Federal Register, Volume 89 Issue 82 (Friday, April 26, 2024)

[Federal Register Volume 89, Number 82 (Friday, April 26, 2024)]
[Rules and Regulations]
[Pages 32842-32973]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-08038]

[[Page 32841]]

Vol. 89

Friday,

No. 82

April 26, 2024

Part IV

Department of Labor

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Wage and Hour Division

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29 CFR Part 541

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

Federal Register / Vol. 89, No. 82 / Friday, April 26, 2024 / Rules
and Regulations

[[Page 32842]]

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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: Final rule.

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SUMMARY: 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 revisions include increasing the standard salary
level, increasing the highly compensated employee total annual
compensation threshold, and adding to the regulations a mechanism that
will allow for the timely and efficient updating of the salary and
compensation thresholds, including an initial update on July 1, 2024,
to reflect earnings growth. The Department is not finalizing in this
rule its proposal to apply the standard salary level to the U.S.
territories subject to the Federal minimum wage and to update the
special salary levels for American Samoa and the motion picture
industry.

DATES: The effective date for this final rule is July 1, 2024. Sections
541.600(a)(2) and 541.601(a)(2) are applicable beginning January 1,
2025.

FOR FURTHER INFORMATION CONTACT: Daniel Navarrete, Acting 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
expressly gives the Secretary of Labor (Secretary) 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 Act, in this final
rule the Department is setting compensation thresholds for the standard
test and the highly compensated employee test that will work
effectively with the respective duties tests to better identify who is
employed in a bona fide EAP capacity for purposes of determining
exemption status under the Act. Specifically, the Department is setting
the standard salary level at the 35th percentile of weekly earnings of
full-time salaried workers in the lowest-wage Census Region ($1,128 per
week or $58,656 annually for a full-year worker) \3\ and the highly
compensated employee total annual compensation threshold at the
annualized weekly earnings of the 85th percentile of full-time salaried
workers nationally ($151,164). These 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 85 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 U.S. Bureau of Labor Statistics (BLS). As explained in section
VII.B.5.i, 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 rule. The Department relied on CPS MORG data for calendar year
2022 to develop the NPRM, including to determine the proposed salary
level. The Department is using the most recent full-year data
available for this final rule, which is CPS MORG data for calendar
year 2023. The new standard salary level of $1,128 per week is $12
to $30 less than the Department estimated in the NPRM. 88 FR 62152,
62152-53 n.3 (Sept. 8, 2023).
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The 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 because they met the prior more
detailed duties test, an approach that received unfavorable treatment
in litigation.\7\ Having grappled with these different approaches to
setting the standard salary level, this final rule retains the
simplified standard test, the benefits of

[[Page 32843]]

which were recognized in the Department's 2004, 2016, and 2019
rulemakings,\8\ while, through a revised methodology, fully restoring
the salary level's screening function and accounting for the switch
from a two-test to a one-test system for defining the EAP exemption,
and also separately updating the standard salary level to account for
earnings growth since the 2019 rule.
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\4\ 69 FR 22122 (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 new 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 new standard salary level will 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 what the methodology used in 2016 would produce
using current data, the new standard salary level will 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 result will be a more effective test for determining who is
employed in a bona fide EAP capacity. The applicability date of the new
standard salary level will be January 1, 2025. The Department is not
finalizing its proposal to apply the standard salary level to the U.S.
territories subject to the federal minimum wage and to update the
special salary levels for American Samoa and the motion picture
industry.\9\
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\9\ The Department proposed in sections IV.B.1 and B.2 of the
NPRM to apply the 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 Commonwealth of the
Northern Mariana Islands (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 will
address these aspects of its proposal in a future final rule.
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The Department is also increasing 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.\10\ The Department is increasing the HCE total annual
compensation threshold to the annualized weekly earnings amount of the
85th percentile of full-time salaried workers nationally ($151,164).
The new HCE threshold is high enough to reserve the test for those
employees who are ``at the very top of [the] economic ladder'' \11\ and
will guard against the unintended exemption of workers who are not bona
fide EAP employees, including those in high-income regions and
industries. The applicability date of the new HCE total annual
compensation threshold will be January 1, 2025.
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\10\ See 69 FR 22172-73.
\11\ 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
time.\12\ 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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\12\ 84 FR 51250-51; 81 FR 32430; see also 69 FR 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.\13\
In the 2016 rule, it included a regulatory provision to automatically
update the salary levels.\14\ Based on its long experience with
updating the salary levels, the Department has determined that adopting
a regulatory provision for updating the salary levels to reflect
current earnings data, 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. This rule establishes a new updating mechanism. The initial
update to the standard salary level and the HCE total annual
compensation threshold will take place on July 1, 2024, and will use
the methodologies in place at that time (i.e., the 2019 rule
methodologies), resulting in a $844 per week standard salary level and
a $132,964 HCE total annual compensation threshold. Future updates to
the standard salary level and HCE total annual compensation threshold
with current earnings data will begin 3 years after the date of the
initial update (July 1, 2027), and every 3 years thereafter, using the
methodologies in place at the time of the updates. The Department
anticipates that, by the time the first triennial update under the
updating mechanism occurs, assuming the Department has not engaged in
further rulemaking, the new methodologies for the standard salary level
and HCE total annual compensation requirement established by this final
rule will have become effective and the triennial update will employ
these new methodologies. The new updating mechanism will allow for the
timely, predictable, and efficient updating of the earnings thresholds.
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\13\ 69 FR 22171; 84 FR 51251-52.
\14\ 81 FR 32430.
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The Department estimates that in Year 1, approximately 1 million
employees who earn at least $684 per week but less than $844 per week
will be impacted by the initial update applying current wage data to
the standard salary level methodology from the 2019 rule, and
approximately 3 million employees who earn at least $844 per week but
less than the new standard salary level of $1,128 per week will be
impacted by the subsequent application of the new standard salary
level. See Table 25. As explained in section V.B.4.ii, for 1.8 million
of the affected employees (including the 1 million impacted by the
initial update), this rule will restore overtime protections that they
would have been entitled to under every rule prior to the 2019 rule.
The Department also estimates that 292,900 employees who are currently
exempt under the HCE test, but do not meet the standard test for
exemption, will be affected by the proposed increase in the HCE total
annual compensation level. Absent an employer increasing these
employees' pay to at or above the new HCE level, the exemption status
of these employees will 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 quantifies the direct costs resulting from this 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 will be $803 million with a 7
percent discount rate. This rule will also give employees higher
earnings in the form of transfers of income from employers to
employees. The

[[Page 32844]]

Department estimates annualized transfers will be $1.5 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 at least one and one-half times the
employee's regular rate of pay for all hours worked over 40 in a
workweek.\15\ 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 Procedure Act] . . .).'' The FLSA
does not define the terms ``executive,'' ``administrative,''
``professional,'' or ``outside salesman,'' but rather directs the
Secretary to define those terms through rulemaking. 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.\16\ Because Congress explicitly gave
the Secretary authority to define and delimit the specific terms of the
exemption, the regulations so issued have the binding effect of
law.\17\
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\15\ See 29 U.S.C. 206(a), 207(a).
\16\ 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.''').
\17\ See Batterton v. Francis, 432 U.S. 416, 425 n.9 (1977).
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The exemption for executive, administrative, or professional
employees was included in the original FLSA legislation passed in
1938.\18\ It was modeled after similar provisions contained in the
earlier National Industrial Recovery Act of 1933 and state law
precedents.\19\ 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.\20\ Second, exempt 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.\21\
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\18\ See Fair Labor Standards Act of 1938, Pub. L. 75-718,
13(a)(1), 52 Stat. 1060, 1067 (June 25, 1938).
\19\ See National Industrial Recovery Act, Pub. L. 73-67, ch.
90, title II, 206(2), 48 Stat 195, 204-5 (June 16, 1933).
\20\ See Report of the Minimum Wage Study Commission, Volume IV,
pp. 236 and 240 (June 1981).
\21\ See id.
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Section 13(a)(1) exempts covered EAP employees from both the FLSA's
minimum wage and overtime requirements. However, because of their long
hours of work, its most significant impact is its exemption of these
employees from the Act's overtime protections, as discussed in section
VII.C.4. An employer may employ such exempt employees for any number of
hours in the workweek without paying an overtime premium. Some state
laws have stricter standards to be exempt from state minimum wage and
overtime protections than those which exist under federal law, such as
higher salary levels or more stringent duties tests. The FLSA does not
preempt any such stricter state standards.\22\ If a state establishes a
higher standard than the provisions of the FLSA, the higher standard
applies in that state.
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\22\ 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 the following three prongs to be satisfied 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's part 541 regulations have always included earnings
criteria. From the first Part 541 regulations, 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[.]'' \23\ Because EAP employees ``are
denied the protection of the [A]ct[,]'' they are ``assumed [to] enjoy
compensatory privileges'' which distinguish them from nonexempt
employees, including substantially higher pay.\24\ Additionally, the
Department has long recognized that the salary level test is a useful
criterion for helping identify bona fide EAP employees and provides a
practical guide for employers and employees, thus tending to reduce
litigation and ensure that nonexempt employees receive the overtime
protection to which they are entitled.\25\ These benefits accrue to
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.\26\
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\23\ ``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) at 19.
\24\ Id.; see 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.'').
\25\ See 84 FR 51237; see also Report and Recommendations on
Proposed Revisions of Regulations, Part 541, by Harry Weiss,
Presiding Officer, Wage and Hour and Public Contracts Divisions,
U.S. Department of Labor (June 30, 1949) (Weiss Report) at 8.
\26\ 84 FR 51235; see also Stein Report at 5, 19; Weiss Report
at 9.
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The Department issued the first version of the part 541 regulations
in October 1938.\27\ The Department's initial regulations included a
$30 per week compensation requirement for executive and administrative
employees. It also included a duties test that prohibited employers
from claiming the EAP exemption for employees who performed ``[a]
substantial amount of work of the same nature as that performed by
nonexempt employees of the employer.'' \28\
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\27\ 3 FR 2518 (Oct. 20, 1938).
\28\ Id.

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[[Page 32845]]

The Department issued the first update to its part 541 regulations
in October 1940,\29\ following extensive public hearings.\30\ Among
other changes, the 1940 update newly applied the salary level
requirement to professional employees; added the salary basis
requirement to the tests for executive, administrative, and
professional employees; and introduced a 20 percent cap on the amount
of nonexempt work that executive and professional employees could
perform each workweek, replacing language which prohibited the
performance of a ``substantial amount'' of nonexempt work.\31\
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\29\ 5 FR 4077 (Oct. 15, 1940).
\30\ See Stein Report.
\31\ 5 FR 4077.
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The Department conducted further hearings on the part 541
regulations in 1947 \32\ and issued revised regulations in December
1949.\33\ 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.\34\ 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 at a level designed 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.\35\ 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 these employees were employed in an 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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\32\ See Weiss Report.
\33\ See 14 FR 7705 (Dec. 24, 1949).
\34\ Id. at 7706.
\35\ See Report and Recommendations on Proposed Revision of
Regulations, Part 541, Under the Fair Labor Standards Act, by Harry
S. Kantor, Assistant Administrator, Office of Regulations and
Research, Wage and Hour and Public Contracts Divisions, U.S.
Department of Labor (Mar. 3, 1958) (Kantor Report) at 6-7. Under the
two-test system, 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.
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Additional changes to the regulations, including salary level
updates, were made in 1954,\36\ 1958,\37\ 1961,\38\ 1963,\39\ 1967,\40\
1970,\41\ 1973,\42\ and 1975.\43\ The Department revised the part 541
regulations twice in 1992 but did not update the salary thresholds at
that time.\44\ None of these updates changed the basic structure of the
long and short tests.
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\36\ 19 FR 4405 (July 17, 1954).
\37\ 23 FR 8962 (Nov. 18, 1958).
\38\ 26 FR 8635 (Sept. 15, 1961).
\39\ 28 FR 9505 (Aug. 30, 1963).
\40\ 32 FR 7823 (May 30, 1967).
\41\ 35 FR 883 (Jan. 22, 1970).
\42\ 38 FR 11390 (May 7, 1973).
\43\ 40 FR 7091 (Feb. 19, 1975).
\44\ 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 Pub. L. 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.'' \45\ 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,\46\
which for a 40-hour workweek 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,\47\ which for
a 40-hour workweek 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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\45\ 40 FR 7091.
\46\ See Pub. L. 101-157, sec. 2, 103 Stat. 938 (Nov. 17, 1989).
\47\ See Pub. L. 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 published a final rule in April 2004 (the 2004 rule)
\48\ 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.\49\
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\48\ 69 FR 22122.
\49\ 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 to
the single standard test for exemption was a significant change in the
regulatory structure,\50\ 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[.]'' \51\ 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[.]'' \52\ The Department acknowledged,
however, that the new standard salary level was comparable to the lower
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 data).\53\ Thus,

[[Page 32846]]

employees who would have been subject to the long duties test with its
limit on the amount of time spent on nonexempt work 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 more than 20 percent of
their 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 long test's more rigorous duties analysis due
to their lower salary.
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\50\ See id. at 22126-28.
\51\ Id. at 22167.
\52\ Id. at 22126.
\53\ Id. at 22171. The Department last set the long and short
test salary levels in 1975. Throughout this preamble, when the
Department refers to the relationship of salary levels set in this
rule and the 2004, 2016, and 2019 rules to equivalent long or short
test salary levels, it is referring to salary levels based on
contemporaneous (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.
---------------------------------------------------------------------------

In the 2004 rule, the Department also created a new test for
exemption for certain highly compensated employees.\54\ 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.\55\ 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.\56\ The
Department also expressed its intent ``in the future to update the
salary levels on a more regular basis, as it did prior to 1975.'' \57\
---------------------------------------------------------------------------

\54\ 69 FR 22172.
\55\ See id. at 22169 (Table 3).
\56\ Id. at 22172.
\57\ Id. at 22171.
---------------------------------------------------------------------------

In May 2016, the Department issued a final rule (the 2016 rule)
that retained the single-test system introduced in 2004 but increased
the standard salary level and provided for regular updating.
Specifically, 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); \58\ (2) increased the HCE test
total annual compensation amount from $100,000 to $134,004 per year;
\59\ (3) increased the special salary level for EAP workers in American
Samoa; \60\ (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;
\61\ and (5) added a mechanism to automatically update the part 541
earnings thresholds every 3 years.\62\ The Department did not change
any of the standard duties test criteria in the 2016 rule,\63\ opting
instead to adopt a standard salary level set at the low end of the
historical range of short test salary levels used in the pre-2004 two-
test system.\64\ The 2016 rule was scheduled to take effect on December
1, 2016.
---------------------------------------------------------------------------

\58\ 81 FR 32404-05.
\59\ Id. at 32428.
\60\ Id. at 32422.
\61\ See id. at 32425-26.
\62\ See id. at 32430.
\63\ Id. at 32444.
\64\ In the 2016 rule, the Department estimated the historical
range of short test salary levels as from $889 to $1,231 (based on
contemporaneous earnings data). Id. at 32405.
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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.\65\ 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.\66\ 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 undertook
further rulemaking. Following an NPRM published on March 22, 2019,\67\
the Department published a final rule on September 27, 2019 (the 2019
rule),\68\ which formally rescinded and replaced the 2016 rule.
---------------------------------------------------------------------------

\65\ See Nevada v. U.S. Department of Labor, 218 F. Supp. 3d 520
(E.D. Tex. 2016).
\66\ See Nevada, 275 F.Supp.3d 795.
\67\ See 84 FR 10900 (March 22, 2019).
\68\ See 84 FR 51230.
---------------------------------------------------------------------------

The 2019 rule (1) raised the standard salary level from the 2004
salary level of $455 to $684 per week, the equivalent of the 20th
percentile of weekly earnings of full-time salaried workers in the
lowest-wage Census Region (the South) and/or in the retail industry
nationally; (2) increased the HCE total annual compensation threshold
from $100,000 to $107,432, the equivalent of the 80th percentile of
annual earnings of full-time salaried workers nationwide; (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.\69\ The 2019 rule did not make
changes to the standard duties test.\70\ While using 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.\71\ The Department acknowledged that
the new standard salary level was, unlike the salary level set in the
2004 rule, below the long test salary level used in the pre-2004 two-
test system.\72\ 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.'' \73\ The 2019 rule took effect on January 1,
2020.\74\
---------------------------------------------------------------------------

\69\ 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. Id. at 51246.
\70\ See id. at 51241-43.
\71\ See id. at 51242.
\72\ Id. at 51244.
\73\ Id. at 51251.
\74\ A lawsuit challenging the 2019 rule was filed in August
2022. The district court upheld the rule and an appeal of that
decision was pending at the time the Department issued this final
rule. See Mayfield v. U.S. Department of Labor, 2023 WL 6168251
(W.D. Tex. Sept. 20, 2023), appeal docketed, No. 23-50724 (5th Cir.
Oct. 11, 2023).
---------------------------------------------------------------------------

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 sections
13(a)(1) and 13(a)(17). The employer bears the burden of establishing
the applicability of any exemption.\75\ Job titles and job descriptions
do not determine

[[Page 32847]]

exemption status, nor does merely paying an employee a salary rather
than an hourly rate.
---------------------------------------------------------------------------

\75\ See, e.g., Idaho Sheet Metal Works, 383 U.S. at 209;
Walling, 330 U.S. at 547-48.
---------------------------------------------------------------------------

As previously indicated, to satisfy the EAP exemption, employees
must meet certain tests regarding their job duties \76\ and generally
must be paid on a salary basis at least the amount specified in the
regulations.\77\ Some employees, such as doctors, lawyers, teachers,
and outside sales employees, are not subject to salary tests.\78\
Others, such as academic administrative personnel and computer
employees, are subject to special, contingent earning thresholds.\79\
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.\80\ A special salary level of $455 per week
currently applies to employees in Puerto Rico, Guam, the U.S. Virgin
Islands, and the CNMI; \81\ a special salary level of $380 per week
applies to employees in American Samoa; \82\ and employers can pay a
special weekly ``base rate'' of $1,043 per week to employees in the
motion picture producing industry.\83\ 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.\84\
---------------------------------------------------------------------------

\76\ 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).
\77\ 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.
\78\ 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.
\79\ See Sec. 541.600(c)-(d).
\80\ See Sec. Sec. 541.600(a); 541.601(a)(1).
\81\ See Sec. Sec. 541.100; 541.200; 541.300.
\82\ See Sec. Sec. 541.100; 541.200; 541.300.
\83\ See Sec. 541.709.
\84\ Sec. 541.602(a)(3).
---------------------------------------------------------------------------

Under the HCE test, employees who currently 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.\85\ The HCE test applies only to employees whose
primary duty includes performing office or non-manual work.\86\
Employees considered exempt under the HCE test must currently 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.\87\
---------------------------------------------------------------------------

\85\ Sec. 541.601.
\86\ Sec. 541.601(d).
\87\ See Sec. 541.601(b)(1); see also 84 FR 51249.
---------------------------------------------------------------------------

D. The Department's Proposal

On September 8, 2023, consistent with its statutory authority to
define and delimit the EAP exemption, the Department published a Notice
of Proposed Rulemaking (NPRM) to revise the part 541 regulations.\88\
The Department proposed 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), equivalent to $1,059
per week based on earnings data used in the NPRM.\89\ The Department
also proposed 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.\90\ The
Department additionally proposed raising the HCE test's total annual
compensation requirement to the annual equivalent of the 85th
percentile of weekly earnings of full-time salaried workers nationally,
equivalent to $143,988 per year based on earnings data used in the
NPRM. Finally, the Department proposed a new mechanism to update the
standard salary level and the HCE total annual compensation threshold
every 3 years to ensure that they remain effective tests for exemption.
---------------------------------------------------------------------------

\88\ See 88 FR 62152.
\89\ The Department noted that the final rule would use the most
recent earnings data available to set the standard salary level,
which would change the dollar amount of the resulting threshold. See
88 FR 62152-53 n. 3.
\90\ In this final rule the Department is not finalizing its
proposal in section IV.B.1 and B.2 of the NPRM to apply the standard
salary level to the U.S. territories subject to the federal minimum
wage and to update the special salary levels for American Samoa and
the motion picture industry. The Department will address these
aspects of its proposal in a future final rule. While the Department
is not finalizing its proposal, it is making nonsubstantive changes
in provisions addressing the territories as a result of other
changes in this final rule.
---------------------------------------------------------------------------

The public comment period for the NPRM concluded on November 7,
2023. The Department received approximately 33,300 comments in response
to the NPRM during the 60-day comment period.\91\ Comments came from a
diverse array of stakeholders, including employees, employers, trade
associations, small business owners, labor unions, advocacy groups,
nonprofit organizations, law firms, academics, educational
organizations and representatives, religious organizations, economists,
members of Congress, state and local government officials, tribal
representatives, and other interested members of the public. All timely
received comments may be viewed on the https://www.regulations.gov
website, docket ID WHD-2023-0001.
---------------------------------------------------------------------------

\91\ In regulations.gov, the number of comments received is
listed as 33,310 and the number of posted comments is 26,280. This
difference is because one commenter, WorkMoney, attached thousands
of comments to their one submission.
---------------------------------------------------------------------------

Commenter views on the merits of the NPRM varied widely. Some of
the comments the Department received were general statements of support
or opposition, while many others addressed the Department's proposal in
considerable detail. As with previous part 541 rulemakings, a majority
of the total comments came from comment campaigns using similar or
identical template language. Such campaign comments expressed support
or opposition to the proposed salary level, and sometimes addressed
other issues including applying the salary level to teachers,\92\ and
concerns from nonprofit agencies. However, the Department also received
thousands of unique comments. Significant issues raised in the comments
are discussed in this final rule. Comments germane to the need for this
rulemaking are discussed in section III, comments about the NPRM's
proposals are discussed in section V, and comments about the potential
costs, benefits, and other impacts of this rulemaking are discussed in
section VII. The Department has carefully considered the timely
submitted comments about the Department's proposal.
---------------------------------------------------------------------------

\92\ As noted above, teachers are among the employees for whom
there is no salary level requirement under the part 541 regulations.
See Sec. 541.303(d).
---------------------------------------------------------------------------

The Department received a number of comments on topics that are
beyond the scope of this rulemaking. A significant number of commenters
(including a large comment campaign) urged the Department to newly
apply the part 541 salary criteria to teachers. The Department did not
solicit comment about the exemption criteria for teachers in the NPRM
and, as many commenters on this issue recognized, addressing this issue
would require a separate rulemaking. Other topics outside the

[[Page 32848]]

scope of this rulemaking include, for example, a request that the
Department extend the right to overtime pay to medical residents,
create exemptions from the salary level test, allow employers to credit
the value of board and lodging towards the salary level, clarify issues
related to the fluctuating workweek method of calculating overtime pay,
or create a ``safe harbor'' provision for restaurant franchisors. The
Department is not addressing these issues in its final rule.
Several stakeholders such as Catholic Charities USA and the
National Council of Nonprofits expressed concern about funding and
reimbursement rates to meet potential new overtime expenses. The
Department appreciates the concerns conveyed in these comments and the
challenges of adjusting public funding. As discussed in section
V.B.4.iv, however, the Department's EAP regulations have never had
special rules for nonprofit or charitable organizations and employees
of these organizations are subject to the EAP exemption if they satisfy
the same salary level, salary basis, and duties tests as other
employees.

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 achieve this
goal, the Department is not only updating 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. To this end, the Department is finalizing its proposed
changes to the standard salary level and the HCE test's total annual
compensation requirement methodologies. Additionally, to maintain the
effectiveness of these tests, the Department is finalizing an updating
mechanism that will update these earnings thresholds to reflect current
wage data, initially on July 1, 2024 and every 3 years thereafter. The
Department's response to commenter feedback on the specific proposals
included in the NPRM is provided in section V. This section explains
the need for the Department to update the part 541 earnings thresholds
and addresses commenter feedback on whether the earnings thresholds
established in the 2019 rule should be increased.
As the Department explained in the NPRM, there is a need for the
Department to update the salary level to fully restore the salary
level's screening function and to account for the shift to a one-test
system in the 2004 rule, which broadened the exemption by placing the
entire burden of this shift on employees who historically were entitled
to the FLSA's overtime protection because they performed substantial
amounts of nonexempt work and earned between the long and short test
salary levels, but became exempt because they passed the more lenient
standard 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 standard salary
level. In 2004, the Department used a methodology that produced a
salary level amount that was equivalent to the lower long test salary
level under the two-test system.\93\ This approach continued to perform
the historical screening function of the long salary test--providing
overtime protection to employees who earned less than the long test
salary level. But it broadened the exemption to include employees
earning between the long and short test salary levels who historically
had not met the long duties test (and therefore were not considered
bona fide EAP employees) and now became exempt if they met the less
rigorous standard duties test.\94\ The Department followed this same
methodology to set the standard salary level in 2019, but applying the
2004 rule's methodology to contemporaneous data in 2019 resulted in a
salary level that was lower than what would have been the equivalent of
the long test salary level and thus did not fulfill the historical
screening function for low-paid employees.\95\ This broadened the EAP
exemption even further by, for the first time, exempting a group of
white-collar employees earning below the equivalent of the long test
salary level.
---------------------------------------------------------------------------

\93\ See 69 FR 22168-69.
\94\ Id. at 22214.
\95\ 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, in 2016 the Department set the standard
salary level using a methodology that produced a salary at the low end
of the historical range of short test salary levels.\96\ This approach
restored overtime protection to lower-salaried white-collar employees
who performed substantial amounts of nonexempt work, but it also made
nonexempt some employees paid below the new salary level who performed
only a limited amount of nonexempt work and would have been exempt
under the long duties test.\97\ 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.\98\
---------------------------------------------------------------------------

\96\ 81 FR 32405.
\97\ See 84 FR 10908; 84 FR 51242.
\98\ See Nevada, 275 F.Supp.3d. at 806.
---------------------------------------------------------------------------

As explained in greater detail in section V.B, setting the standard
salary level at the 35th percentile of weekly earnings of full-time
salaried workers in the lowest-wage Census Region ($1,128 per week,
$58,656 annually), which is below the midpoint between the long and
short tests, will work effectively with the standard duties test to
better define and delimit the EAP exemption, in part by more
effectively accounting for the switch from a two-test to a one-test
system, and will 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.\99\ The new standard salary level will also
account for earnings growth since the 2019 rule and fully restore the
historical screening function of the salary level test. At the same
time, the duties test will continue to determine exemption status for a
large majority of all salaried white-collar employees subject to the
part 541 regulations.
---------------------------------------------------------------------------

\99\ See section V.A.3.
---------------------------------------------------------------------------

As the Department has explained,\100\ earnings thresholds in the
part 541 regulations gradually lose their effectiveness as the salaries
paid to nonexempt employees rise over time. These impacts grow in the
absence of increases to the salary threshold that keep pace with wage
growth. Moreover, the longer it takes for the Department to implement
such increases, the larger the increases must be to restore earning
thresholds to maintain their effectiveness. More than 4 years have
passed since the 2019 final rule established the current earnings
thresholds. In the intervening years, salaried workers in the U.S.
economy have experienced a rapid growth in their nominal wages, such
that the current $684 per week salary level now corresponds to
approximately the 12th percentile of earnings of full-time salaried
workers in the lowest-wage Census Region and retail nationally. The
longer the Department waits to update these earnings thresholds, the
less effective they become in helping define

[[Page 32849]]

and delimit the EAP exemption. For example, applying the 2019 standard
salary level methodology to current earnings data will result in a new
threshold of $844 per week--a 23 percent ($160 per week) increase over
the current $684 salary level. Earnings for full-time wage and salary
workers nationally have increased even more rapidly, rising by 24
percent during this period.\101\
---------------------------------------------------------------------------

\100\ See, e.g., 84 FR 51250-51.
\101\ Estimate based on the change in median usual weekly
earnings of full-time wage and salary workers from Q3 2019 to Q4
2023. BLS, Median usual weekly earnings of full-time wage and salary
workers by sex, quarterly averages, seasonally adjusted. https://www.bls.gov/news.release/wkyeng.t01.htm.
---------------------------------------------------------------------------

The Department is also increasing the HCE total annual compensation
threshold to the annualized weekly earnings amount of the 85th
percentile of full-time salaried workers nationally ($151,164). Similar
to the standard salary level, nominal wage growth among higher-wage
workers has eroded the effectiveness of the HCE threshold; data shows
that the $107,432 threshold now corresponds to the 70th percentile of
annual earnings of full-time salaried workers nationwide. Reapplying
the 2019 methodology (annualized weekly earnings of the 80th percentile
of full-time salaried workers nationally) to current earnings data
would result in a threshold of $132,964 per year--a 24 percent increase
over the current threshold of $107,432. Increasing the HCE test's total
annual compensation threshold equivalent to the 85th percentile of
salaried worker earnings nationwide will result in an HCE threshold
reserved for employees at the top of today's economic ladder and,
unlike a lower threshold, not risk the unintended exemption of large
numbers of employees in high-wage regions.
Finally, the Department is adopting a mechanism to regularly update
the thresholds for earnings growth, which will ensure that the
thresholds continue to work effectively to help identify EAP employees.
As noted above, 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 has generally 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.
Routine updates of the earnings thresholds to reflect wage growth will
bring certainty and stability to employers and employees alike.
The Department received many comments addressing the adequacy of
the current salary and compensation thresholds set in the 2019 rule and
the need for this rulemaking. Generally, employees and affiliated
commenters, including labor unions, worker advocacy groups, plaintiff-
side law firms, and others, supported the rulemaking as an overdue
effort to restore FLSA protections that have eroded in recent decades,
though a number of commenters urged the Department to adopt higher
threshold increases than those proposed in the NPRM. By contrast, most
employers and affiliated stakeholders opposed the main aspects of the
proposal, with many urging the Department to withdraw the NPRM
altogether. Some employers supported the proposal, or stated that they
would support, or not oppose, some change to the current thresholds.
Many commenters agreed with the Department's assessment that the
current salary level is too low.\102\ See, e.g., Coalition of Gender
Justice and Civil Rights Organizations; Coalition of State Attorneys
General; Economic Policy Institute (EPI); Schuck Law LLC; Texas
RioGrande Legal Aid; United Steel, Paper and Forestry, Rubber,
Manufacturing, Energy, Allied Industrial and Service Workers
International Union (United Steelworkers). Several commenters asserted
that the current standard salary level ``fails to provide a true
incentive for employers to balance the additional hours they ask of
their workers with the costs of . . . overtime pay[,]'' which they
stated in turn undermines the FLSA's policy goals of providing ``extra
pay for extra work . . . [and] spreading employment.'' See, e.g.,
Center for Law and Social Policy (CLASP); Caring Across Generations;
Family Values @Work; Jobs to Move America; North Carolina Justice
Center; Workplace Justice Project. Opining that the standard salary
level ``has been increased too infrequently--and by too little[,]''
Business for a Fair Minimum Wage asserted that the ``current outdated
overtime threshold is ripe for abuse and fosters unfair pay, worker
burnout, poorer health and safety, and increased employee turnover.''
American Federation of Labor and Congress of Industrial Organizations
(AFL-CIO) asserted that the $684 per week salary level is ``so low that
it risks becoming irrelevant[.]''
---------------------------------------------------------------------------

\102\ Commenter views on the adequacy of the current HCE
threshold are addressed in section V.C.
---------------------------------------------------------------------------

Finally, some supportive commenters provided reasons why, in their
opinion, this rulemaking is timely. A joint comment submitted by 10
Democratic members of the House of Representatives asserted that
``[o]vertime standards are long overdue for a meaningful update.'' See
also AFL-CIO (asserting that setting the salary level below the long
test level in the 2019 rule ``led to the faster irrelevance of the
current level''). The Coalition of State AGs commented that
``[r]egardless of whether [the $684 per week standard salary] level was
appropriate in 2019, economic trends in the intervening years have
rendered that level obsolete . . . [as] $684 in January 2020 has the
same buying power as $816.90 in September 2023.'' Sanford Heisler Sharp
LLP (Sanford Heisler Sharp) invoked ``the explosion of remote work
since 2020'' as support for the rulemaking, asserting that the
significant increase in telework since 2020 has meant that employers
are ``no longer constrained by the practical limitation of the worker
leaving the workplace.''
Many employer trade associations that were neutral or opposed to
the NPRM's specific proposals for increasing the compensation levels
expressed openness or support for a rulemaking to change the existing
part 541 earnings thresholds. See, e.g., Alliance for Chemical
Distribution; Growmark Comment Campaign (GROWMARK); National Cotton
Ginners Association; National Golf Course Owners Association. Reporting
on the results of a survey taken of its members, Society for Human
Resource Management (SHRM) stated that its members ``support a
reasonable increase to the rule's minimum salary threshold . . . as
only 4% of the total number of respondents indicated that they would
not support any increase.'' Independent Sector remarked that ``a
healthy and equitable nonprofit workforce requires an increase in the
salary threshold beyond $35,568.'' See also North Carolina Center for
Nonprofits (``The Center recognizes that a higher salary level
threshold would benefit people served by nonprofits and many nonprofit
employees, and we encourage the Department to move forward with a final
rule that increases the [current] salary level threshold[.]'').
National Association of Convenience Stores commented that it
``acknowledges that the minimum salary level should be revisited
occasionally, and it support[s] USDOL's approach in 2019 of doing so
approximately every four years[.]'' See also Retail Industry Leaders
Association

[[Page 32850]]

(RILA) (``We recognize that the DOL committed itself in 2019 to engage
in more regular reviews of the salary threshold level for the [EAP]
exemptions and that the DOL now is following up on that commitment.'').
Other employer stakeholders disputed the need for this rulemaking.
Many of these commenters, including the American Bus Association,
Americans for Prosperity Foundation, Construction Industry Round Table,
and National Restaurant Association, asserted that increases to the
part 541 earnings thresholds were unnecessary at this time because the
last update took effect on January 1, 2020. A number of commenters
stated that prior salary level updates have occurred less frequently.
See, e.g., National Association of Manufacturers (NAM) (never less than
5 years); National Demolition Association (on average every 9 to 10
years); National Association of Wholesale Distributors (NAW)
(historically 7 to 9 years). National Retail Federation (NRF) commented
that ``[t]here has been no increase of the federal minimum wage since
2019, and therefore, there is no need to adjust the minimum salary
threshold.'' NRF further asserted that there was no need to increase
the part 541 earnings thresholds because ``market forces have already
increased the compensation of lower-level exempt employees'' since
2019, echoing the sentiment from several individual employers that
markets should determine employee wages rather than government
regulation. See also, e.g., Casa Del Mar Beachfront Suites (opposing
changes to the regulations and stating that the wages it pays ``are
based on free enterprise and competitive business plans''); Individual
Small Business Commenter (asking the Department to ``let the market
take care of the situation''). Numerous commenters also asserted that
the Department should refrain from amending the part 541 regulations at
this time due to current conditions in specific industries or the
broader economy. See, e.g., Asian American Hotel Owners Association,
Inc.; American Hotel and Lodging Association (AHLA); College and
University Professional Association for Human Resources (CUPA-HR); Food
Marketing Institute (FMI); Indiana Chamber of Commerce; National
Association of Home Builders (NAHB).
Finally, a small number of commenters opposed this rulemaking on
the grounds that the Department lacks the legal authority to use any
salary criteria to define and delimit the EAP exemption. See, e.g.,
America First Policy Institute (AFPI); National Federation of
Independent Business (NFIB); Pacific Legal Foundation.\103\ However,
the overwhelming majority of commenters did not oppose the use of
salary criteria in the part 541 regulations or address the Department's
authority, and a number of employer representatives expressed general
support for the use of earnings thresholds. See, e.g., AHLA (``[M]oving
to a duties-only test would undoubtedly result in a more rigid duties
test . . . [and] likely result in excessive burdens on the hospitality
industry, including new and onerous recordkeeping requirements and
increased litigation costs.''); National Restaurant Association
(``[S]alary levels save investigators and employers time by giving them
a quick, short-hand test[.]''); Transportation Intermediaries
Association (``Implementing a duties-only test without considering
salary would be overly complex[.]''). This sentiment is consistent with
stakeholder feedback provided in earlier part 541 rulemakings.\104\
---------------------------------------------------------------------------

\103\ See discussion in section V.A.
\104\ See supra note 23.
---------------------------------------------------------------------------

Having reviewed the comments received, the Department remains of
the view that the earnings criteria in the part 541 regulations must be
increased and disagrees with commenters that urged the Department to
withdraw its proposal. In addition to updating the salary level to
account for wage growth since 2019, an update is needed in part because
the current standard salary level is too low to fully perform its
screening role, as it is now significantly below the contemporary
equivalent of the historical long test salary level ($942 per
week).\105\ Moreover, as the Department explained in the NPRM, there is
a need for the Department to update the salary level to account for the
shift to a one-test system in the 2004 rule, which broadened the
exemption by placing the entire burden of this shift on employees who
historically were entitled to the FLSA's overtime protection because
they performed substantial amounts of nonexempt work and earned between
the long and short test salary levels, but are now exempt because they
pass the more lenient standard duties test. This effect would continue
to grow over time in the absence of an increase to the current $684 per
week standard salary level.
---------------------------------------------------------------------------

\105\ See sections V.B. and VII.C.8.
---------------------------------------------------------------------------

The Department disagrees with the criticism from some commenters
that this rulemaking is premature due to the relative recency of the
2019 rule. In that rule, the Department ``reaffirm[ed] its intent to
update the standard salary level and HCE total annual compensation
threshold more regularly in the future'' than it has in the past,
noting that ``long periods without updates . . . diminish the
usefulness of the salary level test and cause future increases to be
larger and more challenging for businesses to absorb.'' \106\ Notably,
the Department initially proposed in the 2019 NPRM to codify a
commitment to update the part 541 earnings thresholds on a quadrennial
basis (i.e., once every 4 years) through notice and comment
rulemaking.\107\ While that proposed commitment was not adopted in the
2019 final rule, the Department reaffirmed the importance of, and its
commitment to, regular updates in its 2019 final rule. The Department's
2019 final rule in no way suggested that increases to the part 541
earnings thresholds should occur only after some longer period of time.
---------------------------------------------------------------------------

\106\ 84 FR 51251-52.
\107\ 84 FR 10914-15.
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Relatedly, the fact that employee salaries have grown substantially
since 2019 underscores the need for this rulemaking. Commenter
assertions to the contrary, including that the federal minimum wage has
not increased since the salary level was last updated, misunderstand
the purpose of the part 541 earnings thresholds, which are intended to
assist in the identification of EAP employees based on the wages
employees presently receive.\108\ To the extent that employers have
already been providing raises to exempt EAP workers since January 1,
2020 (the effective date of the 2019 final rule), as some commenters
contended, those increases should be appropriately reflected in the
earnings thresholds to ensure their effectiveness.
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\108\ The Department ``is not authorized to set wages or
salaries for executive, administrative, and professional employees .
. . [and] improving the conditions of such employees is not the
objective of the [part 541] regulations.'' Weiss Report at 11.
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The Department is sensitive to commenter concerns about the
potential impact of this rulemaking on affected employers. However, as
discussed in greater detail in the regulatory impact analysis in
section VII, the costs of this rule, while significant, are a necessary
byproduct of ensuring a salary level that works effectively with the
duties tests both now and in the future.

IV. Effective Date

The Department proposed that all aspects of the proposed rule would
become effective 60 days after publication of the final rule. This
proposed effective date was consistent

[[Page 32851]]

with the 60 days mandated for a ``major rule'' under the Congressional
Review Act and exceeded the 30-day minimum required under the
Administrative Procedure Act (APA).\109\ The Department recognized that
the 60-day proposed effective date was shorter than the effective dates
for the 2004, 2016, and 2019 rules, which were between approximately 90
and 180 days. The Department stated that a 60-day effective date was
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 also sought
comments on whether to apply different effective dates to different
provisions of the proposed rule. The Department is finalizing an
effective date of July 1, 2024. The change to the standard salary level
methodology and the change to the HCE total annual compensation
methodology will have a delayed applicability date of January 1,
2025.\110\ Accordingly, the standard salary level and HCE total annual
compensation requirement will increase at the initial update on the
effective date July 1, 2024 (to $844 and $132,964, respectively), again
on the applicability date for the new methodologies on January 1, 2025
(to $1,128 and $151,164, respectively), and then every 3 years after
the initial update on July 1 (using the methodology in effect at the
time of each update).
---------------------------------------------------------------------------

\109\ See 5 U.S.C. 801(a)(3)(A); 5 U.S.C. 553(d).
\110\ The January 1, 2025 applicability date is six months after
the effective date of the rule.
---------------------------------------------------------------------------

The Department specifically asked for comments on whether the
effective date for the increase of the standard salary level should be
60 days after publication as proposed or instead if the increase should
be made effective at a later date, such as 6 months or 1 year after
publication of the final rule. If the effective date were longer than
60 days, the Department sought 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).'' \111\ Were
it to follow such an approach, the Department sought comments on the
methodology it should use for an initial update, specifically ``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[.]'' \112\
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\111\ 88 FR 62180.
\112\ Id. Commenters generally did not address the Department's
suggestion that a delay in the effective date for the proposed
standard salary level increase be combined with an initial update to
the existing salary level to reflect wage growth. An individual
commenter acknowledged the Department's suggestion but ``defer[ed]
to the economists and statisticians to comment as to whether, if the
effective date is later than 60 days, the Department should
initially adjust the salary level to reflect recent wage growth, and
if so, the methodology for doing so.'' See also Ho-Chunk, Inc., a
subsidiary of the Winnebago Tribe of Nebraska.
---------------------------------------------------------------------------

The Department did not specifically request comment on delaying the
effective date of the proposed HCE compensation threshold beyond 60
days or on making an initial update using current data and the existing
HCE compensation methodology if it were to delay the effective date of
the new total annual compensation threshold. The Department stated that
it believed a 60-day effective date was appropriate for the proposed
increase to the HCE compensation threshold because only a relatively
small number of employees earning between the current and proposed HCE
compensation thresholds would not meet the standard duties test and be
affected by the proposed change. The Department sought comment on the
proposed effective date for the HCE compensation threshold.
Lastly, the Department proposed that the first automatic update to
the new compensation levels be effective 3 years after the proposed 60-
day effective date. The Department sought comments on whether the date
for the first automatic update should be adjusted if it were to make an
initial adjustment to any of the compensation levels.
Many commenters that objected to the proposed rule also objected to
the proposed 60-day effective date should the Department go forward
with a final rule. Commenters addressed their comments to the single
60-day effective date and generally did not suggest different effective
dates for different provisions. Several commenters suggested effective
dates between 90 and 180 days, which the NPRM noted was the range for
recent rules. See, e.g., HR Policy Association (minimum of 90 days);
International Foodservice Distributors Association (IFDA) (minimum of
90 days); American Society of Travel Advisors (ASTA) (90 to 180 days);
RILA (at least 120 days); NAIS/NBOA (at least 120 days). Several
commenters suggested a 180-day effective date. See, e.g., AASA/AESA/
ASBO; CUPA-HR; LeadingAge; NRF. The National Council of Young Men's
Christian Associations of the United States of America (YMCA) suggested
an effective date of at least 6 to 9 months. The United States Chamber
of Commerce (Chamber), National Association of Convenience Stores, and
NAFCU suggested an effective date of 12 months. Commenters including
the U.S. Small Business Administration Office of Advocacy (SBA
Advocacy), National Automobile Dealers Association, and Partnership to
Protect Workplace Opportunity (PPWO) suggested an effective date of 12
to 18 months. Commenters including Seyfarth Shaw LLP (Seyfarth Shaw)
and Credit Union National Association (CUNA) suggested an effective
date of 150 days to align with the proposed notice period for future
update amounts. A number of commenters suggested tying the effective
date to the beginning of the next calendar year (January 1, 2025). See,
e.g., Seyfarth Shaw; SHRM; RILA; YMCA. Some commenters suggested a
longer time period between the publication and effective date of the
final rule for specific industries or types of employers. See, e.g.,
Boy Scouts of America (requesting at least 12 months of lead time for
nonprofit employers); Small Business Majority (180 days for small
businesses with fewer than 50 employees). A few commenters linked the
need for a longer effective date with what they asserted was
uncertainty as to the final salary amount caused by the Department's
projections in footnote 3 of the NPRM, with NRF asserting that ``[t]he
brevity of the implementation period is particularly problematic given
the Department's . . . lack of clarity about the dollar value of the
proposed threshold.'' See also HR Policy Association; RILA.
Several commenters suggested phasing in any increase in the salary
level, often in addition to an initial extension of the proposed
effective date. Commenters advocating for a phase-in suggested a range
of steps or timeframes. See, e.g., ASTA (not less than 3 years);
Chamber (3 years in even or incrementally larger steps); North Carolina
Center for Nonprofits (``multiple years''); National Council of
Nonprofits (two or more steps); PPWO (a period of years), Safe Journeys
(6 years); Washington Farm Labor Association (``multi-year''); YMCA
(proportional increases over 5 years).
Most commenters supporting the Department's proposal did not
specifically address the effective date for the Department's proposed
changes. Commenters including American Federation of Teachers (AFT),
National

[[Page 32852]]

Partnership for Women & Families (National Partnership), and National
Women's Law Center (NWLC) urged the Department to finalize the rule
``without delay.'' American Federation of State, County, and Municipal
Employees (AFSCME) specifically supported the 60-day effective date as
proposed. A number of commenters in the home and community-based health
services sector, that were generally supportive of the Department's
intent but expressed concerns with its proposal, advocated for a longer
effective date. ANCOR suggested a 2-year delayed effective date
followed by a 3-to-5-year phase-in of the new salary level. See also
Advancing States (18-month to 2-year effective date); National
Association of State Directors of Developmental Disabilities Services
(NASDDDS) (18- to 24-month effective date for providers of services to
individuals with intellectual and developmental disabilities); United
Cerebral Palsy (phase-in or transition period for the Department to
work with the Centers for Medicare and Medicaid Services and the
Administration for Community Living to minimize impact on access to
services). BrightSpring Health Services urged the Department to delay
the effective date for 2 years and to consider an enforcement delay for
the sector as it did in 2016.
As discussed below, the Department believes it is important to
update the standard salary level in part to account for substantial
earnings growth since the Department last updated the salary level in
the 2019 rule. It has been more than 4 years since the Department
updated the salary level, and economic conditions have changed
significantly since then as evidenced by the salary increase that would
result by applying current data to the 2019 salary level methodology
($844 per week, an increase of $160 per week over the existing salary
level). These economic conditions have also impacted employees subject
to the HCE exemption. Applying current data to the 2019 HCE
compensation methodology would result in an annual compensation
threshold of $132,964 (an increase of $25,551 over the existing
compensation threshold).
At the same time, the Department is also mindful of the desire
expressed by multiple commenters to extend the effective date of the
new standard salary and annual compensation methodologies from the
proposed 60-day period to 6-to-12 months (or more). A longer effective
date for the new standard salary level and HCE compensation
methodologies would provide employers with more time to make
adjustments after they are informed of the exact levels of the
thresholds set in this final rule.
After considering the comments, the Department has determined that
the final rule will be effective on July 1, 2024, but the new standard
salary level methodology and the new HCE total annual compensation
methodology will not be applicable until January 1, 2025. The
Department is setting the effective date on July 1, 2024 rather than a
set number of days after publication in the Federal Register because it
will further administrability for employers to have the effective date
coincide with the first of a month and some employers' budget years
also begin on that date.\113\ While the rule will be effective on July
1, 2024, the Department is extending by an additional 6 months the time
for employers to comply with the new standard salary level methodology
and the HCE total annual compensation methodology. Accordingly, the
applicability date for Sec. 541.600(a)(2), which sets out the new
standard salary level of the 35th percentile of weekly earnings of
full-time nonhourly workers in the lowest-wage Census Region, and Sec.
541.601(a)(2), which sets out the new HCE total annual compensation
level of the annualized earnings amount of the 85th percentile of full-
time nonhourly workers nationally, will be January 1, 2025. The
Department decided to delay application of the new HCE total annual
compensation methodology so that the new methodologies for both the
standard salary level and the HCE compensation level take effect at the
same time. The delayed applicability date will allow employers 6
additional months beyond the proposed 60-day effective date in which to
evaluate employees who will be affected by the new standard salary
level methodology and the new HCE compensation level methodology and
make any adjustments.
---------------------------------------------------------------------------

\113\ Future updates will occur every three years on July 1.
---------------------------------------------------------------------------

New Sec. 541.607, Regular updates to amounts of salary and
compensation required, will be applicable on the effective date July 1,
2024. Because the current standard salary and HCE annual compensation
levels have not been updated in more than 4 years, and economic
conditions have changed markedly during that time, the first update
will occur on that same date (Sec. 541.607(a)). Subsequent updates
will occur every 3 years after this date starting on July 1, 2027
(Sec. 541.607(b)). As discussed in section V.A, regular updating of
the standard salary and HCE annual compensation levels to reflect
current wage data is imperative to ensure that they continue to work
effectively in combination with the duties tests in defining bona fide
EAP employees. In light of the approximately 8-month delay in
applicability of the new standard salary and HCE total compensation
methodologies, the initial update will use the current methodologies
from the 2019 rule, which result in a salary level of $844 per week and
an HCE total annual compensation threshold of $132,964. Accordingly,
the requirement that an exempt employee be compensated on a salary
basis at a salary level of at least $844 per week, set forth in Sec.
541.600(a)(1), and that an employee receive total annual compensation
of at least $132,964 per year to qualify for the HCE exemption, set
forth in Sec. 541.601(a)(1), will apply on July 1, 2024. The
Department believes that this date for the initial update is
appropriate because it will use methodologies that employers are
familiar with. Subsequent triennial updates will apply the most recent
four quarters of data to the standard salary and HCE total annual
compensation levels in effect at the time of the updates. The
Department anticipates that at the time of the first triennial update,
the salary and compensation methodologies that are in effect will be
the methodologies described in Sec. Sec. 541.600(a)(2) and
541.601(a)(2) of this final rule. The Department notes that the
standard salary and HCE compensation levels need to be updated
regularly based on up-to-date earnings data to ensure that they
continue to function effectively regardless of the methodology used to
set the levels.
Except for the specific provisions discussed in this section that
will become applicable on January 1, 2025, all other provisions of this
final rule will be applicable on the effective date on July 1, 2024.

