under that test, while providing a
meaningful and appropriate complement to the more lenient HCE duties
test. While the proposed threshold is higher than the HCE level adopted
in the 2019 rule (which was set equal to the 80th percentile of
earnings for salaried workers nationwide), the proposed HCE threshold
in this rule would be lower than the HCE percentile adopted in the 2004
and 2016 rules, which covered 93.7 and 90 percent of salaried workers
nationwide, respectively. The Department further believes that nearly
all of the highly-paid white-collar workers earning above this
threshold ``would satisfy any duties test.'' \459\
---------------------------------------------------------------------------
\459\ 84 FR 51250 (internal citation omitted).
---------------------------------------------------------------------------
1. Differing Compliance and Reporting Requirements for Small Entities
This proposed rule provides no differing compliance requirements
and reporting requirements for small entities. The Department has
strived to minimize respondent recordkeeping burden by requiring no
specific form or order of records under the FLSA and its corresponding
regulations. Moreover, employers would normally maintain the records
under usual or customary business practices.
2. Least Burdensome Option or Explanation Required
The Department believes it has chosen the most effective option
that updates and clarifies the rule and results in the least burden.
Among the options considered by the Department, the least restrictive
option was using the 2004 methodology (the 20th percentile of weekly
earnings of full-time nonhourly workers in the lowest-wage Census
region, currently the South, and in retail nationally) to set the
standard salary level, which was also the methodology used in the 2019
rule. As noted above, however, the salary level produced by the 2004
methodology is below the long test salary level, which the Department
considers to be the lower boundary for an appropriate salary level in a
one-test system using the current standard duties test. Using the 2004
methodology thus does not address the Department's concerns discussed
above under Objectives of, and Need for, the Proposed Rule.
Pursuant to section 603(c) of the RFA, the following alternatives
are to be addressed:
i. Differing Compliance or Reporting Requirements That Take Into
Account the Resources Available to Small Entities
The FLSA creates a level playing field for businesses by setting a
floor below which employers may not pay their employees. To establish
differing compliance or reporting requirements for small businesses
would undermine this important purpose of the FLSA. The Department
makes available a variety of resources to employers for understanding
their obligations and achieving compliance. Therefore, the Department
has not proposed differing compliance or reporting requirements for
small businesses.
ii. The Clarification, Consolidation, or Simplification of Compliance
and Reporting Requirements for Small Entities
This proposed rule imposes no new reporting requirements. The
Department makes available a variety of resources to employers for
understanding their obligations and achieving compliance.
iii. The Use of Performance Rather Than Design Standards
Under this proposed rule, employers may achieve compliance through
a variety of means. Employers may elect to continue to claim the EAP
exemption for affected employees by adjusting salary levels, hiring
additional workers or spreading overtime hours to other employees, or
compensating employees for overtime hours worked. The Department makes
available a variety of resources to employers for understanding their
obligations and achieving compliance.
iv. An Exemption From Coverage of the Rule, or Any Part Thereof, for
Such Small Entities
Creating an exemption from coverage of this rulemaking for
businesses with as many as 500 employees, those defined as small
businesses under SBA's size standards, is inconsistent with the FLSA,
which applies to all employers that satisfy the enterprise coverage
threshold or employ individually covered employees, regardless of
employer size.\460\
---------------------------------------------------------------------------
\460\ See 29 U.S.C. 203(s).
---------------------------------------------------------------------------
E. Identification, to the Extent Practicable, of All Relevant Federal
Rules That May Duplicate, Overlap, or Conflict With the Proposed Rule
The Department is not aware of any Federal rules that duplicate,
overlap, or conflict with this proposed rule.
IX. Unfunded Mandates Reform Act Analysis
The Unfunded Mandates Reform Act of 1995 (UMRA),\461\ requires
agencies to prepare a written statement for proposed rulemaking that
includes any Federal mandate that may result in increased expenditures
by state, local, and tribal governments, in the aggregate, or by the
private sector, of $192 million ($100 million in 1995 dollars adjusted
for inflation to 2022) or more in at least one year. This statement
must: (1) identify the authorizing legislation; (2) present the
estimated costs and benefits of the rule and, to the extent that such
estimates are feasible and relevant, present its estimated effects on
the national economy; (3) summarize and evaluate state, local, and
tribal government input; and (4) identify reasonable alternatives and
select, or explain the non-selection, of the least costly, most cost-
effective, or least burdensome alternative.