V. Discussion of Final Regulatory Revisions

Consistent with its statutory duty to define and delimit the EAP
exemption, the Department is making several changes to the earnings
thresholds provided in the part 541 regulations. As explained in
greater detail below, the Department is setting the standard salary
level at the 35th percentile of weekly earnings of full-time salaried
workers in the lowest-wage Census Region (currently the South). The
Department additionally is raising the HCE test's total annual
compensation requirement to the annualized equivalent of the 85th
percentile of weekly earnings of full-time salaried workers nationally.
Finally, the

[[Page 32853]]

Department is adopting a new mechanism to update the standard salary
level and the HCE total annual compensation threshold, initially on
July 1, 2024 and every 3 years thereafter to ensure that they remain
effective tests for exemption. The Department is not making substantive
changes to any provisions related to the salary basis or job duties
tests.
The primary changes to the existing regulations are in Sec. Sec.
541.5, 541.600, 541.601, and newly added Sec. 541.607. In addition,
the Department is making conforming changes throughout part 541 to
update references to the applicable salary level requirements.\114\ The
discussion below begins with the new updating provision (Sec.
541.607), which will make an initial update to the salary and
compensation thresholds on July 1, 2024, followed by discussion of
changes to the standard salary level methodology (Sec. 541.600(a)(2))
and HCE total annual compensation threshold methodology (Sec.
541.601(a)(2)), which will become applicable on January 1, 2025. As
noted in these sections, the Department intends for the changes in this
final rule to be severable. Severability is addressed more fully at the
end of the discussion of final revisions with a discussion of the new
severability provision (Sec. 541.5).
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\114\ The Department is also revising Sec. Sec. 541.100,
541.200, and 541.300 to reflect that an executive, administrative,
or professional employee must be compensated on a salary or fee
basis at not less than the level set forth in Sec. 541.600 (rather
than referencing a specific salary level amount). Similarly, it is
revising Sec. 541.204 and Sec. 541.400 to reflect that an employee
employed in a bona fide administrative capacity and a computer
employee may qualify for the section 13(a)(1) exemption if they are
compensated on a salary or fee basis at not less than the level set
forth in Sec. 541.600 (rather than referencing a specific salary
level amount). The Department is also updating cross-references to
Sec. 541.600(a) in Sec. Sec. 541.602 and 541.605 to reference
Sec. 541.600(a)-(c). Finally, the Department is revising Sec.
541.604, which explains the circumstances under which an employer
may provide an exempt employee with additional compensation without
violating the salary basis requirement, and Sec. 541.605, which
sets forth the conditions under which an administrative or
professional employee may be compensated on a fee basis, with
examples that reflect the new standard salary level amount of $1,128
per week.
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A. Updating the Standard Salary Level and Total Annual Compensation
Threshold

As the Department stated in the NPRM, it has long recognized the
need to regularly update the earnings thresholds to ensure that they
remain useful in helping differentiate between exempt and nonexempt
white-collar employees. In each of its part 541 rulemakings since 2004,
the Department has observed that a salary level that is not kept up to
date becomes obsolete as wages for nonexempt workers increase over
time.\115\ Long intervals between 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 most 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 by 1991,
earnings of a worker paid the federal minimum wage exceeded the long
test salary level for a 40-hour workweek and came close to equaling the
short test salary level.\116\
---------------------------------------------------------------------------

\115\ 84 FR 51250-51; 81 FR 32430; 69 FR 22164. See also, 88 FR
62176.
\116\ See section II.B.1.
---------------------------------------------------------------------------

The Department proposed in the NPRM a mechanism to regularly update
the earnings thresholds to maintain their effectiveness. In a new Sec.
[thinsp]541.607(a)(1) and (b)(1), the Department proposed to update the
standard salary level and the HCE total annual compensation requirement
every 3 years to reflect current earnings data. The Department proposed
in Sec. 541.607(a)(2) and (b)(2) to make the triennial updates using
the methodologies proposed to set the thresholds in the NPRM--i.e., the
35th percentile of weekly earnings of full-time nonhourly workers in
the lowest-wage Census Region (currently the South) for the standard
salary level and the annualized weekly earnings of the 85th percentile
of full-time nonhourly workers nationally for the HCE total annual
compensation requirement.\117\ The NPRM also outlined in proposed Sec.
541.607(c) the manner in which the Department would publish advance
notice of the updated thresholds and included a pause mechanism in
proposed Sec. 541.607(d) that could be triggered to delay a scheduled
update under certain circumstances.
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\117\ Observing that the proposed special salary level for
American Samoa and the base rate for the motion picture industry are
set in relation to the standard salary level, the Department also
proposed that those earnings thresholds reset at the time the
standard salary level was updated. The Department is not finalizing
its proposal to apply the standard salary level to the U.S.
territories subject to the federal minimum wage and to update the
special salary levels for American Samoa and the motion picture
industry. See supra note 9. Therefore, the updating mechanism
finalized in this rule will not apply to the special salary levels
at this time.
---------------------------------------------------------------------------

The Department proposed to make the first update under its proposed
updating mechanism 3 years after the effective date of the final rule.
The effective date of the final rule was in turn proposed to be 60 days
after publication and to apply to all aspects of the proposed rule,
including the proposed methodologies for the standard salary level and
the HCE total annual compensation threshold. As discussed in section
IV, the Department specifically sought comments on whether the
effective date for the proposed change to the standard salary level
methodology (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 change should be made effective
at some later date, such as 6 months or 1 year after publication of the
final rule.\118\ If the effective date were longer than 60 days, the
Department sought 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).'' \119\ The Department also sought
comments on what methodology to use for the initial update, were it to
follow such an approach. In particular, the Department invited 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).'' \120\
---------------------------------------------------------------------------

\118\ 88 FR 62180
\119\ Id.
\120\ Id.
---------------------------------------------------------------------------

The Department received numerous comments on its proposed updating
mechanism. Many organizations representing employee interests as well
as some employers generally supported the updating mechanism, while
most organizations representing employer interests opposed it. Many of
the commenters opposing the proposed updating mechanism asserted that
the Department lacked the authority to institute such a mechanism.
After considering the comments received, the Department is finalizing
the updating mechanism, with some modifications as discussed below, to
keep the salary and compensation thresholds up to date with current
data and maintain their effectiveness.
The first update under new Sec. 541.607 will occur on July 1,
2024. As discussed in section IV, the new standard salary level and HCE
total annual compensation threshold methodologies will not be
applicable until January 1, 2025 (a total of approximately 8 months

[[Page 32854]]

after publication of this final rule). Accordingly, Sec. 541.607(a)
establishes an initial update on July 1, 2024 to the standard salary
level and the HCE total annual compensation threshold using the
methodologies in place at that time (i.e., the 2019 rule
methodologies), which results in a $844 per week standard salary level
and a $132,964 HCE total annual compensation threshold. Section
541.607(b) further establishes future updates to the standard salary
level and HCE total annual compensation threshold with current earnings
data beginning 3 years after the date of the initial update, and every
3 years thereafter, using the methodologies in place at the time of the
updates. The Department anticipates that by the time the first
triennial update under the updating mechanism occurs on July 1, 2027,
assuming the Department has not engaged in further rulemaking, the new
methodologies for the standard salary level and HCE total annual
compensation requirement established by this final rule will be
effective and the triennial update would employ these new
methodologies. In response to commenter concerns, the Department is
also adding clarifying language from the NPRM preamble to the final
regulatory text of the delay provision.
1. The Department's Authority To Adopt a Salary Level Test
The updating mechanism in new Sec. 541.607 will maintain the
effectiveness of the salary and compensation thresholds set in
Sec. Sec. 541.600 and 541.601 by adjusting them regularly to reflect
current economic data. At the outset, a small number of commenters
contended the Department lacked authority under section 13(a)(1) to
even include a salary level test in the regulations, advocating for the
Department to withdraw this rulemaking. See, e.g., AFPI; Job Creators
Network Foundation; NFIB; Pacific Legal Foundation. These commenters
asserted that the express terms of section 13(a)(1) do not permit the
Department to include any compensation-based requirements.
The Department maintains its longstanding position that the
Secretary's express 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,\121\ and the Department's
authority to use a salary test has been repeatedly upheld,\122\
including recently in Mayfield v. U.S. Dept. of Labor.\123\ Despite
numerous amendments to the FLSA over the past 85 years, Congress has
not restricted the Department's use of the salary level tests in the
regulations. 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 compensation requirements.
---------------------------------------------------------------------------

\121\ See Stein Report at 5, 19. As discussed in section
V.B.4.i, the vast majority of employer commenters in this
rulemaking, whether favoring no increase or a smaller increase,
presumed the salary level test's continued existence and utility,
with some, such as the National Restaurant Association, expressly
referencing their support for the 2019 rule's salary level increase.
Many commenters acknowledged the salary level's longstanding
function of screening obviously nonexempt employees from the
exemption. See section V.B.4.ii. Other commenters that opposed the
proposal nonetheless cited benefits of having a salary level test,
including helping to ensure that the EAP exemption is not abused,
see, e.g., AASA/AESA/ASBO, Bellevue University, and ``sav[ing]
investigators and employers time by giving them a quick, short-hand
test[.]'' See National Restaurant Association.
\122\ 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).
\123\ 2023 WL 6168251 (W.D. Tex. Sept. 20, 2023), appeal
docketed, No. 23-50724 (5th Cir. Oct. 11, 2023).
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The FLSA gives the Secretary 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.'' \124\ 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.'' \125\
---------------------------------------------------------------------------

\124\ 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.'').
\125\ Stein Report at 2.
---------------------------------------------------------------------------

2. Initial Update to the Standard Salary Level and Total Annual
Compensation Threshold To Reflect the Change in Earnings Since the 2019
Rule
The Department received many comments regarding its proposed
regulatory mechanism for updating the standard salary level and the HCE
total annual compensation requirement to maintain their effectiveness.
While commenters disagreed on how and when the salary and total annual
compensation thresholds should be updated, commenters generally did not
dispute that the earnings thresholds need to be periodically updated to
reflect current economic conditions. Many commenters that opposed the
proposed updating mechanism nonetheless agreed that the thresholds in
the regulations need to be periodically updated. See, e.g., ASTA; FMI;
SBA Advocacy; SHRM; TechServe Alliance; World Floor Covering
Association (WFCA).
In the context of addressing the Department's proposed standard
salary level methodology, several commenters generally expressed
support for--or in opposing the salary level suggested in the
alternative--an increase to the salary level using the 2019
methodology. See, e.g., Bellevue University; Center for Workplace
Compliance (CWC); RILA; YMCA. CWC noted that the 2019 methodology is
well-established and already familiar to employees and employers, and
Bellevue University similarly stated that this methodology ``has been
previously field-tested on the U.S. economy[.]'' As noted in section
IV, commenters generally did not address applying the 2019 methodology
through the updating mechanism.
The Department remains convinced that effective salary and
compensation thresholds must use up-to-date earnings data. This
position is long-standing. When the Department updated its salary level
tests in 1949, for example, it explained that the ``relative
ineffectiveness of these tests in recent years is the result of changed
economic conditions rather than any inherent weakness in the tests[,]''
and that the ``increase in wage rates and salary levels gradually
weakened the effectiveness of the present salary tests as a dividing
line between exempt and nonexempt employees.'' \126\ The principle that
effective tests for exemption must use

[[Page 32855]]

up-to-date earnings data remains as true today as it was 75 years ago.
---------------------------------------------------------------------------

\126\ Weiss Report at 8.
---------------------------------------------------------------------------

The Department's need to update the standard salary level and HCE
total annual compensation requirement for current data in this
rulemaking is distinct from its decision to establish new methodologies
for setting those thresholds. The current salary and compensation
levels have been in place for more than 4 years and need to be updated
to reflect current wage data to maintain their effectiveness.\127\
Since the Department's last rulemaking in 2019, there has been
significant change in salaried worker earnings.\128\ The $684 standard
salary level is far below what constitutes the 20th percentile of
weekly earnings of full-time salaried workers in the South and/or in
the retail industry nationally using current data, which greatly
undermines the utility of the threshold as a means of helping
distinguish exempt from nonexempt employees. The same is true for the
HCE total annual compensation threshold. Updating the existing
thresholds to reflect current earnings data is consistent with the
intent the Department has expressed repeatedly in its past part 541
rulemakings, including in the 2019 rule, to periodically update the
thresholds.
---------------------------------------------------------------------------

\127\ The standard salary level and HCE total annual
compensation threshold in the 2019 rule were set using pooled data
for July 2016 to June 2019, adjusted to reflect 2018/2019. 84 FR
51250.
\128\ See section VII.
---------------------------------------------------------------------------

For these reasons, the Department is revising final Sec.
541.607(a) to provide for an initial update to the standard salary
level and HCE total annual compensation requirement with current
earnings data on July 1, 2024. Specifically, the standard salary level
will be updated to the 20th percentile of weekly earnings of full-time
salaried workers in the South and/or in the retail industry nationally
using the most recent data, resulting in a standard salary level of
$844 per week. The HCE total annual compensation threshold will be
updated to the 80th percentile of full-time salaried worker earnings
nationwide using the most recent data, resulting in an annual
compensation threshold of $132,964. The Department believes that the
July 1, 2024 effective date provides sufficient time for employers to
adjust to this initial update because the methodology used for the
initial update to the standard salary level has been used since 2004
and is familiar to the regulated community. The size of the initial
increase to the standard salary level, which is $160 per week, is also
less (in nominal terms) than the $229 per week change that resulted
from the 2019 rule.\129\
---------------------------------------------------------------------------

\129\ Consistent with the 2019 rule, the Department used pooled
data for the most recent 3 years (2021, 2022, 2023), adjusting them
to reflect 2023, for the initial updates to both the standard salary
level and HCE total annual compensation threshold. See 84 FR 51250.
---------------------------------------------------------------------------

The initial update on July 1, 2024 and the change in the standard
salary level and HCE total annual compensation methodologies on January
1, 2025 will result in two increases in the compensation thresholds
within a 12-month period. The Department recognizes that for some
employers both changes to the compensation thresholds may occur in the
same budget year. Because both the amount of the initial update and the
subsequent increase to the thresholds are set forth in this final rule,
some employers may choose to make a single adjustment at the first date
that encompasses both the initial update and the impending change to
the standard salary level and the HCE total annual compensation
threshold.\130\
---------------------------------------------------------------------------

\130\ Although the Department's approach is not a phase-in, the
effect of increasing the salary level twice in 8 months is, from a
timing perspective, not altogether different from the request from
some commenters to phase in the salary level in more than one step.
See, e.g., Argentum & ASHA; Associated General Contractors; SBA
Advocacy.
---------------------------------------------------------------------------

The Department intends for the initial update of the standard
salary level and the HCE total annual compensation requirement, using
current earnings data applied to the 2019 rule methodologies, to be
severable from future triennial updates to the thresholds under Sec.
541.607(b), as well as from the revision to the methodologies for the
standard salary level and the HCE total annual compensation threshold
discussed in section V.B and section V.C. In implementing the initial
update, the Department intends to account for changes in earnings since
the 2019 rule. In changing the methodology for the standard salary
level, the Department further intends to fully restore the salary
level's historic screening function and account for the shift in the
2004 rule from a two-test to a one-test system for defining and
delimiting the EAP exemption.\131\ Lastly, in changing the methodology
for the HCE total annual compensation threshold, the Department intends
to ensure the HCE threshold's role as a streamlined alternative for
those employees most likely to meet the standard duties test by
excluding all but those employees ``at the very top of [the] economic
ladder[.]'' \132\ These are independent objectives of this rulemaking
and the provisions implementing them can each stand alone. Therefore,
the Department intends for the initial update to remain in force even
if the methodologies for the standard salary level and/or the HCE total
annual compensation threshold established by this final rule are stayed
or do not take effect. Similarly, the Department intends for the
initial update to remain in effect even if future triennial updates
under Sec. 541.607(b) are stayed or do not take effect.
---------------------------------------------------------------------------

\131\ See section V.B.
\132\ See section V.C.
---------------------------------------------------------------------------

The initial update will take effect approximately 60 days after the
publication of the final rule, immediately coming out of this notice
and comment rulemaking. As such, the notice procedures set forth in
Sec. 541.607(b)(3) will not apply. As discussed below, future
triennial updates will be preceded by advance publication of a notice
of the updated salary level and HCE total annual compensation threshold
in the Federal Register. For the initial update, this final rule
provides notice of the updated salary and compensation levels.\133\
---------------------------------------------------------------------------

\133\ The NPRM included updating the 2019 rule standard salary
level and HCE annual compensation threshold using 2022 data as a
regulatory alternative, stating that applying the methodologies
would result in a standard salary level of $822 per week and a HCE
annual compensation threshold of $125,268. See 88 FR 62218.
---------------------------------------------------------------------------

3. Future Triennial Updates To Keep the Standard Salary Level and Total
Annual Compensation Threshold Up to Date
As the Department previously explained, the earnings thresholds are
only an effective indicator of exempt status if they are kept up to
date. Left unchanged, the thresholds become substantially less
effective in helping identify exempt EAP employees as wages for workers
increase over time. To that end, the Department proposed to triennially
update the standard salary level and HCE total annual compensation
threshold by applying the most recent earnings data to the
methodologies set forth in proposed Sec. 541.600(a)(1) and Sec.
541.601(a)(1), while any change to the methodologies used to set the
standard salary level and HCE annual compensation threshold would be
effectuated through future rulemaking.
The Department received many comments on its proposed triennial
updating mechanism for keeping the thresholds up to date in the future,
which are addressed below. The comments were sharply divided on this
aspect of the NPRM. After considering the comments received, the
Department concludes that establishing a mechanism for resetting the
standard salary level and HCE total annual compensation requirement
based on

[[Page 32856]]

current earnings data, and on a regular 3-year schedule, will ensure
that the thresholds remain effective into the future and thus better
serve to help define and delimit the EAP exemption.
i. The Department's Authority To Update the Standard Salary Level and
Total Annual Compensation Threshold With Current Data in the Future
The Department received many comments regarding its authority to
update the earnings thresholds through the proposed triennial updating
mechanism. A majority of the commenters opposing the updating mechanism
challenged the Department's authority to adopt such a provision. Most
commenters that supported the updating mechanism did not specifically
discuss the Department's authority to institute such a mechanism. As to
commenters supporting the proposed triennial updating mechanism that
addressed the issue, they supported the Department's authority.
Commenters favoring automatic updating, such as AFL-CIO and EPI,
agreed with the Department that just as the Department has authority to
set salary thresholds for the EAP exemption, it also has authority to
provide for regular updates to ensure the thresholds do not erode over
time. Some supportive commenters further emphasized that future updates
would make no change to the standard (i.e., methodology) by which the
Department implements the FLSA, but rather merely ensure that the
standard accounts for current economic conditions. See, e.g.,
Administrative Law Professors; Democracy Forward Foundation; EPI. The
Administrative Law Professors similarly asserted that automatic
adjustments to the earnings thresholds fall within the Secretary's
authority to define and delimit ``what it means to function in a `bona
fide executive, administrative, or professional capacity[.]' ''
Observing that even a so-called ``static'' salary threshold expressed
in ``non-indexed dollar terms'' is constantly changing as a matter of
economic value, the Administrative Law Professors asserted that ``if a
non-indexed salary threshold is lawful, as nobody seriously questions,
so too is a standard pegged to income percentile.'' The Administrative
Law Professors observed ``it is arguably more rational'' for the
Department to ``proffer a regulation that expressly accounts for the
inevitably dynamic nature of every salary threshold . . . rather than
to permit arbitrarily fluid macroeconomic conditions to dictate the
threshold's true economic worth.''
On the other hand, many commenters opposing the proposed updating
mechanism asserted that the Department lacks statutory authority to
update the thresholds in this manner. Some of these commenters
contended that since the FLSA does not expressly authorize the
Department to index the earnings thresholds unlike, for example, the
Social Security Act or the Patient Protection and Affordable Care Act,
it follows that the FLSA does not authorize the Department to
automatically update the thresholds.\134\ See, e.g., CUPA-HR;
International Dairy Foods Association (IDFA); PPWO; RILA; Seyfarth
Shaw. Several commenters pointed out that Congress did not provide for
automatic updating of any of the earnings requirements under the FLSA,
such as the minimum wage under section 6, the tip credit wage under
section 3(m), or the hourly wage for exempt computer employees under
section 13(a)(17). See, e.g., AFPI; FMI. Commenters including National
Restaurant Association and PPWO further asserted that Congress never
amended the FLSA to grant the Department explicit authority to index
the salary level despite knowing that the Department has updated the
salary level on an irregular schedule.
---------------------------------------------------------------------------

\134\ In contrast, the Administrative Law Professors highlighted
that ``[a]utomatic updating is a common feature of regulations
pegged to monetary values, even when the relevant authorizing
statutes make no specific reference to indexing or automatic
adjustment.'' Some of the examples cited by the Administrative Law
Professors to illustrate this point include: 79 FR 63317 (2014)
(establishing automatic inflationary adjustments to the minimum
amount set by the regulation to define ``adverse credit history'');
76 FR 23110 (2011) (establishing automatic adjustments to the amount
of ``Denied Boarding Compensation'' airlines must pay affected
passengers); 88 FR 35150 (2023) (adopting once-every-five year
inflation adjustments to the revenue threshold for defining a
``small business''); and Amusement & Music Operators Ass'n v.
Copyright Royalty Tribunal, 676 F.2d 1144 (7th Cir. 1982), cert.
denied, 103 S. Ct. 210 (1982) (upholding a rule promulgated by the
Copyright Royalty Tribunal establishing a $50 compulsory royalty fee
to be paid by jukebox operators, and which would be subject to
future inflationary adjustments).
---------------------------------------------------------------------------

As the Department stated in the NPRM, the Department's authority to
update the salary level tests for the EAP exemption by regularly
resetting them based on existing methodologies is grounded in section
13(a)(1), which expressly gives the Secretary broad authority to define
and delimit the scope of the exemption. 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. As just discussed, 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. Despite having
amended the FLSA numerous times over the years, Congress has not
amended section 13(a)(1) to alter these regulatory salary requirements.
Unlike the statutes some of the commenters referenced explicitly
providing for indexing, or the statutory FLSA wage rates--i.e., the
minimum wage under section 6, the tip credit wage under section 3(m),
or the hourly wage for exempt computer employees under section
13(a)(17)--the part 541 earnings thresholds are established in the
regulations. Therefore, it is not surprising that the FLSA contains no
specific reference to the indexing or automatic adjustments of these
thresholds. The Department agrees with the Administrative Law
Professors and other commenters that stated that the Department has the
authority to establish a mechanism to automatically adjust the earnings
thresholds to ensure their continued effectiveness, using a process
established through notice and comment rulemaking, just as it has the
authority to initially set them. The Department believes the updating
mechanism in this final rule fulfills its statutory obligation to
define and delimit the EAP exemptions by preventing the thresholds from
becoming obsolete and providing predictability and clarity for the
regulated community.
Many of the commenters opposed to the updating mechanism also
asserted that automatically updating the earnings thresholds would
violate the APA's rulemaking requirements expressly incorporated by
reference in section 13(a)(1). See, e.g., AFPI; FMI; National Club
Association; and Wage and Hour Defense Institute. These and other
commenters claimed that the Department cannot lawfully update the
salary level without engaging in notice and comment rulemaking for each
update. See, e.g., AASA/AESA/ASBO; Competitive Enterprise Institute;
CWC; RILA. IFDA, for example, asserted that notice and comment
rulemaking needs to precede each future update so that stakeholders
have the opportunity to comment on and adequately prepare for any
changes that will affect them. AHLA commented that the proposal to
update the thresholds triennially without a preceding opportunity for
comment is

[[Page 32857]]

``drastic and troublesome'' and that ``notice and comment will help
ensure that the knowledge, expertise, and vital input of interested
stakeholders will be considered before moving forward with increases.''
Relatedly, AFPI, NRF, and SBA Advocacy asserted that automatic
updating would violate the directive under section 13(a)(1) that the
Department define and delimit the EAP exemption ``from time to time''
by regulations. NRF, for example, noted that Congress asked the
Department to revisit the EAP exemptions from time to time ``expecting
the Department to use its deep knowledge of the U.S. economy in
general, and labor market in particular, to establish appropriate
parameters for the exemptions'' and contended that by implementing
automatic updates the Department evades that decision-making process.
AFPI similarly asserted that the ``directive, `from time to time,' does
not allow the Department to set it and forget it.''
The Department disagrees with the assertion that triennial updates
using the compensation methodologies adopted in the regulations
improperly bypass the APA's--and section 13(a)(1) by reference--
requirements for notice and comment rulemaking. The Department is
adopting an updating mechanism in this rulemaking after publishing a
notice of the proposed rule and providing opportunity for stakeholders
to comment in accordance with the APA's notice and comment
requirements. The Department has received and considered numerous
comments on the proposed updating mechanism. Future updates under the
triennial updating mechanism would simply reset the thresholds by
applying current data to a standard already established by notice and
comment regulation, providing clarity for the regulated community as to
future changes in the thresholds. Therefore, the Department disagrees
with commenters that claimed that notice and comment rulemaking must
precede each future update made through the updating mechanism even
where the methodology for setting the compensation levels and the
mechanism for updating those levels would remain unchanged.\135\ The
updating mechanism will not alter the Department's ability to engage in
future rulemaking to change the updating mechanism or any other aspect
of the part 541 regulations at any point.
---------------------------------------------------------------------------

\135\ Some commenters, such as Independent Electrical
Contractors, RILA, and U-Haul, further asserted that automatic
updates improperly bypass the requirements of the Regulatory
Flexibility Act (``RFA'') and executive orders requiring the
Department to undertake a detailed economic and cost analysis. The
Department disagrees. Pursuant to the RFA, the Department has
included in this final rule as well as in the NPRM detailed
estimates for the future costs of updates under the updating
mechanism. See section VII and VIII; 88 FR 62224. Similarly, as
relevant here, Executive Order 13563 directs agencies to take
certain steps when promulgating regulations, including using the
``best available techniques to quantify anticipated present and
future benefits and costs as accurately as possible'' and adopting
regulations ``through a process that involves public
participation.'' 76 FR 3821 (Jan. 18, 2011). The current rulemaking
fully satisfies all aspects of Executive Order 13563. See section
VII; 88 FR 62182. The RFA and Executive Order 13563 do not require
notice and comment rulemaking to precede future triennial updates
made through the updating mechanism established in this rulemaking.
---------------------------------------------------------------------------

The Department also disagrees with commenters that claimed section
13(a)(1)'s ``time to time'' language precludes the Department from
adopting an updating mechanism. The updating mechanism would only
ensure the standard salary level and total annual compensation
threshold remain at the percentiles established through rulemaking.
This does not preclude the Department from engaging in future
rulemaking ``from time to time'' if it determines that there is a need
to change the underlying methodologies for setting the standard salary
level or HCE total annual compensation threshold, the updating
mechanism, or any other substantive change to part 541, as the
Department did, for instance, in 1940, 1949, 1958 1975, 2004, 2016, and
2019.
Many commenters opposing the updating mechanism referenced the
Department's prior statements to further support their assertion that
the Department lacks authority to implement automatic updating. In
particular, commenters pointed to the Department's decision not to
institute an automatic updating mechanism in the 2004 rule and its
statement that ``the Department finds nothing in the legislative or
regulatory history that would support indexing or automatic
increases.'' See, e.g., NAM; NFIB; SBA Advocacy. Others, like PPWO,
further asserted that automatic updates are contrary to the
Department's statement in the 2004 rule that ``[t]he salary levels
should be adjusted when wage survey data and other policy concerns
support such a change.''
As stated in the NPRM, the Department's decision not to institute
an automatic updating mechanism in the 2004 and 2019 rulemakings in no
way suggests that it lacks the 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.\136\ As the Department elaborated in its 2016 rulemaking,
there was likewise no such authority prohibiting automatic
updating.\137\ The 2004 rule did not discuss the Department's statutory
authority to promulgate an 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. As the Department explained in the 2016 rule, the
Department's reference in the 2004 rule to automatic updating simply
reflected the Department's conclusion at that time that an inflation-
based updating mechanism, such as one based on changes in the prices of
consumer goods, that unduly impacts low-wage regions and industries,
would be inappropriate. Such concerns are not implicated here, where
the mechanism will update the salary level to keep it at the same
percentile of earnings of full-time salaried workers. As for concerns
that the salary level should be updated only when wage data warrants
it, the updating mechanism does just that--as the earnings thresholds
will change only to the extent earnings data in the relevant data sets
have changed, whether upward or downward as conditions dictate.
---------------------------------------------------------------------------

\136\ 69 FR 22171.
\137\ See 81 FR 32432-33 (noting that ``instituting an automatic
updating mechanism . . . is an appropriate modernization and within
the Department's authority.'').
---------------------------------------------------------------------------

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,'' \138\ and not because it lacked authority to do so.
While the Department decided not to institute an updating mechanism in
its 2019 rule, it never said that it lacked the statutory authority to
do so. Upon further consideration, the Department concludes that the
best way to ensure the standard salary level and HCE total compensation
threshold remain up to date is a triennial updating mechanism that
maintains the Department's flexibility to adapt to different
circumstances and change course as necessary.
---------------------------------------------------------------------------

\138\ 84 FR 51252.
---------------------------------------------------------------------------

ii. Rationale for Continuing To Update the Standard Salary Level and
Total Annual Compensation Threshold With Current Data in the Future
The Department explained in the NPRM that its proposed updating

[[Page 32858]]

mechanism would allow for regular and more predictable updates to the
earnings thresholds, which would benefit both employers and employees
and would better fulfill the Department's statutory duty to define and
delimit the EAP exemption by preventing the erosion of those levels
over time. The Department noted that its regulatory history, marked in
many instances by lengthy gaps between rulemakings, underscored 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 thresholds. Through the
proposed updating mechanism, the Department explained it would be able
to 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 the thresholds. The Department noted that updating the
thresholds in this manner would prevent the more drastic and
unpredictable increases associated with less frequent updates and
ensure that future salary level increases occur at a known interval and
in more gradual increments. The Department received many comments on
the rationale for implementing the proposed triennial updating
mechanism.
Several organizations representing employee interests as well as a
handful of employers agreed with the Department that an updating
mechanism would ensure the thresholds keep pace with wages and retain
their usefulness. See, e.g., Coalition of Gender Justice and Civil
Rights Organizations; National Partnership; National Education
Association (NEA); National Employment Lawyers Association (NELA);
National Employment Law Project (NELP); Uncommon Goods; W.S. Badger
Company. Nichols Kaster, PLLP (Nichols Kaster) noted the updating
mechanism protects the thresholds from becoming outdated and
irrelevant, although it believed that annual updates would better
reflect the economy. NELA commented that ``indexing represents the only
simple and accurate'' way to preserve the real value of the standard
salary level and the HCE total compensation threshold through time,
although they contended that the proposed methodologies should be
higher earnings percentiles.
Many commenters supportive of the updating mechanism also asserted
that regular updates would provide greater predictability for employers
and employees alike. See, e.g., AFL-CIO; Center for WorkLife Law at
University of California Law and Partner Organizations (Family
Caregiving Coalition); Justice at Work; NEA. Small Business Majority
expressed support for the proposed updating mechanism noting that
smaller, predictable increases that are known well in advance--as
opposed to ``large and sudden'' increases--would allow small business
owners to be better prepared for any staffing or compensation changes
they need to make. Nineteen Democratic Senators commented that an
updating mechanism is the most effective way to provide consistency and
stability for both workers and businesses. See also, e.g., EPI;
Washington State Department of Labor and Industries. CLASP similarly
noted the proposed updating provision would enable employers to know
exactly what to expect and when to expect it.
In contrast, many organizations representing employer interests
disagreed with the Department's rationale for the proposed updating
mechanism. Several of these commenters criticized the Department for
stating that the updating mechanism is a more ``viable and efficient''
means of updating the thresholds by asserting that the Department is
trying to avoid its obligation to engage in notice and comment
rulemaking simply because such rulemaking is resource-intensive. See,
e.g., IDFA; National Restaurant Association; PPWO. The Chamber
similarly commented that the Department's history of long gaps in
rulemaking is not an adequate justification for adopting what it
characterized as ``a historically unprecedented change.''
Commenters including AHLA, FMI, the National Beer Wholesalers
Association, and Seyfarth Shaw, asserted automatic updating would lead
to uncertainty that would pose administrative and compliance burdens on
employers. Some commenters, such as HR Policy Association and PPWO,
asserted the proposed mechanism would make it difficult to ascertain
exactly what the threshold will be every 3 years. Other commenters,
including CUPA-HR, FMI, IDFA, and SHRM, asserted triennial updates
would have a significant financial impact on employers as they would
need to account for the cost of salaries or potential overtime as well
as the cost of conducting reclassification analysis and implementing
the necessary changes every 3 years. Some nonprofit organizations and
providers of home and community-based health services expressed concern
that future updates would be difficult for the nonprofit sector because
of their funding sources. See, e.g., Allegheny Children's Initiative;
ANCOR.
Some commenters opposing the updating mechanism claimed automatic
updates would hinder the Department from considering economic
circumstances when making updates. Ten Republican Senators asserted
automatic updates ``blind the administration to critical considerations
about the state of the economy and the workforce, including the
unemployment rate, inflation, job vacancies, or whether employers are
in a position to adjust to the increases without shedding jobs.'' Some
commenters, including Illinois College, ISSA, and the Society of
Independent Gasoline Marketers of America, expressed concern that the
proposed mechanism could lead to updates happening at a time of
economic downturn or a recession and could further exacerbate those
economic conditions. Others expressed concern that the updating
mechanism would hinder future rulemaking to change the earnings
thresholds. See, e.g., Chamber; National Association of Convenience
Stores.
The Department continues to believe that the updating mechanism
will ensure the earnings thresholds keep pace with changes in earnings
and remain useful in the future in helping to delineate EAP employees
from non-EAP employees. Whereas a fixed salary level threshold becomes
less effective over time as the data used to set it grows outdated, a
fixed methodology remains relevant if applied to contemporaneous data.
The Department agrees with the commenters that stated that the updating
mechanism's triennial updates would provide greater certainty and
predictability for the regulated community. Unlike irregular updates to
the earnings thresholds, which may result in drastic changes to the
thresholds, regular updates on a pre-determined interval and using an
established methodology will produce more predictable and incremental
changes. For this reason, the Department disagrees with the assertion
by some commenters that regular updates will lead to unpredictable
adjustments and ongoing uncertainty. The Department also disagrees with
commenters like HR Policy Association that claimed the proposed
mechanism will make it difficult to ascertain what exactly the
threshold will be every 3 years. Through the updating mechanism, the
Department will reset the standard salary level and total annual
compensation threshold using the most recent, publicly available, U.S.
Bureau of Labor Statistics (BLS) data on earnings for salaried workers.
Therefore,

[[Page 32859]]

stakeholders will be able to track where the thresholds would fall on a
quarterly basis by looking at the BLS data \139\ and can estimate the
changes in the thresholds even before the Department publishes the
notice with the adjusted thresholds in the Federal Register. The
Department believes that, compared to the irregular updates of the
past, stakeholders will be better positioned to anticipate and prepare
for future updates under the updating mechanism.
---------------------------------------------------------------------------

\139\ See https://www.bls.gov/cps/research/nonhourly/earnings-nonhourly-workers.htm.
---------------------------------------------------------------------------

Moreover, the Department does not agree with the assertion that
routine updates would lead to undue increases at a time of economic
downturn or recession. If anything, the Department's new updating
mechanism will ensure that the thresholds match the earnings data as
they exist at the time of the update, whether by increasing or
decreasing the earnings thresholds as warranted by the data. As
discussed below, the Department's decision to deviate from the 2016
rule by adopting a mechanism for pausing future updates further guards
against such concerns. Similarly, nothing about the updating mechanism
precludes the Department from revisiting the standard salary level and
HCE total annual compensation methodologies in the future when
conditions warrant. Having considered the comments received, the
Department remains convinced that an updating mechanism providing for
regular updates on a triennial basis is the best means of ensuring that
the salary and compensation tests continue to provide an effective
means, in tandem with the duties tests, to distinguish between EAP and
non-EAP employees.
iii. Specific Features of the Updating Mechanism
The Department received many comments regarding the various aspects
of the proposed updating mechanism, including the updating frequency,
methodology, notice period, and pause mechanism. The Department
proposed in Sec. 541.607(a) and (b) to update the earnings thresholds
every 3 years by using the same methodology used in the regulations to
set the thresholds. Specifically, proposed Sec. 541.607(a)(2) and
(b)(2) stated that the methodologies for setting the standard salary
level and HCE annual compensation threshold in the NPRM would be used
for future updates.
Many commenters that supported the proposed updating mechanism
expressed a preference for more frequent updates. See, e.g., Coalition
of State AGs; Jobs to Move America; NEA; NELP. Commenters including
AFL-CIO, National Partnership, and Nichols Kaster asserted annual
updates, compared to triennial updates, offered better predictability
and would ensure that the salary threshold keeps pace with the changes
in wages. EPI similarly observed that annual updates would ensure that
the salary threshold more closely adheres to the chosen percentile
``rather than slipping further and further behind in between triennial
updates[.]''
Most commenters that opposed updating did not separately comment on
the updating frequency, but some addressed it in the context of
discussing the impact of the updating mechanism on employers. Many of
these commenters claimed triennial updates would impose substantial
financial and compliance burdens on employers as they would need to
engage in reclassification analysis and implement necessary changes to
adjust to the updated thresholds every 3 years. See, e.g., ABC; CUPA-
HR; HR Policy Association; NAM. Most of the commenters opposing the
updating mechanism did not suggest an alternative updating frequency.
Notwithstanding their objection to automatic updating, however, a few
commenters, including AHLA, ASTA, WFCA, and YMCA, suggested a longer
updating frequency ranging from 4 to 6 years.
The Department agrees with the commenters that stated annual
updates would keep the salary level more up to date given that employee
earnings are constantly changing. However, as stated in the NPRM, the
Department is also mindful of the potential burden that possible
changes to the tests for exemption on an annual basis would impose on
employers, including costs associated with evaluating the exemption
status of employees on an annual basis. Conversely, the Department is
not convinced by commenter claims that triennial updates would impose
an undue financial and compliance burden on employers. Many of these
commenters did not address the fact that the alternative to automatic
updating is not a permanent fixed earnings threshold, but instead
larger changes to the threshold that could occur during irregular
future updates. Since the updating mechanism will change the thresholds
regularly and incrementally, and based on actual earnings of salaried
workers, the Department predicts that employers will be in a better
position to be able to adjust to the changes resulting from triennial
updates. The Department remains persuaded that triennial updates are
frequent enough to ensure that the part 541 earnings thresholds are
kept up to date--and continue to serve the purpose of helping to
identify exempt employees--while not being overly burdensome for
employers. The final rule, therefore, adopts an updating frequency of 3
years as proposed.
The comments regarding the method through which the Department's
proposed updating mechanism would reset the salary and compensation
thresholds were also divided. Commenters favoring routine updates also
supported the proposal to update the thresholds using the fixed
percentile approach--to keep the thresholds at the same percentile of
earnings of full-time salaried worker as established by the
regulations. NELA, for example, asserted that updating the thresholds
using a fixed percentile of earnings ``is the fairest way to maintain
consistency in workers' FLSA eligibility in light of inevitable
economic change.'' EPI similarly noted updating the thresholds through
the proposed methodology ensures that the standard under the
Department's rule ``is simply preserved--neither strengthened nor
weakened.''
Commenters that opposed automatic updating opposed the proposed
updating methodology. Several of these commenters reiterated an
assertion from comments on the 2016 rulemaking that the proposed
updating mechanism--tied to a fixed percentile--would result in the
salary level being ``ratcheted'' upward over time due to the resulting
actions of employers. See, e.g., Chamber; NAM; NRF (including a report
by Oxford Economics); SBA Advocacy. The commenters contended that in
response to each automatic update, most employers would either
reclassify employees earning below the new salary level to hourly
status or raise the salaries of those employees to keep their exempt
status. These responses, the commenters claimed, would skew the
relevant data for future updates in favor of substantial increases
because those employees who were reclassified as hourly would fall out
of the data pool causing the data pool to be smaller and skew towards
higher-paid workers. See, e.g., Chamber; National Association of
Convenience Stores; National Restaurant Association; NRF. While
expressing a strong preference that automatic updates be abandoned
altogether, some of the commenters concerned about this possible effect
suggested that the Department adopt an updating mechanism tied to an
inflation-related index. See Seyfarth Shaw; SHRM.
The Department notes that very similar comments concerning an
alleged

[[Page 32860]]

``ratcheting'' effect were received during the 2016 rulemaking, which
also proposed an updating mechanism based on earnings percentiles. In
response to those comments, the Department examined historical data to
determine the impact of its previous salary increase.\140\
Specifically, the Department looked at the share of full-time white-
collar workers paid on an hourly basis before and after the 2004 rule
(January-March 2004; January-March 2005) both below and above the
standard salary level. The Department found that following the 2004
rule, the share of full-time white-collar workers being paid hourly
actually decreased marginally in the group below the standard salary
level and increased slightly in the group above the standard salary
level.\141\
---------------------------------------------------------------------------

\140\ 81 FR 32441.
\141\ See id. at 32441, 32507-08.
---------------------------------------------------------------------------

The Department finds the claim that updating with a fixed
percentile methodology would lead to the ``ratcheting'' upward of the
thresholds to be unsubstantiated. The ``ratcheting'' claim is almost
entirely based on the assumption that employers will respond to an
automatically updated salary level by converting all or a large number
of newly nonexempt workers to hourly status, thus removing them from
the data set of full-time salaried workers. Yet none of the commenters
advancing this claim presented any tangible data or evidence to support
their assumption. Even those few commenters that provided economic
analyses rested their views on the same unsubstantiated assumption that
employers will generally reclassify newly nonexempt employees as
hourly. See, e.g., NRF (including a report by Oxford Economics); PPWO
(quoting a study by Edgeworth Economics).\142\ The results of the
Department's close examination of the impact of the 2004 salary level
increase provide no evidence that salary level increases due to regular
triennial updating will result in employers converting significant
numbers of affected EAP workers to hourly pay status and thus raising
potential concerns about skewing future updates. Although many
commenters made nearly identical ratcheting claims in this rulemaking,
none of the commenters addressed the Department's analysis in response
to those same claims in the 2016 rule.
---------------------------------------------------------------------------

\142\ The Edgeworth Economic study that was quoted by PPWO and a
few other commenters seemed to assume, without any support, that all
affected workers or newly nonexempt workers who earn between $684
and $1,059 per week will be reclassified as hourly employees.
---------------------------------------------------------------------------

Having found no merit in the ``ratcheting'' claim, the Department
declines to adopt the alternative methodologies suggested such as an
updating mechanism tied to an inflation-related index. As noted in the
NPRM, the fixed percentile approach, as opposed to other methods such
as indexing the thresholds for inflation, eliminates the risk that
future levels will deviate from the underlying salary setting
methodology established through rulemaking. During the 2016 rule, 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.\143\ 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 in
the lowest-wage Census Region), observing that the objectives that
justify setting the salary level using a fixed percentile methodology
also supported updating the thresholds using the same methodology.\144\
The Department is persuaded that updating the earnings thresholds by
applying the same methodology used to originally set the levels instead
of indexing them for inflation best ensures that the earnings
thresholds continue to fulfill their objective of helping effectively
differentiate between bona fide EAP employees and those who are
entitled to overtime pay and work appropriately with the duties test.
---------------------------------------------------------------------------

\143\ See 81 FR 32438-41.
\144\ See id. at 32440.
---------------------------------------------------------------------------

New Sec. 541.607 therefore establishes triennial updates of the
standard salary level and the HCE total compensation threshold using
the same methodologies used to set those thresholds. Assuming the
Department has not engaged in further rulemaking, the Department
anticipates the second update under the updating mechanism--which will
occur 3 years after the date of the initial update discussed in section
V.A--will use the methodologies established by this final rule as those
will become effective before the second update. Accordingly, the second
update will reset the standard salary level to the 35th percentile of
weekly earnings of full-time workers in the lowest-wage Census Region
and will reset the HCE total annual compensation threshold to the
annualized weekly earnings of the 85th percentile of full-time salaried
workers nationally based on contemporaneous data at that time.
The Department further proposed to publish in the Federal Register
a notice with the adjusted standard salary level and the HCE total
annual compensation threshold at least 150 days before the date the
adjusted thresholds are set to take effect and to publish the updated
thresholds on WHD's website no later than their effective date. The
Department proposed to update both thresholds using the most recent
available 4 quarters of data, as published by BLS, preceding the
publication of the Department's notice with the adjusted levels. The
Department received fewer comments regarding these aspects of the
proposal than on the updating mechanism itself.
Most commenters supporting the proposed updating mechanism did not
separately comment on the 150-day notice period. Some commenters
opposing automatic updates asserted that the 150-day notice period
would not be adequate time to prepare for compliance with the new
updated thresholds. See, e.g., Association of Public and Land-grant
Universities (APLU) (suggesting 180-day advance notice); Chamber
(suggesting at least 1 year notice); National Association of
Convenience Stores (same); The American Association of Advertising
Agencies (The 4As) (same). Regarding the data set, EPI suggested the
Department use the most recent quarter of data asserting that the
salary threshold would be ``suppressed'' for 2 out of every 3 years if
the Department adopts triennial updates. On the other hand, the
National Association of Convenience Stores, while opposing automatic
updating, recommended the Department use the most recent 6 quarters of
data, or those quarters minus the 2 most recent, to account for changes
it claimed employers may make preemptively to adjust to an upcoming
update for budgetary reasons.
After considering the comments received, the Department is
persuaded that a notice period of not less than 150 days provides
sufficient time for employers to make the necessary adjustments to
comply with the updated thresholds. This is especially true given that
employers will be able to access the data set that will be used to make
the adjustments as published by BLS and anticipate the extent of the
adjustment even before the Department publishes the notice. A period
substantially longer than 150 days would hinder the Department's
ability to ensure that the thresholds that take effect are based on the
most up-to-date data. Similarly, the Department believes that using the
most recent available 4 quarters of data will account for the
Department's goal that

[[Page 32861]]

the thresholds reflect prevailing economic conditions while balancing
the concerns of commenters that wanted a longer or shorter period for
the data set. Therefore, the final rule establishes that for future
updates under the updating mechanism, the Department will publish in
the Federal Register a notice with the adjusted thresholds not fewer
than 150 days before the date the new adjusted thresholds are set to
take effect and will publish the updated thresholds on the WHD website
no later than their effective date. The updates will be based on the
most recent available 4 quarters of data as published by BLS.
Lastly, the Department's proposal included a provision providing
for the delay of a scheduled update under the updating mechanism 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 Department explained that the delay would
be triggered if the Department publishes an NPRM proposing to change
the salary level methodology and/or modify the updating mechanism by
the date on which it publishes the notice of the revised salary and
compensation thresholds. In that instance, the notice with the adjusted
thresholds must state that the scheduled 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 the Department finalizes a rule changing the salary level
methodology and/or automatic updating mechanism by that time. In the
event the Department does not issue a final rule by the prescribed
deadline, the pause on the scheduled update will be lifted and the new
thresholds will take effect on the 121st day after they were originally
scheduled to take effect. The Department also explained the 120-day
pause would not affect the date for the next scheduled triennial update
given the relative shortness of the delay and so as not to disrupt the
updating schedule. The next update, therefore, would occur 3 years from
the date on which the delayed update would have originally been
effective.
The Department received somewhat mixed comments regarding its
proposed pausing mechanism. For example, notwithstanding their
objection to automatic updating (and in some cases, certain aspects of
the pause mechanism), some employer organizations such as CUNA, AHLA,
and the National Association of Professional Insurance Agents commended
the Department for recognizing that there may be circumstances that may
require temporarily delaying a scheduled update. Some commenters that
supported the updating proposal agreed. For example, the Coalition of
State AGs described the delay provision as ``a fail-safe mechanism''
that would provide the Department flexibility to adjust to changed
circumstances as necessary. On the other hand, Sanford Heisler Sharp,
while otherwise favoring the updating mechanism, objected to the pause
feature asserting that it would ``inject uncertainty into the
administration of the threshold, undermining the stated purpose of the
NPRM to simplify enforcement of overtime and minimum wage
protections.''
Some commenters took issue with the phrase ``unforeseen economic or
other conditions'' in the NPRM's preamble which generally described the
circumstances in which the Department may trigger the pause mechanism.
AHLA, CUNA, and NAIS/NBOA asserted it is not clear what circumstances
would constitute ``unforeseen economic or other conditions.'' AFPI
similarly pointed out the phrase was found only in the preamble and not
in the proposed Sec. 541.607. American Council of Engineering
Companies expressed concern that the proposed pause mechanism does not
provide sufficient flexibility for the Department to respond to
unexpected economic conditions and recommended that the provision be
modified to allow the Secretary ``to suspend automatic updates if
economic conditions warrant.'' RILA asserted the pause feature is an
inflexible process asserting that if a catastrophic event were to occur
within 150 days of the date of a scheduled update, the Department would
have no flexibility or ability to delay or stop the update. A few
commenters claimed that the 120-day pause period is not sufficient time
to provide the Department the flexibility it needs to adjust to
unforeseen circumstances or complete a rulemaking. See, e.g., National
Association of Convenience Stores; NRF.
Most of the comments objecting to or otherwise criticizing the
pause mechanism seem to assume the only way the Department can alter a
scheduled update or change any other aspect of the rule is through the
updating mechanism's pause provision. That is not correct. Nothing in
the proposed updating mechanism limits the Department's ability to
engage in future rulemaking to change any aspect of the part 541
regulations at any time. The pause mechanism offers the Department
added flexibility--in addition to its ability to engage in rulemaking
at any time to change the rule--by allowing it the ability to delay a
scheduled update as it engages in rulemaking. As the Department noted
in the NPRM, the pause mechanism offers the Department 270 days--150
days before, and 120 days after, the effective date for the scheduled
update--to complete the rulemaking process. The Department can still
engage in rulemaking outside of this period and through that rulemaking
can stop or delay a scheduled update or change any other aspect of the
part 541 regulations. This is true regardless of whether the Department
adopts the delay provision. The Department believes that the pause
provision will provide additional flexibility in the context of the
triennial updates and will not impact the Department's normal
rulemaking powers.
The Department recognizes that the phrase ``unforeseen economic or
other conditions'' was not in proposed Sec. 541.607 and agrees that
the lack of this language in the regulatory text creates ambiguity
about the standard for pausing a triennial update. Therefore, the
Department is revising Sec. 541.607(d) to include similar language.
The Department believes this revision clarifies the standard for when
the pause mechanism may be triggered but does not impinge on the
Department's normal authority to engage in rulemaking for other
reasons. The Department is disinclined to further define what
circumstances would trigger the pause mechanism, as some commenters
suggested. In proposing the pause mechanism, the Department was mindful
of previous statements from stakeholders, and the Department's own
prior statements, about the need to preserve flexibility to adapt to
unanticipated circumstances. As an example, the Department referenced
the COVID pandemic and its widespread impact on workplaces. However, it
is not feasible for the Department to outline every possible
circumstance that could warrant a delay of a scheduled update. Doing so
would unduly limit the Department's flexibility to adjust to truly
unanticipated circumstances.
For these reasons, the Department has concluded that the proposed
pause mechanism, with the modification noted above, provides the
Department sufficient flexibility to adopt to unforeseen circumstances
where necessary. Therefore, the new Sec. 541.607(b)(4) establishes
that the Department can trigger the pause, where unforeseen economic or
other

[[Page 32862]]

conditions warrant, by issuing an NPRM proposing to change the salary
level methodology and/or modify the updating mechanism by the date on
which it publishes the notice with the adjusted salary and compensation
thresholds. Section 541.607(b)(4) further clarifies that the notice
with the adjusted thresholds must state that the scheduled 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 the Department finalizes a rule changing the
salary level methodology and/or automatic updating mechanism by that
time.
Lastly, as discussed in more detail in section V.D, the Department
intends for the triennial updates of the standard salary level and the
HCE total annual compensation threshold using current earnings data to
be severable from the revision to those methodologies discussed in
section V.B and section V.C. In implementing routine triennial updates,
the Department intends to ensure that the salary and compensation
thresholds set in the regulations reflect changes in earnings data and
continue to function effectively in helping identify exempt white-
collar employees. As already noted, the Department has different
objectives for changing the methodologies for setting the standard
salary level and HCE total annual compensation threshold. Specifically,
in changing the methodology for the standard salary level, the
Department intends to fully restore the salary level's historic
screening function and account for the shift in the 2004 rule from a
two-test to a one-test system for defining and delimiting the EAP
exemption.\145\ In changing the methodology for the HCE total annual
compensation threshold, the Department intends to ensure the HCE
threshold's role as a streamlined alternative for those employees most
likely to meet the standard duties test by excluding all but those
employees ``at the very top of [the] economic ladder[.]'' \146\ These
are independent objectives of this rulemaking and the provisions
implementing them can each stand alone. Therefore, the Department
intends for the triennial updates to remain in force even if the
methodologies for the standard salary level and the HCE total annual
compensation threshold established by this final rule are stayed or do
not take effect. Similarly, the Department intends for the triennial
updates under Sec. 541.607(b) to remain in force even if the initial
update for wage growth in Sec. 541.607(a) is stayed or does not take
effect.
---------------------------------------------------------------------------

\145\ See section V.B.
\146\ See section V.C.
---------------------------------------------------------------------------

B. Standard Salary Level

In its NPRM, the Department proposed to update the salary level by
setting it equal to the 35th percentile of earnings of full-time
salaried workers in the lowest-wage Census Region (the South),
resulting in a proposed salary level of $1,059 per week ($55,068 for a
full-year worker). The proposed salary level methodology built on
lessons learned in the Department's most recent rulemakings to more
effectively define and delimit employees employed in a bona fide EAP
capacity. Specifically, the Department's intent in the NPRM was to
fully restore the salary level's screening function and account for the
switch in the 2004 rule from a two-test system to a one-test system for
defining the EAP exemption, while also updating the standard salary
level for earnings growth since the 2019 rule.
The Department is finalizing the proposed standard salary level
methodology and applying it to the most recent available earnings data,
resulting in a salary level of $1,128 per week ($58,656 for a full-year
worker). Setting the standard salary level at the 35th percentile of
weekly earnings of full-time salaried workers in the lowest-wage Census
Region 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. Because the salary level is above the
equivalent of the long test salary level, the final rule will (unlike
the 2004 and 2019 rules) ensure that 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 not all
included in the exemption. At the same time, by setting the salary
level well below the equivalent of the short test salary level, the
final rule will address potential concerns that the salary level test
should not be determinative of EAP exemption status for too many white-
collar employees. The combined result will be a more effective test for
exemption. The final salary level will 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 FLSA became law in 1938 and the first version of the part 541
regulations, issued later that year, set a minimum compensation
requirement of $30 per week for executive and administrative
employees.\147\ Since then, the Department has increased the salary
levels eight times--in 1940, 1949, 1958, 1963, 1970, 1975, 2004, and
2019.
---------------------------------------------------------------------------

\147\ 3 FR 2518.
---------------------------------------------------------------------------

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 the National
Industrial Recovery Act, and Federal government salaries to determine
the salary level that was a reasonable ``dividing line'' between
employees performing exempt and nonexempt work.\148\
---------------------------------------------------------------------------

\148\ See Stein Report at 20-21, 31-32.
---------------------------------------------------------------------------

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.\149\ 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).'' \150\ Employees who met
only the lower long test salary level, and not the higher short test
salary level, were 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. 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

[[Page 32863]]

``found no satisfactory substitute for the salary tests.'' \151\ 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.\152\ 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.\153\ In laying out this methodology, often referred to as the
``Kantor'' methodology and generally referenced in this rule 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.''
\154\
---------------------------------------------------------------------------

\149\ Weiss Report at 8, 14.
\150\ Id. at 22-23.
\151\ Kantor Report at 2-3.
\152\ Id. at 6, 9.
\153\ Id. at 6-7.
\154\ 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.\155\
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.\156\ The Department noted that these
salary levels approximated the methodology used in 1958 to set the long
test salary levels.\157\
---------------------------------------------------------------------------

\155\ 28 FR 7002 (July 9, 1963).
\156\ Id. at 7004.
\157\ 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,\158\ 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.\159\
---------------------------------------------------------------------------

\158\ See 34 FR 9934, 9935 (June 24, 1969).
\159\ 35 FR 885.
---------------------------------------------------------------------------

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.\160\ 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.\161\ The envisioned process was never completed, however,
and the ``interim'' salary levels remained unchanged for the next 29
years.
---------------------------------------------------------------------------

\160\ 40 FR 7091.
\161\ 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 (approximately 130 percent to 180 percent of the long test
level).
When the Department updated the part 541 regulations in 2004, it
created 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. 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 contemporaneous data.\162\
---------------------------------------------------------------------------

\162\ See 69 FR 22168. The 2004 rule looked to 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 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). This resulted 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, in moving from a two-test to a one-test system, the 2004 rule
exempted lower-salaried employees performing large amounts of nonexempt
work who had historically been, and should continue to be, covered by
the overtime compensation requirement.\163\ 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--traditionally 130
to 180 percent of the long test salary level--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.
---------------------------------------------------------------------------

\163\ 81 FR 32405.
---------------------------------------------------------------------------

In the 2019 rule, the Department reapplied the methodology for
setting the standard salary threshold 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/or in the retail sector
nationwide.\164\ This methodology addressed concerns that had been
raised that the 2016 methodology excluded too many employees from the
exemption based on their salary alone and produced the current standard
salary level of $684 per week (equivalent to $35,568 per year).\165\
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, in 2019 this methodology now
produced a salary level amount that was lower than the equivalent of
the long test salary level using contemporaneous data ($724 per week,
$37,648 per year). Put another way, the salary level set in the 2019
rule was $40 per week below the long test level (used to validate the
salary level in the 2004 rule) and $292 per week below the low end of
the short test range (used to set the salary level in the 2016 rule).
---------------------------------------------------------------------------

\164\ See 84 FR 51260 (Table 4).
\165\ Id. at 51238.
---------------------------------------------------------------------------

2. Standard Salary Level Proposal
In its NPRM, the Department proposed to update the salary level by
setting it equal to the 35th percentile of earnings of full-time
salaried workers in the lowest-wage Census Region (the

[[Page 32864]]

South), resulting in a proposed salary level of $1,059 per week
($55,068 for a full-year worker). The Department's proposal explained
that fully restoring the salary level's screening function required
setting a salary level at least equal to the long test salary level.
The Department elaborated that prior to the 2019 rule (when the
Department set the salary level $40 per week below the long test
level), employees who earned below the long test salary level were
screened from the EAP exemption by virtue of their pay--either by the
long test salary level itself or, in the case of the 2004 rule, a
standard salary level set equal to the long test salary level. The
Department stated that the long test salary level provided what it
believed should be the lowest boundary of the new salary level
methodology because it would ensure the salary level's historic
screening function was restored.
In selecting the proposed salary level methodology, the Department
also considered the impact of its switch in 2004 to a one-test system
for determining exemption status. The Department explained that 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.
Rather than reinstate the long duties test with its limitation on
nonexempt work, the Department examined earnings ventiles that would
produce a salary level between the long and short test salary levels
(which were, respectively, equivalent to between the 26th and 27th
percentiles, and the 53rd percentile, of full-time salaried worker
earnings in the lowest-wage Census Region). The Department explained
that the long and short tests had served as the foundation for nearly
all 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 the one-test system, and therefore were
useful parameters. The Department concluded that setting the salary
level equal to the 35th percentile would, in combination with the
standard duties test, more 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
to a one-test system.
After reviewing the comments received, the Department is finalizing
its proposal to set the standard salary level equal to the 35th
percentile of full-time salaried worker earnings in the lowest-wage
Census Region (the South), which is below the midpoint of the long and
short test salary levels. Applying this methodology to data for
calendar year 2023 results in a salary level of $1,128 per week
($58,656 annually for a full-year worker). This approach will fully
restore the salary level's function of screening obviously nonexempt
workers from the EAP exemption, and account for the switch in the 2004
rule to a one-test system in a way that reasonably distributes the
impact of this shift among employees earning between the long and short
test salary levels and their employers. The resulting salary level will
work effectively with the standard duties test to better define who is
employed in a bona fide EAP capacity.
3. Salary Level Test Function and Effects
For 85 years, 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 duty
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[.]' '' \166\ 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.\167\ 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.\168\ 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 by lower-
salaried employees, which ensured that these employees were employed in
an EAP capacity by limiting the amount of time they could spend on
nonexempt work. 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, and 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).\169\
---------------------------------------------------------------------------

\166\ See id. at 51237 (quoting Kantor Report at 2-3).
\167\ 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[.]'').
\168\ See 84 FR 51236.
\169\ 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 test 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

[[Page 32865]]

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.\170\
---------------------------------------------------------------------------

\170\ Id.
---------------------------------------------------------------------------

In 2004, rather than updating 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.\171\ 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.
---------------------------------------------------------------------------

\171\ 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.\172\ 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.\173\
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: employees who historically were entitled to
overtime compensation because they earned below the long test salary
level remained nonexempt under the new standard test.
---------------------------------------------------------------------------

\172\ See id. at 22168-69.
\173\ See id.
---------------------------------------------------------------------------

Without a higher salary short test, however, all employees who met
the standard salary level were subject to the same duties test. Since
the single standard duties test was equivalent to the short duties
test, 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 were now defined as falling within the exemption and would
not be eligible for overtime compensation. 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 20 percent 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,
which does not have a numerical limit on the amount of nonexempt work.
The Department's discussion of the elimination of the long duties
test in the 2004 rule 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.\174\ 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 in the
2004 rule 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
contemporaneous data and the existing long duties test.
---------------------------------------------------------------------------

\174\ 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, which had traditionally been paired
with the short duties test, and above the midpoint between the long and
short test salary levels.\175\ 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.
Specifically, the 2016 rule's narrowing of the exemption 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 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.
---------------------------------------------------------------------------

\175\ 81 FR 32405, 32467.
---------------------------------------------------------------------------

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
lower-paid employees who performed only limited amounts of nonexempt
work.\176\ 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
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.'' \177\ To address these concerns, the
Department simply returned to the 2004 rule's methodology for setting
the salary threshold. Applying the 2004 method to the earnings data
available in 2019 produced a standard salary level of $684 per week,
which was below the equivalent of what the long test salary level would
have been using contemporaneous data ($724 per week).\178\ The 2019
rule was the first time the Department paired the standard duties test
with a salary level that was not at least equivalent to the long test
level.
---------------------------------------------------------------------------

\176\ 84 FR 10908.
\177\ Id. (quoting Kantor Report at 5).
\178\ 84 FR 51260.
---------------------------------------------------------------------------

The 2019 rule, like the 2004 rule, exempted all employees who
earned between the long and short test salary levels and performed too
much nonexempt work to meet the long duties test, but passed the
standard duties test (equivalent to 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

[[Page 32866]]

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.\179\ In response to commenter concerns about the 2019 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 (drawing on the district court's
decisions as evidence) 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.\180\ As in the 2004 rule,
the Department did not address the protection such lower salaried
employees would have received had the Department updated the long test
using contemporary data.
---------------------------------------------------------------------------

\179\ Id. at 51244.
\180\ Id. at 51243.
---------------------------------------------------------------------------

As explained in the NPRM, the Department's experience with a one-
test system shows that it is less nuanced than the two-test system,
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
in that earnings range who performed only limited amounts of nonexempt
work 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.\181\
---------------------------------------------------------------------------

\181\ Numerous employer organizations supported the Department's
decision in 2004 to move to a one-test system. See 69 FR 22126-27.
Commenters likewise opposed returning to the two-test structure in
the 2016 and 2019 rulemakings. See 84 FR 10905; 81 FR 32444.
---------------------------------------------------------------------------

As explained in the NPRM, one way in a one-test system to ensure
appropriate overtime protection to 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, the Department did not propose 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,\182\ when the Department replaced this approach with its two-test
system, and the two-test system was replaced 20 years ago. Returning to
the two-test system would eliminate the benefits of the current duties
test, including having a single test with which employers and employees
are familiar.
---------------------------------------------------------------------------

\182\ 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 through the use of the
updating mechanism, 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 section 13(a)(1), the Department's aim is to have
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 fully perform the salary level's initial
screening function and account for the change to a single-test system.
4. Discussion of Comments and Final Standard Salary Level
i. Overall Commenter Feedback
The Department received a significant number of comments in
response to its proposal to set the standard salary level equal to the
35th percentile of weekly earnings of full-time salaried workers in the
lowest-wage Census Region. Numerous commenters supported the
Department's proposed salary level. Supporters included thousands of
individual employees, writing separately or as part of comment
campaigns, and many groups representing employees or employee
interests. See, e.g., American Association of Retired Persons (AARP);
AFSCME; AFT; NEA; Restaurant Opportunities Center United; United Auto
Workers Region 6; United Steelworkers; WorkMoney. Many other
commenters, including advocacy groups, academics, and State officials
also supported the Department's proposal. See, e.g., Administrative Law
Professors; CLASP; Coalition of Gender Justice and Civil Rights
Organizations; Coalition of State AGs; Common Good Iowa; EPI; The
Leadership Conference on Civil and Human Rights; National Partnership;
NWLC. A number of supportive commenters urged the Department to set a
higher salary level than the one it proposed. See, e.g., AFL-CIO;
Demos; Nichols Kaster; Sanford Heisler Sharp; SEIU; Winebrake &
Santillo, LLC (Winebrake & Santillo). A minority of employers,
including most notably a campaign of small business commenters, also
supported the proposed salary level. See, e.g., Business for a Fair
Minimum Wage; Dr. Bronners; Firespring; Small Business Majority. Some
members of Congress also commented in support of the proposed salary
level. See 19 Democratic Senators; 10 Democratic Representatives; U.S.
Representative Maxwell Frost (D-FL).
Commenters that supported increasing the salary level often
emphasized that the FLSA's minimum wage and overtime requirements are
fundamental employee protections, intended to spread employment to more
workers and provide extra

[[Page 32867]]

compensation (above the statutory minimum) to employees who work more
than 40 hours in a week. See, e.g., AARP; AFL-CIO; Coalition of State
AGs; NELA; NELP; Nichols Kaster; United Steelworkers. Some supportive
commenters, including Sanford Heisler Sharp, Texas RioGrande Legal Aid,
and Washington State Department of Labor and Industries, stressed that
the EAP exemption was premised in part on the expectation that exempt
employees received high salaries and other privileges to compensate for
their long hours of work and lack of FLSA protections. Other commenters
similarly stressed that the exemption is intended for employees who,
based on the nature of their work and their compensation, have
sufficient bargaining power not to need the Act's protections. See,
e.g., Business for a Fair Minimum Wage; CLASP; NELP; NWLC.
Supportive commenters often also emphasized that the salary level
test has an important and longstanding role in helping define which
employees are employed in a bona fide executive, administrative, or
professional capacity. Some commenters, including AARP and NELA,
stressed that the salary level provides an important ``bright line''
test for helping determine exemption status, and NWLC similarly stated
that the salary level provides a ``clear, objective, and
straightforward'' test that is ``easy for employers to apply and for
employees to understand[.]'' NELP, quoting testimony from EPI at a 2015
Congressional hearing on this issue, stated that salary level tests
have been used since the Department's earliest part 541 regulations
because the `` `final and most effective check on the validity of the
claim for exemption is the payment of a salary commensurate with the
importance supposedly accorded the duties in question.' '' The
Coalition of State AGs stated that a salary level that is too low ``no
longer accurately delimits the boundaries of who is an EAP'' employee.
The vast majority of employers and commenters supporting employer
interests opposed the proposed salary level. As discussed in section
III, many employer representatives opposed any salary level increase
and urged the Department to withdraw its proposal. See, e.g., AHLA;
Americans for Prosperity; Chamber; CUPA-HR; FMI; NAM; National
Restaurant Association; Oregon Restaurant and Lodging Association;
PPWO; Wisconsin Bankers Association. Some Members of Congress also
opposed the proposed salary level and urged that the proposal be
withdrawn. See 10 Republican Senators; 16 Republican Representatives;
U.S. Senator Mike Braun (R-IN). Some commenters opposed to the
proposal, writing separately or as part of comment campaigns, expressed
general opposition to the rule but did not specifically address what,
if any, salary level increase they would support in a final rule. See,
e.g., American Dental Association; Humane Society of Manatee County;
National Sporting Goods Association. Others that opposed or questioned
any salary level change stated, in the alternative, what method they
preferred if the Department updated the salary level in the final rule.
Most such commenters favored applying the methodology that the
Department used to set the salary level in its 2004 and 2019
rulemakings (the 20th percentile of earnings of full-time salaried
workers in the South and in the retail industry nationally) or updating
for inflation the current salary level, which was set using that
methodology. See, e.g., ABC; CWC; NAM; National Restaurant Association.
A handful of employer commenters supported, or stated that they did not
oppose, an increase based on the 2004/2019 methodology (resulting in a
salary level of $822 per week based on data used in the NPRM), citing,
for example, that this approach promoted predictability, see RILA, and
accounted for regional and industry-specific differences, see YMCA. See
also, e.g., SHRM; WFCA. Others supported or suggested a salary level
that was higher, but below the Department's proposed level. See, e.g.,
American Society of Association Executives; Ho-Chunk, Inc.; University
System of Maryland.
Commenters that opposed the Department's proposal almost always
objected to the size and/or timing of the proposed salary level
increase rather than to the existence of the salary test itself. Most
employer commenters, whether favoring no increase or a smaller
increase, presumed the salary level test's continued existence and
lawfulness, with some, such as National Restaurant Association,
expressly referencing their support for the 2019 rule's salary level
increase. As discussed in detail below, many commenters acknowledged
the salary level's longstanding function of screening obviously
nonexempt employees from the exemption. See section V.B.4.ii. Other
commenters that opposed the proposal nonetheless cited benefits of
having a salary level test, including helping to ensure that the EAP
exemption is not abused, see, e.g., AASA/AESA/ASBO, Bellevue
University, and ``sav[ing] investigators and employers time by giving
them a quick, short-hand test[.]'' See National Restaurant Association.
APLU recognized ``DOL's mission and responsibility to update the Fair
Labor Standards Act overtime regulations and ensure a baseline of
protections for our nation's workers, including periodic updates to the
minimum salary threshold for overtime exemptions.'' In rather stark
contrast, AFPI asserted that employee ``[c]ompensation is no more
helpful than would be a dress code test'' in determining exemption
status. AFPI was one of only a small number of commenters, as
previously discussed in section V.A.1, that asserted the Department
lacks authority under section 13(a)(1) to adopt a salary level test.
See, e.g., Job Creators Network Foundation; NFIB; Pacific Legal
Foundation.
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.'' \183\ 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.\184\ 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.'' \185\ Employee compensation is a relevant
indicator of exemption status given that, as many commenters observed,
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.\186\

[[Page 32868]]

Accordingly, the Department agrees with the overwhelming majority of
commenters that, explicitly or implicitly, supported the salary level
continuing to have a role in helping determine whether employees are
employed in a bona fide executive, administrative, or professional
capacity.\187\
---------------------------------------------------------------------------

\183\ 84 FR 51239 (internal quotation marks omitted).
\184\ Stein Report at 19, 24; see also 81 FR 32422.
\185\ Stein Report at 19; 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.'').
\186\ 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).
\187\ Consistent with its longstanding practice, the Department
declines requests from commenters, including Defiance College,
International Bancshares Corporation, Rachel Greszler, and WFCA,
that suggested the Department adopt multiple salary level tests for
different regions, industries, and/or small businesses, rather than
a single salary level that applies to all entities nationwide. See
84 FR 51239; 81 FR 32411; 69 FR 22171.
---------------------------------------------------------------------------

The Department nonetheless recognizes that commenters had a wide
range of views about the salary level test and that no salary level
methodology can satisfy all stakeholders. As discussed below, competing
commenter views were often grounded in differing opinions about the
salary level test's role in defining the EAP exemption. Broadly
speaking, commenters that opposed the proposal generally favored a far
more limited role for the salary level test and emphasized perceived
negative effects on employers of the proposed increase, while
commenters that supported the proposal or urged the Department to set a
higher salary level often deemed the proposal modest by historical
standards and emphasized perceived positive effects on employees of the
proposed increase. Against this backdrop, the Department has reviewed
the comments received on its proposed methodology, with particular
focus on feedback on the NPRM's rationale that the proposed methodology
will better define and delimit the EAP exemption by fully restoring the
salary level's screening function and accounting for the switch from a
two-test to a one-test system.
ii. Fully Restoring the Salary Level's Screening Function
Some employer advocates that opposed the Department's proposal
emphasized the salary level's limited function of screening obviously
nonexempt employees from the EAP exemption. See, e.g., Independent
Community Bankers of America; IFDA; National Council of Farmer
Cooperatives (NCFC); SHRM. Many employer representatives stated that
the proposed salary level exceeded this purpose by excluding from the
exemption too many employees who pass the duties test, particularly in
low-wage regions and industries. See, e.g., Chamber; NAW; PPWO; RILA;
Seyfarth Shaw. AFPI quoted the statement in the Department's 2019 rule
that any salary level increase must ``have as its primary objective the
drawing of a line separating exempt from nonexempt'' employees, and the
Chamber asserted that to the extent employee ``protection or fairness''
concerns motivated the proposed increase, such considerations exceed
the Department's statutory authority.
Employer representatives that focused on the salary level's
screening function often contrasted the Department's proposal with
prior rules that they stated met this objective. CWC referenced the
Department's 1958 and 2004 rules as such examples, while AHLA stated
more broadly that the Department historically set a salary level that
was ``intentionally low'' to screen out nonexempt employees, and that
the Department's proposed methodology ``is objectively not the low end
of the salary range as that has been understood since 2004[.]'' Other
commenters similarly cited the 2004 and 2019 rules as fulfilling the
salary level test's screening function, with National Restaurant
Association, for example, emphasizing the salary level's screening
function when explaining that the ``2004 methodology's chief virtue is
its consistency with historical practice.'' See also, e.g., Bellevue
University. Some commenters, including NCFC and PPWO, stated that the
proposed salary level would change the salary level from a ``screening
device'' to a ``de facto sole test'' for exemption, while others
cautioned that the salary level set in the 2016 rule was declared
invalid for exceeding this screening function. See also, e.g., Argentum
& ASHA; NAM.
Though some employee representatives addressed the salary level's
screening function, they generally emphasized other considerations that
they believed justified setting a salary level equal to or higher than
what the Department proposed. A number of commenters stated that, along
with the duties test, the salary level ``is intended to set a guardrail
so that employers do not incorrectly classify lower-paid salaried
employees as'' exempt. See, e.g., AFSCME; Family Values @ Work; North
Carolina Justice Center; United Steelworkers; Yezbak Law Offices.
Similarly alluding to the salary level's screening function, AFL-CIO
emphasized that until 2019 the Department had never set the salary
level below the long test level and that as a result more than half of
the employees affected by the proposed salary level would have been
nonexempt under every prior rule (because they earned below the long
test or long test-equivalent salary level). EPI similarly stated that
the 2019 rule set a salary level ``that was even lower than what the
long-test methodology would have yielded.'' See also Coalition of State
AGs (referencing the salary level's screening function).
The Department has considered commenter feedback about the salary
level test's screening function. The Department agrees with all
commenters that emphasized the salary level test's function of
screening obviously nonexempt employees from the exemption, a principle
that, as the Department observed in the 2019 rule and in the NPRM,
``has been at the heart of the Department's interpretation of the EAP
exemption for over 75 years.'' \188\ Fully effectuating the salary
level's screening function is a key part of ensuring that the salary
level sets an appropriate dividing line separating exempt and nonexempt
employees. In response to the Chamber's concern about the motivations
underlying the proposed salary level, the Department notes that while
its proposal protects employees and promotes fairness (by helping
ensure that only employees employed in a bona fide executive,
administrative, or professional capacity are deprived of the FLSA's
minimum wage and overtime protections), these beneficial effects are a
byproduct of any higher salary level, not a basis for the proposed
salary level.
---------------------------------------------------------------------------

\188\ 88 FR 62165 (citing 84 FR 51241).
---------------------------------------------------------------------------

As the Department explained in its NPRM, the concept of the salary
level's screening function dates back to the two-test system, when 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.'' \189\ When the Department updated the long test in
1958, it reaffirmed the long test salary's function as a screening
tool.\190\ When the Department moved to a one-test system in 2004, 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 and, most
significantly, used the long test salary level methodology to validate
its new salary level of $455 per week.\191\ The Department stressed in
its final rule that both the 2004 rule standard salary level
methodology and the long test salary level methodology ``are capable of

[[Page 32869]]

reaching exactly the same endpoint'' and demonstrated that the two
methods, in fact, produced equivalent salary levels using
contemporaneous data.\192\ By setting a salary level equivalent to the
long test level, the Department ensured that employees earning at
levels that would have entitled them 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.
The Department rejected requests from commenters that supported a
salary level that was $30 to $95 lower than the level the Department
ultimately adopted,\193\ thus maintaining the historic screening
function by declining to set a salary level lower than the long test
level.
---------------------------------------------------------------------------

\189\ Weiss Report at 8.
\190\ Kantor Report at 2-3.
\191\ 69 FR 22165-22166.
\192\ 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). AFPI commented that in the 2003
NPRM the Department ``acknowledged that `equivalency to either the
current long or short test salary levels is not appropriate' because
of the switch to a one-test system.'' (quoting 68 FR 15560, 11570
(Mar. 31, 2003)). However, the Department shifted in its final rule
and validated its chosen methodology using the long test salary
level.
\193\ See 69 FR 22164.
---------------------------------------------------------------------------

In its 2019 rule, the Department reemphasized the salary level's
screening function.\194\ The Department distinguished the 2016 rule,
which 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.'' \195\ In contrast, the Department explained, reapplying
the 2004 methodology to contemporaneous 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 employees' is `consistent with
Congress's intent.' '' \196\
---------------------------------------------------------------------------

\194\ 84 FR 51237.
\195\ Id. at 51231 (quoting 84 FR 10901).
\196\ Id. at 51241 (quoting 275 F. Supp.3d at 806).
---------------------------------------------------------------------------

In its NPRM, the Department explained that it needed to set a
salary level at least equal to the long test--$925 per week, equating
to between the 26th and 27th percentiles of weekly earnings of full-
time salaried workers in the South--to fully restore the salary level's
screening function. As noted above, employer commenters that emphasized
the salary level's screening function generally viewed this function
(which they often construed narrowly) as a justification for limiting
the size of any potential salary increase. However, such commenters did
not directly address the NPRM's explanation of the long test salary
level's key role in the salary level's screening function or the
relationship between the 2004/2019 methodology and the long test. Other
commenters that endorsed the screening function as embodied in the 2004
rule did not grapple with the fact that in the 2019 rule, that
methodology did not fully fulfill that function because it no longer
arrived at the same endpoint as prior rules (i.e., a long test or long-
test equivalent salary level).
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 to reach the same outcome--setting
a single salary level test that was equivalent to, and thus set the
same line of demarcation as, the long test salary level. 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.\197\ In doing so, the Department for the first time
expanded the exemption to include employees who were paid below the
equivalent of the long test salary level.
---------------------------------------------------------------------------

\197\ Id. at 51244.
---------------------------------------------------------------------------

The Department reaffirms its position stated in the NPRM that the
salary level test must equal at least the long test salary level in
order to fulfill its historical screening function. 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; \198\ 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--a key fact that commenters
that opposed the Department's proposal generally did not address.
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. As an initial step, the new 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 or long test-equivalent salary level are
also nonexempt under the standard test. Achieving this objective
requires a standard salary level amount at least equal to the long test
level ($942 per week using current data, which equates to approximately
the 25th percentile of full-time salaried worker earnings in the
South).
---------------------------------------------------------------------------

\198\ 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.
---------------------------------------------------------------------------

As discussed in section V.B.5.iii, fully restoring the salary
level's screening function would affect 1.8 million employees. These
are currently exempt employees who earn between $684 (the current
salary level) and $942 per week (the long test level calculated using
current data) and would become nonexempt absent intervening action by
their employers. In every rule prior to 2019, employees who earned
below the long test or long-test equivalent salary level have always
been excluded from the exemption based on their salary alone--even if
they passed the standard duties test or (prior to 2004) the more
rigorous long duties test. The Department's approach does not, as
commenters asserted, create an impermissible ``de facto'' salary-only
test or make nonexempt too many employees who pass the duties test, and
is compatible with the district court decision's emphasis on the salary
level test's historic screening function.\199\
---------------------------------------------------------------------------

\199\ The district court was principally concerned with the 2016
rule exceeding the salary level's screening function and making too
many employees nonexempt based on salary alone. See Nevada 275
F.Supp.3d at 806 & n.6.
---------------------------------------------------------------------------

iii. Accounting for the Shift to a One-Test System
In addition to fully restoring the salary level test's screening
function, the Department's proposed salary level methodology also
accounted for the shift from a two-test to a one-test system for
determining who is employed in a bona fide executive, administrative,
or professional capacity. Commenters that supported the proposed salary
level and specifically addressed this rationale agreed with it. A group
of Administrative Law Professors stated that the Department's move to a
one-test system in 2004 ``significantly expanded the number of
relatively low-income

[[Page 32870]]

workers who might fall within the exemption . . . despite engaging in
substantial nonexempt work[,]'' and concluded that the Department's
proposal was ``reasonably geared'' to restoring nonexempt status to
this class of workers. The Coalition of State AGs similarly stated that
the proposal ``does more to take into account the shift to a one-test
system in 2004 and establishes more of a middle ground between . . .
the previous short- and long-test methodologies.'' They elaborated that
``the balance struck is a more appropriate one'' because 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. Some commenters asserted that this
aspect of the Department's rationale supported setting a salary level
higher than proposed. For example, AFL-CIO stated that the proposed
salary level captures only ``a portion of workers who have been wrongly
excluded from nonexempt status since the 2004 elimination of the long
and short test in favor of a single test,'' and Sanford Heisler Sharp
stated that the proposal ``does not go far enough towards meeting [the]
goal'' of ```ensur[ing] 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.' '' \200\ NELA
similarly urged the Department to adopt its 2016 methodology to more
fully account for the shift to a one-test system.
---------------------------------------------------------------------------

\200\ Quoting 88 FR at 62158.
---------------------------------------------------------------------------

Employer commenters that directly addressed the shift to a one-test
system generally rejected the premise that any adjustment for this
change was warranted or appropriate. Some commenters emphasized that
the long test's limit on nonexempt work became inoperative in 1991 and/
or that the Department fully accounted for the move to the standard
duties test in its 2004 rule. See Bellevue University; Chamber; NAM;
RILA. The National Association of Convenience Stores, which likewise
emphasized that the short and long tests have not existed since 2004,
stated that to ``the extent the two-test system still has any limited
relevancy to the current inquiry, it is that the salary level should be
closer to what the pre-2004 long test would have produced'' rather than
``to what the pre-2004 `short' test would have produced'' today. AFPI
asserted that ``[a]ny salary level that excludes employees who are not
`obviously nonexempt' is invalid[,]'' that the long test salary level
is a ``made-up concept[,]'' and that the `` `long test' and the `short
test' are terms [that have not been] considered since the Department's
regulatory changes in 2004 . . . [and] should have no place in
determining an appropriate increase to the minimum salary level for
exemption today.'' \201\
---------------------------------------------------------------------------

\201\ NRF included an Oxford Economics report that questioned
the Department's long test figure ($925 per week), and, observing
that the long test methodology varied over time, stated that a
``more reasonable'' approach for replicating the long test would be
to adjust the 1975 long test level for inflation (which it concluded
would result in a salary level of $843 per week in 2022 dollars).
---------------------------------------------------------------------------

The Department agrees with commenters that supported the NPRM's
objective of updating the salary level in part to account for the move
to a one-test system. As previously explained in detail in the NPRM and
in section V.B.3 of this preamble, the Department traditionally
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 significantly decreased the examination of 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 traditionally
were protected by the long duties test. The approach taken in the 2016
rule was challenged and criticized as making employees earning between
the long test salary level and the low end of the short test salary
range nonexempt--including employees who performed very little
nonexempt work and would have been exempt under the long duties test.
The Department recognizes that 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. 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.\202\ But such a result is inherent in setting any
salary level. The Department continues to believe that it can better
identify which employees are employed in a bona fide EAP capacity by,
in combination with the current duties test, using a salary level
methodology that accounts for the shift to a one-test system, and that
doing so will both restore overtime eligibility for many individuals
who perform substantial amounts of nonexempt work and historically
would have been protected by the long duties test, and address
potential concerns that the salary level test should not be
determinative of exemption status for too many individuals. Such a
salary level will also more reasonably distribute between employees and
their employers what the Department now understands to be the impact of
the shift to a one-test system on employees earning between the long
and short test salary levels.
---------------------------------------------------------------------------