---------------------------------------------------------------------------
\461\ 2 U.S.C. 1501 et seq.
---------------------------------------------------------------------------
A. Authorizing Legislation
This proposed rule is issued pursuant to section 13(a)(1) of the
Fair Labor Standards Act (FLSA or Act), 29 U.S.C. 213(a)(1). The
section exempts from the FLSA's minimum wage and overtime
[[Page 62237]]
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] . . .).'' \462\ The requirements of the
exemption are contained in part 541 of the Department's regulations.
Section 3(e) of the FLSA \463\ defines ``employee'' to include most
individuals employed by a state, political subdivision of a state, or
interstate governmental agency. Section 3(x) of the FLSA \464\ also
defines public agencies to include the government of a state or
political subdivision thereof, or any interstate governmental agency.
---------------------------------------------------------------------------
\462\ 29 U.S.C. 213(a)(1).
\463\ 29 U.S.C. 203(e).
\464\ 29 U.S.C. 203(x).
---------------------------------------------------------------------------
B. Costs and Benefits
For purposes of the UMRA, this proposed rule includes a Federal
mandate that is expected to result in increased expenditures by the
private sector of more than $192 million in at least one year, but the
rule will not result in increased expenditures by state, local and
tribal governments, in the aggregate, of $192 million or more in any
one year.
Based on the economic impact analysis of this proposed rule, the
Department determined that Year 1 costs for state and local governments
would total $184.1 million, of which $74.0 million are direct employer
costs and $110.1 million are payroll increases (Table 40). In
subsequent years, state and local governments may experience payroll
increases of as much as $192.5 million per year.
The proposed rule would result in Year 1 costs to the private
sector of approximately $2.2 billion, of which $1.1 billion are direct
employer costs and $1.1 billion are payroll increases. In subsequent
years, the Department estimated that the private sector may experience
a payroll increase of as much as $1.8 billion per year.
Table 40--Summary of Year 1 Impacts by Type of Employer
----------------------------------------------------------------------------------------------------------------
Impact Total Private Government \a\
----------------------------------------------------------------------------------------------------------------
Affected EAP Workers (1,000s)
----------------------------------------------------------------------------------------------------------------
Number.......................................................... 3,648 3,250 392
----------------------------------------------------------------------------------------------------------------
Direct Employer Costs (Millions)
----------------------------------------------------------------------------------------------------------------
Regulatory familiarization...................................... $427.2 $422.4 $4.8
Adjustment...................................................... 240.8 214.5 25.9
Managerial...................................................... 534.9 490.0 43.3
-----------------------------------------------
Total direct costs.......................................... 1,202.8 1,126.8 74.0
----------------------------------------------------------------------------------------------------------------
Payroll Increases (Millions)
----------------------------------------------------------------------------------------------------------------
From employers to workers....................................... $1,234.2 $1,121.4 $110.1
----------------------------------------------------------------------------------------------------------------
Direct Employer Costs & Payroll Increases (Millions)
----------------------------------------------------------------------------------------------------------------
From employers.................................................. $2,437.0 $2,248.2 $184.1
----------------------------------------------------------------------------------------------------------------
\a\ Includes only state, local, and tribal governments.
UMRA requires agencies to estimate the effect of a regulation on
the national economy if, at its discretion, such estimates are
reasonably feasible and the effect is relevant and material.\465\
However, OMB guidance on this requirement notes that such macroeconomic
effects tend to be measurable in nationwide econometric models only if
the economic effect of the regulation reaches 0.25 percent to 0.5
percent of GDP, or in the range of $63.7 billion to $127.3 billion
(using 2022 GDP). A regulation with a smaller aggregate effect is not
likely to have a measurable effect in macro-economic terms unless it is
highly focused on a particular geographic region or economic sector,
which is not the case with this proposed rule.
---------------------------------------------------------------------------
\465\ 2 U.S.C. 1532(a)(4).
---------------------------------------------------------------------------
The Department's RIA estimates that the total first-year costs
(direct employer costs and payroll increases from employers to workers)
of the proposed rule would be approximately $2.2 billion for private
employers and $184.1 million for state and local governments. Given
OMB's guidance, the Department has determined that a full macro-
economic analysis is not likely to show any measurable effect on the
economy. Therefore, these costs are compared to payroll costs and
revenue to demonstrate the feasibility of adapting to these new rules.