\202\ 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.'').
---------------------------------------------------------------------------

The Department disagrees with commenters that disputed this aspect
of the NPRM based on their view that the only valid salary level
function is to screen from exemption obviously nonexempt employees.
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. As discussed in section V.B.3, for decades, the short test
salary level did not perform a screening function, but rather was used
to determine whether the full duties test or the short-cut duties test
would be applied to determine EAP exemption status. In a one-test
system, the Department can change the duties test, the salary level, or
both, to ensure that the test for exemption appropriately distinguishes
bona fide EAP employees from nonexempt workers. As discussed at length
in the NPRM,\203\ while acknowledging that it could lessen the salary
level test's role by returning to a duties test that explicitly limited
the amount of nonexempt work that could be performed, the Department
ultimately declined to propose changes

[[Page 32871]]

to the duties test in this rulemaking. Given that decision, it is
appropriate for the Department to choose to better define the EAP
exemption by accounting for the shift to a one-test system, and to
select a salary level methodology that excludes from exemption some
employees who historically were nonexempt because of the more rigorous
long duties test. The 2004 and 2019 rules' significant broadening of
the statutory exemption (a fact employer commenters generally did not
address) to permit all salaried employees earning between the long and
short tests who passed the standard duties test to be exempt was not
unlawful, but it leaves room for refinement. Section 13(a)(1) does not
require the Department to forever maintain the regulatory choice it
made 20 years ago to pair the current duties test with a salary level
that places the entire burden of the move to a one-test system on
employees who historically were entitled to the FLSA's overtime
protection because they performed substantial amounts of nonexempt work
and earned between the long and short test salary levels.
---------------------------------------------------------------------------

\203\ 88 FR 62164-65. Although some commenters addressed changes
to the duties test, see, e.g., AFL-CIO, AHLA, NELA, FMI, such
changes are beyond the scope of the current rulemaking.
---------------------------------------------------------------------------

The Department continues to believe that the long and short tests
provide useful parameters for determining the new salary level test
methodology in this rulemaking. The Department disagrees with AFPI that
variations in the long test methodology render it a ``made-up concept''
or that the long and short tests have ``no place'' in determining the
new salary level. The long test salary level has played a crucial role
in defining the EAP exemption for the better part of a century, either
directly under the two-test system or indirectly under the one-test
system. As the Department explained in detail in its 2004 rule, the
long test salary level ``regulatory history reveals a common
methodology used, with some variations, to determine appropriate salary
levels[,]'' and (with the exception of the 1975 rule) beginning in 1958
``the Department set the [long test] salary levels to exclude
approximately the lowest-paid 10 percent of exempt salaried employees''
in low-wage areas and industries.\204\ The Department ``[u]se[d] this
regulatory history as guidance'' in its 2003 NPRM and, most
importantly, validated its chosen methodology in the 2004 rule by
showing that it produced the same salary level as the long test
methodology--a critical fact employer representatives generally did not
address in their comments.\205\ While the Department agrees with AFPI
and the Oxford Economics report that the data set used to set the long
test salary level was not exactly the same in each regulatory update,
just as in 2004, minor historical variations do not deprive the long
test of its usefulness in helping determine an appropriate salary level
now. The Oxford Economics report's suggestion to calculate the long
test by updating the 1975 long test salary level for inflation would
not faithfully replicate the long test because it would produce a
salary level below the 10th percentile of exempt workers in low-wage
regions and industries and would conflict with the Department's
historical practice of avoiding the use of inflation indicators in
updating the salary level.\206\
---------------------------------------------------------------------------

\204\ 69 FR 22166.
\205\ See id. at 22166-70; see also section V.B.3.
\206\ See, e.g., 84 FR 51245; 69 FR 22167.
---------------------------------------------------------------------------

The Department also disagrees with commenters who asserted that no
adjustment is needed to account for the shift to a one-test system
because the long test became largely dormant in 1991. In the 2004 rule,
the Department acknowledged this dormancy resulting from its outdated
salary levels and asserted that employees who were then subject to the
long test would be better protected under the higher salary level of
the new standard test.\207\ But as previously explained, section V.B.3,
in the 2004 rule the Department did not compare the overtime protection
lower-salaried employees would receive under the standard test with the
protection they would have received had the Department updated the long
test with a salary level based on contemporaneous data and kept the
existing long duties test. Instead, the Department's discussion of the
elimination of the long duties test in the 2004 rule 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.\208\
---------------------------------------------------------------------------

\207\ See 69 FR 22126.
\208\ See id. at 22126-27.
---------------------------------------------------------------------------

The Department also disagrees with commenters that asserted that
the 2004 rule fully accounted for the move to the standard duties test.
Because the 2004 rule did not fully account for the lessened overtime
protection for employees who would have been nonexempt under an updated
long test (as just described), it created a group of employees with
lessened protection under the standard test--those who earned between
the long and short test salary levels. These employees were
traditionally nonexempt because they failed the long duties test, but
were exempt under the 2004 rule because they passed the more lenient
standard duties test.\209\ By setting the standard salary level
equivalent to the long test salary, the 2004 rule in effect created a
group of employees who bore the impact of the change from the two-test
to the one-test system.
---------------------------------------------------------------------------

\209\ The Chamber asserted that the Department's decision to
adjust the salary level to account for the shift to a one-test
system ``fails to appreciate the continued importance of the
`primary duty' principles, the application of which includes an
analysis of non-exempt work performed and its relation to the
employee's exempt work.'' Although the Chamber is correct that the
standard duties test accounts for nonexempt work, it does so in a
less rigorous manner than the long duties test, resulting in some
lower-paid white-collar employees who pass the standard duties test
but (due to their nonexempt work) would have failed the long duties
test.
---------------------------------------------------------------------------

iv. Selecting the Salary Level Methodology
In its NPRM, the Department explained that fully restoring the
salary level's screening function and accounting for the move to a one-
test system supported setting the salary level at the 35th percentile
of full-time salaried worker earnings in the lowest-wage Census Region
(the South)--resulting in a proposed salary level of $1,059 per week.
Commenters provided competing views on this proposed increase.
Employers and employer representatives that opposed the proposed salary
level often characterized it as ``too much, too soon''--stating that an
increase of 54.8 percent (or 69.3 percent, based on the $60,209
projected salary level figure included in footnote 3 of the NPRM) \210\
less than 4 years after the most recent increase was unnecessary and
unprecedented. See, e.g., Air Conditioning Contractors of America;
Americans for Prosperity; Joint Comment from Argentum and American
Seniors Housing Association; CUPA-HR; International Sign Association;
NRF. Some commenters, including American Association of Community
Colleges and Associated Builders and Contractors, observed that, by
contrast, prior salary level updates have ranged from 5 to 50 percent,
and others commented that the proposed increase greatly exceeded the
rate of inflation since the 2019 rule, see Independent Community
Bankers of America, Ohio

[[Page 32872]]

Township Association. Many employer organizations asserted that the
Department was trying to resurrect a methodology akin to the
invalidated 2016 rule and that, like that rule, the proposed salary
level (which many stressed is a higher dollar figure than the level set
in the 2016 rule) would unlawfully supplant the duties test. See, e.g.,
Americans for Prosperity; National Restaurant Association; PPWO.
---------------------------------------------------------------------------

\210\ Several commenters criticized the Department for providing
projected salary level figures in footnote 3. See, e.g., PPWO; NRF.
NAM stated that footnote 3 was ``inconsistent'' with the
Administrative Procedure Act.
---------------------------------------------------------------------------

Commenters that opposed the proposed salary level were particularly
concerned about the impact of this change on specific industries and on
businesses in low-wage regions. Some commenters, such as the American
Outdoors Association, CUPA-HR, NAHB, and SHRM, provided information
from internal surveys to support how the proposal would negatively
affect their members. SBA Advocacy similarly summarized concerns
received from small businesses. See also, e.g., NFIB. Some commenters
emphasized the proposal's impact on particular occupations in their
industries, including first-line supervisors, see, e.g., AHLA, NAHB,
and entry-level managers, see, e.g., NAM, NRF. Emphasizing the proposed
salary level's geographic impact, National Restaurant Association and
PPWO warned that the proposal would exclude from exemption a high
percentage of employees who pass the duties test in lower-wage regions,
and could result in employees in the same job classification being
treated differently based on where they live. A number of educational
institutions opposed the proposed increase due to cost-related concerns
specific to the educational sector. See, e.g., American Association of
Community Colleges; Association of Independent Colleges and
Universities of Ohio; National Association of Independent Colleges and
Universities. The National Association of Counties raised similar
concerns about the impact of the increased salary level on local
governments. Nonprofit sector feedback was more mixed, with the
National Council of Nonprofits characterizing the industry response as
one of ``moral support'' and ``operational anxiety.'' Some nonprofit
organizations opposed the proposal, see, e.g., Children's Alliance of
Kentucky, U.S. Public Interest Research Group (U.S. PIRG), some
supported it, see, e.g., CLASP, Justice at Work, and some agreed with
the Department's intent but raised cost and other concerns, see, e.g.,
Catholic Charities, Open Roads Bike Program.
Commenters had different suggestions for how the Department should
account for such regional and industry-specific differences. For
example, RILA urged the Department to include the retail industry in
its data set, AFPI suggested setting the salary level equal to the 20th
percentile of non-hourly employee earnings in the ten lowest-wage
states, and Seyfarth Shaw recommended using the East South Central
Census Division. The Chamber asked the Department to focus on data from
the lowest-wage types of entities (such as small businesses, small
nonprofits or small public employers), in the lowest-wage industries,
in rural areas, in the lowest-wage Census Region. The Chamber and
National Association of Convenience Stores favored excluding nonexempt
workers from the data set (and using a lower earnings percentile) and
questioned the Department's use of Current Population Survey (CPS)
Merged Outgoing Rotation Group (MORG) data for nonhourly earnings for
full-time workers as a proxy for salaried worker earnings.
Commenters that supported increasing the salary level viewed the
Department's proposal very differently than employer representatives.
Whereas many employer representatives focused on specific regions or
industries to assert that the proposed salary level was too high,
supportive commenters focused on the national impact to assert that the
salary level was appropriate or too low. Many supportive commenters
considered it ``modest.'' See, e.g., AFSCME; CLASP; Family Caregiving
Coalition; National Partnership. Others stated that the salary level
``could have reasonably been significantly higher and still within
historical precedent.'' See, e.g., Common Good Iowa; Jobs to Move
America; Louisiana Budget Project; Maine Center for Economic Policy;
North Carolina Justice Center. The statistic most often cited to
support that the proposal was conservative by historical standards was
that whereas 62.8 percent of full-time salaried workers earned less
than the short test salary level in 1975, 28.2 percent of full-time
salaried workers earned less than the proposed standard salary level
(and several of these commenters noted that only approximately 9
percent earned less than the current salary level). See, e.g., EPI;
National Center for Law and Economic Justice; Worker Justice Center of
New York; Workplace Justice Project. AFL-CIO and others highlighted
that the proposed salary level was 19 percent lower than the inflation-
adjusted value of the 1975 short test salary level, and EPI stated
that, on average, the proposed salary level was 16 percent lower than
inflation-adjusted short test salary levels set from 1949 and 1975.
Some supportive commenters stressed that a significant salary level
increase was needed in part to account for the 2004 rule's elimination
of the long duties test, see, e.g., EPI, NELP, while NWLC stated that
the proposed methodology would ``not eclipse the role of the duties
test'' and instead would ``restore[] a reasonable balance between the
strength of the duties test and the height of the salary threshold.''
Some commenters advocated for a much higher salary level than the
Department proposed, and a number of commenters specifically proposed
alternate methodologies for the Department to adopt in the final rule.
For example, NELA stated that the proposed level was ``too low from a
historical perspective'' and, favoring ``[b]older federal action[,]''
asked the Department to (like in the 2016 rule) set the salary level
equal to the 40th percentile of weekly earnings of full-time salaried
workers in the lowest-wage Census Region (which would produce a salary
level of $1,196 per week based on the data used in this final rule).
Winebrake & Santillo similarly favored a return to that methodology.
AFL-CIO supported setting the salary level higher--at the historical
average short test salary level (which would result in a salary level
of $1,404 per week based on current data). Other commenters sought a
salary level that they stated would exclude from exemption the same
proportion of full-time salaried workers as under the 1975 salary level
test. For example, Demos urged the Department to set the salary level
at the 55th percentile of weekly earnings of full-time salaried workers
nationwide to meet this ``high-water'' mark, and Nick Hanauer supported
a salary level of at least $83,000 to ``restore the overtime
threshold'' to a time ``when the American middle class was
strongest[.]'' Commenters that sought a higher salary level than the
Department proposed often expressed their disagreement with the
district court's decision invalidating the 2016 rule. See, e.g., NELA;
Sanford Heisler Sharp; Winebrake & Santillo.
After considering the comments received, the Department is
finalizing the salary level methodology as proposed, setting it equal
to the 35th percentile of full-time salaried worker earnings in the
lowest-wage Census Region (the South)--which produces a salary level of
$1,128 per week using calendar year 2023 data. 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

[[Page 32873]]

exemption is not applicable[,]'' \211\ this salary level will, in
combination with the standard duties test, effectively calibrate the
scope of the exemption for 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. As previously discussed, updating the
salary level for wage growth since the 2019 rule produces a salary
level of $844 per week, and fully restoring the salary level's historic
screening function would result in a salary level of $942 per week,
equivalent to the 25th percentile of full-time salaried worker earning
in the South (i.e., the long test level). Accordingly, the increase
from the 25th percentile to the 35th percentile is to account for the
shift to a one-test system.\212\ The Department set the standard salary
level at (or below) the long test 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, would have been exempt under
the Department's historical view of the EAP exemption, or in raising
concerns that the salary level is determining the exemption status of
too many employees. In contrast, an appropriately calibrated salary
level between the long and short test salary levels better defines and
delimits which employees are employed in a bona fide EAP capacity, and
thus better fulfills the Department's duty to define and delimit the
EAP exemption.
---------------------------------------------------------------------------

\211\ Stein Report at 2.
\212\ AFPI mistakenly asserts that the increase from the 20th
percentile to the 35th percentile ``is based entirely on the switch
to a one-test system in 2004.'' The majority of the salary level
increase (from $684 to $942) is to update the salary level for wage
growth and fully restore the salary level's historic screening
function, with less than half (the increase from the $942 to $1,128)
made to account for the shift from the two-test system.
---------------------------------------------------------------------------

The Department's methodology established in this final rule uses
the second-to-lowest of the earnings ventiles between the long test
salary level (the 25th percentile of full-time salaried worker earnings
in the lowest-wage Census Region) and the short test salary level
(approximately the 51stth percentile of this data set). These ventiles
are the 30th, 35th, 40th, 45th, and 50th percentiles of full-time
salaried worker earnings in the lowest-wage Census Region. The
Department continues to believe that its methodology produces a salary
level high enough above the long test salary 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, and 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. Whereas the 2004 and 2019
rules permitted the exemption of employees earning between the long and
short test salary levels even if they performed significant amounts of
nonexempt work, and the 2016 rule prevented employers from using the
exemption for such employees earning below the short test salary range
even if they performed EAP duties, the methodology adopted in this
final rule falls between these two methodologies and thus, as
commenters including the Administrative Law Professors and Coalition of
State AGs agreed, 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. Of the 10.8
million salaried white-collar employees earning between the equivalent
of the long and short test salary levels, approximately 40 percent earn
between $942 (the equivalent of the long test salary level) and $1,128
(the new salary level) and would receive overtime protection by virtue
of their salary, while approximately 60 percent earn between $1,128 and
$1,404 (the equivalent of the short test salary level) and would have
their exemption status turn on whether they meet the duties test. These
and other statistics, discussed in section V.B.5.iii, demonstrate that
the salary level will not ``essentially eliminate[ ] the role of the
duties test'' as National Restaurant Association and others contended.
See also, e.g., AHLA; CWC.
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 employees earning within this range and
their employers is not exactly equal, a higher salary level could
disrupt the 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 appropriately balances the impact of the move to
a one-test system between employees' right to receive overtime
compensation and employers' ability to use the exemption. Such
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, or
professional capacity.'' \213\ This grant of authority confers
discretion upon the Department to 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.\214\
---------------------------------------------------------------------------

\213\ See Walling, 140 F.2d at 831-32.
\214\ Id. at 832.
---------------------------------------------------------------------------

The Department recognizes the tension between the methodology
adopted in this final rule and some statements made in its 2016 and
2019 rules. The Department 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.\215\ 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.\216\ 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, the Department concludes 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

[[Page 32874]]

appropriately recalibrates the salary level in a one-test system to
ensure that it effectively identifies bona fide EAP employees.
---------------------------------------------------------------------------

\215\ 81 FR 32410.
\216\ See 84 FR 51244.
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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 is
setting the salary level using earnings data from 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.\217\ Specifically, the Department is setting
the salary level using the data set of full-time nonhourly \218\
workers in the lowest-wage Census Region (the South). This approach
promotes transparency because BLS routinely compiles this data. It also
promotes 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.\219\ In keeping with the
Department's past practice, it is relying on up-to-date data to
determine the salary level.\220\ In the NPRM, the Department used 2022
salary data for estimating the salary level resulting from the proposed
methodology, which was current at the time the Department developed its
proposal. In this final rule, the Department is relying on calendar
year 2023 salary data, as published by BLS, to set the salary
level.\221\
---------------------------------------------------------------------------

\217\ See id. at 51238; 81 FR 32404.
\218\ Consistent with recent rulemakings and the NPRM, see 88 FR
62188, 84 FR 51258, in determining earnings percentiles the
Department looked at nonhourly earnings for full-time workers from
the CPS MORG data collected by BLS.
\219\ As discussed in the economic analysis, see section VII,
this modeling is done using the Department's probability codes. See
84 FR 51244; 69 FR 22167.
\220\ See 84 FR 51245; 81 FR 32405; 69 FR 22168.
\221\ BLS currently publishes this data at https://www.bls.gov/cps/research/nonhourly/earnings-nonhourly-workers.htm.
---------------------------------------------------------------------------

Given the strong views expressed by commenters, including those
opposing the proposal or favoring a higher salary level, the Department
did not arrive lightly at its decision to finalize the salary level
methodology as proposed. Commenter feedback often reflected competing
vantage points for assessing the Department's proposal. Commenters that
supported the Department's proposal or a higher salary level (most
often, the 2016 rule methodology) often compared the proposed salary to
short test salary levels, while commenters that opposed the proposed
increase often stressed the size of the change from the current salary
level. The Department agrees with supportive commenters that past
salary levels should inform the current update, and agrees that
statistics such as the percentage of salaried white-collar workers who
earn below the salary level or statistics comparing the new salary
level to inflation-adjusted prior levels, reinforce the reasonableness
of the Department's approach. However, the Department is wary of
comments urging a return to the 2016 rule methodology that do not
account for subsequent court decisions and the Department's 2019
rulemaking. The Department also recognizes concerns from some
commenters about the size of the salary level increase. But this metric
is influenced by many factors and thus does not, in and of itself,
establish whether a salary level sets an appropriate dividing line for
determining whether an employee is employed in a bona fide EAP
capacity. For example, the size of the current increase is influenced
by factors including significant wage growth since the 2019 rule
(simply adjusting the current salary level methodology for wage growth
would result in a roughly 23 percent increase); the Department for the
first time updating a salary level that was set below the long test;
and the Department adjusting the salary level to account for the move
to a one-test system. While the 65 percent increase is greater in
percentage terms than most prior updates, the Department does not
consider this factor dispositive.\222\
---------------------------------------------------------------------------

\222\ As discussed in section IV, in part to provide employers
more time to adjust, the new methodology will not be applicable
until January 1, 2025.
---------------------------------------------------------------------------

The salary level methodology adopted in this final rule ($1,128 per
week; $58,656 annually) produces a salary level that is lower than the
two salary level estimates provided in footnote 3 of the NPRM ($59,284
and $60,209), which were based on a quarter of data. The Department
disagrees with commenters that criticized the Department for providing
projected salary level figures in its NPRM. These comments overlook
that the NPRM proposed a methodology for updating the salary level
test, not just a salary level figure. Providing commenters an estimate
of the salary level that the proposed methodology could produce in a
final rule based on updated data promoted rulemaking transparency and
the opportunity for fully informed commenter feedback. That many
commenters used the figures in footnote 3 in their comments, and the
final salary level based on calendar year 2023 data is between the
proposed salary level and the two estimates in the footnote, reinforces
that footnote 3 in no way deprived commenters of the opportunity to
meaningfully comment on the NPRM.
As previously discussed, most employer commenters that opposed the
proposed salary level opposed any increase or at most supported a
return to the 2004/2019 methodology, and so they did not address the
NPRM's analysis examining where to set the salary level between the
long and short test salary levels. The Department does not find these
comments persuasive because they in effect sought a salary level below
the long test level, which would not even fully restore the salary
level's screening function, let alone account at all for the move to a
one-test system. As for commenter concerns about the salary level's
impact on low-wage regions and industries, the Department accounts for
these concerns by setting the salary level using the lowest-wage Census
Region. This aspect of the rulemaking differs from the 2016 rulemaking,
where the Department proposed to set the salary level using a national
data set and then, in response to commenters concerns, shifted to the
lowest-wage Census Region in the final rule to account for low-wage
regions and industries.\223\ The Department used this past experience
to account for the impact on low-wage regions and industries in
developing the NPRM and, having done so, is again basing the salary
level on the earnings of workers in the lowest-wage Census Region in
this final rule.
---------------------------------------------------------------------------

\223\ See 81 FR 32408.
---------------------------------------------------------------------------

The Department declines requests from some commenters to change the
data set it used to set the salary level. Some asked the Department to
add earnings data from a specific industry to the CPS earnings data.
The Department is not altering the data set in this way because it
believes that using earnings data from the lowest-wage Census Region
produces a salary level that accounts for differences across industries
and regional labor markets. The Department also is not altering the
Census region data set so that it excludes all states with higher
earnings, nor is the Department creating a new data set that includes
only States with the lowest earnings. The Department's chosen approach
is consistent with its practice since the 2004 rule of using the South,
rather than a narrower geographic region, when setting the salary
level. Restricting the data set to the ten lowest-wage states or to the
East South Central Region (made up of just four states, Alabama,
Kentucky, Mississippi, and Tennessee) would give undue weight to low-
wage areas and

[[Page 32875]]

skew the salary level. The Chamber's suggestion to restrict the data
set even further (by focusing on low-wage entities within low-wage
industries within rural areas within the South) would even further
compound this concern.
The purpose of the data set is not simply to produce the lowest
possible salary level. The Department's approach directly accounts for
low-wage areas while producing a salary level that is appropriate to
apply nationwide. The Department also declines requests to limit its
data set to exempt workers, instead continuing to set the salary level
using earnings data for exempt and nonexempt workers--as it has done in
every one of its rulemakings under the one-test system. As explained in
the 2004 rule, the Department's chosen approach is preferable in part
because restricting the data set to exempt employees requires
``uncertain assumptions regarding which employees are actually
exempt[.]'' \224\ The Department is also continuing to use data on
nonhourly worker earnings as a proxy for compensation paid to salaried
workers. Although some commenters challenged this approach, the
Department is not aware of, and commenters did not provide, any
statistically robust data source that more closely reflects salary as
defined in the Department's regulations. Also, as discussed in section
VII, the Department believes that relatively few nonhourly workers were
paid by methods other than salaried.
---------------------------------------------------------------------------

\224\ 69 FR 22167.
---------------------------------------------------------------------------

In response to commenter opposition to the proposed salary level
and the concerns described above, the Department considered setting the
salary level equal to the 30th percentile of earnings of full-time
salaried workers in the lowest-wage Census Region. The Department
ultimately decided not to adopt this approach, however, because it
would less effectively account for the shift to a one-test system. This
methodology would set the salary level based on the lowest earnings
ventile between the short and long test salary levels and produce a
salary level that is only $77 above the long test level. As a result,
for the population of white-collar workers earning between the long and
short tests, only 18 percent would earn below the salary level (whereas
40 percent of this population earn below the new salary level). This
approach thus 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 close to the long test salary level--where the Department
would expect a higher proportion of workers to perform more nonexempt
work.\225\ In contrast, the Department's approach addresses these
concerns in a manner that more reasonably distributes among employees
earning between the long and short test salary levels and their
employers the impact of the Department's move to a one-test system.
---------------------------------------------------------------------------

\225\ The Department has repeatedly recognized that increasing
salary level tends to correlate with the performance of bona fide
EAP duties. See section V.B.1 (discussing role of long test and
short test salary levels); section V.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.
---------------------------------------------------------------------------

The Department disagrees with commenters that stated that the
chosen methodology simply resurrects the 2016 methodology--which set
the salary level equal to the 40th percentile of full-time salaried
worker earnings in the lowest-wage Census Region. The fact that the new
salary level is higher in nominal dollars than the level set in the
2016 rule ($913 per week) is irrelevant because that level was
calculated using 2015 data.\226\ Applying the 2016 methodology to
current data produces a salary level of $1,196 per week. Whereas under
this rule an employee's salary level will be determinative of exemption
status for 40 percent of the 10.8 million employees earning between the
long and short test levels, under the 2016 methodology salary would be
determinative for 55 percent of such employees. A salary level
equivalent to the 40th percentile in the South would also result in 5.0
million affected workers. Although some of these workers earn below the
long test level and would be nonexempt under either approach, this
alternative approach would result in 949,000 more affected workers than
the Department's chosen methodology. The Department's decision to
deviate from the 2016 methodology is significant, as underscored by the
fact that (as discussed in more detail below) a number of employee
representatives urged the Department to adopt that methodology or a
higher percentile.
---------------------------------------------------------------------------

\226\ See 81 FR 32393.
---------------------------------------------------------------------------

The Department recognizes that many commenters found the proposed
methodology conservative, or overly conservative, with some commenters
urging the Department to select a methodology that produces a higher
salary level. Repeating the 2016 rule methodology, as some commenters
requested, by setting the salary level at the 40th percentile of weekly
earnings of full-time salaried workers in the lowest-wage Census Region
would further reduce the impact of the move to a one-test system on
lower-paid white-collar employees who perform significant amounts of
nonexempt work. As discussed above, commenters that supported the 2016
rule methodology provided statistics demonstrating that this approach
yields a salary level within historical norms. The 40th percentile
would produce a salary level ($1,196 per week) that is above the
midpoint between the long and short test salary levels. As noted above,
of the approximately 10.8 million salaried white-collar employees who
earn between the long and short test salary levels, approximately 55
percent earn between the long test salary level and $1,196 and would
receive overtime protection by virtue of their salary, while
approximately 45 percent earn between $1,196 and the short test salary
level and would have their exemption status turn on whether they meet
the duties test.
The Department believes this rule appropriately distributes the
burden of the change from a two-test to one-test system between
employees and employers. By contrast, the Department remains concerned
that courts could find that adopting the 2016 rule methodology would
make the salary level test determinative of overtime eligibility for
too many employees. Setting the salary level equal to a higher
percentile of weekly earnings (such as the 55th percentile as Demos
recommended), would further amplify this concern. 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 increase 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. EPI did not find the number of workers affected by a salary
level increase to be an informative metric for assessing whether a
threshold is appropriate and the Department agrees that this statistic
has significant limitations. In particular, it is notable that although
the standard salary level changes will result in 4.0 million affected
workers (1.0 million from the initial update and 3.0 million from
applying the new standard salary

[[Page 32876]]

level),\227\ only 2.2 million of these workers are due to the increase
from the long test to the new methodology, while 1.8 million affected
workers (or 45 percent) are a result of restoring the historic
screening function of the long test salary level. By comparison,
updating the salary level using the 2016 methodology and current data
would result in 5.0 million affected workers. Although the number of
affected workers for this rule is above the number of affected workers
in the 2019 rule, the difference is necessary to fully restore the
salary level's screening function and account for the shift to a one-
test system, and the overall impact of this change on the workforce is
relatively small (see section V.B), such that the new salary level is a
proper exercise of the Department's authority to define and delimit the
scope of the EAP exemption.
---------------------------------------------------------------------------

\227\ See Table 25.
---------------------------------------------------------------------------

In declining to adopt the 2016 rule methodology, 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 that amount ($1,196 per week
based on the data used in this final rule) 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.\228\ Litigants
challenging the 2016 rule 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 to a one-test system. Although some
commenters favored a salary level equivalent to the short test level,
such an approach would result in employers being unable to use the
exemption for any employees who earn between the long and short test
and have previously been exempt, either under the long test, or under
the standard test set equal to the long test. In contrast, the
methodology in this final rule produces a salary level that is not only
below any short test level, but also lower than the midpoint between
the long and short test salary levels. This approach appropriately
balances the goal of ensuring that employees earning above the long
test salary level who perform 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.
---------------------------------------------------------------------------

\228\ See 84 FR 51242.
---------------------------------------------------------------------------

v. Salary Level Effects
In selecting the salary level methodology, the Department also
considered commenter views that the proposed salary level would
generate a range of repercussions. Many commenters that opposed the
proposed salary level stated that it would cause widespread
reclassification of currently exempt employees to nonexempt status and
a corresponding decrease in flexible work arrangements, including
remote work opportunities. See, e.g., FMI; IFDA; National Lumber and
Building Material Dealers Association; NRF. Others stated that
employers would convert newly nonexempt employees from salaried to
hourly status, which they contended would harm employee morale, see,
e.g., Independent Electrical Contractors, National Small Business
Association, and create an undesirable ``punch the clock'' mentality,
see, e.g., North Carolina Center for Nonprofits, The 4A's. Some
commenters that opposed the proposal stated that the rule would ``harm
the very workers the Department says it is trying to benefit,''
asserting, for example, that the proposal would result in reduced
employee benefits and career advancement opportunities, and increased
turnover. See Americans for Prosperity; see also PPWO. Other commenters
expressed concern that the proposed increase would decrease employee
productivity, see, e.g., John. C. Campbell Folk School, decrease social
services, see, e.g., Social Current, increase employer costs, prices,
and inflation, see, e.g., Chamber, and/or cause salary compression
issues, see, e.g., Seyfarth Shaw.
Commenters that supported the Department's proposed salary level or
a higher salary level than proposed often highlighted what they viewed
as positive effects of the proposed increase. Many emphasized that the
updated salary level would make it more difficult to exempt lower-paid
employees who they believed should be nonexempt, particularly low-level
managers with many duties equivalent to non-managerial employees. See,
e.g., Coalition of Gender Justice and Civil Rights Organizations; NELP;
Winebrake & Santillo. Restaurant Opportunities Center United stated
that the current ``low salary threshold discourages restaurant
employees from taking managerial and supervisory positions, thereby
gaining skills and experience that would enable them to advance their
careers[.]'' Sanford Heisler Sharp stated that the ``need for
monitoring and protecting white-collar workers' hours is critical
today'' because the significant increase in telework since 2020 has
meant that employers are ``no longer constrained by the practical
limitation of the worker leaving the workplace.'' Other employee
representatives explained that the rule would produce positive societal
benefits such as increased economic security, see, e.g., NELP, improved
worker health due to decreased work hours, see, e.g., SEIU, decreased
poverty, see, e.g., NEA, and disproportionate benefits for women,
people of color, and workers with disabilities, see, e.g., National
Partnership.
Taken together, the above comments do not provide a compelling
justification for deviating from the Department's proposed salary level
methodology. The Department agrees that the salary level increase will
result in some currently exempt employees becoming nonexempt and
therefore receiving minimum wage and overtime protections. Employee
reclassification is a consequence of any salary level increase, and the
number of reclassified employees will depend on how employers choose to
respond to this rule for their employees who earn between the current
and new salary levels. Moreover, there is no prohibition on paying
nonexempt employees a salary as long as any overtime hours are
appropriately compensated, and employers may therefore choose to
continue to pay a salary to affected workers. Employers likewise have
latitude to determine what flexible work arrangements to provide
employees and, more broadly, need not structure their pay plans in a
manner that results in the potentially adverse effects (such as
decreased employee benefits) that some employers identified.
Significantly, employees and employee representatives did not share
employer commenter concerns about potential adverse consequences of the
proposed salary level, let alone view them as a justification for
deviating from the proposed salary level. This includes comments from
individual employees. For example, an exempt manager for a small
nonprofit organization stated that they ``would love the opportunity to
be reclassified to nonexempt and be compensated for time worked beyond
40 hours, or alternatively be given a raise if that level of
flexibility is deemed necessary by my employer.'' As to potential
consequences of the updated salary level on the economy more broadly,
such implications are speculative and in dispute (as discussed

[[Page 32877]]

in some detail in section VII), and do not provide a basis for a
different salary level methodology.
iv. Other Issues
The Department also addresses some other issues stakeholders raised
in their comments.
Many nonprofit organizations worried that the proposed salary level
would disproportionately affect them, raising concerns related to, for
example, their reliance on government grants, see, e.g., Asclepius
Initiative, Catholic Charities, National Council of Nonprofits, and
their inability to raise prices, see, e.g., Advancing States,
Independent Sector, YMCA. Some commenters asked the Department to
exempt at least certain nonprofit organizations from the salary level
test. See, e.g., Oklahoma Wesleyan University; U.S. PIRG. Many
nonprofit organization commenters opposed this idea. See, e.g., A
Second Chance; Delaware Alliance for Nonprofit Advancement; National
Council for Nonprofits; North Carolina Center for Nonprofits. The
Department recognizes and values the enormous contributions that
nonprofit organizations make to the country. Nonprofit organizations
provide services and programs that benefit many vulnerable individuals
in a variety of facets of life, including services that benefit the
vulnerable workers who the Department also works to protect by ensuring
that their workplaces are fair, safe, and secure. However, the
Department's EAP exemption regulations have never had special rules for
nonprofit organizations; the employees of nonprofits have been subject
to the EAP exemption if they satisfied the same salary level, salary
basis, and duties tests as other employees.\229\ Consistent with this
history, the Department declines to exempt nonprofit organizations from
the salary level test. As with other industries, as discussed above,
the Department accounts for nonprofit industry concerns by setting the
salary level using the lowest-wage Census Region.
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\229\ See 81 FR 32398, 32421; see also 84 FR 51234.
---------------------------------------------------------------------------

A number of community-based service providers for people with
intellectual and developmental disabilities urged the Department to
work closely with other government agencies, including the Centers for
Medicare and Medicaid Services (CMS) and the Administration for
Community Living (ACL), to implement the Department's proposed changes
in the context of Medicaid home and community-based services (HCBS).
See, e.g., ANCOR; BrightSpring Health Services; NASDDDS; United
Cerebral Palsy Association. Some commenters specifically referenced a
policy that was adopted by the Department related to the enforcement of
the 2016 regulation for providers of Medicaid-funded services for
individual with intellectual or developmental disabilities in
residential homes or facilities with 15 or fewer beds.\230\ See, e.g.,
Chimes; The Arc of the United States. Consistent with its approach in
the 2019 rule, the Department is not adopting a similar policy in this
rulemaking. The Department believes following this approach is
appropriate given that the initial update (to $844 per week) is less
than salary level increase in the 2019 rule, and service providers will
have approximately 8 months from publication of this rule to comply
with the new salary level ($1,128 per week). Additionally, the
Department intends (as many commenters requested) to issue technical
assistance to help employers comply with the FLSA and will continue to
coordinate (as other commenters requested) with ACL and CMS on
supporting Medicaid-funded service providers impacted by this rule.
---------------------------------------------------------------------------

\230\ See 81 FR 32390 (May 23, 2016).
---------------------------------------------------------------------------

Some commenters asked the Department to permit employers to prorate
the salary level for part-time employees. See, e.g., NCFC; PPWO;
Seyfarth Shaw; University System of Maryland. The Department has never
prorated the salary level for part-time positions; considered and
rejected similar requests in its 2004, 2016, and 2019 rules; and
declines to establish a prorated salary level for part-time positions
in this rule.\231\ As the Department has previously explained,
employees hired to work part time generally do not work in excess of 40
hours in a workweek, and overtime pay is not at issue for these
employees. An employer may pay a nonexempt employee a salary to work
part time without violating the FLSA, so long as the salary equals at
least the minimum wage when divided by the actual number of hours (40
or fewer) the employee worked.\232\
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\231\ 84 FR 51239; 81 FR 32422; 69 FR 22171.
\232\ See FLSA2008-1NA (Feb. 14, 2008).
---------------------------------------------------------------------------

The Chamber objected to the Department's proposed change to the
example provided in Sec. 541.604(b), a salary basis test regulation
establishing that an exempt employee may be paid on an hourly, daily,
or shift basis if the employment arrangement ``includes a guarantee of
at least the minimum weekly required amount paid on a salary basis
regardless of the number of hours, days or shifts worked, and a
reasonable relationship exists between the guaranteed amount and the
amount actually earned.'' The Department did not propose any
substantive change to this regulation and only proposed to update the
dollar amounts in light of the proposed increase in the standard salary
level. The Department has again updated the figures in the regulation
to account for the salary level change from the NPRM to the final rule.
The updated numbers in this final rule produce the same ratios between
actual and guaranteed earnings as example in the current regulations.
The Department declines the Chamber's suggestion to change the numbers,
which would change the ratio.
Some commenters urged the Department to increase the percentage of
the salary level that employers could satisfy using nondiscretionary
bonuses and incentive payments (including commissions). See, e.g., FMI;
National Automobile Dealers Association; National Golf Course Owners
Association; TechServe Alliance. The Department did not propose any
changes to how bonuses are counted toward the salary level
requirement,\233\ and declines to make any such changes in this final
rule. Consistent with the current regulations, employers can satisfy up
to 10 percent of the new salary level ($112.80 per week under this
final rule) through the payment of nondiscretionary bonuses and
incentive payments (including commissions) paid annually or more
frequently.
---------------------------------------------------------------------------

\233\ See 88 FR 62169.
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5. Assessing the Impact of the Salary Level
i. The Department's Assessment of the Impact of the Proposed Salary
Level
As stated in the NPRM, the Department sought to achieve three
objectives in 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: preserve the primary role that the duties
test plays in determining EAP exemption status; fully restore the
initial screening function of the salary level; and more 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.
In assessing whether the proposal met these objectives, the
Department first considered the impact of its proposed

[[Page 32878]]

salary level on salaried white-collar workers across the income
spectrum. The Department noted that almost three-quarters of salaried
white-collar workers earned above the proposed salary level, and
therefore duties, rather than salary, would remain determinative of
exemption status for a significant majority of white-collar workers.
The Department also concluded that a minority of the smaller share of
salaried white-collar workers who earn less than the proposed standard
salary level would meet the duties test, whereas approximately three-
quarters of the far-larger share of salaried white-collar workers who
earn at least the proposed standard salary level would meet the duties
test. The Department noted that this supported that the proposed salary
level would be an effective indicator of the capacity in which salaried
white-collar workers are employed. The Department also examined the
impact of the proposed salary level on currently exempt EAP workers--
salaried white-collar employees who meet the standard duties test and
earn at least $684 per week. The Department found that 1.8 million of
the workers who would be affected by the proposed salary level earned
less than the long test salary level and therefore would have been
screened from the exemption under every prior rule issued by the
Department except for the 2019 rule, thus confirming that the proposed
standard salary level would play a relatively modest role in
determining EAP exemption status.
ii. Comments Received
The Department received relatively few comments directly addressing
its estimates of the impact of the proposed salary level or the metrics
it identified to assess those impacts. As previously discussed, some
commenters representing employer interests stated that the proposal
would exclude too many workers from the exemption based on their
earnings. See, e.g., Chamber; PPWO; Seyfarth Shaw. However, commenters
that expressed such views generally did not challenge the Department's
analysis of the impact of its proposed salary level on all salaried
white-collar workers,\234\ nor did they generally address the
Department's conclusion that under the proposed standard salary level,
duties would be determinative of exemption status for a large majority
of full-time salaried white-collar workers.\235\ As noted in section
V.B, employer advocates that opposed the Department's proposed salary
level instead often emphasized the salary level's function of screening
obviously nonexempt employees from the exemption, albeit asserting that
the proposed salary level would exceed its screening function, see,
e.g., PPWO, RILA, SHRM, whereas worker advocates often favored a
greater role for the salary level than employer representatives, see,
e.g., AFSCME, EPI, Family Values @Work.
---------------------------------------------------------------------------

\234\ Some commenters asserted that the proposed salary level
would make nonexempt too many workers in lower-wage regions and
industries. See, e.g., AHLA; CUPA-HR; NAHB; National Restaurant
Association. As discussed above, the Department has accounted for
low-wage industries and regions by using earnings data from the
lowest-wage Census Region to set the salary level.
\235\ AFPI objected to the Department's use of nonhourly
workers' earnings to estimate the impact of the proposed salary
level on salaried workers. See also Chamber; National Association of
Convenience Stores. The Department disagrees with the suggestion
that data on compensation paid to full-time nonhourly workers is not
representative of the earnings of full-time salaried workers. The
Department used the same approach in the 2004, 2016, and 2019 rules.
See 84 FR 51258; 81 FR 32414; 69 FR 22197. As explained in greater
detail below, see section VII, while the CPS MORG data on full-time
nonhourly workers on which the Department has relied includes
workers paid on a salary basis along with workers paid on other
bases, such as on a piece-rate or day-rate basis, the Department's
analysis of data from the Panel Study of Income Dynamics (PSID)
shows that relatively few nonhourly workers were paid by methods
other than salaried.
---------------------------------------------------------------------------

AFPI challenged the Department's estimate of the number of workers
who earn between the proposed salary level and the long test salary
level, which it claimed is a ``made-up number.'' \236\ Some commenters
representing employer interests stated that the Department
underestimated the number of currently exempt workers who would be
impacted by its proposed salary level. See, e.g., AFPI; NAM; NRF
(including a report by Oxford Economics); Rachel Greszler; Seyfarth
Shaw. The Oxford Economics report claimed that up to 7.2 million
workers could be affected by the proposed salary level; AFPI asserted
that approximately ``7.5 million employees would be non-exempt for the
first time based on salary alone''; and Rachel Greszler stated that the
correct figure is as high as 12.3 million workers. NAM stated that the
Department ``underestimated the impact,'' though it did not elaborate.
Some of these commenters also challenged the probability codes the
Department used to estimate the number of workers who meet the duties
test. See, e.g., AFPI; Rachel Greszler.
---------------------------------------------------------------------------

\236\ NRF included a report from Oxford Economics which stated
that a more reasonable methodology for modeling the long test salary
level would be to update the 1975 long test level for inflation. As
discussed in section V.B, the Department disagrees with Oxford
Economics' suggestion, which would conflict with the Department's
historical practice of avoiding the use of inflation indicators in
updating the salary level.
---------------------------------------------------------------------------

On the other hand, AFL-CIO, the Coalition of State AGs, and EPI
relied on the Department's estimates in their comments. For instance,
the Coalition of State AGs observed that `` `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,' '' quoting the NPRM, in opining that the proposed
salary level struck a more appropriate balance between the long and
short test salary levels than the 2004 and 2019 rules. In asserting
that the proposed salary level, although ``too low[,]'' would restore
overtime protections to lower-paid workers ``who were wrongly
classified as exempt[,]'' AFL-CIO referenced the Department's estimate
that the proposed salary level would be ``restorative for more than
half of the workers it affects'' since ``these employees would have
been entitled to overtime in every rule prior to the 2019 rule.'' EPI
noted that the 3.4 million workers that the Department estimated would
be affected by the proposed salary level, plus the approximately
248,000 workers who would be affected by the proposed change in the
total compensation threshold for the HCE test, discussed below,
together constituted ``just 2.6% of workers subject to [the] FLSA . . .
and just 2.3% of all workers.'' As discussed in section V.B, numerous
commenters representing workers also pointed to additional data points
which, they stated, show that the Department's proposed salary level
would fulfill a relatively limited role in determining exemption
status, particularly by historical standards. For instance, multiple
commenters stated that approximately 28.2 percent of all full-time
salaried workers earn below the proposed salary level, whereas in 1975
approximately 62.8 percent of full-time salaried workers earned below
the short test salary level. See, e.g., AFL-CIO; EPI; NELP; NWLC.
iii. Assessing the Impact of the New Salary Level
As discussed in section V.B, the Department is finalizing its
proposal to set the standard salary level equal to the 35th percentile
of earnings of full-time salaried workers in the lowest-wage Census
Region, which, based on the most recent earnings data, produces a
salary level of $1,128 per week. The Department has analyzed the impact
of the new salary level, applying generally the same metrics that it
applied in the

[[Page 32879]]