Total first-year state and local government costs compose 0.02
percent of state and local government payrolls.\466\ First-year state
and local government costs compose 0.004 percent of state and local
government revenues (projected 2022 revenues were estimated to be $4.8
trillion).\467\ Effects of this magnitude will not result in
significant disruptions to typical state and local governments. The
$184.1 million in state and local government costs constitutes an
average of approximately $2,000 for each of the approximately 90,126
state and local entities. The Department considers these costs to be
quite small both in absolute terms and in relation to payroll and
revenue.
---------------------------------------------------------------------------
\466\ 2020 state and local government payrolls were $1.1
trillion, inflated to 2022 payroll costs of $1.2 trillion using the
GDP deflator. State and Local Government Finances 2020. Available at
https://www.census.gov/data/datasets/2020/econ/local/public-use-datasets.html.
\467\ 2020 state and local revenues were $4.3 trillion, inflated
to 2022 dollars using the GDP deflator. State and Local Government
Finances 2020. Available at https://www.census.gov/data/datasets/2020/econ/local/public-use-datasets.html.
---------------------------------------------------------------------------
Total first-year private sector costs compose 0.029 percent of
private sector
[[Page 62238]]
payrolls nationwide.\468\ Total private sector first-year costs compose
0.005 percent of national private sector revenues (revenues in 2022 are
projected to be $43.7 trillion).\469\ The Department concludes that
effects of this magnitude are affordable and will not result in
significant disruptions to typical firms in any of the major industry
categories.
---------------------------------------------------------------------------
\468\ Private sector payroll costs are projected to be $7.8
trillion in 2022 based on private sector payroll costs of $6.6
trillion in 2017, inflated to 2022 dollars using the GDP deflator.
2017 Economic Census of the United States.
\469\ Private sector revenues in 2017 were $37.0 trillion using
the 2017 Economic Census of the United States. This was inflated to
2022 dollars using the GDP deflator.
---------------------------------------------------------------------------
C. Summary of State, Local, and Tribal Government Input
The Department held a series of stakeholder listening sessions
between March 8, 2022 and June 3, 2022 to gather input on its part 541
regulations. Stakeholders invited to participate in these listening
sessions included representatives from labor unions; worker advocate
groups; industry associations; small business associations; state and
local governments; tribal governments; non-profits; and representatives
from specific industries such as K-12 education, higher education,
healthcare, retail, restaurant, manufacturing, and wholesale.
Stakeholders were invited to share their input on issues including the
appropriate EAP salary level, the costs and benefits of increasing the
salary level to employers and employees, the methodology for updating
the salary level and frequency of updates, and whether changes to the
duties test are warranted. A listening session was held specifically
for state and local governments on April 1, 2022, and a session for
tribal governments was held on May 12, 2022. The input received at
these listening sessions aided the Department in drafting its proposed
rule.
D. Least Burdensome Option or Explanation Required
This proposed rule has described the Department's consideration of
various options throughout the preamble (see section IV.A.5) and
economic impact analysis (see section VII.C.8). The Department believes
that it has chosen the least burdensome but still cost-effective
methodology to update the salary level consistent with the Department's
statutory obligation to define and delimit the scope of the EAP
exemption. Although some alternative options considered would set the
standard salary level at a rate lower than the proposed level, that
outcome would not necessarily be the most cost-effective or least-
burdensome. A salary level equal to or below the long test level would
result in the exemption of lower-salaried employees who traditionally
were entitled to overtime protection under the long test either because
of their low salary or because they perform large amounts of nonexempt
work, effectively placing the impact of the move from a two-test system
to a one-test system on employees.
Selecting a standard salary level in a one-test system inevitably
affects the risk and cost of providing overtime protection to employees
paid between the long and short test salary levels. Too low of a salary
level shifts the impact of the move to a one-test system to employees
by exempting lower-salaried employees who perform large amounts of
nonexempt work. However, too high a salary level shifts the impact of
the move to a one-test system to employers by denying them the use of
the exemption for lower-salaried employees who traditionally were
exempt under the long duties test, thereby increasing their labor
costs. The Department determined that setting the standard salary level
equivalent to the earnings of the 35th percentile of full-time salaried
workers in the lowest-wage Census region and automatically updating it
every three years to reflect current earnings appropriately accounts
for the shift from a two-test to a one-test system for determining
exemption status, protecting lower-paid white-collar employees who
traditionally have been entitled to overtime protection, while allowing
employers to use the exemption for EAP employees earning less than the
short test salary level.
The Department believes that the proposed rule could reduce burden
on employers of nonexempt workers who earn between the current and
proposed standard salary level. Currently, employers must rely on the
duties test to determine the exemption status of these workers. But if
this proposal is finalized, the exemption status of these workers will
be determined based on the simpler salary level test.
X. Executive Order 13132, Federalism
The Department has reviewed this proposed rule in accordance with
Executive Order 13132 regarding federalism and determined that it does
not have federalism implications. The proposed rule would not have
substantial direct effects on the States, on the relationship between
the National Government and the States, or on the distribution of power
and responsibilities among the various levels of government.
XI. Executive Order 13175, Indian Tribal Governments
This proposed rule will not have tribal implications under
Executive Order 13175 that would require a tribal summary impact
statement. The proposed rule would not have substantial direct effects
on one or more Indian tribes, on the relationship between the Federal
Government and Indian tribes, or on the distribution of power and
responsibilities between the Federal Government and Indian tribes.
List of Subjects in 29 CFR Part 541
Labor, Minimum wages, Overtime pay, Salaries, Teachers, Wages.
For the reasons set out in the preamble, the Wage and Hour
Division, Department, of Labor proposes to amend 29 CFR part 541 as
follows:
PART 541--DEFINING AND DELIMITING THE EXEMPTIONS FOR EXECUTIVE,
ADMINISTRATIVE, PROFESSIONAL, COMPUTER, AND OUTSIDE SALES EMPLOYEES
0
1. The authority citation for part 541 is revised to read as follows:
Authority: 29 U.S.C. 213; Pub. L. 101-583, 104 Stat. 2871;
Reorganization Plan No. 6 of 1950 (3 CFR, 1945-53 Comp., p. 1004);
Secretary's Order 01-2014 (Dec. 19, 2014), 79 FR 77527 (Dec. 24,
2014).
0
2. Add Sec. 541.5 to read as follows:
Sec. 541.5 Severability.
If any provision of this part is held to be invalid or
unenforceable by its terms, or as applied to any person or
circumstance, or stayed pending further agency action, the provision
must be construed so as to continue to give the maximum effect to the
provision permitted by law, unless such holding be one of utter
invalidity or unenforceability, in which event the provision will be
severable from part 541 and will not affect the remainder thereof.
0
3. Amend Sec. 541.100, by revising paragraph (a)(1) to read as
follows:
Sec. 541.100 General rule for executive employees.
(a) * * *
(1) Compensated on a salary basis at not less than the level set
forth in Sec. 541.600;
* * * * *
0
4. Amend Sec. 541.200, by revising paragraph (a)(1) to read as
follows:
[[Page 62239]]
Sec. 541.200 General rule for administrative employees.
(a) * * *
(1) Compensated on a salary or fee basis at not less than the level
set forth in Sec. 541.600;
* * * * *
0
5. Amend Sec. 541.204, by revising paragraph (a)(1) to read as
follows:
Sec. 541.204 Educational establishments.
(a) * * *
(1) Compensated on a salary or fee basis at not less than the level
set forth in Sec. 541.600; or on a salary basis which is at least
equal to the entrance salary for teachers in the educational
establishment by which employed; and
* * * * *
0
6. Amend Sec. 541.300, by revising paragraph (a)(1) to read as
follows:
Sec. 541.300 General rule for professional employees.
(a) * * *
(1) Compensated on a salary or fee basis at not less than the level
set forth in Sec. 541.600; and
* * * * *
0
7. Amend Sec. 541.400, by revising the first sentence of paragraph (b)
to read as follows:
Sec. 541.400 General rule for computer employees.
* * * * *
(b) The section 13(a)(1) exemption applies to any computer employee
who is compensated on a salary or fee basis at not less than the level
set forth in Sec. 541.600. * * *
* * * * *
0
8. Revise Sec. 541.600 to read as follows:
Sec. 541.600 Amount of salary required.
(a) Standard salary level. (1) 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 per
week of not less than the standard salary level (the 35th percentile of
weekly earnings of full-time nonhourly workers in the lowest-wage
Census Region), unless employed in American Samoa as set forth in
paragraph (b) of this section, exclusive of board, lodging, or other
facilities. As of [EFFECTIVE DATE OF THE FINAL RULE], and until such
time as the standard salary level is updated pursuant to Sec. 541.607,
the standard salary level is $1,059 per week. Administrative and
professional employees may also be paid on a fee basis, as defined in
Sec. 541.605.