NPRM. Upon consideration of the comments received, the Department
concludes that this salary level meets the objectives it sought to
achieve in undertaking this rulemaking: preserving the primary role of
an analysis of employee duties in determining EAP exemption status;
fully restoring the initial screening function of the salary level; and
more effectively identifying 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.
The Department intentionally chose a salary level methodology that
will ensure that EAP exemption status for the great majority of white-
collar employees will continue to depend on their duties. Consistent
with the NPRM, the Department thus began by analyzing the impact of the
new salary level on all full-time white-collar salaried workers. The
Department continues to believe that an analysis of how the new salary
level will impact all full-time salaried white-collar workers is
necessary to put the salary level and its relation to an examination of
duties in the appropriate context, as this is the universe of workers
who could potentially be impacted by an increase in the standard salary
level. As noted above, commenters representing employers did not
directly challenge this aspect of the Department's analysis. And many
commenters representing workers effectively endorsed this approach in
stating that the proportion of full-time salaried workers who earn less
than the proposed salary level shows the relatively modest impact of
the proposed salary level in determining EAP exempt status, in
comparison to an examination of duties. See, e.g., AFL-CIO; EPI; NELP;
NWLC.\237\
---------------------------------------------------------------------------

\237\ As discussed further below, the Department does not
believe, as some commenters representing workers suggested, that the
proportion of full-time salaried workers who earned below the short
test salary level in 1975 is the most appropriate comparator for the
population of workers who earn below the new salary level.
---------------------------------------------------------------------------

The Department's analysis confirms that the number of full-time
salaried white-collar workers who will be excluded from the EAP
exemption due to the Department's salary level is greatly exceeded by
the far-larger population of full-time salaried white-collar workers
for whom duties will continue to determine their exemption status. As
illustrated in Figure A below, of the approximately 45.4 million full-
time salaried white-collar workers in the United States subject to the
FLSA,\238\ about 12.7 million earn below the new salary level of $1,128
per week, and about 32.7 million earn above the salary level.\239\
Thus, approximately 28 percent of full-time salaried white-collar
workers (most of whom, as discussed below, do not perform EAP duties)
earn below the new salary level, whereas approximately 72 percent of
full-time salaried white-collar workers earn above the salary level and
would have their exemption status turn on their job duties.
---------------------------------------------------------------------------

\238\ 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. Commenters did not address the
Department's exclusion of these workers from its analysis of the
impact of the proposed salary level.
\239\ This estimate is conservative, as it excludes 8.1 million
white-collar workers 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 workers in ``named
occupations'' are included, the percentage of salaried full-time
white-collar employees for whom exemption status would depend on
duties, rather than salary, increases to 76 percent. See Sec. Sec.
541.303-304.
---------------------------------------------------------------------------

Figure A--Distribution of Full-Time Salaried White-Collar Workers by
Weekly Earnings
[GRAPHIC] [TIFF OMITTED] TR26AP24.140

Scrutinizing these figures more closely reinforces the continued
importance of the duties test under the final rule. Of the
approximately 12.7 million full-time salaried white-collar workers who
earn below the new salary level of $1,128 per week, about 8.3 million
earn below the long test salary level of $942 per week. 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 workers earning below the long test salary
level. As discussed in section V.B, the long test salary level is a key
parameter for determining an appropriate salary level.\240\ The number
of full-time salaried white-collar workers for whom salary would be
determinative of their nonexempt status and who earn at least the long
test salary level--4.3 million--is over seven times smaller than the
number of full-time salaried white-collar workers for whom job duties
would continue to be determinative of their exemption status because
they earn at least the new salary level--32.7 million.
---------------------------------------------------------------------------

\240\ The Department calculated the value of the long test
salary level using the same methodology it used in the NPRM, updated
for current earnings data: the 10th percentile of earnings of likely
exempt workers in low-wage industries and regions. As explained in
section V.B, any minor historical variations in the long test
methodology do not deprive it of its usefulness in helping determine
an appropriate salary level now.
---------------------------------------------------------------------------

In analyzing how the Department's new salary level will impact all
salaried white-collar workers, the Department also considered the
extent to which full-time salaried white-collar workers across the
income distribution perform EAP duties. As the Department stated in

[[Page 32880]]

the NPRM and the 2019 rule, the salary level has historically served as
``a helpful indicator of the capacity in which an employee is employed,
especially among lower-paid employees; however, the salary level should
not eclipse the duties test.\241\ In considering the extent to which
full-time salaried white-collar workers perform EAP duties, the
Department uses probability estimates of passing the standard duties
test, as it did in the NPRM.\242\
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\241\ 88 FR 62171;84 FR 51239, 51237.
\242\ See section VII.
---------------------------------------------------------------------------

The Department's analysis shows that the new salary level is a
helpful indicator of whether salaried workers perform EAP duties, since
a minority of full-time salaried white-collar workers who earn less
than the salary level meet the standard duties test, whereas a large
majority of such workers who earn more than the salary level meet the
standard duties test. As illustrated in Figure B, of the 12.7 million
full-time salaried white-collar workers who earn less than $1,128 per
week, the Department estimates that only 38 percent--about 4.8 million
workers--meet the standard duties test. In contrast, of the 32.7
million full-time salaried white-collar workers who earn at least
$1,128 per week, a large majority--77 percent, or about 25.3 million
workers--meet the standard duties test.\243\ The number of full-time
salaried white-collar workers who meet the standard duties test and
earn below the salary level is thus over five times smaller than the
number of full-time salaried white-collar workers who meet the standard
duties test and earn at least the salary level amount.\244\ And 84
percent of all full-time salaried white-collar workers who meet the
standard duties test--25.3 million out of a total of approximately 30.0
million--earn at least the new salary level.\245\
---------------------------------------------------------------------------

\243\ While a significant majority of full-time salaried white-
collar workers who earn above the new salary level meet the duties
test, helping confirm its appropriateness as an indicator of the
capacity in which individuals are employed, a large number of full-
time salaried white-collar workers who earn above the salary level--
7.4 million--do not meet the duties test. A comparable number of
salaried white-collar workers who earned above the proposed salary
level did not meet the duties test, as EPI and AFI-CIO noted in
their comments. PPWO's statement that ``[t]he Department seem[ed] to
be setting the salary level at a point at which all employees above
the line would be exempt'' is thus incorrect. The Department agrees
with EPI that the fact that a large number of salaried white-collar
workers who earn above the salary level will be nonexempt because
they do not meet the duties test underscores the importance of an
examination of duties under this rule. These 7.4 million workers
will continue to be entitled to overtime because of their duties,
not their salaries. Notably, this population is significantly larger
than the population of workers who will become nonexempt under the
new salary level. Rather than indicating that the salary level must
be set higher, as AFL-CIO suggested, this fact indicates that this
rule meets the Department's objective of preserving a primary role
for an examination of duties.
\244\ As noted above, see supra note 239, these figures exclude
salaried white-collar workers who are not subject to the part 541
salary criteria.
\245\ Note that these numbers refer only to salaried white-
collar workers at all salary levels who meet the standard duties
test, including workers who are nonexempt because they earn below
the current standard salary level.
---------------------------------------------------------------------------

Figure B--Salaried White-Collar Workers Earning Above and Below the
Standard Salary Level Who Meet or Do Not Meet the Standard Duties Test
[GRAPHIC] [TIFF OMITTED] TR26AP24.141

The Department disagrees with commenters that challenged its use of
its probability codes to determine whether a worker meets the duties
test in light of changes in occupational codes and the duties test
since the

[[Page 32881]]

probability codes were first developed. The Department has used the
probability codes to estimate the number of workers who meet the duties
test in its last three EAP rules.\246\ As noted in section VII,
although the probability codes were developed 25 years ago, the
standard duties test is not substantively different from the former
short duties tests reflected in the probability codes,\247\ and the
Department used occupational crosswalks to map the occupational codes
on which the probability codes were originally based onto the 2018
Census occupational codes, which are used in the most recent CPS MORG
data.\248\ Additionally, the Department verified the continued
appropriateness of the probability codes in 2016 through a review of
the O*NET database,\249\ which confirmed that the probability codes
reflected current occupational duties.\250\ The Department's
probability codes remain reliable and appropriate indicators for
evaluating whether workers meet the standard duties test.
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\246\ See 84 FR 51258-59; 81 FR 32458; 69 FR 22198.
\247\ See 69 FR 22214.
\248\ See section VII.
\249\ The O*NET database contains hundreds of standardized and
occupation-specific descriptors. See https://www.onetcenter.org.
\250\ See 81 FR 32459.
---------------------------------------------------------------------------

Consistent with the NRPM, the Department next examined how the new
salary level will impact salaried white-collar workers earning between
the historic long and short test thresholds. As discussed in section
V.B, the long and short test salary levels are important parameters for
assessing the appropriateness of the salary level. Under the final
rule, duties will continue to be determinative of exemption status for
a majority of white-collar workers earning between these thresholds. As
illustrated in Figure C, of the approximately 10.8 million salaried
white-collar workers who earn between the long test salary level of
$942 per week and the short test salary level of $1,404 per week, about
40 percent (4.3 million) earn below the new salary level, and about 60
percent (6.5 million) earn at or above the new salary level. Moreover,
of the 4.3 million workers earning between the long test and the new
standard salary level, almost half do not meet the standard duties
test.\251\
---------------------------------------------------------------------------

\251\ As discussed further below, about 2.1 million of the
approximately 4.3 million salaried white-collar workers who earn
between the long test salary threshold and the Department's new
salary level (about 48 percent of these workers) do not meet the
standard duties test. Thus, in effect, only 21 percent of salaried
white-collar workers who earn between the long and short test salary
levels--2.2 million out of a total of 10.8 million--have their
exemption status determined solely by the new standard salary level.
---------------------------------------------------------------------------

Figure C--Salaried White-Collar Workers Between the Long and Short Test
Salary Levels Who Meet or Do Not Meet the Standard Duties Test
[GRAPHIC] [TIFF OMITTED] TR26AP24.142

Commenters representing workers pointed to the proportion of full-
time salaried workers who earned below the short test salary level in
1975, as compared to the proportion of full-time salaried workers who
earned below the proposed salary level, in stating that the Department
could or should set the salary level higher than the proposed salary
level. See, e.g., AFL-CIO; EPI; NELP; NWLC. As emphasized above, the
Department agrees that the short test and long test salary levels are
key parameters for assessing the appropriateness of a salary level in a
one-test system. It is also useful to put any salary level in
historical context.
However, the Department notes that under the two-test system,
employers could also use the long test, which paired a lower salary
level with a more rigorous duties test. Accordingly, a segment of the
workers who earned below the short test salary level in 1975--those who
earned between the short and long test salary levels and

[[Page 32882]]

performed limited amounts of nonexempt work--were still exempt from
overtime under the long test even though they earned below the short
test salary level. As explained in section V.B.4, the Department has
elected to set the salary level well below the short test salary level
in part because setting it in the short test salary range would prevent
employers from using the EAP exemption for this entire population of
historically exempt workers.
Lastly, the Department also looked at the impact of the new salary
level on currently exempt employees--those salaried white-collar
workers 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 workers will
become nonexempt. Of the approximately 45.4 million salaried white-
collar workers in the United States, approximately 29.3 million
currently qualify for the EAP exemption.\252\ Of these 29.3 million
presently exempt workers, just 4.0 million earn at or above the current
$684 per week standard salary level but less than $1,128 per week and
will, without some intervening action by their employers, become
entitled to overtime protection as a result of the combined effect of
the initial update and the subsequent application of the new standard
salary level in this rule. A test for exemption that includes a salary
level component will necessarily result in a number of workers who
earned at or above the prior salary level and pass the duties test
becoming nonexempt when the salary level is increased. As the
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.
---------------------------------------------------------------------------

\252\ Note that the 29.3 million worker figure only refers to
workers who meet the standard EAP exemption and thus differs from
the population of potentially affected EAP workers identified in the
economic analysis (29.7 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 workers in the ``named
occupations'' who, under the Department's regulations, are exempt
based on their duties alone.
---------------------------------------------------------------------------

As the Department explained in its analysis of the impact of the
proposed salary level, the new salary level will impact the exemption
status of two distinct and important, but relatively small, groups of
lower-paid EAP workers. First, the new salary level will restore
overtime protections to 1.8 million currently exempt workers who meet
the standard duties test but earn less than the equivalent of the long
test salary level ($942 per week). Such employees were excluded from
the EAP exemption under every rule prior to 2019, either by the long
test salary level itself, or under the 2004 rule standard salary level,
which was set equivalent to the long test salary level. Fully restoring
the salary level's initial screening function requires a salary level
that will ensure all employees who earn below the long test level are
excluded from the exemption.
Second, the new salary level will result in overtime protections
for an additional 2.2 million currently exempt workers who meet the
standard duties test and earn between the long test salary level ($942
per week) and the final salary level. As explained earlier, the
Department is setting the standard salary level above the long test
level to account for the shift to a one-test system in a manner that
reasonably distributes the impact of this switch. The final rule will
limit the number of affected workers by setting a standard salary level
below the midpoint between the long and short test salary levels and by
using earnings data from the lowest-wage Census Region (the South).
Even among the 4.0 million workers affected by the combination of
the initial update and the subsequent application of the new standard
salary level in this rule, the fact that a large share of these workers
earn below the long test level underscores the modest role of the final
salary level. Beyond the 1.8 million workers earning less than the long
test salary level--to whom the final rule will simply restore overtime
protections that they had under every rule prior to 2019--the increase
in the salary level will affect the exemption status of 2.2 million
workers. This group makes up about 8 percent of all currently exempt,
salaried white-collar workers and just under 5 percent of all salaried
white-collar workers.\253\ The salary level methodology adopted in this
rule will thus maintain the ``useful, but limited, role'' of the salary
level in defining and delimiting the EAP exemption.\254\
---------------------------------------------------------------------------

\253\ The 4.0 million workers affected by the new salary level
represent only 13.8 percent of the 29.3 million salaried white-
collar workers who currently qualify for the standard EAP exemption.
\254\ See 88 FR 62173; 84 FR 51238.
---------------------------------------------------------------------------

Finally, the Department does not agree with commenters that stated
that it underestimated the number of affected workers in the NPRM.
Commenters that asserted the number of affected workers could be much
higher generally referenced estimates of the number of workers earning
between the current salary level and the proposed salary level,
regardless of whether they passed the duties test, and then posited
that up to that many workers (e.g., 7.2 million, 7.5 million, or 12.3
million) could be affected. See AFPI; NRF; Rachel Greszler. The
position that all workers earning below the new salary level,
regardless of their duties, will be affected by the new salary level
fails to account for the fact that that millions of these workers are
already nonexempt because they fail the duties test. The exemption
status of workers who fail the duties test will not be affected by this
rule.
Determining the workers who will be affected by a change in the
salary level requires an examination of workers' earnings and their
duties. Consistent with the NPRM, the Department determined the
populations of currently exempt workers who will be affected by the
salary level by applying its probability codes. For the reasons
discussed earlier in this section and in section VII below, the
Department's probability codes are reliable and appropriate indicators
of whether an employee meets the standard duties test. The Department
has consistently applied this methodology in all its recent part 541
rules.\255\ Though some commenters criticized the Department's method
for calculating the affected worker figure, they did not offer an
alternate methodology for determining which workers pass the current
duties test, let alone one as robust and proven as the Department's
probability codes.
---------------------------------------------------------------------------

\255\ See 84 FR 51258-59; 81 FR 32458; 69 FR 22198.
---------------------------------------------------------------------------

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.\256\ The HCE test's primary purpose is therefore 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.\257\
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\256\ 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.'').
\257\ See 69 FR 22173-74.

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[[Page 32883]]

As outlined in Sec. [thinsp]541.601, to be exempt under the HCE
test, an employee must earn at least the amount specified in the
regulations in total annual compensation--presently $107,432 per
year.\258\ Of this HCE threshold amount, no less than the full standard
salary level amount must be paid on a salary or fee basis.\259\
Finally, the employee must ``customarily and regularly perform[ ] any
one or more of the exempt duties or responsibilities of an executive,
administrative, or professional employee[.]'' \260\ The HCE test
applies only to employees whose primary duty includes performing office
or non-manual work.\261\
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\258\ Sec. 541.601(a)(1).
\259\ Sec. 541.601(b)(1). Although Sec. 541.602(a)(3) allows
employers to use nondiscretionary bonuses, incentives, and
commissions 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. [thinsp]541.601(b)(1) does not
permit employers to use such payments to satisfy the weekly standard
salary level requirement for HCE workers. See 84 FR 51249.
\260\ Sec. 541.601(c).
\261\ Sec. 541.601(d).
---------------------------------------------------------------------------

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.\262\ 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 1 month after
the end of the 52-week period to bring an employee's compensation up to
the required level.
---------------------------------------------------------------------------

\262\ 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.
---------------------------------------------------------------------------

As stated in the NPRM, 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
meet the standard duties test, the HCE total annual compensation level
must be high enough to exclude all but those employees ``at the very
top of [the] economic ladder[.]'' \263\ The proposal noted that 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.\264\ 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. At the time of the NPRM, however, the $107,432 per year HCE
threshold covered only 72 percent of full-time salaried workers
nationwide.\265\
---------------------------------------------------------------------------

\263\ 69 FR 22174.
\264\ See 88 FR 62159.
\265\ Id.
---------------------------------------------------------------------------

The Department proposed 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. Based on earnings
data used in the NPRM, this proposed methodology resulted in a proposed
HCE threshold of $143,988, of which at least $1,059 per week (the
proposed standard salary level) would have to be paid on a salary or
fee basis.\266\ The Department noted that its proposed methodology
would produce an HCE threshold that was higher than under the
methodology adopted in the 2019 final rule (which set the HCE threshold
equal to the annualized weekly earnings of the 80th percentile of full-
time salaried workers nationwide),\267\ but lower than under the 2004
rule (which covered 93.7 percent of salaried workers nationwide) and
the method adopted in the 2016 rule (which would have covered 90
percent of salaried workers nationwide).\268\ In justifying the
proposed HCE threshold, the Department explained in the NPRM that it
was 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.\269\
---------------------------------------------------------------------------

\266\ It is the Department's intent that the increase in the HCE
total annual compensation threshold is independent of, and severable
from, the 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) and the updating provision,
pursuant to which the HCE total annual compensation threshold will
be regularly updated to reflect current earnings.
\267\ See 84 FR 51250.
\268\ See 69 FR 22169-70 (Tables 3 and 4); 81 FR 32429.
\269\ 88 FR 62176.
---------------------------------------------------------------------------

The Department is finalizing its proposal to increase the HCE total
compensation threshold to the 85th percentile of annualized weekly
earnings of full-time salaried workers nationwide. Applying this
methodology to calendar year 2023 earnings data results in a total
compensation threshold of $151,164 per year. This approach will 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.
As in prior rulemakings, the Department received significantly less
feedback from commenters on the proposed increase to the HCE threshold
than on the proposed increase to the standard salary level. Most
commenters did not address the issue. Among the comments that addressed
the proposed HCE threshold, stakeholder sentiment was split; employee
representatives generally supported the proposed increase or asked for
a higher increase, while most employer representatives favored a
smaller increase or no increase at all.
A number of commenters expressed support for the proposed increase
to the HCE threshold. See, e.g., AFT; AFL-CIO; Coalition of State AGs.
For example, the Coalition of State AGs asserted that ``[s]ignificant
inflation since the 2019 rule became effective in January 2020 has
eroded the purchasing power of the HCE salary level'' and remarked that
the HCE threshold ``could arguably be made even higher than the
proposed level, particularly for high-cost, high-wage states[.]'' The
National Partnership described the proposed HCE threshold as ``in line
with historic and economic precedent,'' while the AFT commented that
the proposed HCE threshold ``will ensure [that] workers in the health
care sector, and workers who provide a wide range of services and
expertise for state and local governments, are not completely excluded
from possibly qualifying for overtime.''
A handful of commenters advocated for the adoption of a higher HCE
threshold than proposed. Noting that the HCE threshold originally
exceeded the earnings of 93.7 percent of all salaried employees
nationwide when it was introduced in 2004, Sanford Heisler Sharp
asserted that the Department's proposal to set the HCE threshold at the
85th percentile ``introduces a substantial risk of harming employees
who truly need overtime protections.'' NELA and Nichols Kaster urged
the Department to repeat the approach it took in the 2016 rule, which
set the HCE threshold equal to the 90th percentile of salaried earnings
nationwide. Invoking

[[Page 32884]]

the FLSA's policy goal of spreading employment, NELA also opined that
``an overly permissive HCE [test] will result in fewer `highly
compensated' jobs available for workers aspiring to climb the economic
ladder to benefit themselves and their families.''
Employer stakeholders that addressed the HCE threshold opposed the
Department's proposed increase, with many commenters disputing that the
current HCE threshold should be increased at all. See, e.g., ABC; AHLA;
Argentum & ASHA; NAW; Visiting Angels. A number of commenters that
opposed the proposed HCE threshold asserted that it would be
administratively burdensome to reevaluate the exemption status of
employees who earn between the current and proposed HCE thresholds.
See, e.g., HR Policy Association; NAM; NCFC. PPWO commented that
``[e]mployers will be faced with the task of reviewing the basis on
which each employee was accorded exempt status, including employees for
whom the exempt status decision was made a decade ago and who may be
among the most highly paid employees in the company.''
Other employer-side stakeholders opposed the proposed HCE threshold
but indicated (either in the alternative or outright) that they would
be open to a smaller increase. Several commenters stated an increase to
the HCE threshold using the 80th percentile methodology applied in the
2019 rule would be preferable. See, e.g., CWC; LeadingAge; RILA; see
also Chamber (asserting that the NPRM ``does not address whatsoever why
the 80th percentile [methodology] would be insufficient''). National
Restaurant Association asserted that if the Department changes the HCE
threshold, it ``should calculate any new HCE highly compensated level
by using data from the South Census Region, rather than on a nationwide
basis, to ensure that the HCE exemption is at least within reach of
some employers in the lowest-wage regions in the country.'' WFCA
similarly recommended that the Department set the HCE threshold at the
85th percentile of salaried earnings in lowest-wage Census Region or,
alternatively, use the 80th percentile of national data for full-time
salaried workers (i.e., the 2019 rule's approach).
Having considered the comments received, the Department is
finalizing its proposal to increase the HCE threshold to the 85th
percentile of annualized weekly earnings of full-time salaried earnings
nationwide. This results in a new HCE threshold of $151,164 per year,
using calendar year 2023 earnings data, of which at least $1,128 per
week (the standard salary level) must be paid on a salary or fee
basis.\270\
---------------------------------------------------------------------------

\270\ As discussed in section IV, the increase in the HCE
threshold and the standard salary level using the new methodologies
will be applicable on January 1, 2025.
---------------------------------------------------------------------------

As an initial matter, the Department maintains that the current HCE
threshold must be increased. In nominal terms, the current $107,432 HCE
threshold is only 7 percent higher than the $100,000 HCE threshold that
was introduced in 2004 and, as multiple commenters noted, it has failed
to keep up with wage growth over the last 20 years. According to 2023
earnings data, the current HCE threshold ($107,432) now covers just 70
percent of full-time salaried workers nationwide, less than the 80
percent of such workers that it covered when it was set in 2019. This
coverage would continue to decrease in the absence of an increase,
which is needed to reserve the HCE test for employees ``at the very top
of today's economic ladder,'' \271\ as the Department originally
intended. Inaction could risk the unintended exemption of employees in
higher-income regions and industries who clearly are outside of the
scope of the exemption.\272\
---------------------------------------------------------------------------

\271\ 69 FR 22174.
\272\ Id.
---------------------------------------------------------------------------

The Department concludes that increasing the HCE threshold to the
85th percentile of annualized weekly earnings of full-time salaried
workers nationwide will ensure that the threshold is sufficiently high
to provide a meaningful and appropriate complement to the minimal HCE
duties test, and that nearly all of the highly paid white-collar
workers earning above this threshold ``would satisfy any duties test.''
\273\ The Department considered keeping the 2019 rule's methodology for
the HCE threshold (i.e., the 80th percentile of earnings of full-time
salaried employees nationwide) and applying it to current earnings
data. However, the Department reaffirms its determination from the NPRM
that this methodology is not appropriate because it does not produce a
threshold high enough to reserve the HCE test for employees who would
almost invariably pass the standard duties test. The Department agrees
with commenters that stated that setting the HCE threshold at the
annualized weekly earnings of the 85th percentile of full-time salaried
workers nationwide will 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.
---------------------------------------------------------------------------

\273\ 84 FR 51250 (internal citation omitted).
---------------------------------------------------------------------------

The Department disagrees that the new HCE threshold is too high.
Adjusting for wage growth, the proposed HCE threshold is significantly
lower than the original HCE threshold that was introduced in 2004
(which surpassed the earnings of 93.7 percent of full-time salaried
workers). Going forward, employers with employees affected by the
increased HCE threshold can still use the standard exemption criteria
to take advantage of the EAP exemption. The HCE test is a streamlined
alternative to the standard exemption criteria for a select class of
employees who are so highly paid that they will almost invariably pass
the standard duties test.\274\ By design, the HCE test is reserved for
employees ``at the very top of today's economic ladder'' who would
satisfy ``any duties test'' in ``virtually every'' case.\275\ This
exclusivity is necessary because of the risk that the HCE test poses to
salaried employees in high-income regions and industries who are not
bona fide EAP employees, which the Department acknowledged when the HCE
test was created in 2004.\276\
---------------------------------------------------------------------------

\274\ See Sec. 541.601(c) (``A high level of compensation is a
strong indicator of an employee's exempt status, thus eliminating
the need for a detailed analysis of the employee's job duties.'');
see also 84 FR 51249.
\275\ 69 FR 22174.
\276\ See id. (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.'').
---------------------------------------------------------------------------

Although the Department has previously acknowledged that the HCE
test may exempt some employees who fail the standard duties test and
would otherwise be entitled to overtime pay, such outcomes should be
``rare,'' involving employees whose pay is high enough that their
exemption ``would not defeat the objectives of section 13(a)(1) of the
Act.'' \277\ The only way to ensure that the HCE test serves its
intended purpose--i.e., serving as an efficient, streamlined test for
employees who would ``almost invariably'' meet the standard duties
test--is for the test to include an earnings threshold high enough to
exclude nearly all employees whose EAP status may be questionable. The
exemption status of such employees should be determined by the standard
exemption criteria.
---------------------------------------------------------------------------

\277\ See 84 FR 51249.
---------------------------------------------------------------------------

The Department acknowledges that some commenters requested the
adoption of a higher HCE threshold, closer in magnitude to the original
$100,000 HCE threshold that was

[[Page 32885]]

adopted in 2004. As noted above, the original HCE threshold exceeded
the earnings of over 93 percent of salaried white-collar workers when
it was adopted. Germane to these comments, the Department considered
repeating the approach it took in the 2016 final rule and proposed in
the 2019 NPRM of setting the HCE threshold at the annualized weekly
earnings of the 90th percentile of full-time salaried workers
nationwide, which would result in a threshold of $179,972 per year. As
noted in the NPRM, however, the Department is concerned that an HCE
threshold set at $179,972 could unduly restrict the use of the HCE test
for employers in lower-wage regions and industries.\278\ While the new
HCE threshold does not exclude from the HCE test as high a percentage
of full-time salaried employees as the HCE threshold initially adopted
in 2004, it excludes a sufficiently large percentage (i.e., 85 percent
of full-time salaried employees nationwide) to guard against the
unintended exemption of employees in higher-income regions and
industries who are not bona fide EAP employees.
---------------------------------------------------------------------------

\278\ See 88 FR 62176; see also 84 FR 51250.
---------------------------------------------------------------------------

For all of the reasons provided above, the Department adopts its
proposal to set the HCE threshold equal to the annualized weekly
earnings of the 85th percentile of full-time salaried workers
($151,164). This new level will be applicable on January 1, 2025.

D. Severability

1. The Department's Proposal
The Department proposed to add a severability provision to its part
541 regulations at Sec. 541.5. Proposed Sec. 541.5 stated that 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 Department intended that the provision be
given the fullest effect permitted by law, unless the provision is held
to be completely invalid or unenforceable, in which case, the
Department intended the provision to be severable and not to affect the
remaining provisions.
The Department illustrated the intended effect of proposed Sec.
541.5 with some examples. The Department noted that it was its intent
that the proposed updating mechanism be effective even if the proposed
increase in the standard salary level were invalidated. It was also the
Department's intent that the proposed increase in the HCE total annual
compensation threshold be effective even if the increase in the
standard salary level were invalidated. And it was the Department's
intent that the proposed increases in the standard salary level and HCE
annual total compensation requirement apply even if the updating
mechanism was determined to be invalid.\279\
---------------------------------------------------------------------------

\279\ The Department also stated that it was the Department's
intent that its proposal to apply the standard salary level to the
U.S territories subject to the Federal minimum wage remain in effect
even if the proposed change to the standard salary level were
invalidated. As discussed above, see supra note 9, at this time the
Department is not finalizing in this final rule its proposal to
apply the standard salary level to the U.S. territories subject to
the Federal minimum wage and to update the special salary levels for
American Samoa and the motion picture producing industry.
---------------------------------------------------------------------------

The Department is finalizing Sec. 541.5, Severability, as
proposed, with that addition of clarifying language as discussed below.
2. Discussion of Comments and Final Rule
Most commenters did not address proposed Sec. 541.5. Of the few
commenters that did address the Department's severability proposal, the
Administrative Law Professors and NELP supported the inclusion of a
severability provision in the final rule.
In expressing their support, the Administrative Law Professors
provided the most in-depth discussion of the Department's proposed
severability provision. The Administrative Law Professors explained
that a provision of a rule is severable where the agency intends for
the remainder of the rule to be effective, even if the provision is
invalidated, and the rule would be workable absent the provision,
citing precedent from the U.S. Supreme Court and the U.S. Court of
Appeals for the District of Columbia Circuit.\280\ The professors noted
that the Department ``clearly state[d] [its] intention'' in proposed
Sec. 541.5 that the updating mechanism in proposed Sec. 541.607 ``be
effective even if the proposed increase in the standard salary level is
invalidated.'' They further noted that the Department ``expresse[d] the
same intention with regard to the implementation of the HCE total
annual compensation requirement whether or not the standard salary
level is invalidated'' and ``the application of the Department's
proposed 2023 earnings thresholds, whether or not automatic updating is
upheld.''
---------------------------------------------------------------------------

\280\ See K-Mart Corp. v. Cartier, 486 U.S. 281, 294 (1988);
Davis Cnty. Solid Waste Mgmt. v. EPA, 108 F.3d 1454, 1459-60 (D.C.
Cir. 1997).
---------------------------------------------------------------------------

The Administrative Law Professors observed that the Department's
inclusion of a severability provision in the NPRM was consistent with
guidance from the Administrative Conference of the United States
(ACUS), which advised agencies in a 2018 report \281\ to address
severability in the text and preamble of both the NPRM and the final
rule where the agency intends the provisions of a rule to be severable
and anticipates that the rule may be challenged in court. The
professors suggested that the Department further explain in the final
rule how the rule ``would remain workable'' if any of its provisions
were declared invalid. As an example, the professors suggested stating
explicitly that invalidation of the updating provision ``would have no
bearing on the rationality or administrability of the standard salary
and HCE salary thresholds'' as set in the rule. They further noted that
in the event of the invalidation of either the standard salary level or
the HCE compensation threshold, the updating provision could function
independently because ``updating would simply take as the 2023 baseline
the thresholds left in place from the 2019 rule.'' The Administrative
Law Professors made clear that expanding the explanation of ``the
independent workability of any of the rule's provisions'' should not be
seen as an indication of legal vulnerability but instead as merely an
acknowledgement of the possibility of legal challenge.
---------------------------------------------------------------------------

\281\ See Admin. Conf. of the U.S., Recommendation 2018-2,
Severability in Agency Rulemaking, 83 FR 30683, 30685 (June 29,
2018).
---------------------------------------------------------------------------

NELP also supported the proposed severability provision, noting the
``vital importance'' of the proposed rule to millions of workers.
Specifically, NELP stated that if any provision of the rule ``is deemed
legally questionable, only that provision should be stayed while
litigation proceeds.''
A small number of commenters representing employer interests
specifically opposed the proposed severability provision or criticized
the Department's severability proposal. Indiana Chamber of Commerce and
U-Haul Holding Company (U-Haul) stated that the proposed severability
provision was an acknowledgement of the legal vulnerability of the
Department's proposed updating section. The YMCA stated that the
Department failed to explain the need for, or appropriateness of, the
proposed severability provision, and RILA asserted that the Department
failed to explain how the proposed rule would function if any of its
provisions were declared invalid. The Chamber and the National
Association of Convenience Stores asserted that the Department should
withdraw the severability provision.
The Chamber further asserted that, pursuant to the district court
decision

[[Page 32886]]

invalidating the 2016 rule, ``the automatic increase provision in the
Proposed Rule cannot survive if the increase to the minimum salary
level is struck down.'' The Department does not read the court's
decision as substantively examining the validity of the 2016 rule's
automatic updating provision or analyzing whether that provision was
severable from the remainder of the rule. And importantly, the 2016
rule did not contain a severability provision or discuss the
Department's intent regarding severability of the provisions of that
rule. In contrast, the Department's current NPRM included a
severability provision and a detailed discussion of the Department's
intent that specifically addressed severability of the updating
provision. As the Administrative Law Professors noted, as proposed, the
updating provision was not dependent on the proposed increases to the
standard salary level and the HCE compensation threshold. If either of
the new thresholds were vacated, the updating provision would simply
use the existing methodologies set in the 2019 rule as the baseline for
the update (i.e., the Department would apply those methodologies
triennially to update the earnings thresholds as established in Sec.
541.607). This is a significant change from the 2016 updating
provision, which would have updated the standard salary level and HCE
total compensation requirement based on the specific methodologies set
in that rule and facially could not function if those methodologies
were invalidated.\282\
---------------------------------------------------------------------------

\282\ See 81 FR 32251.
---------------------------------------------------------------------------

Upon consideration of the comments received, the Department is
finalizing the severability provision in Sec. 541.5 as proposed, with
an additional sentence to further clarify its intent. The Department
intends that each of this rule's provisions be considered separate and
severable and operate independently from one another. The Department is
revising Sec. 541.5 to state this explicitly. In this regard, the
Department intends that if any application of a provision is stayed,
enjoined, or invalidated, the provision be construed to continue to
give the maximum effect to the provision permitted by law. In the event
any provision within a section of the rule is stayed, enjoined, or
invalidated, the Department intends that all remaining provisions
within that section, plus all other sections, remain effective and
operative. And in the event any whole section of the rule is stayed,
enjoined, or invalidated, the Department intends that all remaining
sections remain effective and operative.
It is the Department's position that the provisions and sections of
the rule can function sensibly in the event that any specific
provisions, sections, or applications are invalidated, enjoined, or
stayed. To begin, the new standard salary level set forth in Sec.
541.600(a)(2) of $1,128 per week--the 35th percentile of weekly
nonhourly earnings in the lowest-wage Census Region--can function
sensibly, even if, for instance, the rule's new updating section or the
revision to the HCE total compensation requirement are stayed,
enjoined, or invalidated. The revision to the standard salary level
under the new methodology operates independently of and does not depend
on either the new updating section or the revision to the HCE total
compensation requirement. If, for instance, the triennial updating of
the standard salary level were invalidated, the new salary level of
$1,128 would still go into effect, and it would remain $1,128 per week
until the Department conducts further rulemaking. The new standard
salary level of $1,128 per week would also still take effect if the
initial update to the standard salary level were invalidated.\283\ And
the new standard salary level would still go into effect and function
sensibly if the revision to the HCE total compensation requirement were
invalidated as well. Notably, in such an event, the total annual
compensation an employee would need to receive to qualify for the HCE
test would remain at the existing level; \284\ however, the employee's
total annual compensation would need to include at least $1,128 per
week paid on a salary or fee basis. As discussed in section V.B, the
revised standard salary level will work effectively with the standard
duties test to better define who is employed in a bona fide EAP
capacity by restoring the initial screening function that the salary
level long fulfilled and adjusting the salary level to account for the
change to a single-test system. Finalizing the new standard salary
level will thus accomplish several of the key objectives the Department
is seeking to achieve in undertaking this rulemaking, even if all or
part of the updating section or the revisions to the HCE total
compensation requirement do not also go into effect.
---------------------------------------------------------------------------

\283\ As noted in section IV, the initial update to the standard
salary level and HCE total annual compensation requirement are
applicable July 1, 2024, whereas the new standard salary level and
HCE total annual compensation requirement are applicable 6 months
later on January 1, 2025.
\284\ Under these circumstances, the HCE total annual
compensation requirement would be $132,964 per year or, if the
initial update to the earnings thresholds under this rule did not go
into effect, the current HCE total annual compensation requirement
of $107,432 per year.
---------------------------------------------------------------------------

The revised HCE total compensation requirement of $151,164 per year
set forth in Sec. 541.601(a)(1)--the 85th percentile of annualized
weekly earnings of full-time nonhourly workers nationally--can also
function sensibly, even if the other provisions of this final rule are
stayed, enjoined, or invalidated. The revision to the HCE total
compensation requirement under the new methodology operates
independently of, and does not depend on, either the new updating
provision or the revision to the standard salary level. Accordingly,
if, for instance, the triennial updating of the HCE total compensation
requirement were invalidated, the new HCE total compensation
requirement of $151,164 per year would still become effective, and the
HCE total compensation requirement would remain at that amount until
the Department undertakes further rulemaking. If the initial update to
the HCE total compensation requirement were invalidated, the revised
HCE total compensation requirement would still go into effect, too. And
the revised HCE total compensation requirement would still go into
effect and function sensibly if the revision to the standard salary
level were invalidated. In such an event, an employee would need to be
paid the new total annual compensation amount of $151,164 per year to
qualify as exempt under the HCE test, though the total annual
compensation would need to include only the existing standard salary
level \285\ per week paid on a salary or fee basis. As noted in section
V.C, the HCE test was intended to be limited to those highly paid
employees who would almost invariably meet the standard duties test.
The revision to the HCE total compensation requirement would restore it
to a level that is high enough to avoid the unintended exemption of
large numbers of employees in high-wage regions but not so high as to
unduly restrict the use of the HCE test in lower-wage regions and
industries, even if the revisions to the standard salary level and all
or part of the updating provision do not go into effect.
---------------------------------------------------------------------------

\285\ Under these circumstances, the standard salary level would
be $844 per week or, if the initial update to the earnings
thresholds under this rule did not go into effect, the current
standard salary level of $684 per week.
---------------------------------------------------------------------------

The new updating section can also function sensibly, independent of
the other provisions of this final rule. As explained in section V, the
updating section provides in Sec. 541.607(a) and (b) that the
Department will update the

[[Page 32887]]

standard salary level and HCE total compensation requirement,
respectively, initially on July 1, 2024 and every 3 years thereafter,
to reflect current earnings data, in accordance with the methodology
used to set each threshold. Both the triennial updating of the earnings
thresholds for exemption and the initial update to these thresholds can
function sensibly on their own.
The triennial updating of the earnings thresholds for exemption can
function sensibly, even if the new standard salary level and new HCE
total compensation requirement are stayed, enjoined, or invalidated, as
the triennial updates are based on the methodology used to set each
threshold that is in place at the time of the update. If all the
provisions of this rule do go into effect (and assuming the Department
has not engaged in further rulemaking), as discussed in section V.A,
the triennial updates to the standard salary level and HCE total
compensation threshold will be based on the new methodologies
established in this rule: the 35th percentile of weekly nonhourly
earnings in the lowest-wage Census Region and the 85th percentile of
annualized weekly earnings of full-time nonhourly workers nationally,
respectively. However, the updating provision does not depend on the
revisions to the standard salary level and HCE methodologies also going
into effect. If, for instance, both the new standard salary level and
HCE total compensation requirement were invalidated, the updating
provision would, as the Administrative Law Professors noted, use the
existing methodologies set in the 2019 rule as the baseline for the
each triennial update: the 20th percentile of weekly earnings of full-
time nonhourly workers in the lowest-wage Census Region and/or retail
nationally, in the case of the standard salary level, and the 80th
percentile of annualized weekly earnings of full-time nonhourly workers
nationally, in the case of the HCE test. The updating section thus
ensures that the standard salary level and HCE total compensation
requirement continue to reflect current earnings--among the key
objectives the Department is seeking to achieve in undertaking this
rulemaking, see section V.A--even if the new methodologies for setting
these earnings thresholds do not go into effect.
The initial update of the earnings thresholds for exemption can
function sensibly as well, even if this rule's other revisions do not
go into effect, as the baseline for the initial update to each
threshold is the current methodology established in 2019. Accordingly,
if, for instance, the new standard salary level, new HCE total
compensation requirement, and the triennial updating provision were
invalidated, the standard salary level and HCE total compensation
requirement would still be updated on July 1, 2024 to $844 per week and
$132,964 per year, respectively. In undertaking this rulemaking, the
Department sought (among other objectives) to account for the
considerable earnings growth that has taken place since it last updated
the earnings thresholds for exemption.\286\ The initial updating of the
standard salary level and HCE total compensation requirement ensures
these thresholds reflect earnings growth since the Department's 2019
rule, even if the new methodologies for setting the standard salary
level and the HCE total compensation requirement and the future
triennial updates to these earnings thresholds do not go into effect.
---------------------------------------------------------------------------

\286\ See section V.A.2.
---------------------------------------------------------------------------

In sum, the Department has taken care to draft this final rule such
that its provisions function independently and is including a
severability section, Sec. 541.5, to make clear that all the rule's
provisions are separate and severable and should be given the fullest
possible effect. As the Administrative Law Professors observed, this
discussion of severability is not an acknowledgement of the legal
vulnerability of any particular provision. However, since some
commenters have indicated that they may challenge all or part of this
rule, see e.g., AFPI, Chamber, NFIB, and the 2016 and 2019 rules were
both subject to legal challenge, the Department, consistent with ACUS
guidance, makes explicit in the regulatory text that it considers the
provisions of this rule to be severable and explains here how the
various provisions of the rule can operate sensibly in the event
another provision of the rule is stayed, enjoined, or declared invalid.

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, the
information collections' practical utility, the impact of paperwork and
other information collection burdens imposed on the public, and how to
minimize those burdens. Under the PRA, an agency may not collect or
sponsor an information collection requirement unless it displays a
currently valid Office of Management and Budget (OMB) control
number.\287\
---------------------------------------------------------------------------

\287\ See 5 CFR 1320.8(b)(3)(vi).
---------------------------------------------------------------------------

OMB has assigned control number 1235-0021 to the information
collection that gathers information from complainants alleging
violations of the labor standards that WHD administers and enforces,
and OMB has assigned control number 1235-0018 to the information
collection, Records to be kept by Employers--Fair Labor Standards Act.
In accordance with the PRA, the Department solicited public comments on
the proposed burden changes to the information collection under control
number 1235-0021 and the proposed burden changes to the information
collection under OMB control number 1235-0018.\288\ Because OMB control
number 1235-0021 was encumbered by a different rulemaking at the time
of submission of the NPRM to OMB, the Department at that time created a
duplicate ICR of 1235-0021 under OMB control number 1235-0NEW to allow
the public to comment on the proposed estimates. The Department
submitted a contemporaneous request for OMB review of the proposed
revisions to the existing information collection and the duplicate ICR
in accordance with 44 U.S.C. 3507(d). On October 12, 2023, OMB issued a
notice that assigned the duplicate information collection control
number 1235-0035 and indicated the Department should address comments
received during the NPRM comment period and resubmit for approval at
the time of the final rule. Also on October 12, 2023, OMB issued a
notice that continued the previous approval of the information
collection under 1235-0018 under the existing terms of clearance and
advised the Department to address any comments received during the NPRM
comment period and resubmit at the time of the final rule.
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\288\ See 88 FR 62181.
---------------------------------------------------------------------------

Circumstances Necessitating this Collection: This rulemaking
revises 29 CFR part 541 and affects provisions that could be considered
to entail collections of information including (1) the complaint
process under which employees may file a complaint with the Department
to investigate potential violations of the laws administered by the
Department, including the FLSA; and (2) disclosure and recordkeeping
requirements for covered employers under the FLSA. This rulemaking does
not impose new information collection requirements. Rather, burdens
under the existing requirements would increase due to the changes in
the universe of employees for whom employers are

[[Page 32888]]

required to maintain records. The changes adopted in this rulemaking
may also cause an initial increase in burden if more employees file
complaints with WHD to collect back wages under the overtime pay
requirements.
Information and technology: There is no particular order or form of
records prescribed by the regulations. A respondent may meet the
requirements of this final rule using paper or electronic means. WHD,
to reduce 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 assist.
Public comments: The Department invited public comment on its
analysis that the rule would create a slight increase in the paperwork
burden associated with the complaint ICR 1235-0021 (submitted as a
duplicate ICR at the NPRM stage under control number 1235-0NEW and
later assigned by OMB as 1235-0035) and on the burden associated with
ICR 1235-0018, Records to be kept by employers--Fair Labor Standards
Act. The Department did not receive comments on the ICRs themselves or
any comments submitted regarding the PRA analysis in particular,
including the methodology. No comments were received with respect to
the complaint ICR (1235-0021). However, commenters addressed aspects of
the information collections while commenting on the text of the
proposed rule as it relates the records ICR (1235-0018).
For example, Horizon Health Services commented that ``[r]equiring
supervisors to record their hours worked and request overtime, as
needed, would [be] a disruption to business operations by adding a
significant administrative burden.'' The University of Dayton agreed
that a change would require additional administrative burden stating,
``new training and systems would need to be put in place for newly
nonexempt employees to record their time and for their supervisors to
track and approve their time. They would have to become accustomed to
tracking their hours, being sure not to work unbudgeted hours and
overtime unless approved, and so forth.'' Others, like Argentum & ASHA
and Oklahoma Wesleyan University, similarly expressed concerns about
the costs associated with having newly nonexempt employees record their
time. SBA Advocacy stated that ``DOL should consider'' that ``small
entities face vast administrative and operational costs to schedule and
track employee hours to minimize overtime costs.'' In addition, some
commenters expressed concern that the Department's cost estimates
related to recordkeeping were too low, given among other things that
employers would need to adjust their recordkeeping and payroll systems
for newly overtime-eligible employees. See, e.g., NFIB; PPWO; Seyfarth
Shaw. The National Roofing Contractors Association stated that it ``is
concerned the proposed regulation would result in dramatically
increased labor costs and additional paperwork burdens for employers,
while also reducing workplace flexibility and compensation for many
workers.''
In response to these comments, the Department observes that most
employers currently have both exempt and nonexempt workers and
therefore have systems already in place for employers to track hours.
Additionally, commenters did not offer alternatives for estimates or
make suggestions regarding the methodology for calculating the PRA
burdens. The actual recordkeeping requirements are not changing in the
final rule. However, the pool of workers for whom employers will be
required to make and maintain records has increased under the final
rule, and as a result the burden hours have increased. Included in this
PRA section are the regulatory familiarization costs for this final
rule. However, this is a duplication of the regulatory familiarization
costs contained in section VII, economic impact analysis.
The Department plans to submit these ICR's to OMB upon publication
of the final rule. The agency will publish a notice in the Federal
Register to inform the public of OMB's decision.
Total burden for the subject information collections, including the
burdens that will be unaffected by this final rule and any changes, is
summarized as follows:
Type of review: Revision to currently approved information
collections.
Agency: Wage and Hour Division, Department of Labor.
Title: Employment Information Form.
OMB Control Number: 1235-0021.
Affected public: Private sector, businesses or other for-profits
and Individuals or Households.
Estimated number of respondents: 29,160 (2,150 from this
rulemaking).
Estimated number of responses: 29,160 (2,150 from this rulemaking).
Frequency of response: On occasion.
Estimated annual burden hours: 9,720 (717 burden hours due to this
rulemaking).
Capital/Start-up costs: $0 ($0 from this rulemaking).
Title: Records to be kept by Employers--Fair Labor Standards Act.
Type of review: Revision to currently approved information
collections.
Agency: Wage and Hour Division, Department of Labor.
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 (0 from this
rulemaking).
Estimated number of responses: 42,725,207 (10,320,000 from this
rulemaking).
Frequency of response: On occasion.
Estimated annual burden hours: 1,157,993 (344,000 from this
rulemaking).
Capital/Start-up costs: $0 ($0 from this rulemaking).

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 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

[[Page 32889]]

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 rule and was prepared pursuant to the
above-mentioned executive orders.

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.\289\ 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).
---------------------------------------------------------------------------

\289\ 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.

[[Page 32890]]

Table 1--Historical Weekly Salary Levels for the EAP Exemptions
[GRAPHIC] [TIFF OMITTED] TR26AP24.143

2. 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 finalizing its proposed change to the standard salary
level. Specifically, the Department is adjusting 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 year of Current Population Survey
(CPS) data at the time of drafting.\290\ Using the Bureau of Labor
Statistics (BLS) 2023 data on percentiles of usual weekly earnings of
nonhourly full-time workers, the standard salary level will be set at
$1,128 per week.\291\ Additionally, to maintain the effectiveness of
this test, the Department is finalizing an updating mechanism that will
update the earnings thresholds to reflect current wage data initially
on July 1, 2024 and every 3 years thereafter.
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\290\ 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.
\291\ BLS publishes quarterly and annual estimates of percentile
earnings values beginning with 2022 data at https://www.bls.gov/cps/research/nonhourly/earnings-nonhourly-workers.htm.
---------------------------------------------------------------------------

The Department's new 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 V.B, 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 the equivalent
of the long test salary level (using current data), the final rule will
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 will 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 the equivalent of the short
test salary level (using current data), the rule will 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
new salary level will 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.\292\ 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.\293\ 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.\294\ Under the final rule,
duties will continue to determine the exemption status for most
salaried white-collar employees.
---------------------------------------------------------------------------

\292\ Stein Report at 19, 24; see also 81 FR 32422.
\293\ See 84 FR 51237.
\294\ See 84 FR 51238.
---------------------------------------------------------------------------

The Department also will adjust the HCE total annual compensation
requirement to the annualized weekly earnings of the 85th percentile of
full-

[[Page 32891]]

time salaried workers nationally ($151,164 using 2023 data). 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,\295\ the
Department's new HCE threshold will ensure it continues to serve its
intended function, because the HCE total annual compensation level will
be high enough to exclude all but those employees at the very top of
the economic ladder.
---------------------------------------------------------------------------

\295\ See 69 FR 22169 (Table 3).
---------------------------------------------------------------------------

In this final rule, the Department is not finalizing its proposal
in section IV.B.1 and B.2 of the NPRM to apply the standard salary
level to the U.S. territories subject to the federal minimum wage and
to update the special salary levels for American Samoa and the motion
picture industry.\296\
---------------------------------------------------------------------------

\296\ The Department will address these aspects of its proposal
in a future final rule. While the Department is not finalizing its
proposal, it is making nonsubstantive changes in provisions
addressing the territories as a result of other changes in this
final rule.
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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. In
contrast, routine updates of the earnings thresholds to reflect wage
growth will bring certainty and stability to employers and employees
alike. Based on its long experience with updating the salary levels,
the Department has determined that adopting a regulatory provision for
regularly 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, in addition to the salary
level changes discussed above, the Department is including in this rule
a mechanism for updating the salary and compensation levels to reflect
current wage data initially on July 1, 2024 and every 3 years
thereafter. As explained in greater detail in section V.A, employees
and employers alike will benefit from the 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 final rule
using pooled CPS Merged Outgoing Rotation Group (MORG) data. See
section VII.B.2. The Department estimates in the first year after
implementation, there will be 4.3 million affected workers.\297\ This
includes 4.0 million workers (1.0 million at the first update and 3.0
million when the new salary level is applied) who meet the standard
duties test and earn at least $684 per week but less than $1,128 per
week and will either become eligible for overtime or have their salary
increased to at least $1,128 per week (Table 2).\298\ An estimated
292,900 workers will be affected by the increase in the HCE
compensation test from $107,432 per year to $151,164 per year. In Year
10, with triennial updating of the standard salary and HCE thresholds,
the Department projects that 5.0 million workers will be affected by
the change in the standard salary level test and 1.0 million workers
will be affected by the change in the HCE total annual compensation
test.\299\
---------------------------------------------------------------------------

\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
$1,128 per week or pass only the HCE duties test and earn at least
$107,432 but less than the new HCE compensation level of $151,164
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 occurs
both in update years (i.e., triennially) and non-update years but
will occur to a much greater degree 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 rule they would lose their overtime protections. To estimate
the total number of affected workers over time, the Department
accounts for both of these effects.
---------------------------------------------------------------------------

This analysis quantifies three direct costs to employers: (1)
regulatory familiarization costs; (2) adjustment costs; and (3)
managerial costs (see section VII.C.3). Total annualized direct
employer costs over the first 10 years were estimated to be $802.9
million, assuming a 7 percent discount rate.\300\ This rule will also
transfer income from employers to employees in the form of increased
wages. The Department estimated annualized transfers will be $1.5
billion. Most of these transfers will be attributable to wages paid
under the FLSA's overtime provision; a smaller share will 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.
---------------------------------------------------------------------------

\300\ Hereafter, unless otherwise specified, annualized values
will be presented using the 7 percent real discount rate.
---------------------------------------------------------------------------

The Department also provides a qualitative discussion of the
potential benefits and unquantified transfers of this 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.

[[Page 32892]]

Table 2--Summary of Affected Workers, Regulatory Costs, and Transfers--
Standard and HCE Salary Levels
[GRAPHIC] [TIFF OMITTED] TR26AP24.144

B. Number of Affected EAP Workers

1. Overview
This section explains the methodology used to estimate the number
of workers who will be affected by the final rule. The pool of
potentially affected workers is workers who are currently EAP exempt.
In this final 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 data collection agency or as
part of any employee or establishment survey. The methodology described
in this final rule is consistent with the approach the Department used
in the 2004, 2016, and 2019 final rules.\301\ To estimate the number of
workers who will be affected by the rule, the new standard salary level
and the new HCE total annual compensation threshold are applied to the
earnings of current EAP exempt workers.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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 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\ The data in this supplement contain 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.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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 (2021-2023). Earnings for each observation from 2021 and
2022 were inflated to 2023 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 2023 CPS
MORG. Thus, the pooled CPS MORG sample uses roughly three times as many
observations to represent the same total

[[Page 32893]]

number of workers in 2023. 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 final rule.
---------------------------------------------------------------------------

\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 2021 and 2023
may not be consistent. During the pandemic, large employment losses
in low-wage industries resulted in stronger wage growth at the
aggregate level. In part of the 2021-2023 period, high inflation
outpaced overall wage growth. Given these mixed effects, the
Department decided to continue its prior practice of adjusting these
observations using CPI-U.
---------------------------------------------------------------------------

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 4.4 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.
---------------------------------------------------------------------------

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 167.3 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.

Figure 1--Flow Chart of FLSA Exemptions and Estimated Number of
Affected Workers
[GRAPHIC] [TIFF OMITTED] TR26AP24.145

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

[[Page 32894]]

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.
---------------------------------------------------------------------------

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 167.3 million wage and salary workers in the United States,
the Department estimates that 143.7 million are covered by the FLSA and
subject to the Department's regulations (85.9 percent). The remaining
23.7 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, several other groups
of workers were identified and excluded from further analysis since
this final rule is unlikely to affect them. These include blue-collar
workers,\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 90.2 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 49.1 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 80.3 million workers were paid on an hourly basis in 2023.\313\
---------------------------------------------------------------------------

\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 3.7 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 final rule followed the more recent analyses and only
excluded agricultural workers in certain occupation-industry
combinations. \315\ The exclusion of transportation workers matched the
method for the 2004, 2016, and 2019 final rules. \316\ 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 1.0
million agricultural workers and 2.1 million transportation workers
from the analysis.
---------------------------------------------------------------------------

\314\ 69 FR 22197.
\315\ 84 FR 51257; 81 FR 32456, n.114.
\316\ 84 FR 51257; 81 FR 32456-57; 69 FR 22197.
---------------------------------------------------------------------------

In addition, the Department excluded another 22,700 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 final
rule (i.e., blue-collar workers, workers paid hourly, workers who are
subject to another (non-EAP) overtime exemption), the Department
estimated there are 53.5 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); \317\
---------------------------------------------------------------------------

\317\ 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 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 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).

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[[Page 32895]]

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.\318\ 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.\319\
---------------------------------------------------------------------------

\318\ The CPS variable PEERNHRY identifies workers as either
hourly or nonhourly.
\319\ See 69 FR 22197; 81 FR 32414; 84 FR 51258.
---------------------------------------------------------------------------

The CPS population of ``nonhourly'' workers includes salaried
workers along with those who are paid a piece rate, 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.\320\ In the PSID,
respondents are asked how they are paid on their main job and are also
asked for more detail if their response is other than salaried or
hourly. Possible responses include piecework, commission, self-
employed/farmer/profits, and by the job/day/mile. The Department
analyzed the PSID data and found that relatively few nonhourly workers
were paid by methods other than salaried. The Department is not aware
of any statistically robust source that more closely reflects salary as
defined in its regulations.
---------------------------------------------------------------------------

\320\ 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.\321\ 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.\322\ 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 earnings.'' Additionally, as noted
above, most salaried workers do not receive commissions.
---------------------------------------------------------------------------

\321\ The CPS MORG variable PRERNWA, which measures weekly
earnings, is used to identify weekly salary.
\322\ 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
through the March 2023 data.\323\ Topcoding refers to how data sets
handle observations at the top of the distribution and is performed to
protect the confidentiality of data provided by CPS respondents. 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.\324\
---------------------------------------------------------------------------

\323\ Beginning in the April 2023 data, the CPS data are
topcoded independently each month and represent the average earnings
of the top 3 percent of earnings reported. See https://www.census.gov/content/dam/Census/programs-surveys/cps/updated-2022-cps-puf-changes.pdf for additional details.
\324\ 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.\325\
---------------------------------------------------------------------------

\325\ 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.\326\ 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.\327\
---------------------------------------------------------------------------

\326\ 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.
\327\ 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.

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[[Page 32896]]

Table 3--Probability Worker in Category Passes the Duties Tests
[GRAPHIC] [TIFF OMITTED] TR26AP24.146

[[Page 32897]]

The occupations identified in GAO's 1999 report map to an earlier
occupational classification scheme (the 1990 Census occupational
codes).\328\ For this final 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 2021 through 2023
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 codes, rounded to the closest
probability code.
---------------------------------------------------------------------------

\328\ 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 which workers in the CPS
MORG met the duties test. For example, for every ten public relations
managers, between five and nine are assumed to meet 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.\329\
---------------------------------------------------------------------------

\329\ 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.\330\ 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.\331\ For details, see
Appendix A (in the rulemaking docket).
---------------------------------------------------------------------------

\330\ 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).
\331\ 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.
---------------------------------------------------------------------------

As previously discussed in section V.B.5, some commenters
challenged the Department's use of its probability codes to determine
whether a worker meets the duties test. 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 \332\
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.\333\ The
2019 final rule also used these probability codes and likewise found
that these codes are the best available methodology to accurately
estimate exemption status.\334\
---------------------------------------------------------------------------

\332\ The O*NET database contains hundreds of standardized and
occupation-specific descriptors. See https://www.onetcenter.org.
\333\ 81 FR 32459.
\334\ 84 FR 51259.
---------------------------------------------------------------------------

The Department estimates that of the existing 53.5 million salaried
white-collar workers considered in the analysis, 37.9 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 final rule will 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 37.9 million workers
who were EAP exempt, 8.1 million, or 21.4 percent, were expected to be
in named occupations.

[[Page 32898]]

Thus, the changes to the standard salary level and HCE compensation
tests would not affect these workers. The 29.7 million EAP exempt
workers remaining in the analysis are referred to in this final rule as
``potentially affected'' (17.8 percent of all workers).
Based on analysis of the occupational codes and CPS earnings data
(described above), the Department has concluded there are 29.7 million
potentially affected EAP workers.\335\
---------------------------------------------------------------------------

\335\ Of these workers, approximately 16.5 million pass only the
standard test, 12.8 million pass both the standard and the HCE
tests, and 446,600 pass only the HCE test.
---------------------------------------------------------------------------

Figure 2--Exemption Status and Number of Affected Workers
[GRAPHIC] [TIFF OMITTED] TR26AP24.147

As shown in Figure 2 above, 8.1 million of the 53.5 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 45.4 million salaried white-collar
workers, about 12.7 million earn below the Department's new standard
salary level of $1,128 per week and about 32.7 million earn above the
Department's new salary level. Thus, approximately 28 percent of
salaried white-collar employees earn below the new salary level,
whereas approximately 72 percent of salaried white-collar employees
earn above the salary level and will have their exemption status turn
on their job duties.
7. Number of Affected EAP Workers
The Department estimated that the increase in the standard salary
level from $684 per week to $1,128 per week will affect 4.0 million
workers in Year 1 (of these 4.0 million affected employees, 1.8 million
earn less than the long test salary level ($942)).\336\ The Department
estimated that the increase in the HCE annual compensation level from
$107,432 to $151,164 will impact 292,900 workers (Figure 3).\337\ In
total, the Department expects that 4.3 million workers out of the 29.7
million potentially affected workers will be affected in Year 1. This
estimate of 4.3 million affected workers represents only approximately
10 percent of all salaried white-collar workers who are not in named
occupations (45.4 million).
---------------------------------------------------------------------------

\336\ See section VII.C.8 (Alternative 2). As discussed in
section V.B, 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 2.2 million of these
affected employees earn between the long test salary level and the
Department's new standard salary level.
\337\ 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.
---------------------------------------------------------------------------

As illustrated in Figure 1 above, this final rule affects a
specific and small portion of all employed workers. In particular, the
number of affected workers is 2.6% of total employed workers in 2023
and represents about 8 percent of all white-collar salaried workers
(including workers in named occupations). While Figure 1 provides a
snapshot of the impacts of this rule in the context of the broader
labor market of 2023, it may also be helpful to understand how the
labor market has grown since the Department first introduced a one-test
system in 2004. Broadly, since 2004 the size of the labor force and the
white-collar workforce has grown considerably. Between 2004 and 2023,
total employment grew by 21.8 million, with employment increasing by
nearly 10 million since 2016 and 3.5

[[Page 32899]]

million since 2019.\338\ Over this period, the size of the white-collar
workforce has also increased considerably. In 2004, the total number of
white-collar workers who were subject to the Part 541 regulations,
including the salary level test, was 31.7 million. By 2016 it had
reached 37.4 million; in 2019 it was 39.8 million; and in 2023 it was
nearly 45.4 million.
---------------------------------------------------------------------------

\338\ Employment status of the civilian noninstitutional
population, 1953 to date. BLS Current Population Survey. https://www.bls.gov/cps/cpsaat01.htm.
---------------------------------------------------------------------------

Figure 3--Pie Chart of Potentially Affected Employees and Their
Affected Status
[GRAPHIC] [TIFF OMITTED] TR26AP24.148

Several commenters stated that the Department's estimates of
affected workers were incorrect because of the application of the
probability codes. For example, NCFC stated that ``the Department's
impact calculations rely on outdated and flawed data'' because the
``Department's predictions as to the probability of employees passing
the duties test are based on a 1999 study . . . which itself relied
upon information provided by DOL in the 1990s--more than three decades
ago.'' AFPI further added that since the Department's probability codes
were developed, ``occupational codes have changed; the Part 541 duties
tests have changed; and litigation has resulted in thousands of court
decisions finding employees to be exempt or non-exempt.'' Similarly,
NRF included a report by Oxford Economics stating that there have been
numerous economics changes since 1998, ``includ[ing] increases in
automation, virtual work, computerized scheduling, and the effects of a
global pandemic.'' \339\ The Oxford Economics report also stated that
``if the relationship between salaried [status] and EAP exemption
status is tighter than the [Department] . . . assumes,'' the number of
affected workers could be as high as 7.2 million. AFPI asserted that
approximately ``7.5 million employees would be non-exempt for the first
time based on salary alone[.]'' Rachel Greszler stated that the correct
figure is as high as 12.3 million workers.
---------------------------------------------------------------------------

\339\ The Oxford Economics report also noted that there has been
a 6-percent rise in ``the share of salaried workers in the economy .
. . since 1998.'' However, any increase in the number of salaried
workers does not have any bearing on the validity of the probability
codes, which the Department uses to estimate whether a worker passes
the duties test. Being paid on a salary basis is one of the three
tests for exemption, see Sec. 541.602(a), and is distinct from the
duties test. Accordingly, the Department only applies the
probability codes to nonhourly workers--whom, as discussed above,
the Department considers to be an appropriate proxy for workers paid
on a salary basis.
---------------------------------------------------------------------------

The Department disagrees with commenters that challenged its use of
its probability codes. The Department has used its probability codes to
estimate the number of workers who meet the duties test in its 2004,
2016, and 2019 rules. The Department reiterates that these codes have
been updated and mapped onto current occupational codes, as explained
above. As also noted above, the standard duties test is not
substantively different from the former short duties tests reflected in
the codes. In consequence, the probability codes remain relevant and
are currently the most accurate way to estimate the probability of a
worker satisfying the duties test. Furthermore, while several
occupations have changed over time, modifications affecting specific
occupations would only affect the validity of these probability codes
if they systematically affected an occupation's probability of
performing exempt tasks. In contrast, other changes, such as employees
performing remotely the job duties they once performed in-person, do
not affect the validity of these probabilities. Additionally, the
probability codes can still effectively predict whether employees in
new industries will meet the duties test insofar as these occupations
existed in other industries. Finally, as previously noted, the
Department used the O*NET database to confirm the appropriateness of
the probability codes in 2016. Commenters did not provide a basis for
concluding that the Department's 2016 evaluation is obsolete or that
the probability codes no longer provide the most reasonable basis for
estimating the population of affected workers.

[[Page 32900]]

The Department also does not agree with commenters that stated that
it underestimated the number of affected workers in the NPRM. As
discussed above, see section V.B.5.iii, commenters that asserted the
number of affected workers could be much higher generally referenced
estimates of the number of workers earning between the current salary
level and the proposed salary level, regardless of whether they passed
the duties test, and then posited that up to that many workers (e.g.,
7.2 million, 7.5 million, or 12.3 million) could be affected. The
position that all workers earning below the new salary level,
regardless of their duties, will be affected by the new salary level
fails to account for the fact that that millions of these workers are
already nonexempt because they do not meet the duties test.

C. Effects of Revised Salary and Compensation Levels

1. Overview and Summary of Quantified Effects
The Department is setting 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 setting 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
2023 CPS data to calculate the levels.\340\
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\340\ Full-time is defined as 35 or more hours per week.
---------------------------------------------------------------------------

Transfers both from employers to employees and between employees,
and direct employer costs, will 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 4 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 rule will total $1.4 billion in the first year, with 10-
year annualized direct costs of $802.9 million per year using a 7
percent discount rate.
In addition to these direct costs, this rule will transfer income
from employers to employees. Estimated Year 1 transfers will equal $1.5
billion, with annualized transfers of $1.5 billion per year using the 7
percent real discount rates and $1.6 billion using the 3 percent
discount rate. Potential employer costs due to reduced profits and
additional hiring were not quantified but are discussed in section
VII.C.3.v. These estimates encompass in Year 1 both the impact of the
initial update to the earnings thresholds and the change in those
thresholds that will become applicable 6 months later.\341\
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\341\ The Department estimates the initial update to the
standard salary level will result in 959,000 affected workers
earning between $684 and $844 per week. The Department estimates the
adjustment and managerial costs for this update will be $202.3
million and transfers will be $204.3 million. For the initial update
to the HCE total annual compensation threshold, the Department
estimates that the update will result in 223,000 affected workers,
$58.7 million in adjustment and managerial costs, and $164.5 million
in transfer payments.

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[[Page 32901]]

Table 4--Summary of Affected Workers and Regulatory Costs and Transfers
[GRAPHIC] [TIFF OMITTED] TR26AP24.149

2. Characteristics of Affected EAP Workers
Table 5 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.\342\ 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.
---------------------------------------------------------------------------

\342\ Regular overtime workers were identified in the CPS MORG
with variable PEHRUSL1. Occasional overtime workers were identified
with variables PEHRUSL1 and PEHRACT1.
---------------------------------------------------------------------------

The 4.0 million workers affected by the combined effect of the
initial update and the subsequent application of the new standard
salary level work on average 1.6 usual hours of overtime per week and
earn on average $948 per week.\343\ However, most of these workers
(about 86 percent) usually do not work overtime. The 14 percent of
affected workers who usually work overtime average 11.1 hours of
overtime per week. In a representative week, roughly 135,000 (or 3.3
percent) of the 4.0 million affected workers occasionally work
overtime; they averaged 8.5 hours of overtime in the weeks they worked
overtime.\344\ Finally, 20,000 (or 0.5 percent) of all workers affected
by the increase in the standard salary level earn less than the minimum
wage. \345\
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\343\ CPS defines ``usual hours'' as hours worked 50 percent or
more of the time.
\344\ 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).
\345\ A small proportion (0.5 percent) of all 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).

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[[Page 32902]]

The 292,900 workers affected by the change in the HCE compensation
level average 2.9 hours of overtime per week and earn an average of
$2,397 per week ($124,668 per year). About 73 percent of these workers
do not usually work overtime, while the 27 percent who usually work
overtime average 11.0 hours of overtime per week. Among the 2.6 percent
who occasionally work overtime, they averaged 8.2 hours in the weeks
that they worked overtime.
Although most affected workers who typically do not work overtime
will 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 will be most likely to experience
significant changes. Impacts on employee hours and earnings are
discussed further in section VII.C.4.

Table 5--Number of Affected EAP Workers, Mean Overtime Hours, and Mean
Weekly Earnings, Year 1
[GRAPHIC] [TIFF OMITTED] TR26AP24.150

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 6 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 (827,000), while the industry with the highest
percentage of EAP workers affected is leisure and hospitality (about 24
percent). The occupational category with the most affected EAP workers
is management, business, and financial (2.0 million), while the
occupation category with the highest percentage of EAP workers affected
is farming, fishing, and forestry (about 45 percent).
Potentially affected workers in private-sector nonprofits are more
likely to be affected than workers in private-sector for-profit firms
(18.9 percent compared with 13.6 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.

[[Page 32903]]

Table 6--Estimated Number of Workers and Whether They Will Be Affected
by the New Earnings Thresholds, by Industry and Occupation, Year 1
[GRAPHIC] [TIFF OMITTED] TR26AP24.151

[[Page 32904]]

[GRAPHIC] [TIFF OMITTED] TR26AP24.152

Table 7 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
(1.9 million), but the South's percentage of potentially affected
workers who are estimated to be affected is relatively small (17.9
percent). Although 90 percent of affected EAP workers will reside in
MSAs (3.92 of 4.34 million), so do a corresponding 88 percent of all
workers subject to the FLSA.\346\
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\346\ 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
rule is appropriate for these lower-wage sectors, in part because the
methodology uses earnings data from the lowest-wage census region.
Moreover, the duties test will continue to determine exemption status
for the vast majority of workers in low-wage regions and industries
under the rule. For example, as displayed in Table 7, 82.1 percent of
potentially affected EAP workers in the South Census Region earn more
than the new salary levels and thus will not be affected by the rule
(8.59 / 10.46). Effects by region and industry are considered in
section VII.C.7.

[[Page 32905]]

Table 7--Estimated Number of Workers and Whether They Will Be Affected
by the New Earnings Thresholds, by Region, Division, and MSA Status,
Year 1
[GRAPHIC] [TIFF OMITTED] TR26AP24.153

Table 8 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 $1,709 compared to $2,108 for men.
Among potentially affected workers, certain demographic groups--
women, Black workers, Hispanic workers, young

[[Page 32906]]

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,
21.7 percent of potentially affected Black workers are affected, while
only 14.5 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 (2.9 percent of Black
workers and 3.0 percent of white workers).

[[Page 32907]]

Table 8--Estimated Number of Workers and Whether They Will Be Affected
by the New Earnings Thresholds, by Demographics, Year 1
[GRAPHIC] [TIFF OMITTED] TR26AP24.196

[[Page 32908]]

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 will be $451.6 million, adjustment
costs will be $299.1 million, and managerial costs will be $685.5
million (Table 9). Total direct employer costs in Year 1 will be $1.4
billion. Recurring costs are projected in section VII.C.10. The
Department discusses costs that are not quantified in section
VII.C.3.v.

Table 9--Summary of Year 1 Direct Employer Costs (Millions)
[GRAPHIC] [TIFF OMITTED] TR26AP24.154

ii. Regulatory Familiarization Costs
This rulemaking will impose direct costs on firms by requiring them
to review the regulation. To estimate these ``regulatory
familiarization costs,'' three pieces of information must be estimated:
(1) the number of affected establishments; (2) a wage level for the
employees reviewing the rule; and (3) the amount of time spent
reviewing the rule. The Department generally used the same methodology
for calculating regulatory familiarization costs that it used in the
NPRM and 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
rule was drafted are from the 2021 Statistics of U.S. Businesses
(SUSB), which reports 8.15 million establishments with paid
employees.\347\ Additionally, there were an estimated 90,126 state and
local governments in 2017, the most recent data available.\348\ The
Department thus estimated 8.24 million entities (the term ``entities''
is used to refer to the combination of establishments and governments).
---------------------------------------------------------------------------

\347\ Statistics of U.S. Businesses 2021, https://www.census.gov/programs-surveys/susb.html.
\348\ 2017 Census of Governments. Table 1, https://www.census.gov/data/tables/2017/econ/gus/2017-governments.html.
---------------------------------------------------------------------------

The Department assumes that all entities will incur some regulatory
familiarization costs, even if they do not employ exempt workers,
because all entities will need to confirm whether this rulemaking
affects their employees. Entities with more affected EAP workers will
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 1 hour per entity is
appropriate because the regulated community is 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 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 1 hour is an appropriate average estimate for the time
each entity will 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, will spend more than 1 hour, and some will 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 will review the rulemaking.^{349 350} The Department also
assumed that benefits are paid at a rate of 45 percent of the base wage
\351\ and overhead costs are paid at a rate of 17 percent of the base
wage,\352\ resulting in an hourly rate of

[[Page 32909]]

$54.82 in 2023 dollars.\353\ The Department thus estimates regulatory
familiarization costs in Year 1 would be $451.6 million ($54.82 per
hour x 1 hour x 8.24 million entities).
---------------------------------------------------------------------------

\349\ OEWS 2022. Available at: https://www.bls.gov/oes/current/oes131141.htm.
\350\ 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.
\351\ The benefits-earnings ratio is derived from BLS's Employer
Costs for Employee Compensation (ECEC) data using variables
CMU1020000000000D and CMU1030000000000D. This fringe benefit rate
includes some fixed costs such as health insurance. As of when this
final rule was drafted, 2023 ECEC data were available only through
the third quarter, so the Department continued to use the 2022 full-
year data to calculate the benefits share.
\352\ 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.
\353\ The 2022 fully-loaded hourly wage was adjusted to 2023
using the CPI-U.
---------------------------------------------------------------------------

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, 6.4
million, would result in a reduced regulatory familiarization cost
estimate of $350.0 million in Year 1.
Some commenters representing employer interests stated that rule
familiarization costs are underestimated. See, e.g., ABC; IEC; Job
Creators Network Foundation; NSBA; SBA Office of Advocacy. For
instance, ABC commented that ``compliance with the proposal will not be
as simple as reviewing the salary level and making a one-time
decision'' and that ``82% of recently surveyed ABC members . . .
responded that reviewing the final rule would take three hours or
longer, with 47% saying it would take five hours or more.''
While the Department acknowledges that some employers will spend
more than an hour reviewing the rule, the estimate of 1 hour for rule
familiarization is an assumption about the average representing all
establishments, even those without any affected or exempt workers.
Those establishments will likely not need to spend any time reviewing
the rule. Employers in industries with more affected workers may spend
more time reviewing the rule, but across all industries, the Department
believes that 1 hour continues to be appropriate. The Department used
the same 1 hour estimate in its 2016 and 2019 rules,\354\ and the
Department did not receive comments with concrete data that is
representative across all industries from which to conclude that its
average estimate of one hour is incorrect. The Department continues to
believe that businesses are already familiar with this rulemaking. The
EAP exemptions have existed for a long time, and recent rules were
published in 2016 and 2019. This rulemaking sets a new standard salary
level and a new HCE compensation level for exempt workers and
establishes a mechanism for keeping these thresholds up to date.
However, this rulemaking does not fundamentally change the existing
method for determining whether an employee qualifies for the EAP
exemption. To the extent commenters' familiarization cost concerns
related to time needed to comply with the rule, these costs are
addressed separately under the Department's managerial and adjustment
cost estimates. As for concerns relating to the hourly wage rate used
to calculate rule familiarization costs, the Department notes that it
relies on the standard occupation used in previous WHD and DOL
rulemakings.
---------------------------------------------------------------------------

\354\ 81 FR 32474; 84 FR 51266.
---------------------------------------------------------------------------

iii. Adjustment Costs
This rulemaking will 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. For each affected worker who works
overtime, an employer will need to decide whether they will increase
their salary, adjust their hours, or some combination of the two. The
Department believes the size of these ``adjustment costs'' will depend
on the number of affected EAP workers and will occur in any year when
exemption status is changed for any workers. To estimate adjustment
costs, three pieces of information must be estimated: (1) a wage level
for the employees making the adjustments; (2) the amount of time spent
making the adjustments; and (3) the estimated number of newly affected
EAP workers. The Department again estimated that the average wage with
benefits and overhead costs for a mid-level human resource worker is
$54.82 per hour (as explained above).
The Department estimated that it will take establishments an
average of 75 minutes per affected worker to make the necessary
adjustments. This is the same time estimate as used in the 2016 and
2019 rulemakings, as well as in the NPRM. 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 due to the change in the standard salary level to $1,128 per week and
the HCE level to $151,164 per year is 4.3 million (as discussed in
section VII.B.7). However, because the compensation thresholds will
undergo an initial update on July 1, 2024 and then an increase using
the new methodologies 6 months later, employers may have additional
adjustment costs when the standard salary level is initially updated to
$844 per week and the HCE level is initially updated to $132,964.
Some employers may make two adjustments for affected workers--one
at the initial update to the standard salary level and then again with
the salary level adjustment 6 months later. To estimate the costs
associated with multiple adjustments, the Department assumed that at
the initial update, some employers could experience additional
adjustment costs for the affected workers who will have their weekly
earnings increased to $844 per week. In order to estimate the number of
affected workers who would have their weekly earnings increased to $844
per week, the Department looked at EAP exempt workers earning at least
$684 per week but less than $844 per week. Using the methodology laid
out in the transfer analysis in section VII.C.4.iii, the Department
then estimated the share of these workers who regularly work overtime
and would remain exempt, because it is less expensive for the employer
to pay the updated salary level than to pay overtime (described in that
section as Type 4 workers). The Department estimated that there would
be 27,692 workers who earn between $684 and $844 and would have their
earnings increased at the initial update. The Department does not have
data to determine how many employers would increase earnings twice for
workers earnings between $684 and $844. For these workers, unless they
are working large numbers of overtime hours, it is likely to be more
economically beneficial for employers to make other changes in response
to the rule instead of increasing their salary to $1,128 a week, such
as limiting overtime hours worked. Despite this, in case there are
limited cases in which workers do have their earnings increased twice,
the Department has included these additional adjustment costs in the
total adjustment cost estimate. Therefore, total estimated Year 1
adjustment costs would be $299.1 million ($54.82 x 1.25 hours x
(4,337,469 + 27,692 workers)).
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

[[Page 32910]]

an employee is exempt, employers must apply the duties test to salaried
workers who earn $684 or more per week. However, under the final rule,
firms will no longer be required to apply the duties test to the 8.7
million employees earning above the current standard salary level of
$684 and less than the new standard salary level of $1,128. While this
will be a clear cost savings to employers for these employees, the
Department did not estimate the potential size of this cost savings.
Some commenters representing employer interests stated that the
Department underestimated adjustment costs. See, e.g., NAHB; NSBA;
PPWO. NAHB, for instance, stated that ``the Department's economic
analysis,'' including its estimate of ``75 minutes per affected worker
for adjustment,'' ``dramatically understate[d] the . . . cost burden on
employers,'' and PPWO stated that adjustment costs (and regulatory
familiarization and managerial costs) were ``all dramatically
understated.'' SBA Advocacy and Seyfarth Shaw asserted that the
Department underestimated adjustment costs for small businesses, with
both commenters stating that smaller employers would be more likely
than larger ones to hire outside assistance to make needed adjustments.
See also NFIB (``The NPRM underestimates compliance costs for small
businesses[.]''). Some commenters asserted that the Department failed
to account for adjustment costs that employers would need to incur
beyond the first year the rule is in effect, such as costs associated
with determining whether an employee remains exempt, reclassifying
newly-exempt employees as hourly, and making other adjustments to time
and attendance systems, given that the earnings thresholds for
exemption will be updated on a triennial basis. See PPWO; The 4As.
Additionally, some commenters expressed particular concern with
adjustment costs stemming from the proposed increase in the HCE
compensation level, noting that for workers who were previously exempt
under the HCE test but earn below the proposed HCE compensation level,
employers would need to evaluate the worker's duties to determine
whether they remain exempt under the standard test. See, e.g., HR
Policy Association; NAM; PPWO. NAM stated that ``[a]cross the
manufacturing sector, the change in the HCE threshold may be as
difficult and consequential as the proposed increases to the standard
salary threshold.''
The Department is retaining its estimate of adjustment costs as 75
minutes per affected worker in the final rule. This estimate is
consistent with the Department's estimate in the 2016 and 2019
rules.\355\ The Department notes that the 75-minute-per-worker average
time estimate is an assumption about the average across all workers,
and it believes this estimate takes into account adjustment time for
workers affected by the new standard salary level and the smaller
portion of workers affected by the new HCE total compensation
threshold. 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 the 69
percent of affected workers who work no overtime (described below as
Type 1 workers). This leaves more time for employers to spend on
adjustment costs for the 31 percent of affected workers who work
overtime either occasionally or regularly. To demonstrate, if the
aggregate time spent on adjustments (75 min x 4.37 million workers) was
spread out over only workers who work overtime, then the time estimate
is 4.0 hours per worker. Lastly, the Department did not receive any
comments with data providing a different estimate for the Department to
rely on.
---------------------------------------------------------------------------

\355\ See 84 FR 51267; 81 FR 32475.
---------------------------------------------------------------------------

Contrary to commenters that stated that the Department failed to
take into account adjustment costs beyond the first year the rule is in
effect, the Department's estimated adjustment costs include costs in
all years for newly affected workers. The Department limits adjustment
costs in projected years to newly affected workers because there is no
need to ``adjust'' for workers who are already overtime eligible (due
to a prior adjustment of the salary level) when the salary level is
updated again. Table 26 provides adjustment (and other) cost
projections in future years due to the updating mechanism.
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
911,000 workers (see Table 13 and accompanying explanation). Consistent
with its approach in its 2019 rule and the NPRM, the Department assumed
that management 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.
As discussed in detail below, most affected workers do not
currently work overtime, and there is no reason to expect their hours
worked to change when their status changes from exempt to nonexempt.
For that group of workers, management will have little or no need to
increase their monitoring of hours worked; therefore, these workers are
not included in the managerial cost calculation. Under these
assumptions, the additional managerial hours worked per week will be
151,800 hours ((10 minutes / 60 minutes) x 911,000 workers).
The median hourly wage in 2022 for a manager was $51.62.\356\
Together with a 45 percent benefits rate and a 17 percent overhead
cost, this totals $86.82 per hour in 2023 dollars.\357\ Thus, the
estimated Year 1 managerial costs total $685.5 million (151,835 hours
per week x 52 weeks \358\ x $86.82/hour). Although

[[Page 32911]]

the exact magnitude will vary each year with the number of affected EAP
workers, the Department anticipates that employers would incur
managerial costs annually.
---------------------------------------------------------------------------

\356\ 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.
\357\ The benefits ratio is derived from BLS' 2022 Employer
Costs for Employee Compensation data using variables
CMU1020000000000D and CMU1030000000000D. The fully-loaded hourly
wage rate was inflated to 2023 dollars using the BLS CPI-U.
\358\ Fifty-two weeks may be an overestimate of the amount of
time that an employer would incur management costs in Year 1. For
affected workers who earn below $1,128, but at least $844, their
employers may not incur additional managerial costs until January 1,
2025 if they decide to wait to make changes in response to the rule.
Therefore, these managerial costs would not occur for the full 52
weeks of the year. Because the Department does not know when
employers would make changes in response to the rule, this estimate
of 52 weeks is used for the entire population.
---------------------------------------------------------------------------

Some commenters expressed concerns that the regulation will
increase managerial costs, with some specifically asserting that the
Department's estimate was too low, see, e.g., PPWO, SBA Advocacy, NCFC,
IEC. Commenter concerns with managerial costs were often tied to the
additional costs they asserted would result from tracking the work
hours of newly nonexempt employees. See, e.g., 16 Republication
Representatives; APLU. Commenters specifically asserted tracking hours
of currently exempt employees would increase human resources paperwork
and technology costs for their companies. See, e.g., The Chamber of
Commerce for Greater Philadelphia; John C. Campbell Folk School.
The Department continues to believe that 10 minutes per worker per
week is an appropriate managerial cost estimate. Currently, EAP exempt
employees account for about 24 percent of total employment; as such,
the Department expects that many 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 created or acquired 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.\359\ The Department
believes its estimate, which tracks the approach taken in its 2019
rule, accurately predicts management costs, including costs firms may
incur for monitoring and managing the hours of formerly exempt
employees.
---------------------------------------------------------------------------

\359\ See Fact Sheet #21: Recordkeeping Requirements under the
Fair Labor Standards Act, available at: https://www.dol.gov/agencies/whd/fact-sheets/21-flsa-recordkeeping.
---------------------------------------------------------------------------

v. Other Potential Costs
In addition to the costs discussed above, commenters raised other
potential costs that could not be quantified. These potential costs are
discussed qualitatively below.
(a) Reduced Scheduling Flexibility
Several commenters claim that this rule would restrict employee
workplace flexibility, such as remote work and flexible scheduling.
See, e.g., HR Policy Association; NAM; NRF; SBA; Chamber. For example,
the Chamber stated, ``workers will lose their ability to work from home
and the flexibility that they have enjoyed in salaried positions,
particularly since the COVID-19 pandemic changed the face of the
American workplace in 2020.'' However, commenters did not provide any
specific evidence to support this claim. The Department notes that even
those workers that are paid on an hourly basis can still take advantage
of workplace flexibilities such as remote work. According to the CPS
data, of all workers who reported working at home any time in the past
week, 74.2 percent of them were categorized as hourly workers.
To the extent that some employers spend more time monitoring
nonexempt workers' hours than exempt workers' hours, some employers
could respond to this rule by limiting the ability of newly nonexempt
workers to adjust their schedules. However, 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 and so
monitoring their hours as newly nonexempt workers should not be unduly
burdensome. 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.'' \360\ Because there is little data or
literature on these potential costs, the Department did not quantify
potential costs regarding scheduling flexibility.
---------------------------------------------------------------------------

\360\ Golden, L. (2014). Flexibility and Overtime Among Hourly
and Salaried Workers. Economic Policy Institute. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2597174.
---------------------------------------------------------------------------

Organizations such as the American Beverage Licensees and
educational institutions in CUPA-HR and APLU, also asserted that the
rule would reduce employer flexibility to allocate work hours based on
schedules that include non-traditional work hours. The Hinton Rural
Life Center said that the rule would make it financially unfeasible for
nonexempt employees to attend specific activities such as ``overnight
training sessions or marketing events.'' NCFC stated that because of
the increased attention that must be paid to the hours worked by
nonexempt employees, they are likely to be at a competitive
disadvantage with exempt employees in the same role. Under this
assumption, they asserted that ``many training opportunities'' would
now require additional compensation if ``those opportunities would put
the nonexempt employee into an overtime situation,'' and therefore
``access to those opportunities may be limited'' for nonexempt
employees. The Department notes that if an employer believes that
training opportunities are sufficiently important, it can ensure
employees attend the trainings during their 40-hour workweek or pay the
overtime premium where training attendance causes the employee to work
over 40 hours in a workweek. Given this, and because there is no data
and literature to quantify any potential costs to workers, the
Department did not quantify these costs.
(b) Preference for Salaried Status
Many commenters contended that the employers of some of the workers
who will become nonexempt as a result of the rule could change their
pay basis to hourly status despite the employee preferring to remain
salaried. See, e.g., AHLA; NSBA; SIGMA. Some commenters, such as SIGMA,
stated that conversion of employees to hourly status that will
negatively affect morale, as employees may perceive the change as a
demotion or a loss of status because of, among other reasons, the lost
flexibility associated with salaried status. Conversely, commenters
such as the Coalition of State AGs and the Family Caregiving Coalition
asserted that the proposed rule would increase employee satisfaction
and retention, improve work-life balance, reduce stress and health
problems, and make jobs more attractive to qualified applicants
primarily because employees will now be compensated for hours worked
beyond a standard workweek. Notably, a strong majority of the
individual commenters who said they would be personally affected by the
proposed rule expressed support for the rule.
If a worker does prefer to be salaried rather than hourly, then the
employer changing them from salaried to hourly may impact the worker.
However, the Department believes that for most

[[Page 32912]]

employees their feelings of importance and worth come not from their
FLSA exemption status, but from the increased pay, flexibility, fringe
benefits, and job responsibilities that traditionally have accompanied
exempt status, and that these factors are not incompatible with
overtime eligibility. And while research has shown that salaried
workers (who are not synonymous with exempt workers, but whose status
is correlated with exempt status) are more likely than hourly workers
to receive certain benefits, as discussed below, such research
generally does not control for differences between salaried and hourly
workers such as education, job title, or earnings.
(c) Reduction in Employer-Provided Benefits
Several commenters stated that in response to the proposed salary
level employers would likely decrease employee benefits. See, e.g.,
PPWO; Rachel Greszler. These and similar comments were mostly general
statements, often listing types of benefits employees may lose. Others
stated that employees would lose benefits due to being reclassified as
hourly workers. See, e.g., Independent Women's Forum (IWF); NRF. Some
commenters stated that these employees would have reductions in their
ability to earn bonuses or other types of incentive payments, but these
commenters generally did not discuss the net impact on these employees'
earnings. See, e.g., NRF. These comments did not provide information
that would allow the Department to estimate the purported impact of the
final rule on employee benefits.
Research has shown that salaried workers are more likely than
hourly workers to receive benefits such as paid vacation time and
health insurance \361\ and are more satisfied with their benefits.\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.
---------------------------------------------------------------------------

\361\ 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.
\362\ Balkin, D.B., & Griffeth, R.W. (1993). The Determinants of
Employee Benefits Satisfaction. Journal of Business and Psychology,
7(3), 323-339.
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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. 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.
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(d) Increased Prices
Several commenters such as AAHOA, the Chamber, CUPA-HR, Indiana
Chamber of Commerce, NAHB, and the National Association of Wholesaler-
Distributors stated that the regulation will result in increased prices
due to increased employee salaries and other costs to employers. Some
of these commenters assert that employers increasing their workers'
salaries to maintain their exempt status would induce a general price
increase if anticipated wage increases do not result in productivity
increases. See, e.g., Chamber; NAW. NAHB conducted a survey among its
members about the proposal, and 50 percent of survey respondents stated
that finalizing the salary level as proposed would lead them to raise
home prices, while 25 percent of respondents stated that the change
would make some projects unprofitable.
The Department acknowledges that, 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 employees
are working. Businesses that are unable to rebalance these hours and do
incur increased labor costs might pass along these increased labor
costs to consumers through higher prices for goods and services.
However, because costs and transfers will be, on average, small
relative to payroll and revenues, the Department does not expect the
rule to have a significant effect on prices. The Department estimated
that, on average, costs and transfers make up less than 0.04 percent of
payroll and 0.006 percent of revenues, although for specific industries
and firms this percentage may be larger (see Table 24). Therefore, any
potential change in prices related to costs and transfers from this
rulemaking would be modest, and the Department notes that commenter
predictions (such as those in the NAHB survey described above) reflect
speculation about what will occur in the future and thus may not
reflect actual economic responses by employers. 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\
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\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. https://dx.doi.org/10.17016/FEDS.2015.042.
---------------------------------------------------------------------------

(e) Reduced Services
Some commenters expressed concern that, by reducing the number of
exempt employees, this rulemaking will negatively impact the amount or
quality of services that employers can provide. See, e.g., ANCOR; Boy
Scouts of America; Catholic Charities USA; YMCA. The National
Association of Counties raised similar concerns with respect to county
governments. A number of colleges, universities, and other higher-
education stakeholders, such as APLU and CUPA-HR, similarly asserted
that the proposed rule would negatively affect support services for
students. The Department appreciates that employers in some industries
have

[[Page 32913]]

less flexibility than others to account for new labor costs and that
the services provided by such employers could be negatively affected.
However, the Department believes the effect of the rule on public
services will be small. The Department acknowledges that some newly
nonexempt employees who currently work overtime providing public
services may see a reduction in hours as an effect of the rulemaking.
But if the services are in demand, the Department believes additional
workers may be hired, as funding availability allows, to make up some
of these hours, and productivity increases may offset some reduction in
services. In addition, the Department expects some employers will
adjust base wages downward to some degree so that even after paying the
overtime premium, overall pay and hours of work for many employees will
be relatively minimally impacted. Additionally, many nonprofits are
noncovered enterprises because when determining enterprise coverage
only revenue derived from business operations, not charitable
activities, is included.
(f) Reduced Profits
Some commenters asserted that the rule would lead to decreased
profits. See e.g., Quad Cities Chamber of Commerce, ESEI, DT-Trak
Consulting. The Department acknowledges that the increased employer
costs and transfer payments as a result of this 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.
(g) Hiring Costs
To the extent that firms respond to this 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 exempt, 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 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
nonexempt workers.) The Department does not know how many new employees
would be hired and thus did not estimate this cost.
(h) Hours-Related Worker Effects
Some employer representatives highlighted the possibility that some
workers might work more hours as a consequence of this rulemaking. For
example, Construction Industry Roundtable commented that employers
responding to the increased salary level might ``require the remaining
exempt employees to absorb some of the duties of the newly non-exempt
employees--which would be viewed as an unfair burden by the remaining
exempt employees who are at or near capacity already.'' See also SIGMA
(providing similar statements).
The Department acknowledges that 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 those hours to other workers who remain exempt. The
Department believes that while some workers may see an increase in
hours, others may see their hours decline (discussed further in the
Benefits section below).
(i) Wage Compression
Some commenters contended that the update to the salary threshold
in this rule would lead to wage compression. For example, PPWO stated
that the Department did not account for this potential cost, stating,
``Where employees below the proposed salary minimum have their salaries
raised to meet the new minimum, employees above the new minimum will
likewise need to have their salaries raised to account for the relative
value of the work being performed.'' See also, e.g., Seyfarth Shaw.
However, as discussed in section VII.C.4.iii.f., the Department
estimates that only 2.2 percent of affected workers will have their
earnings increased to the updated salary level. Thus, in the
overwhelming majority of cases wage compression concerns should not
arise. The Department recognizes that there may be some cases in which
employers that raise the pay of affected employees to the new salary
level will also choose to increase the earnings of more highly paid
employees to avoid wage compression, but the Department does not have
data to estimate this impact.
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 will result from the 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 $87.5
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
will be $1.4 billion: $1.2 billion from the increased standard salary
level and $255.6 million from the increased HCE compensation level.
Total Year 1 transfers are estimated at $1.5 billion (Table 10).