(2) Beginning 3 years from the date the $1,059 per week salary
level takes effect, and every 3 years thereafter, the Secretary will
update the amount of the required standard salary level pursuant to
Sec. 541.607.
(b) American Samoa. To qualify as an exempt executive,
administrative, or professional employee under section 13(a)(1) of the
Act, an employee in American Samoa (except if employed by the Federal
Government), must be compensated on a salary basis at a rate of not
less than 84 percent of the standard salary level applicable under
paragraph (a) of this section (e.g., $890 per week when the standard
salary level is $1,059), exclusive of board, lodging, or other
facilities. Provided that 90 days after the highest industry minimum
wage for American Samoa equals the minimum wage under section 6(a)(1)
of the Act, exempt employees employed in all industries in American
Samoa must be paid the full standard salary level set forth in
paragraph (a) of this section, subject to the exceptions provided in
paragraphs (d) through (f) of this section. Administrative and
professional employees may also be paid on a fee basis, as defined in
Sec. 541.605.
(c) Frequency of payment. The salary level requirement may be
translated into equivalent amounts for periods longer than one week.
For example, the $1,059 per week requirement described in paragraph (a)
of this section would be met if the employee is compensated biweekly on
a salary basis of not less than $2,118, semimonthly on a salary basis
of not less than $2,295, or monthly on a salary basis of not less than
$4,589. However, the shortest period of payment that will meet this
compensation requirement is one week.
(d) Alternative salary level for academic administrative employees.
In the case of academic administrative employees, the salary level
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).
(e) Hourly rate for computer employees. 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).
(f) Exceptions to the standard salary criteria. 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.
0
9. Amend Sec. 541.601 by:
0
a. Adding introductory text to paragraph (a);
0
b. Revising paragraph (a)(1);
0
c. Revising paragraph (a)(2);
0
d. Adding paragraph (a)(3);
0
e. Revising the first sentence of paragraph (b)(1); and
0
f. Revising the second, third, and fourth sentences of paragraph
(b)(2).
The revisions and additions read as follows:
Sec. 541.601 Highly compensated employees.
(a) An employee shall be exempt under section 13(a)(1) of the Act
if:
(1) The employee receives not less than the total annual
compensation level (the annualized earnings amount of the 85th
percentile of full-time nonhourly workers nationally), and 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 subpart B, C, or D of this part. As of
[EFFECTIVE DATE OF THE FINAL RULE], and until such time as the total
annual compensation level is updated pursuant to Sec. 541.607, such an
employee must receive total annual compensation of at least $143,988.
(2) Beginning 3 years from the date the $143,988 total annual
compensation level takes effect, and every 3 years thereafter, the
Secretary will update the required total annual compensation amount
pursuant to Sec. 541.607.
(3) Where the annual period covers periods both prior to and after
the $143,988 total annual compensation level takes effect, or the
effective date of any future change to the total annual compensation
requirement made pursuant to Sec. 541.607, the amount of total annual
compensation due will be determined on a proportional basis.
(b)(1) Total annual compensation must include at least a weekly
amount equal to that required by Sec. 541.600(a) paid on a salary or
fee basis as set forth in Sec. Sec. 541.602 and 541.605, except that
Sec. 541.602(a)(3) will not apply to highly compensated employees. * *
*
(2) * * * For example, for a 52-week period beginning [EFFECTIVE
DATE OF
[[Page 62240]]
FINAL RULE], an employee may earn $120,000 in base salary, and the
employer may anticipate based upon past sales that the employee also
will earn $25,000 in commissions. However, due to poor sales in the
final quarter of the year, the employee only earns $20,000 in
commissions. In this situation, the employer may within one month after
the end of the year make a payment of at least $3,988 to the employee.
* * *
* * * * *
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10. Amend Sec. 541.604 by:
0
a. Revising the second, third, and fourth sentences of paragraph (a);
and
0
b. Revising the third sentence in paragraph (b).
The revisions read as follows:
Sec. 541.604 Minimum guarantee plus extras.