Table 10--Total Annual Change in Earnings for Affected EAP Workers by
Provision, Year 1 (Millions)
[GRAPHIC] [TIFF OMITTED] TR26AP24.155

[[Page 32914]]

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, 2023. Most affected EAP workers already receive at least the
minimum wage; only an estimated 0.5 percent (19,900 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 rule, their employers will not be able to
adjust their wages downward to offset part of the cost of paying the
overtime pay premium (which will be discussed in the following
section). Therefore, these workers will generally receive larger
transfers attributed to the overtime pay provision than other
workers.
---------------------------------------------------------------------------

In response to an increase in the regular rate of pay to the
minimum wage, employers may reduce the workers' hours. 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 regulation,
the Department believes that any disemployment effect due to the
minimum wage provision will 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.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

At the new standard salary level, the Department estimated that
19,900 affected EAP workers will, on average, see an hourly wage
increase of $1.57, work 2.1 fewer hours per week and receive an
increase in weekly earnings of $84.73 as a result of coverage by the
minimum wage provisions (Table 11). The total change in weekly earnings
due to the payment of the minimum wage was estimated to be $1.7 million
per week ($84.73 x 19,900) or $87.5 million in Year 1.

Table 11--Minimum Wage Only: Mean Hourly Wages, Usual Weekly Hours and
Weekly Earnings for Affected EAP Workers, Year 1
[GRAPHIC] [TIFF OMITTED] TR26AP24.197

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 will result in a transfer
of income to the affected workers, increasing the marginal cost of
labor, which employers may try to offset by adjusting the wages and/or
hours of affected workers. The size of the transfer will 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

[[Page 32915]]

overtime (provided that the reduced rates still exceed the minimum
wage); (4) increasing affected workers' salaries to the updated salary
or compensation level to preserve their exempt status; or (5) using
some combination of these responses. How employers will respond depends
on many factors, including the relative costs of each of these
alternatives. In turn, the relative costs of each of these alternatives
are a function of workers' earnings and hours worked.
(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.
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\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

[[Page 32916]]

mandate (e.g., Britain), or when the mandate exists but the
requirements are not met (e.g., United States).\376\
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\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 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) Comments Regarding Transfers
Many commenters representing employer interests indicated that
employers would respond to the changes proposed in the NPRM by making a
variety of adjustments to wages, hours worked, or both. Some commenters
responded with results from surveys of their constituents. Although
these surveys may be helpful as background information, they generally
cannot be used in a quantitative analysis due to issues such as
insufficient or uncertain sample sizes, missing sampling methodology,
and missing magnitudes. For example, NAHB referenced results from a
survey of an unknown number of its members, asserting that 38 percent
of respondents indicated they would respond to the proposed increase in
the salary level by ``[m]inimiz[ing] overtime hours.'' The Department
agrees that firms may reduce the hours of some workers and has included
this in the quantitative analysis below; however, the modeling question
is to what degree employers will adjust hours.\380\ As discussed below,
the Department estimates that employers will reduce hours for Type 2B
and Type 3 workers, which together make up 21% of all affected workers.
The Department's model is based on worker-specific adjustments and does
not assume that a firm would respond the same way for all affected
workers that they employ. Moreover, such surveys were often sector-
specific, making it difficult to extrapolate economy-wide trends,
because the distribution of affected workers varies across sectors.
Also, these surveys were often based not on actual economic responses,
but rather on expressions of intentions. See, e.g., AHLA; ANCOR; NAIS
and NBOA; NDA.
---------------------------------------------------------------------------

\380\ Illustrating the limitations of commenter-provided surveys
for this quantitative analysis, the responses to NAHB's survey have
inconsistencies that make them hard to interpret. For example,
concerning the 2019 rule, NAHB reported that 94 percent of
respondents stated that the rule's increase in the salary level to
$35,568 did not affect anyone on their payroll. Nevertheless, of the
same respondents, 20% stated that they responded to the 2019 rule by
minimizing overtime hours and 18% stated that they raised salaries
above the threshold.
---------------------------------------------------------------------------

Despite the inability to incorporate these survey results into the
analysis, select results are presented here. For instance, according to
AHLA, of the members it surveyed, ``70% anticipat[ed] reclassifying
workers, 60% anticipat[ed] reducing hours and career development
opportunities to reduce potential overtime costs, and 51% anticipat[ed]
position consolidation.'' ANCOR found that ``approximately 61 percent
of [its constituents] would employ a mitigation strategy of converting
currently exempt salaried workers to hourly workers,'' ``[f]ifty-six
percent . . . would increase the salary of full-time exempt workers to
meet the projected threshold,'' ``49 percent . . . would prohibit or
significantly restrict'' permitted overtime, and ``33 percent indicated
the necessity of reducing salaried full-time employees.'' NAIS and NBOA
stated that 13 percent of schools that responded to its survey said
they would ``raise salaries of those exempt employees who do not meet
the new threshold,'' 27 percent said they would ``convert employees to
non-exempt and limit hours where possible,'' 11 percent said they would
``convert employees to non-exempt and pay overtime if hours worked are
over 40 in a week'' and ``47% of schools said they will enact some
combination of the available options.'' NAHB stated that, if the
proposed salary threshold were implemented, 38 percent of respondents
reported they would ``[m]inimize overtime hours,'' as noted above; 24
percent would ``[r]aise salaries above the threshold''; and 9 percent
would ``[r]educe salaries to compensate for overtime'' (among other
changes). And NDA stated that 66 percent of respondents ``said they
would have to reclassify exempt employees as hourly employees and
restructure jobs if DOL raised the minimum salary threshold'' as
proposed in the NPRM.
Regarding the transfer calculations in the NPRM, SBA Advocacy
expressed concern about the Department's

[[Page 32917]]

estimates that affected small business establishments would have, on
average, $360 to $2,683 in additional payroll costs in the first year
of the proposed rule. SBA Advocacy stated that ``an Arkansas restaurant
with four locations stated it would cost almost $200,000 to increase
manager salaries to make them compliant,'' and that ``small amusement
businesses reported estimated salary increases for their businesses''
ranging from $57,000 to $250,000. It also provided hypothetical
examples of potential salary increases that restaurants in two states
would need to make to comply with the proposed rule based on various
assumptions, including different salaries and amounts of overtime
performed. These anecdotal reports and hypothetical examples do not
have any information on the actual amount of overtime work being
performed by newly nonexempt workers at these businesses. The
Department expects that businesses that would be faced with large
increases in payroll costs if they were to increase salaries to the new
threshold would instead find other responses more economically
beneficial, such as limiting the number of overtime hours worked by
workers who become nonexempt or paying such workers the overtime
premium for hours in excess of 40 per week. Furthermore, this comment
does not explain what methodological approach the Department should use
to estimate transfers; what error(s), if any, the Department made in
its transfer estimate in its NPRM; or how much the Department
underestimated such transfers.
Some commenters indicated that employers may follow the fixed-job
model rather than the incomplete fixed-job model used by the Department
in the NPRM. See, e.g., AFPI; Americans for Prosperity. AFPI, for
instance, stated that ``[r]esearch shows employers primarily respond to
expanded overtime eligibility by reducing base earnings to reflect
expected overtime--leaving total earnings unchanged.'' Americans for
Prosperity similarly asserted that ``[o]ver time, the natural response
of business enterprises of all types to the higher wage costs
occasioned by the proposed rule will be an adjustment in base pay and
fringe benefits lower so that total compensation (base pay, benefits,
overtime) does not rise.'' \381\
---------------------------------------------------------------------------

\381\ In support, AFPI and Americans for Prosperity both cited
to reports regarding the NPRM for the 2016 rule. See James Sherk,
Salaried Overtime Requirements: Employers Will Offset Them with
Lower Pay, Heritage Foundation Backgrounder No. 3031, July 2, 2015.
https://thf_media.s3.amazonaws.com/2015/pdf/BG3031.pdf (cited by
AFPI); Donald J. Boudreaux & Liya Palagashvili, An Economic Analysis
of Overtime Pay Regulations 17-21 (Apr. 2016), available at https://www.mercatus.org/hayekprogram/research/working-papers/economic-analysis-overtime-pay-regulations (cited by Americans for
Prosperity).
---------------------------------------------------------------------------

The Oxford Economics report included with NRF's comment pointed to
a study by Quach (2022),\382\ which analyzed the effects of the
rescinded 2016 rule and the 2019 rule, along with the impact of state-
level increases to the overtime exemption threshold. According to
Oxford Economics, ``Quach finds evidence that overtime coverage
decreases employment and increases earnings polarization'' and ``strong
evidence of employee reclassifications from salaried to hourly
status[.]'' The Department notes that the revised 2024 version of the
working paper did not find that increasing overtime exemption
thresholds decreases employment. In fact, when summarizing his
findings, he says, ``I estimate that expansions in overtime coverage
actually have little effect on employment.'' He also notes, ``while the
DOL accurately predicted that average weekly earnings would rise, they
calculated an income effect of only 0.7%, whereas I show that earnings
increased by nearly twice that amount for salaried workers.'' While the
Department also reviewed the 2022 study, as discussed further below, it
has not incorporated this study into its analysis as it has multiple
limitations, including a reliance on a non-representative selection of
employers, which makes it inappropriate as a model of aggregate effects
across the economy. The Oxford Economics report also claimed that the
Department's analysis in the NPRM demonstrated ``a tendency to assume
that which workers are paid on a salaried basis is determined by an
exogenous occupational structure and to ignore the role that the DOL's
overtime regulations themselves play in determining this.''
---------------------------------------------------------------------------

\382\ Simon Quach, The Labor Market Effects of Expanding
Overtime Coverage. This is a working paper that was published in
both 2022 and 2024. The 2024 version can be found linked on Simon
Quach's website: https://raw.githubusercontent.com/SimonQuach1/Papers/main/Quach_OT.pdf?token=AH2DVMEDLJGBAWFAVXXUNMDAYGGDQ. The
Department believes that Oxford Economics was citing to the 2022
version of the paper, which is Quach, S. (2022). The Labor Market
Effects of Expanding Overtime Coverage. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3608506.
---------------------------------------------------------------------------

The Department's review of the literature cited above supports a
result between the fixed-job model and the fixed-wage model and thus
the results were modeled accordingly. Specifically, the Department
believes the incomplete fixed-job model is most appropriate and
consistent with the literature. Therefore, the analysis has not been
changed. The Department further notes that its estimates of transfers
are informed by its projection that employers will respond to the final
rule in many ways. If, for example, an employer simply pays each
affected employee the overtime premium for each hour worked in excess
of 40 hours per week, without making any adjustments to wages, hours,
or duties, such an approach would maximize transfers from employers to
employees. However, as discussed above, the Department believes that
employers will respond to the final rule by adjusting wages, hours, and
duties to minimize the cost of the rule. Accordingly, the actual amount
of transfers will fall well short of the transfers that would result if
employers simply paid each affected employee overtime premiums without
adjusting wages, hours, or duties.
(d) 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 Type 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
$14.47 ($86.82 per hour x (10 minutes / 60 minutes)).\383\ 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

[[Page 32918]]

weekly managerial costs are less than the new standard salary. The
Department assumed that firms will include incremental managerial costs
in their determination of whether to treat an affected employee as a
Type 3 or Type 4 worker because those costs are only incurred if the
employee is a Type 3 worker.
---------------------------------------------------------------------------

\383\ 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 12).

Table 12--Types of Affected Workers
[GRAPHIC] [TIFF OMITTED] TR26AP24.156

(e) Modeling Changes in Wages and Hours
The incomplete fixed-job model predicts that employers will adjust
wages of regular overtime workers but not to the full extent indicated
by the fixed-job model, and thus some employees will receive a small
increase in weekly earnings due to overtime pay coverage. The
Department used the average of two estimates of the incomplete fixed-
job model adjustments to model impacts of this rule: \384\
---------------------------------------------------------------------------

\384\ 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.
---------------------------------------------------------------------------

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 will become overtime-eligible, but because they do not work
overtime, they will see no change in their wages, hours, or weekly
earnings. Type 4 workers will remain exempt because their earnings will
be raised to at least the updated EAP level (either the standard salary
level or HCE compensation level). These workers' earnings will increase
by the difference between their current earnings and the amount
necessary to satisfy the new salary or compensation level. It is
possible employers will increase these workers' hours in response to
paying them a higher salary, but the Department did not have enough
information to model this potential change.\385\
---------------------------------------------------------------------------

\385\ 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.

[[Page 32919]]

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).\386\ 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.\387\ 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.\388\
---------------------------------------------------------------------------

\386\ 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.
\387\ 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.
\388\ 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 will pay more for the same number of labor hours,
for Type 2 and Type 3 EAP workers, the quantity of labor hours demanded
by employers will decrease. 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).^{389 390} Brown and Hamermesh (2019)
estimated the elasticity of overtime hours for EAP-exempt workers.\391\
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.\392\
---------------------------------------------------------------------------

\389\ Lichter, A., Peichl, A. & Siegloch, A. (2014). The Own-
Wage Elasticity of Labor Demand: A Meta-Regression Analysis. IZA DP
No. 7958.
\390\ 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.
\391\ 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.
\392\ 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.\393\
Figure 4 is a flow chart summarizing the four types of affected EAP
workers. Also shown are the effects on exempt status, weekly earnings,
and hours worked for each type of affected worker.
---------------------------------------------------------------------------

\393\ 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.

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

[[Page 32920]]

Figure 4--Flow Chart of the Rule's Effect on Earnings and Hours Worked
[GRAPHIC] [TIFF OMITTED] TR26AP24.198

[[Page 32921]]

[GRAPHIC] [TIFF OMITTED] TR26AP24.199

(f) Estimated Number of and Effects on Affected EAP Workers
The Department estimated the rule will affect 4.3 million workers
(Table 13), of which 3.0 million are Type 1 workers (68.7 percent of
all affected EAP workers), 704,000 were estimated to be Type 2 workers
(16.2 percent), 558,800 were Type 3 workers (12.9 percent), and 94,100
were estimated to be Type 4 workers (2.2 percent).

Table 13--Affected EAP Workers by Type (1,000s), Year 1
[GRAPHIC] [TIFF OMITTED] TR26AP24.158

The rule will affect some affected workers' hourly wages, hours,
and weekly earnings. Predicted changes in implicit wage rates are
outlined in Table 14, changes in hours in Table 15, and changes in
weekly earnings in Table 16. How these will change depends on the type
of worker, but on average the Department projects that weekly earnings
will be unchanged or increase while hours worked will be unchanged or
decrease.
Type 1 workers will have no change in wages, hours, or earnings due
to the overtime pay provision because these workers do not work
overtime.\394\
---------------------------------------------------------------------------

\394\ 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.

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

[[Page 32922]]

For Type 2A workers, the Department assumed employers will 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 will 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.\395\
---------------------------------------------------------------------------

\395\ 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 969,100
workers), the Department used the incomplete fixed-job model to
estimate changes in the regular rate of pay. These workers will see a
decrease in their average regular hourly wage and a small decrease in
hours. However, because these workers will 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 will 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 15).
Type 4 workers' implicit hourly rates of pay and weekly earnings
will increase to meet the updated standard salary level or HCE annual
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 14--Average Regular Rate of Pay by Type of Affected EAP Worker,
Year 1
[GRAPHIC] [TIFF OMITTED] TR26AP24.159

[[Page 32923]]

Table 15--Average Weekly Hours by Type of Affected EAP Worker, Year 1
[GRAPHIC] [TIFF OMITTED] TR26AP24.160

[[Page 32924]]

Table 16--Average Weekly Earnings by Type of Affected EAP Worker, Year
1
[GRAPHIC] [TIFF OMITTED] TR26AP24.161

At the new standard salary level, the average weekly earnings of
affected workers will increase $5.96 (0.6 percent), from $947.71 to
$953.67. Multiplying the average change of $5.96 by the 4.0 million EAP
workers affected by the combination of the initial update and the
subsequent application of the new standard salary level and 52 weeks
equals an increase in earnings of $1.3 billion in the first year. For
workers affected by the change in the HCE compensation level, average
weekly earnings will increase by $16.79. When multiplied by 292,900
affected workers and 52 weeks, the national increase will be $255.6
million in the first year. Thus, total Year 1 transfer payments
attributable to this rule will equal $1.5 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 (2024) \396\ used administrative payroll data from May 2008 to
July 2021 to estimate the impacts of the rescinded 2016 rule and the
2019 rule on employment, earnings, and salary status.\397\ 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.
---------------------------------------------------------------------------

\396\ Quach, S. (2024). The Labor Market Effects of Expanding
Overtime Coverage. https://raw.githubusercontent.com/SimonQuach1/Papers/main/Quach_OT.pdf?token=AH2DVMEDLJGBAWFAVXXUNMDAYGGDQ.
\397\ 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.
---------------------------------------------------------------------------

In terms of its findings, concerning employment, the author found
that expansions in overtime coverage actually had little effect on
employment. He also found that average weekly earnings rose by about
1.4% for salaried workers, and found no evidence that firms reduced
base pays in response to changes in the overtime threshold. Concerning
salary status, he found that approximately 2.6% of affected workers are
re-classified from salaried to hourly status. The Department has not
adjusted its methodology in response to this paper given the concerns
listed above.
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.\398\ 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.
---------------------------------------------------------------------------

\398\ Rohwedder, S. and Wenger, J.B. (2015). The Fair Labor
Standards Act: Worker Misclassification and the Hours and Earnings
Effects of Expanded Coverage. RAND Labor and Population.

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[[Page 32925]]

iv. Potential Transfers Not Quantified
This rule could lead to additional transfers that the Department is
unable to quantify. For example, in response to this 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 rule. 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 free or reduced-priced school meals. 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 multiple social
assistance programs.\399\ Thus, transferring income to these workers
could reduce eligibility for government social assistance programs.
This could lead to an increase or a reduction in a family's total
resources, depending on the relative size of the increase in earnings
and the value of the decrease in assistance. Regardless, reduced
eligibility for social assistance programs would reduce government
expenditures at the Federal, State, and/or local level.
---------------------------------------------------------------------------

\399\ Department of Health and Human Services (2023). Federal
Poverty Level. https://www.healthcare.gov/glossary/Federal-poverty-level-fpl/.
---------------------------------------------------------------------------

5. Benefits and Cost Savings
The Department expects that this rule could lead to multiple
benefits, which were discussed qualitatively in the NPRM. These
potential benefits and commenter feedback about them are addressed
below.
The revised salary level will 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 new standard 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 new
salary level, the number of white-collar salaried employees who earn
between the current and the new salary levels and fail the duties test
would decrease by 4.7 million. Because these nonexempt employees no
longer meet the salary level, employers will 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. Also, as many commenters observed, the new salary level will
strengthen the right to overtime pay for nonexempt workers who earn
between the current and new standard salary levels. See, e.g.,
Coalition of State AGs; Coalition of Gender Justice and Civil Rights
Organizations; Washington Dept. of Labor & Industries. Similarly, to
the extent that some of these 4.7 million employees are currently
misclassified as exempt, the new salary level will make it more clear
for workers and employers that such workers are not EAP exempt.\400\
Thus, this aspect of the rule is responsive to commenter concerns that
the current salary level is too low to prevent the misclassification of
salaried employees who fail the duties test. See e.g., AFSCME; EPI;
NELP; Sanford Heisler Sharp.
---------------------------------------------------------------------------

\400\ 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.
---------------------------------------------------------------------------

Commenters disagreed over whether the proposed rule would improve
or hinder the productivity of affected workers. Some commenters, such
as the AFL-CIO, agreed with the analysis provided in the NPRM that this
rulemaking could increase productivity ``by reducing turnover,
incentivizing workers to work harder, and increasing marginal
productivity as fewer hours are worked.'' In contrast, a number of
employer representatives asserted that the rule would hinder worker
productivity. For example, PPWO asserted that affected workers who
become nonexempt ``will now need to account for their time in a way
they have not had to previously, and in a way that their exempt co-
workers do not.'' See also, e.g., AFPI.
The Department continues to believe that the 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.\401\ Efficiency wages may elicit greater effort on the
part of workers, making them more effective on the job.\402\ 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.\403\ They
found that in both full and limited-service restaurants productivity
increased due to improved worker morale after a wage increase.
Additionally, research demonstrates a correlation between increased
earnings and reduced employee turnover.^{404 405} Reducing
turnover, in turn, may increase productivity because longer-tenured
employees have more firm-specific skills and knowledge and thus could
be more productive and require less

[[Page 32926]]

supervision and training.\406\ 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.
---------------------------------------------------------------------------

\401\ Akerlof, G.A. (1982). Labor Contracts as Partial Gift
Exchange. The Quarterly Journal of Economics, 97(4), 543-569.
\402\ 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.
\403\ 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.
\404\ 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.
\405\ 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.
\406\ 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.
---------------------------------------------------------------------------

This rulemaking could also result in an increase in personal time
for some affected workers. Worker advocacy organizations and individual
commenters asserted that employees would generally enjoy more personal
time as a consequence of the rule. For example, SEIU commented that
``[w]hen workers are exempted from overtime pay protections, it
disincentivizes employers from being efficient with [employees']
time.'' 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.\407\ Workers in executive,
administrative, and professional occupations tend to work longer
hours.\408\ They also have the highest percentage of workers who would
prefer to work fewer hours compared to other occupational
categories.\409\ Therefore, the Department believes that this rule may
result in reduced time spent working overtime for a group of workers,
some of whom may prefer such an outcome.
---------------------------------------------------------------------------

\407\ For more information, see OECD series, average annual
hours actually worked per worker, available at: https://stats.oecd.org/index.aspx?DataSetCode=ANHRS.
\408\ 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.
\409\ 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 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 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
$631.1 million to $2.9 billion, with the primary estimate equal to $1.5
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 17). 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.\410\ 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).
---------------------------------------------------------------------------

\410\ The straight-time wage adjusts to a level that keeps
weekly earnings constant when overtime hours are paid at 1.5 times
the straight-time wage. In cases where adjusting the straight-time
wage results in a wage less than the minimum wage, the straight-time
wage is set to the minimum wage.

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[[Page 32927]]

Table 17--Summary of the Assumptions Used to Calculate the Lower
Estimate, Primary Estimate, and Upper Estimate of Transfers
[GRAPHIC] [TIFF OMITTED] TR26AP24.162

7. Effects by Regions and Industries
This section compares the number of affected workers, costs, and
transfers across regions and industries. Although impacts will 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 will be fairly
consistent with the proportion of total workers in each region.
Affected workers are overrepresented in some industries, but costs and
transfers will still be manageable as a share of payroll and of total
revenue (See Table 21 for regions and Table 24 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 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 new
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,\411\ to set the salary level. However, because wages are
lower in the South and the Midwest \412\ than the Northeast \413\ and
the West,\414\ 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 (1.9 million), though it also has
the most workers of any Census region (Table 18). As a share of
potentially affected workers in the region, the South will have
somewhat more affected workers relative to other regions (17.9 percent
are affected compared with 11.0 to 15.4 percent in other regions).
However, as a share of all workers in the region, the South will not be
particularly affected relative to other regions (3.5 percent are
affected compared with 2.3 to 3.0 percent in other regions).
---------------------------------------------------------------------------

\411\ The South Census region is comprised of the following
states: Alabama, Arkansas, Delaware, District of Columbia, Florida,
Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina,
Oklahoma, South Carolina, Tennessee, Texas, Virginia, and West
Virginia.
\412\ The Midwest Census region is comprised of the following
states: Kansas, Illinois, Indiana, Iowa, Michigan, Minnesota,
Missouri, Nebraska, North Dakota, Ohio, South Dakota, and Wisconsin.
\413\ The Northeast Census region is comprised of the following
states: Connecticut, Maine, Massachusetts, New Hampshire, New
Jersey, New York, Pennsylvania, Rhode Island, Vermont.
\414\ The West Census region is comprised of the following
states: Alaska, Arizona, California, Colorado, Hawaii, Idaho,
Montana, Nevada, New Mexico, Oregon, Utah, Washington, Wyoming.
---------------------------------------------------------------------------

Table 18--Potentially Affected and Affected Workers, by Region, Year 1

[[Page 32928]]

[GRAPHIC] [TIFF OMITTED] TR26AP24.163

Total transfers in the first year were estimated to be $1.5 billion
(Table 19). As expected, the transfers in the South will be the largest
portion because the largest number of affected workers would be in the
South. However, transfers per affected worker will be less in the South
than in other Census regions. Annual transfers per affected worker will
be $291 in the South, and between $346 and $462 in other regions.

Table 19--Annual Transfers by Region, Year 1
[GRAPHIC] [TIFF OMITTED] TR26AP24.164

Table 20--Annual Costs by Region, Year 1
[GRAPHIC] [TIFF OMITTED] TR26AP24.165

[[Page 32929]]

Direct employer costs are composed of regulatory familiarization
costs, adjustment costs, and managerial costs. The Department estimates
that total direct employer costs will be the highest in the South
($581.7 million) and lowest in the Northeast ($240.7 million).
Transfers and direct employer costs in each region, as a percentage of
the total transfers and direct costs, would range from 16.9 percent in
the Northeast to 38.2 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 37.0 percent in the South.
Costs and transfers per establishment would be slightly higher in the
Midwest ($392) than on average, but still small (Table 21).
Another way to compare the relative effects of this rule by region
is to consider the transfers and costs as a proportion of payroll and
revenues (Table 21).\415\ Nationally, employer costs and transfers will
be approximately 0.031 percent of payroll. By region, direct employer
costs and transfers as a percent of payroll will be approximately the
same (between 0.025 and 0.036 percent of payroll). Employer costs and
transfers as a percent of revenue will be 0.006 percent nationally and
range between 0.005 and 0.006 percent in each region.
---------------------------------------------------------------------------

\415\ The Department uses 2017 data here because although
payroll data are available for more recent years, the most recent
revenue data are for 2017.
---------------------------------------------------------------------------

Table 21--Annual Transfers and Costs as Percent of Payroll and of
Revenue by Region, Year 1
[GRAPHIC] [TIFF OMITTED] TR26AP24.166

Impacts may be more pronounced in some industries. In particular,
lower-wage industries where more workers may earn between $684 and the
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 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 22 presents the number of affected workers by industry. The
industry with the most affected workers is professional and business
services (827,400). The industry with the largest share of workers
affected is financial activities (5.7 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 leisure and hospitality
(24.3 percent), followed by agriculture, forestry, fishing, & hunting
(22.8 percent).

[[Page 32930]]

Table 22--Potentially Affected and Affected Workers, by Industry, Year
1
[GRAPHIC] [TIFF OMITTED] TR26AP24.167

Both transfers and costs will be the largest in the professional
and business services industry because this industry is large and
heavily composed of salaried white-collar workers (Table 23). Combined,
in Year 1, these total $564.7 million and represent 19.2 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
will be relatively low in this industry, $229 in the first year
compared with $348 nationally. A third industry with relatively large
total transfers and costs is the retail trade industry.

[[Page 32931]]

Table 23--Annual Transfers and Costs by Industry, Year 1
[GRAPHIC] [TIFF OMITTED] TR26AP24.168

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; retail trade; leisure and hospitality; and
education (Table 24). However, the magnitude of the relative shares
will 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 0.03 percent of revenues in any industry. The industries with
the largest transfers and costs as a percent of revenue will be
education; leisure and hospitality; and professional and business
services. Table 24 illustrates that the differences in costs and
transfers relative to revenues will 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.^{416 417} By industry, the value of total costs and
transfers as a percent of profits ranges from a low of 0.02 percent
(wholesale trade) to a high of 0.62 percent (agriculture, forestry,
fishing, and hunting). Benchmarking against profits is potentially
helpful in the sense that it provides a measure of the 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

[[Page 32932]]

differences in the firm-level adjustment to profit impacts reflecting
cross-industry variation in market structure.\418\
---------------------------------------------------------------------------

\416\ 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.
\417\ 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.
\418\ 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 24--Annual Transfers, Total Costs, and Transfers and Costs as
Percent of Payroll, Revenue, and Profit by Industry, Year 1
[GRAPHIC] [TIFF OMITTED] TR26AP24.169

[[Page 32933]]

8. Regulatory Alternatives
The Department considered a range of alternatives before selecting
its methods for setting the standard salary level and the HCE
compensation level. As seen in Table 25, 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 is increasing the standard salary level using
earnings for the 35th percentile of full-time salaried workers in the
South Census Region, $1,128 per week. The alternative methods
considered for setting the standard salary level are:
Alternative 1: 2004/2019 method--$844 per week--20th
percentile of earnings of nonhourly full-time workers in the South
Census region and/or in the retail industry nationally.
Alternative 2: Kantor long test method--$942 per week--
10th percentile of earnings of likely exempt workers.
Alternative 3: 2016 method--$1,196 per week--40th
percentile of earnings of nonhourly full-time workers in the South
Census region.
Alternative 4: Kantor short test method--$1,404 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/or in retail nationally),
which is currently $844 per week ($43,888 per year). This is also the
methodology that the Department used in the 2019 rule.\419\ However,
the salary level produced by the 2004 methodology is below the current
equivalent long test salary level ($942 per week), which the Department
considers to be a key parameter for determining an appropriate salary
level.
---------------------------------------------------------------------------

\419\ 84 FR 51260.
---------------------------------------------------------------------------

The Department also considered setting the standard salary level at
the long test level ($942 per week or $48,984 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.\420\ However, as explained above, setting the standard salary
level at the long test level would not address the impact of the change
from a two-test to a one-test system.
---------------------------------------------------------------------------

\420\ See section V.B.4.ii.
---------------------------------------------------------------------------

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) ($1,196 per week or
$62,192 per year). 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 more than half (55 percent) 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 ($1,404
per week or $73,008 per year). 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.
As described above, the Department is setting the HCE compensation
level using earnings for the 85th percentile of all full-time salaried
workers nationally, $151,164 per year. The Department also evaluated
the following alternative methods to set the HCE compensation levels:
HCE alternative 1: 2019 method \421\--$132,964 annually--
80th percentile of earnings of nonhourly full-time workers nationally.
---------------------------------------------------------------------------

\421\ See 84 FR 51250.
---------------------------------------------------------------------------

HCE alternative 2: 2016 method \422\--$179,972 annually--
90th percentile of earnings of nonhourly full-time workers nationally.
---------------------------------------------------------------------------

\422\ See 81 FR 32429.
---------------------------------------------------------------------------

The Department believes that HCE alternative 1 does not produce a
threshold high enough to reserve the HCE test for employees who would
``almost invariably pass the standard duties test.'' The Department
also considered setting the HCE threshold at the 90th percentile;
however, the Department is concerned that the resulting level
($179,972) 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.

[[Page 32934]]

Table 25--Updated Standard Salary and HCE Compensation Levels and
Alternatives, Affected EAP Workers, Costs, and Transfers, Year 1
[GRAPHIC] [TIFF OMITTED] TR26AP24.170

[[Page 32935]]

9. Triennial Updates to the Standard Salary and Annual Compensation
Thresholds
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 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. The mechanism the Department
established in this rulemaking for 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, the updating mechanism 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 will allow firms to better predict
short- and long-term costs and employment needs. In addition to the
changes being made to the standard salary level and HCE compensation
threshold, the Department is including in this rule a mechanism for
updating the salary and compensation levels initially on July 1, 2024
and every 3 years thereafter to reflect current earnings.
i. Initial Update
As discussed in section IV, the new standard salary level and HCE
total annual compensation threshold methodologies do not become
applicable until approximately 8 months after publication of this final
rule. Therefore, the initial update on July 1, 2024 will use the
methodologies in place at the time of the update (i.e., the 2019 rule
methodologies), which results in a $844 per week standard salary level
and a $132,964 HCE total annual compensation threshold. Consistent with
the 2019 rule, the Department used pooled CPS data for the most recent
3 years (2021, 2022, 2023), adjusted to reflect 2023, for the initial
updates to the standard salary and annual compensation thresholds.
As previously discussed, the Department's affected worker, cost,
and transfer estimates for Year 1 have accounted for the initial update
and the new standard salary and annual compensation thresholds that
become applicable 6 months after the initial update. Just looking at
the initial update, the Department estimated the initial update to the
standard salary level will affect workers who earn between $684 and
$844 per week. The Department estimates that this update will result in
959,000 affected workers. Of these affected workers, 68.7 percent of
them do not work overtime. The Department estimated the Year 1
adjustment and managerial costs for just this update would be $202.3
million and transfer payments would be $204.3 million. For the initial
update to the HCE total annual compensation threshold, the Department
estimated that just the update would result in 223,000 affected
workers, $58.7 million in adjustment and managerial costs, and $164.5
million in transfer payments in Year 1.
ii. Future Updates
The Department is establishing future updates to the standard
salary level and HCE total annual compensation threshold with current
earnings data beginning 3 years after the date of the initial update,
and every 3 years thereafter, using the methodologies in place at the
time of the updates. For purposes of this analysis, the Department
assumes that the future triennial updates to the standard salary level
will be based on the same methodology that the Department used to set
the new standard salary level in this rule: 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
future triennial updates to the HCE total annual compensation level
will be based on the same methodology the Department used to set this
earnings threshold in this rulemaking: the annualized weekly earnings
of 85th percentile of full-time salaried workers nationally.
As previously discussed, future triennial updates will set the
earnings thresholds using the most recent available 4 quarters of CPS
data preceding the Department's notice with the updated 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 2012 and 2022 in (1) the 35th earnings percentile
of full-time salaried workers in the South for the standard salary
level and (2) the annualized weekly earnings of the 85th percentile of
full-time salaried workers nationally for the HCE compensation level.
For example, between 2012 and 2022, the annual growth rate in the 35th
percentile of full-time salaried workers in the South has increased by
3.17 percent. To estimate the first future triennial update salary
level of $1,239, the Department multiplied $1,128 by 1.0317 to the
power of three. Figure 5 shows the projected future triennial 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 2023 dollars.