(a) * * * Thus, for example, an exempt employee guaranteed at least
$1,059 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
$1,059 each week paid on a salary basis. Similarly, the exemption is
not lost if an exempt employee who is guaranteed at least $1,059 each
week paid on a salary basis also receives additional compensation based
on hours worked for work beyond the normal workweek. * * *
(b) * * * Thus, for example, an exempt employee guaranteed
compensation of at least $1,125 for any week in which the employee
performs any work, and who normally works four or five shifts each
week, may be paid $325 per shift without violating the $1,059 per week
salary basis requirement. * * *
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11. Amend Sec. 541.605 by revising the second sentence of paragraph
(b) to read as follows:
Sec. 541.605 Fee basis.
* * * * *
(b) * * * Thus, for example, an artist paid $550 for a picture that
took 20 hours to complete meets the $1,059 minimum salary requirement
for exemption since earnings at this rate would yield the artist $1,100
if 40 hours were worked. * * *
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12. Add Sec. 541.607 to read as follows:
Sec. 541.607 Automatic updates to amounts of salary and compensation
required.
(a) Standard salary level. (1) Beginning 3 years from [EFFECTIVE
DATE OF THE FINAL RULE], and every 3 years thereafter, the amount
required to be paid to an exempt employee on a salary or fee basis, as
applicable, pursuant to Sec. 541.600(a) will be updated to reflect
current earnings data.
(2) The Secretary will determine the lowest-wage Census Region for
paragraph (a)(1) of this section using the 35th percentile of weekly
earnings of full-time nonhourly workers in the Census Regions based on
data from the Current Population Survey as published by the Bureau of
Labor Statistics.
(b) Highly compensated employees. (1) Beginning 3 years from
[EFFECTIVE DATE OF THE FINAL RULE], and every 3 years thereafter, the
amount required in total annual compensation for an exempt highly
compensated employee pursuant to Sec. 541.601 will be updated to
reflect current earnings data.
(2) The Secretary will use the 85th percentile of weekly earnings
of full-time nonhourly workers nationally based on data from the
Current Population Survey as published by the Bureau of Labor
Statistics for paragraph (b)(1) of this section.
(c) Notice. (1) Not fewer than 150 days before each automatic
update of earnings requirements under this section, the Secretary will
publish a notice in the Federal Register stating the updated amounts
required by paragraphs (a) and (b) of this section, which shall be
determined by applying the methodologies set forth in those paragraphs
to data from the four quarters preceding the notice as published by the
Bureau of Labor Statistics.
(2) No later than the effective date of the updated earnings
requirements, the Wage and Hour Division will publish on its website
the applicable earnings requirements for employees paid pursuant to
this part.
(d) Delay of updates. An automatic update to the earnings
thresholds is delayed from taking effect for a period of 120 days if
the Secretary has separately published a notice of proposed rulemaking
in the Federal Register, not fewer than 150 days before the date the
automatic update is set to take effect, proposing changes to the
earnings threshold(s) and/or automatic updating mechanism. If the
Secretary does not issue a final rule affecting the scheduled automatic
update to the earnings thresholds by the end of the 120-day extension,
the updated amounts published in accordance with paragraph (c)(1) of
this section will take effect upon the expiration of the 120-day
period. The 120-day delay of a scheduled update under this paragraph
will not change the effective dates for future automatic updates of the
earnings requirements under this section.
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13. Revise Sec. 541.709 to read as follows:
Sec. 541.709 Motion picture producing industry.
(a) Base rate. The requirement that the employee be paid ``on a
salary basis'' does not apply to an employee in the motion picture
producing industry who is compensated at a base rate of at least $1,617
per week (exclusive of board, lodging, or other facilities), except as
provided in paragraph (b) of this section. 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 the applicable
current minimum amount 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:
(1) 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 the
minimum weekly amount if 6 days were worked; or
(2) The employee is in a job category having the minimum weekly
base rate and the daily base rate is at least one-sixth of such weekly
base rate.
(b) Updating the base rate. Upon the date of each increase to the
standard salary level pursuant to Sec. 541.607, the base rate required
to be paid to an exempt motion picture producing employee pursuant to
this section will be updated from the previously applicable base rate,
adjusted by the same percentage as the updated standard salary set by
Sec. 541.607(a), and rounded to the nearest multiple of $1.00.
Julie A. Su,
Acting Secretary, Department of Labor.
[FR Doc. 2023-19032 Filed 9-7-23; 8:45 am]
BILLING CODE 4510-27-P