Figure 5--Projected Future Salary and Compensation Levels, Nominal
Dollars

[[Page 32936]]

[GRAPHIC] [TIFF OMITTED] TR26AP24.171

Figure 6--Projected Future Standard Salary Levels, Nominal and Real
(Constant 2023 Dollars)
[GRAPHIC] [TIFF OMITTED] TR26AP24.172

[[Page 32937]]

iii. Concerns With Use of Fixed Earnings Percentile as Updating
Methodology
As discussed in detail in section V.A.3.iii, some commenters
expressed concern that triennially updating the salary level using a
fixed percentile of earnings would result in the salary levels growing
at too quick a rate. See, e.g., Chamber; National Lumber and Building
Material Dealers Association; NRF; Seyfarth Shaw.
These commenters stated that updating the standard salary level
using a fixed percentile of earnings of full-time salaried workers will
cause some or all of the newly nonexempt workers to be converted to
hourly status and thus removed from the data set, and earnings at the
35th percentile of salaried workers will quickly rise solely due to the
exclusion of these hourly workers (an effect some commenters referred
to as ``ratcheting''). Commenters asserted that this may cause growth
in the 35th percentile of full-time salaried workers to no longer
reflect prevailing economic conditions.
Claims that an updating mechanism using the fixed percentile
approach will lead to the rapid escalation of the salary level are
based primarily on the assumption that employers will respond to this
rulemaking by converting newly nonexempt workers to hourly pay status.
However, the Department believes these concerns are overstated because
many affected EAP workers who are reclassified as nonexempt are likely
to remain salaried as: (1) An analysis of the 2004 rule's salary level
update did not indicate significant numbers of workers were converted
to hourly pay; and (2) an analysis of updates in California's higher
EAP exemption salary level (under state law) did not indicate
significant numbers of workers were reclassified as hourly. In any
event, the Department's modeling of the impact of updating shows that
any potential ``ratcheting'' effect that may occur would be small,
largely because newly nonexempt workers compose a small percentage of
the pool of full-time nonhourly workers in the dataset used to
establish the salary level.
The analyses discussed below are based on CPS MORG data. As
acknowledged in the NPRM and above in section VII.B.5.i, salary status
for CPS respondents cannot definitively be determined because workers
who indicate they are paid on a salary basis or on some basis other
than hourly are all classified as ``nonhourly.'' To consider the
possibility this biases our results, the Department looked at the Panel
Study of Income Dynamics (PSID). The PSID provides additional
information concerning salaried versus other nonhourly workers. In the
PSID, respondents are asked how they are paid on their main job and are
asked for more detail if their response is in some way other than
salaried or hourly.\423\ The available responses include piecework,
commission, self-employed/farmer/profits, and by the job/day/mile. None
of these options are ones to which employers are likely to change their
salaried workers. The share of workers who are not paid on either an
hourly or salaried basis is relatively small, about 10 percent of
workers in the PSID. Accordingly, grouping nonhourly workers with
salaried workers does not negate the following comparisons and
conclusions based on CPS data.
---------------------------------------------------------------------------

\423\ University of Michigan, Institute for Social Research.
2019 PSID. Data available at: https://simba.isr.umich.edu/data/data.aspx.
---------------------------------------------------------------------------

(a) Workers May Remain Salaried Even if Nonexempt
The Department disagrees with commenters that suggested that
employers will likely (or automatically) convert large numbers of newly
nonexempt employees to hourly pay status. In some instances such
conversion may occur; for example, if an employee regularly works
overtime and the employer is able to adjust his or her regular rate.
However, for the majority of affected employees, there will be no
incentive for employers to convert them to hourly pay because they do
not work more than 40 hours in a workweek. Also, employers may have
other incentives to maintain workers' salaried status; for example,
they may offer salaried positions to attract talent. Some commenters
representing employer interests highlighted that employees value job
characteristics associated with salaried pay--such as earnings
predictability--and so employers may pay nonexempt employees on a
salary basis to preserve these benefits. Using the CPS MORG data pooled
for 2021-2023 and projected to 2023, the Department estimated that 29.4
percent of white-collar workers earning below $684 per week are
nonhourly; based on findings from the PSID, the Department believes
most of these nonhourly workers are salaried. This data shows that even
for some current nonexempt workers, employers are choosing to keep them
as salaried instead of hourly. Furthermore, some nonhourly workers
above the current salary threshold fail the duties test, and are
therefore nonexempt, which is further evidence that employers already
employ nonexempt workers who are paid on a salary basis.
(b) Previous Salary Level Updates Did Not Indicate a Significant Number
of Workers Being Converted to Hourly
The ``ratcheting'' concerns raised in the comments are very similar
to comments on this alleged effect that were received during the 2016
rulemaking. In that rule the Department analyzed employer responses to
the 2004 rule and to a series of revisions to California's salary level
test for exemption under state law in order to better estimate whether
workers who become nonexempt are more likely to be paid on an hourly
basis.\424\ These analyses allow the identification of potential
regulatory impact while controlling for time trends and a broad range
of other relevant factors (education, occupation, industry, geographic
location, etc.).
---------------------------------------------------------------------------

\424\ See 81 FR 32441, 32507.
---------------------------------------------------------------------------

In the 2016 rule the Department analyzed the effect of the Federal
2004 salary level increase from $250 per week (short test salary level)
to $455 (standard salary level) on the share of full-time, white-collar
workers paid hourly. The analysis considered two types of differences:
pre- versus post-rulemaking; and workers exempt before, but not after
the rule compared to workers exempt both before and after the rule. As
noted in the discussion of this analysis in the 2016 rule, if the
salary level increase in the 2004 rule led employers to convert
significant numbers of workers to hourly status (as commenters assert
will result from the current rulemaking), then the Department would
have expected to see a notable increase in the share of workers earning
just below the new threshold at the time ($455) who are paid hourly
relative to the share of workers earning just above the new threshold
who are paid hourly. Instead, the Department found that between the
first quarter of 2004 and the first quarter of 2005, the share of full-
time white-collar workers who are paid hourly decreased marginally in
the group of potentially affected workers (those earning $250 to $455),
whereas in the group earning above the salary level (those earning more
than $455 but less than $600) it increased by 2.6 percentage points.
These results do not suggest that the 2004 salary level increase caused
an increase in the share of workers paid hourly below the new
threshold, and thus provide no evidence that salary level increases due
to triennial updates will result in employers converting significant

[[Page 32938]]

numbers of affected EAP workers to hourly pay status.
The Department did not replicate this analysis for the salary level
increase in the 2019 final rule, because it would require comparing a
quarter in 2019 before the effective date of the rule with a quarter in
2020 after the effective date. The economic effects of the COVID-19
pandemic would make it impossible to isolate the impact of the 2019
rule.
In the 2016 rule the Department also analyzed the effect of changes
to California statutes that set exempt salary levels at a level equal
to twice the state minimum wage for 40 hours worked per week. The
analysis considered two types of differences: pre- versus post-
rulemaking; workers exempt before, but not after the rule compared to
workers exempt both before and after the rule; and California workers
versus workers in other states where the salary level was not
increased. The analysis of two updates found that the share of full-
time white-collar workers in California being paid hourly decreased
from 73.4 percent to 73.1 percent compared to an increase of 66.2
percent to 67.5 percent in states where the salary level did not change
after the 2007-2008 update, while there was an increase from 72.0
percent to 74.0 percent in California compared to an increase of 68.2
to 69.4 percent in other states after the 2014 update.
The Department found no evidence that changes in the salary level
for exemption resulted in a statistically significant increase in the
percent of full-time white-collar workers paid on an hourly basis
following either the 2004 rule or the California salary level updates.
(c) The Department's Modeling of Possible ``Ratcheting'' Indicates
Effect Would Be Negligible
In a study referenced by PPWO, Edgeworth Economics estimated the
impact that an updating mechanism using the fixed percentile approach
would have on the salary level. They found that ``the DOL's automatic
update mechanism would increase the salary threshold by approximately
9.1% to the current 40th percentile [which Edgeworth Economics
estimated was equivalent to the 35th percentile of the resulting
distribution after workers are reclassified] within three years even if
there was not ANY wage growth.'' Their estimate was based on the
assumption that all affected workers in the South Census Region who
earn between $684 and $1,059 per week and who are expected to pass the
duties test, which they estimate to be 1.4 million, would be
reclassified to hourly employees, thus falling out of the distribution
of workers that are part of the 35th percentile in the Census Region.
However, as discussed above, the Department has found no evidence that
previous changes in the salary level for exemption have resulted in a
statistically significant increase in the percent of full-time white-
collar workers paid on an hourly basis.
NRF submitted a 2023 study by Oxford Economics that also considered
how converting salaried workers to hourly status could influence future
triennial updates. The Oxford study states that DOL's updating
methodology ``suffers from the same technical flaw as its NPRM analysis
of the effects of the proposed regulation suffers from: the failure to
model newly nonexempt affected workers losing salaried status.'' The
study presents a visual analysis showing a share of workers who earn
below the overtime threshold losing their salaried status, and a higher
threshold for 2027 after this rule than in the scenario where there is
no change to the standard salary level. Like Edgeworth Economics,
Oxford Economics erroneously assumes that a large share of all affected
workers will lose their salaried status. As discussed previously, the
Department has found no evidence that previous changes in the salary
level for exemption have resulted in a statistically significant
increase in the percent of full-time white-collar workers paid on an
hourly basis.
In 2016, the Department conducted a similar analysis, using what
the Department believes are more realistic assumptions, and found a
significantly smaller potential impact. The Department considered which
affected workers are most likely to be converted from salaried to
hourly pay as a result of that rulemaking. Type 4 workers, those whose
salaries are increased to the new standard salary level, remain exempt
and their method of pay will not change. Type 3 workers, who regularly
work overtime and become nonexempt, and Type 2 workers, those who
occasionally work overtime and become nonexempt, are the most likely to
have their pay status changed. Type 1 workers (who, at the time, made
up more than 60 percent of the affected workers) were assumed to not
work overtime, and employers thus have little incentive to convert them
to hourly pay. For this analysis, the Department assumed all Type 2 and
Type 3 workers were converted to hourly status to generate a realistic
upper bound of the magnitude of any possible ratcheting effect. The
Department estimated that in 2026, after three updates over 10 years,
the salary level as set in the final rule (based on weekly earnings of
full-time salaried workers in the South) could be approximately 2.5
percent higher than expected due to this effect. This figure is
significantly smaller than the estimates provided by the commenters.
Furthermore, the Department believes its estimate is an overestimate
because it assumed employers convert all Type 2 and Type 3 workers to
hourly status, which, for the reasons discussed above and in section
V.A.3.iii of the preamble, the Department believes is a highly unlikely
outcome. The Department did not replicate this analysis for the salary
level increase in the 2019 final rule, because the economic effects of
the COVID-19 pandemic make it difficult to compare periods before and
after the effective date of the 2019 final rule and isolate the effect
of the rule.
10. Projections
The Department estimated that in Year 1, 4.3 million EAP workers
will be affected, with about 292,900 of these attributable to the
revised HCE compensation level (Table 26). In Year 10, the number of
affected EAP workers was estimated to equal 6.0 million with 1.0
million attributable to the updated HCE compensation level. Average
annualized costs are $802.9 million and transfers are $1.5 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 32939]]

Figure 7--10-Year Projected Number of Affected Workers
[GRAPHIC] [TIFF OMITTED] TR26AP24.173

Figure 8--10-Year Projected Costs and Transfers (Millions $2023)
[GRAPHIC] [TIFF OMITTED] TR26AP24.174

[[Page 32940]]

Table 26--Projected Costs and Transfers, Standard Salary and HCE
Compensation Levels
[GRAPHIC] [TIFF OMITTED] TR26AP24.175

[[Page 32941]]

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 2011-2023.\425\ 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.\426\
---------------------------------------------------------------------------

\425\ 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 2011, 2012, and 2013 (converted to 2012 dollars) were used to
calculate the 2012 median wage and data from 2021, 2022, and 2023
(converted to 2022 dollars) were used to calculate the 2022 median
wage.
\426\ 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 for 2012 to 2022. 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.\427\ 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.
---------------------------------------------------------------------------

\427\ 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 will become exempt in the absence of this 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 $1,128 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 2022 to 2032 within an
occupation-industry category.^{428 429} 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.
---------------------------------------------------------------------------

\428\ Bureau of Labor Statistics, Employment Projections
Program. 2022-32 National Employment Matrix. https://www.bls.gov/emp/ind-occ-matrix/matrix.xlsx.
\429\ 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.\430\
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).
---------------------------------------------------------------------------

\430\ 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-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 2023 dollars using the Congressional Budget
Office's projections for the CPI-U.\431\
---------------------------------------------------------------------------

\431\ Congressional Budget Office. 2023. The Budget and Economic
Outlook: 2023 To 2033. See https://www.cbo.gov/system/files/2023-02/58848-Outlook.pdf.
---------------------------------------------------------------------------

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
average time estimate is low because the majority of establishments
will not have newly affected workers, and while some firms may spend
more than 10 minutes to read the new rule, many firms will spend no
time. The time estimate has been increased from 5 minutes in the 2016
rulemaking. In each of these 3 years regulatory familiarization costs
are between $68.9 and $73.1 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 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 update years and then modestly
decrease between updates since earnings growth will cause some workers
to no longer be affected in those years.

[[Page 32942]]

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 $87.5 million in Year 1 to $22.6 million in Year 10 as
increased earnings over time move workers' regular rates of pay above
the minimum wage.\432\ Transfers due to overtime pay should grow
slightly over time because the number of affected workers would
increase, although transfers fall in years between updates. Transfers
to workers from employers due to the overtime pay provision would
increase from $1.4 billion in Year 1 to $2.5 billion in Year 10.
---------------------------------------------------------------------------

\432\ State minimum wages above the Federal level as of January
1, 2023 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 updating
(Table 27). Projections without updating are shown so impacts of the
initial increase and subsequent increases can be disaggregated. With
triennial updating, the number of affected EAP workers would increase
from 4.3 million to 6.0 million over 10 years. Conversely, in the
absence of updating, the number of affected EAP workers is projected to
decline from 4.3 million in Year 1 to 2.6 million in Year 10. As shown
in Figure 9, the number of affected workers decreases from year to year
between 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
updating because, in the absence of 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 updating.
Average annualized direct costs will be $802.9 million with updating
and $615.6 million without updating. Transfers are also a function of
the number of affected workers and hence are lower without updating.
Average annualized transfers with a 7 percent real discount rate will
be $1.5 billion with updating and $990 million without updating. Table
27 shows aggregated costs and transfers over the 10-year horizon.

Figure 9--10-Year Projected Number of Affected Workers, With and
Without Updating
[GRAPHIC] [TIFF OMITTED] TR26AP24.176

[[Page 32943]]

Table 27--Comparison of Projected Costs and Transfers With and Without
Updating
[GRAPHIC] [TIFF OMITTED] TR26AP24.177

VIII. Final Regulatory Flexibility Analysis (FRFA)

The Regulatory Flexibility Act of 1980 (RFA) as amended by the
Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA),
hereafter jointly referred to as the RFA, requires that an agency
prepare an initial regulatory flexibility analysis (IRFA) when
proposing, and a final regulatory flexibility analysis (FRFA) when
issuing, regulations that will have a significant economic impact on a
substantial number of small entities. The Department has determined
that this rulemaking is economically significant. This section (1)
provides an overview of the objectives of this 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 rule.

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

The FLSA requires covered employers to (1) pay employees who are
covered and not exempt from the Act's requirements not less than the
Federal minimum wage for all hours worked and overtime premium pay at a
rate of not less than one and one-half times the employee's regular
rate of pay for all hours worked over 40 in a workweek, and (2) make,
keep, and preserve records of the persons employed by the employer and
of the wages, hours, and other conditions and practices of employment.
The FLSA provides exemptions from the Act's minimum wage and overtime
pay provisions, including one for bona fide executive, administrative,
and professional (EAP) employees, as those terms are ``defined and
delimited'' by the Department.\433\ The Department's regulations
implementing this white-collar exemption are codified at 29 CFR part
541.
---------------------------------------------------------------------------

\433\ 29 U.S.C. 213(a)(1).
---------------------------------------------------------------------------

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

[[Page 32944]]

duties test.\434\ 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.
---------------------------------------------------------------------------

\434\ Sec. 541.601.
---------------------------------------------------------------------------

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 finalizing its proposed change to the salary level.
Specifically, the Department is adjusting the 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 year (2023) of Current Population
Survey (CPS) data at the time of drafting. Using BLS 2023 data on
percentiles of usual weekly earnings of nonhourly full-time workers,
the standard salary level will be set at $1,128 per week. Additionally,
to maintain the effectiveness of this test, the Department is
finalizing an updating mechanism that will update the earnings
thresholds to reflect current wage data on July 1, 2024 and every 3
years thereafter.
The Department's new 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 V.B, 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 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 the equivalent of the long
test salary level (using current data), the final rule will 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 will 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 the equivalent of the short test salary
level (using current data), the rule will 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 new salary
level will 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.\435\ 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.\436\ 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.\437\ Under the final rule,
duties will continue to determine the exemption status for most
salaried white-collar employees.
---------------------------------------------------------------------------

\435\ Stein Report at 19, 24; see also 81 FR 32422.
\436\ See 84 FR 51237.
\437\ See id. at 51238.
---------------------------------------------------------------------------

The Department is also adjusting the HCE total annual compensation
requirement to the annualized weekly earnings for the 85th percentile
of full-time salaried workers nationally ($151,164 using 2023 data).
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,\438\ the Department's new HCE threshold will ensure it
continues to serve its intended function, because the HCE total annual
compensation level will be high enough to exclude all but those
employees at the very top of the economic ladder.
---------------------------------------------------------------------------

\438\ See 69 FR 22169 (Table 3).
---------------------------------------------------------------------------

B. Response to Comment Filed by the Chief Counsel for Advocacy of the
Small Business Administration

SBA Advocacy expressed similar concerns as those expressed by other
small business commenters, based upon its meetings, roundtables, and
other discussions regarding the NPRM. SBA Advocacy stated that it was
concerned that the IRFA underestimated the compliance costs of the
rule, the proposed rule would add to the current difficult business
environment, the proposed rule would have significant impacts on small
nonprofits, the IRFA did not account for non-financial costs to small
entities and employees, and the IRFA did not consider less burdensome
alternatives. SBA Advocacy recommended that the Department issue a
supplemental RFA to reanalyze small entity impacts, adopt a lower
standard salary level, update the standard salary level every four
years through notice and comment rulemaking, publish a

[[Page 32945]]

small entity compliance guide, provide more time for compliance, and
add provisions to help small nonprofits comply. SBA Advocacy's comments
and the Department's response to those comments are discussed in detail
below.
SBA Advocacy reported that participants at its roundtables
estimated first year costs would be much higher than the estimates in
the IRFA, from $20,000 to over $200,000 in compliance costs per small
entity. SBA Advocacy asserted that small businesses may have to hire
outside staff to interpret and implement the rule and face high
administrative and operational costs to schedule and track employee
hours to minimize overtime costs. SBA Advocacy also stated that
participants at their roundtables reported much higher payroll costs
than the estimates provided by the Department in the IRFA. Advocacy
further stated that the IRFA failed to estimate compliance costs by
small entity size and revenue by presenting average impacts by
industry.
The assumptions small businesses used to estimate first-year
compliance costs ranging from $20,000 to $200,000 per entity were not
described. However, the Department clearly outlined its methodology and
assumptions used to estimate regulatory familiarization, adjustment,
and management costs that it expects businesses, including small
businesses, might incur. The Department disagrees that it
underestimated small entity costs in the IRFA. First, this rulemaking
is narrow in scope as it only makes changes relating to earnings
thresholds in the part 541 regulations. The Department published final
rules changing the salary thresholds in 2016 and 2019. The Department
therefore expects that most businesses will not require significant
time to become familiar with these regulations, or that they will
require significant time from outside consultants. Furthermore, the
Department expects that small entities will rely upon compliance
assistance materials provided by the Department, including the small
entity compliance guide that will be published, or industry
associations to become familiar with the final rule.
Second, the Department estimates businesses will require an average
of 75 minutes per employee to choose how to make adjustments for
affected employees. The Department expects that employers will most
likely need to spend little to no time making adjustments for many
affected workers, such as the almost 70 percent of the employees who do
not work overtime (Type 1 employees) and those whose salaries are well
below the new standard salary level or only occasionally work overtime.
If, for example, decisions can be quickly made for half of a business'
affected employees, then that leaves two hours or more per employee for
employers to consider how to respond with regard to employees requiring
more consideration.
Third, the Department believes that most, if not all, entities have
at least some nonexempt employees and, therefore, already have policies
and systems in place for monitoring and recording their hours. The
Department believes that applying those same policies and systems to
the workers whose exemption status changes will, on average, not
require more than 10 minutes per week per worker who works overtime in
managerial time cost, as employers will rely on policies such as a
policy against working overtime without express approval or a standard
weekly schedule of assigned hours. The Department notes that nearly 70
percent of affected employees do not work overtime, and another 17
percent who do work overtime average about an hour of overtime per
week; less than 15 percent of currently exempt employees average 10 or
more hours of overtime per week. The Department therefore disagrees
with SBA Advocacy that small entities will ``face vast administrative
and operational costs to schedule and track employee hours to minimize
overtime costs.'' Consistent with the approach taken in calculating
managerial costs in the 2019 rule,\439\ the Department believes that an
average of 10 additional minutes per week managing the hours of each
newly exempt worker who works overtime is appropriate.
---------------------------------------------------------------------------

\439\ See 84 FR 51267.
---------------------------------------------------------------------------

SBA Advocacy bases its claim that the Department underestimated
payroll costs on reports from ``[r]oundtable participants'' of ``much
higher payroll costs,'' pointing to four businesses--``an Arkansas
restaurant with four locations'' and three ``small amusement
businesses''--which claimed they would need to increase manager
salaries from $57,000 to $250,000 to comply with the rule. SBA Advocacy
also provided hypothetical scenarios of potential salary increases that
restaurant employers with currently exempt employees would need to
incur to comply with the proposed rule based on various assumptions. As
discussed in section VII.C.4.iii.c, these anecdotal reports and
hypothetical examples do not have any information on the actual amount
of overtime work being performed by employees who could become newly
nonexempt under the new salary level. The Department expects that
businesses that would be faced with large increases in payroll costs if
they were to increase salaries to the new threshold would instead find
other responses more economically feasible, such as limiting the number
of overtime hours worked by nonexempt workers.
Moreover, as explained above, the majority of affected workers who
work no overtime or minimal overtime will likely receive little
additional pay as a result of the rule. While some employers might have
to pay the overtime premium, when combined with the 85 percent of
affected employees who will receive little or no overtime pay premium
because they work little or no overtime, the average pay raise over all
affected employees and their employers will be much smaller than the
examples presented in SBA Advocacy's comment.
SBA Advocacy stated that small firms have expressed the sentiment
that they would have to fire and not promote employees and limit hours
worked as a result of the rule, after recent inflation, supply chain
disruptions, shutdowns and tight labor markets that followed the COVID-
19 pandemic. The Department acknowledges that the economic climate has
been difficult to navigate since the start of 2020. However, most
indications are that the economy has been returning to long run growth
patterns with subsiding inflation. For example, a report by Van
Nostrand and Sinclair (2023) \440\ from the U.S. Department of the
Treasury indicates that the United States has seen a strong GDP
recovery and was on track during 2023 to recover to levels predicted
before the pandemic. Similarly, reflecting improvements in inflation
and personal incomes, the Survey of Consumers from the University of
Michigan reported that consumer sentiment in January 2024 grew by 13
percent and reached its highest level since July 2021.\441\ To the
extent that labor markets remain tight, that might be a reflection of
significant, potentially long-run changes in factors such as long run
labor force participation rates.\442\ Regardless,

[[Page 32946]]

workers affected by this rule compose a relatively small part of the
overall labor market and the increase in wages should be relatively
small (see e.g., estimated transfers per worker, Table 23). While small
businesses may be more affected by labor market turmoil, the overall
size of the impact of this rule on the economy would indicate that it
is unlikely that the rule will have a significant impact on this market
turmoil.
---------------------------------------------------------------------------

\440\ Van Nostrand and Sinclair (2023). The U.S. Economy in
Global Context. U.S. Department of the Treasury. https://home.treasury.gov/news/featured-stories/the-us-economy-in-global-context.
\441\ University of Michigan (2024). Surveys of Consumers.
http://www.sca.isr.umich.edu/.
\442\ Bognar et al. (2023) What Does Everything Besides the
Unemployment Rate Tell Us About Labor Market Tightness?. Federal
Reserve Bank of Chicago. https://www.chicagofed.org/publications/chicago-fed-letter/2023/491. Hornstein and Kudlyak (2022). The
Pandemic's Impact on Unemployment and Labor Force Participation
Trends. Federal Reserve of Richmond Economic https://www.richmondfed.org/publications/research/economic_brief/2022/eb_22-12.
---------------------------------------------------------------------------

SBA Advocacy also stated that it believes that the Department
underestimated the impact of the proposed rule on small nonprofit
organizations, citing examples of small nonprofits that estimate costs
above the one to three percent of revenue threshold, a measure for
determining the economic impact on small entities from SBA Advocacy's
RFA compliance guide. The Department disagrees that it underestimated
the impact of this rule on small nonprofits. First, many nonprofits are
non-covered enterprises because when determining enterprise coverage,
only revenue derived from business operations, not charitable
activities, is included. However, as discussed in section VII.B.3, the
Department nonetheless included workers employed by enterprises that do
not meet the enterprise coverage requirements in its estimate of
workers subject to the FLSA, since 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. \443\ Second, for the
reasons stated above, the Department believes that expected costs and
payroll impacts of the rule cited by SBA Advocacy and other commenters
are overestimates, and that the Department's estimates are more
accurate reflections of costs and impacts. The Department finds that
even if all employees at a small entity, whether for-profit or
nonprofit, are exempt--an unlikely scenario--then cost and increased
payroll combined comprise about one percent of payroll per affected
small entity, and therefore an even smaller percentage of revenues. See
Table 32. SBA Advocacy cited concerns about the rule's effect on
seasonal businesses raised by a representative from America Outdoors
Association, which asserted that many affected employees in seasonal
recreational businesses work nontraditional work schedules that would
make it difficult to reclassify them as hourly workers, as well as a
concern raised by a representative of the Independent Community Bankers
Association of America that the rule could cause its members to reduce
services in ``rural or less profitable areas.'' The Department
reiterates that employers do not need to reclassify nonexempt workers
as hourly employees; they merely need to pay an overtime premium for
hours worked over 40 in a workweek. While there will be affected
workers in the finance sector, the Department believes that costs and
transfers for small entities in the finance sector will be manageable
as a share of payroll and of total revenue.\444\
---------------------------------------------------------------------------

\443\ 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
nonprofits, because revenue from charitable activities is not
included when determining enterprise coverage. See section VII.B.3.
\444\ See Table 32.
---------------------------------------------------------------------------

SBA Advocacy further stated that the IRFA ``does not consider the
non-financial consequences to reclassify workers, such as the effect on
worker flexibility, worker morale, and loss of benefits and career
advancement.'' The Department addresses these and other possible
impacts that cannot be quantified in sections V.B.4.v and VII.C.3.v. In
addition, the Department believes that while individual experiences
vary, the rule will benefit employees in a variety of ways (e.g.,
through increased earnings and an increase in personal time for some
affected workers).
Exempt workers may enjoy more scheduling flexibility because their
hours are less likely to be monitored than nonexempt workers. If so,
the final rule could impose costs on newly nonexempt, overtime-eligible
workers by, for example, limiting their ability to adjust their
schedules to meet personal and family obligations. However, employers
can continue to offer flexible schedules and require workers to monitor
their own hours and to follow the employers' timekeeping rules.
Additionally, some exempt workers already monitor their hours for
billing purposes. For these reasons, and because there is little data
or literature on these costs, the Department did not quantify potential
costs regarding scheduling flexibility. Further, a study by Lonnie
Golden \445\ using data from the General Social Survey (GSS) found that
``[i]n general, salaried workers at the lower (less than $50,000)
income levels don't have noticeably greater levels of work flexibility
that they would `lose' if they became more like their hourly
counterparts.''
---------------------------------------------------------------------------

\445\ Golden, L. (2014). Flexibility and Overtime Among Hourly
and Salaried Workers. Economic Policy Institute. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2597174.
---------------------------------------------------------------------------

Some of the workers who become nonexempt as a result of the final
rule and whose pay is changed by their employer from salaried to hourly
status may have preferred to remain salaried. As noted above in section
VII.C.3.v, research has shown that salaried workers are more likely
than hourly workers to receive benefits such as paid vacation time and
health insurance,\446\ and are more satisfied with their benefits.\447\
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.\448\ 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.
---------------------------------------------------------------------------

\446\ 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.
\447\ Balkin, D.B., & Griffeth, R.W. (1993). The Determinants of
Employee Benefits Satisfaction. Journal of Business and Psychology,
7(3), 323-339.
\448\ Lambert, S.J., & Henly, J.R. (2009). Scheduling in Hourly
Jobs: Promising Practices for the Twenty-First Century Economy. The
Mobility Agenda. Lambert, S.J. (2007). Making a Difference for
Hourly Employees. In A. Booth, & A.C. Crouter, Work-Life Policies
that Make a Real Difference for Individuals, Families, and
Communities. Washington, DC: Urban Institute Press.
---------------------------------------------------------------------------

If workers are reclassified as hourly, and hourly workers have
fewer benefits than salaried workers, reclassification could reduce
workers' benefits. But the Department notes that 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 base wage for any overtime hours each week. Similarly, employers
may continue to provide these workers with the same level of benefits
as previously, whether paid on an hourly or salary basis. While
reducing benefits may be one way for employers to offset payroll
increases associated with this rule, as shown below, the Department
estimates that costs and payroll increases for small, affected firms
are less than 0.9 percent of payroll and less than 0.2 percent of
estimated revenues. Therefore, the Department does anticipate that it
will be necessarily for a significant number of employers to reduce
employee benefits.

[[Page 32947]]

Finally, it is unclear why career advancement will be inhibited. As
noted above, see section VII.C.3.v., nothing in this rule requires
employers to limit advancement opportunities for newly nonexempt
workers. The Department notes that if an employer believes that career
advancement opportunities such as training are sufficiently important,
it can ensure employees attend the trainings during their 40-hour
workweek or pay the overtime premium where training attendance causes
the employee to work over 40 hours in a workweek.
SBA Advocacy stated that the IRFA was incomplete ``because it d[id]
not analyze any regulatory alternatives that would minimize the impact
of the rule for small businesses, such as lower salary levels.''
However, the Department considered several regulatory alternatives in
the NPRM, describing both the alternatives it considered, which
included lower (and higher) thresholds for the standard salary level
and HCE total compensation requirement, and why it chose the earnings
thresholds it proposed.\449\ And it has considered and analyzed
multiple regulatory alternatives, including lower (and higher)
thresholds for the standard salary and HCE total compensation
requirement, in this final rule as well.\450\
---------------------------------------------------------------------------

\449\ See 88 FR 62217.
\450\ See section VII.C.8.
---------------------------------------------------------------------------

SBA Advocacy recommended that the Department issue a Supplemental
Regulatory Flexibility Analysis to be published in the Federal Register
for public comment addressing compliance costs in and after the first
year, compliance costs by different sized small entities, the current
business environment, impacts to small nonprofits, the non-financial
consequences of the rule, and the impacts of adopting alternative
salary thresholds on different sizes of small businesses. The
Department disagrees with SBA Advocacy that this rulemaking should be
delayed for this reason. The Department provided a fully robust and
transparent analysis of estimated impacts on small entities in its
IRFA, relying on largely the same methods and assumptions the
Department employed in drafting the IFRA in its 2019 rulemaking.
As the Department stated in the IRFA, it is difficult to directly
evaluate compliance cost impacts by entity size due to lack of data
concerning the distribution of affected workers by entity size. There
are fewer affected workers than there are small entities. Therefore,
many small entities will employ zero affected workers; small entities
that do employ affected workers may employ one affected worker, or have
nearly all workers affected, and anywhere in between. The number of
small entities that employ affected workers will be inversely related
to the number of affected employees per entity; if small entities only
employ one affected worker, more entities will be affected, and vice
versa.
Therefore, the Department evaluated a range of potential impacts
from lowest to highest depending on whether one or all employees are
affected. Furthermore, the Department evaluated the impact of
regulatory compliance costs plus increased wages as a percent of
payroll. Payroll is largely proportionate to the number of employees at
the firm; if one entity has 10 times as many employees as another, its
payroll is likely to be 10 times larger. Similarly, if an entity has 10
times more affected employees than another firm, then it will likely
incur 10 times more compliance cost and wage impacts. Finally, firms
hire more workers to increase production and sales, so entity revenues
will be a multiple of payroll, although that multiple might vary by
industry. If compliance costs and increased wages comprise 2 percent of
payroll, those costs will comprise less than 2 percent of revenues.
Thus, regardless of the size of the small entity, regulatory impacts
should fall within the range calculated by the Department.
The Department shows in Table 34 that with the exception of the
accommodation and the food services and drinking places industries, if
all employees at an entity are affected by the rule, compliance cost
and increased wages comprise less than 1.5 percent of payroll and
substantially less than 1 percent of revenues per affected small
entity. Although compliance costs and increased wages might comprise
3.55 percent of payroll in the food services and drinking places
industry, that is about 1.10 percent of revenues. Performing this
analysis for different sized firms should not appreciably change these
results.
SBA Advocacy also recommended adopting a lower standard salary
level that considers the significant small business impacts of the
rule. The comment proposed two alternatives: retain the current
standard salary threshold, or ``adjust[ ] the standard salary threshold
by a particular industry sector that will experience the greatest
economic costs,'' noting that the 2019 standard salary level was based
on earnings in both the lowest-wage Census region and the retail
industry. The comment also stated that small entities at SBA Advocacy's
roundtable recommended a gradual or phased increase in the standard
salary threshold.
Although SBA Advocacy disagreed with the standard salary level
selected by the Department, the salary level accounts for regions and
industries likely to be most affected by the rule. As discussed
above,\451\ the Department is setting the final rule standard salary
level using the lowest-wage Census Region, instead of a national level,
ensuring the salary level is not driven by earnings in high- or even
middle-wage regions of the country. The Department believes that using
earnings data from the lowest-wage Census Region produces a salary
level that accounts for differences across industries and regional
labor markets. The Department thus believes that the standard salary
level is appropriate for small businesses.
---------------------------------------------------------------------------

\451\ See sections V.B.4.iv, VII.C.2.
---------------------------------------------------------------------------

Consistent with the history of the part 541 regulations, the
Department also declines to create a lower salary level requirement for
employees employed at small entities, or to exclude such employees from
the salary level test. As the Department has previously noted, while
``the FLSA itself does provide special treatment for small entities
under some of its exemptions . . . the FLSA's statutory exemption for
white-collar employees in section 13(a)(1) contains no special
provision based on size of business.'' \452\ In the 86-year history of
the part 541 regulations defining the EAP exemption, the salary level
requirements have never varied according to the size or revenue of the
employer.\453\
---------------------------------------------------------------------------

\452\ See 81 FR 32526; 69 FR 22238.
\453\ See Stein Report at 5-6 (rejecting proposals to set
varying regional salary levels); see also 69 FR 22238 (stating that
implementing differing salary levels based on business size
industry-by-industry ``would present the same insurmountable
challenges'' as adopting regional or population-based salary
levels).
---------------------------------------------------------------------------

SBA Advocacy recommended that updates to the standard salary
threshold be made once every 4 years through a proposed rule with a
notice and comment process for each update, as opposed to updating the
standard salary level every three years through the proposed updating
mechanism. The comment conveyed skepticism regarding the lawfulness of
the Department's proposed updating mechanism asserting that the FLSA
requires the Department to periodically issue regulations to set the
standard salary level. The comment also expressed concern that the
updating provision would drive wage inflation for salaried workers
because employers

[[Page 32948]]

may raise the salaries of their newly nonexempt workers to keep them
exempt or move them to hourly work to comply with the rule, thereby
causing ``a self-perpetuating threshold, as the salary level of the
35th percentile would grow each iteration or three years.'' The comment
reported small businesses at Advocacy's roundtable opposed the proposed
updating mechanism ``because it creates steep and unpredictable changes
to the EAP exemption and uncertainty for employers[,]'' and asserted
that small entities have highlighted the administrative burdens of
reclassifying workers and tracking employee hours. The comment also
mentioned the concern from small construction and professional services
businesses about difficulties setting price structures on long term
federal and private contracts.
The Department disagrees with SBA Advocacy's skepticism regarding
the lawfulness of the updating mechanism. As explained in section
V.A.3.i, the Department is adopting an updating mechanism in this
rulemaking after publishing a notice of the proposed rule and providing
opportunity for stakeholders to comment in accordance with the
appropriate notice and comment requirements. The Department has
received and considered numerous comments on the proposed updating
mechanism. Future updates under the triennial updating mechanism would
simply reset the thresholds by applying current data to a standard
already established by regulation. Therefore, the Department disagrees
with the assertion that a notice and comment rulemaking must precede
each future update made through the updating mechanism even where the
methodology for setting the compensation levels and the mechanism for
updating those levels would remain unchanged.
The Department also disagrees with the concern that the updating
mechanism would result in rapid increases to the salary level solely
because of employers' actions in response to the rule. This assertion
is akin to the ones made by a number of other commenters that the
updating mechanism tied to a fixed percentile would lead to the salary
level being ratcheted upward over time due to the resulting actions of
employers. As explained in detail in sections V.A.3.iii and VII.C.9,
there is nothing to substantiate this assertion. On the contrary, the
Department's analyses shows that employers' actions in response to the
rule will not have the asserted impact on future updates. Rather, the
updating mechanism will only ensure that the salary level continues to
reflect prevailing economic conditions.
The Department also finds unpersuasive the assertion that the
updating mechanism will lead to unpredictable changes and uncertainty
for employers. Unlike irregular updates to the earnings thresholds,
which may result in drastic changes to the thresholds, regular updates
on a pre-determined interval and using an established methodology will
produce more predictable and incremental changes. Through the updating
mechanism, the Department will reset the standard salary level and
total annual compensation threshold using the most recent, publicly
available, BLS data on earnings for salaried workers. Therefore,
employers will be able to track where the thresholds would fall on a
quarterly basis by looking at the BLS data and can estimate the changes
in the thresholds even before the Department publishes the notice with
the adjusted thresholds in the Federal Register. The Department
believes that, compared to the irregular updates of the past, employers
will be better positioned to anticipate and prepare for future updates
under the updating mechanism.
SBA Advocacy also referenced that the Department must publish a
small entity compliance guide for this rule. Pursuant to its
obligations under section 212 of SBREFA, the Department will publish a
small entity compliance guide for this rule.
SBA Advocacy recommended the Department add provisions to help
small nonprofits comply with the rule, due to difficulties
renegotiating government grants and contracts. As explained in section
II.D, issues directly related to the public financing available for
certain employers that might be affected by this final rule are beyond
the Department's authority to address. However, the Department intends
to issue technical assistance to help employers comply with the FLSA.
Finally, SBA Advocacy recommended an extended effective date for
the rule of at least 1 year or 18 months, as small entities indicated
needing ``more time to understand and evaluate the rule, and possibly
reclassify their workforce and budget for expenditures.'' As discussed
in section IV, having considered commenter feedback in response to the
NPRM, the Department has determined that a delayed applicability date
is appropriate for the new standard salary level and the HCE total
annual compensation threshold. Specifically, the new $1,128 per week
standard salary level and $151,164 per year HCE total annual
compensation threshold will not be applicable until approximately 8
months after publication of this final rule in the Federal Register.
The Department will initially update those thresholds on July 1, 2024,
by reapplying the methodologies used to set those thresholds in the
2019 rule, resulting in an initial salary level of $844 per week and an
initial HCE total annual compensation threshold of $132,964 per year.
Those initial thresholds will remain in effect until the higher
thresholds become applicable.

C. Significant Issues Raised by Public Comments in Response to the
Initial Regulatory Flexibility Analysis

Many of the issues raised by small businesses in the public
comments received on the proposed rule are described in the preamble
and RIA above, which are incorporated herein. Nevertheless, significant
issues raised by representatives of small businesses are also addressed
here.
Most of the comments received concerning small businesses centered
on the burden that the proposed salary level would impose on small
entities. Many such commenters emphasized that rule-related costs would
detrimentally impact small businesses. See, e.g., Amusement and Music
Operators Association; Independent Women's Forum; NSBA. Some commenters
specifically asserted that the Department underestimated compliance
costs for small entities under the proposed rule. See, e.g., ABC; The
4A's. For example, NFIB contended that the rule could cost small
businesses more than large businesses because, among other reasons,
small businesses often have fewer resources (such as administrative
staff members, experienced human resources personnel, or regular access
to legal counsel). Sixteen Members of the U.S. House of Representatives
cited rule-related costs, combined with burdens facing small
businesses, in urging the Department to withdraw its proposal. A number
of small businesses specifically raised concerns about the impact of
the proposed salary level on small entities in low-wage regions and
industries. See, e.g., Nebraska Bankers Association; National
Restaurant Association. Other commenters, including the Job Creators
Network Foundation, expressed concern that the rule would adversely
impact small businesses by increasing inflation. Some small businesses,
raising these and similar concerns, urged the Department to set a
special salary level or create an exemption for small businesses. See,
e.g., Bowling Proprietors Association of America; WFCA. Opposition was
not uniform,

[[Page 32949]]

however, as some small businesses supported the proposed rule. See,
e.g. A Few Cool Hardware Stores; BA Auto Care; Well-Paid Maids.
For the reasons previously discussed in detail, the Department
believes its cost estimates are appropriate and do not provide a basis
for changing the methodology used to set the salary level or for
abandoning this rulemaking altogether. The Department does not agree
with those commenters who asserted that the proposal would be ruinous
for small businesses. As shown later in this section, Department's
upper bound estimate of the impact of this rule per small establishment
(which assumed all employees in a small firm are affected by the new
rule) shows that costs and payroll increases for small affected firms
were less than 0.9 percent of payroll and less than 0.2 percent of
estimated revenues. While the affect in some industries will be
somewhat larger, these figures reinforce that this rule will not be
unduly burdensome for small businesses. In addition, the Department
believes that most, if not all, small businesses, like larger
businesses, employ a mix of exempt and overtime-protected workers. As
such, to the extent cost concerns are tied in part to small businesses
reclassifying some employees who become nonexempt as hourly as a result
of this rule, many employers will already have policies and systems in
place for scheduling workers and monitoring overtime hours worked and
the corresponding overtime premium pay. Such established procedures,
and experience gained through fairly recent rulemakings to increase the
earnings thresholds, may help mitigate concerns related to small
businesses requiring substantial assistance from outside professionals
to comply with this final rule. Additionally, the Department intends to
publish compliance assistance materials, including a small entity
compliance guide. Industry associations also typically become familiar
with rulemakings such as this one and often provide compliance
assistance to association members. As to inflationary concerns, as
previously discussed, the Department does not expect its rule to lead
to increased inflation on a national level.
The Department recognizes that many small employers operate in low-
paying regions or industries, and the Department has historically
accounted for small employers when setting the salary level.\454\ This
final rule is no exception, as the Department is setting the salary
level using the lowest-wage Census Region. The Department declines to
adopt special exceptions or lower salary levels for small businesses.
As stated above and as the Department has emphasized in past rules,
```the FLSA's statutory exemption for white-collar employees in section
13(a)(1) contains no special provision based on size of business.' ''
\455\ In the 86-year history of the part 541 regulations defining the
EAP exemption, the Department has never adopted special salary levels
for small businesses. The Department continues to believe that
implementing differing salary levels based on business size industry-
by-industry would be inadvisable because, among other reasons, it
``would present the same insurmountable challenges'' as adopting
regional or population-based salary levels.\456\
---------------------------------------------------------------------------

\454\ See, e.g., Weiss Report at 14-15 (setting the long test
salary level for executive employees ``slightly lower than might be
indicated by the data'' in part to avoid excluding ``large numbers
of the executives of small establishments from the exemption'').
\455\ See 81 FR 32526 (quoting 69 FR 22238).
\456\ 69 FR 22238.
---------------------------------------------------------------------------

The Department received many comments in response to its proposed
mechanism to update the standard salary and HCE total annual
compensation requirements. As discussed in section V.A.3.i, some
commenters asserted that the proposed updating mechanism would violate
the RFA. Commenters, including Independent Electrical Contracts, RILA,
and Seyfarth Shaw, commented that the RFA required the Department ``to
undertake a detailed economic and cost analysis'' and that Department's
proposed updating mechanism would bypass these requirements. The RFA
requires a regulatory flexibility analysis to accompany any agency
final rule promulgated under 5 U.S.C. 553.\457\ In accordance with this
requirement, this section estimates the costs of future triennial
updates using the fixed percentile method. The RFA only requires that
such analyses accompany rulemaking, and commenters did not cite any RFA
provision that would require the Department to conduct a new regulatory
flexibility analysis before each scheduled update to the salary and
annual compensation thresholds.
---------------------------------------------------------------------------

\457\ See 5 U.S.C. 603-604.
---------------------------------------------------------------------------

Several commenters addressed the potential effects that the
proposed updating mechanism could have on small entities. Small
Business Majority expressed support for the proposed updating
mechanism, asserting that ``[s]maller, predictable increases that are
known well in advance will allow small business owners to be better
prepared for any staffing or compensation changes they need to make.''
Business for a Fair Minimum Wage--whose members include many small
business owners--commented that the proposed updating mechanism would
keep the thresholds up to date and predictable for employers. In
contrast, NFIB asserted that ``triennial updates would result in
instability in labor and administrative costs for small businesses in
perpetuity'' as small businesses would have to reconsider the
classifications given to their employees every 3 years. The 4As
similarly asserted that the updating mechanism imposes substantial
ongoing expense on small agencies noting that ``[l]ike many small
businesses, small agencies often outsource legal, payroll, and some HR
functions to outside professionals.'' ASTA expressed concern that
``small business owners with limited resources to engage outside help,
would have difficulty keeping abreast of salary level increases and
could inadvertently find themselves out of compliance.''
As previously explained, the Department believes the updating
mechanism adopted by this final rule will ensure greater certainty and
predictability for the regulated community. For all future triennial
updates, the Department will publish a notice with the revised salary
and annual compensation thresholds not fewer than 150 days before the
new thresholds are set to take effect. Moreover, businesses will be
able to estimate the changes in the thresholds by looking at BLS data
even before the Department publishes the notice with the adjusted
thresholds. The Department believes that, compared to the irregular
updates of the past, employers will be better positioned to anticipate
and prepare for future updates under the updating mechanism. As noted
in section V.A.3.ii, the alternative to Department's updating mechanism
is not a permanent fixed earnings threshold, but instead larger changes
to the threshold that would occur during irregular future updates.
Since the updating mechanism will change the thresholds regularly and
incrementally, and based on actual earnings of salaried workers, the
Department predicts that employers will be in a better position to be
able to adjust to the changes resulting from triennial updates.
The Department believes that the updating mechanism will ensure
that the earnings thresholds for the EAP exemption will remain
effective and up to date over time. The updating mechanism should
benefit employers of

[[Page 32950]]

all sizes going forward by avoiding the uncertainty and disruptiveness
of larger increases that would likely occur as a result of irregular
updates.

D. Estimate of the 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.\458\
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 entity size standards instead of the 2022 standards.\459\
---------------------------------------------------------------------------

\458\ See https://data.sba.gov/dataset/small-business-size-standards/resource/d89a5f17-ab8e-4698-9031-dfeb34d0a773.
\459\ 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.\460\
---------------------------------------------------------------------------

\460\ See https://advocacy.sba.gov/resources/the-regulatory-flexibility-act/rfa-data-resources-for-federal-agencies/ for
details.
---------------------------------------------------------------------------

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,\461\ commercial banks and savings
institutions,\462\ agriculture \463\), and public administration.\464\
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.
---------------------------------------------------------------------------

\461\ 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.
\462\ 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.
\463\ 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.
\464\ 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).\465\ Although more recent 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.\466\
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.\467\ The
estimated share of establishments that were small in 2017 was applied
to the more recent 2021 SUSB data on the number of small establishments
to determine the number of small entities.\468\
---------------------------------------------------------------------------

\465\ The SUSB defines employment as of March 12th.
\466\ 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.
\467\ 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.
\468\ Statistics of U.S. Businesses 2021, 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 2021 SUSB counts. For
governments, the Department used the number of governments reported in
the 2017 Census of Governments.\469\
---------------------------------------------------------------------------

\469\ Census of Governments 2017. Available at https://www.census.gov/programs-surveys/cog.html.
---------------------------------------------------------------------------

Table 28 presents the estimated number of establishments/
governments and small establishments/governments in the U.S.
(hereafter, referred to as ``entities'').\470\ The numbers in the
following tables are for Year 1; projected impacts are considered
later. The Department found that of the 8.2 million entities, 80
percent (6.6 million) are small by SBA standards. These small entities
employ 55.3 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 ($3.7 trillion of
$10.7 trillion).\471\
---------------------------------------------------------------------------

\470\ 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.
\471\ 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.\472\
The Department started with the 51-industry breakdown and aggregated
where necessary to obtain adequate sample sizes.
---------------------------------------------------------------------------

\472\ The Department required at least 15 affected workers
(i.e., observations) in small entities in Year 1.
---------------------------------------------------------------------------

Table 28--Number of Entities and Employees by SBA Size Standards, by
Industry and Employer Type

[[Page 32951]]

[GRAPHIC] [TIFF OMITTED] TR26AP24.178

[[Page 32952]]

[GRAPHIC] [TIFF OMITTED] TR26AP24.179

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.\473\ 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.^{474 475}
---------------------------------------------------------------------------

\473\ 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.
\474\ 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.
\475\ 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 1.6 million of
the 4.3 million affected workers (36.3 percent) (Table 29). This
composes 2.8 percent of the 55.3 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
(281,000); health care services, except hospitals (140,000); and retail
trade (125,000). The sectors with the largest percent of workers
employed by small entities who are affected include:

[[Page 32953]]

insurance (7.0 percent); membership associations and organizations (5.7
percent); and professional and technical services (5.3 percent).

Table 29--Number of Affected Workers Employed by Small Entities, by
Industry and Employer Type
[GRAPHIC] [TIFF OMITTED] TR26AP24.180

[[Page 32954]]

[GRAPHIC] [TIFF OMITTED] TR26AP24.181

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 1.6 million of the 6.6 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.\476\ The average
number

[[Page 32955]]

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 208,300
affected small entities.
---------------------------------------------------------------------------

\476\ 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 30 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 will
affect 1.6 million workers who are employed by somewhere between
208,300 and 1.6 million small entities; this comprises from 3.2 percent
to 23.9 percent of all small entities. It also means that from 5.0
million to 6.4 million small entities would incur no more than minimal
regulatory familiarization costs (i.e., 6.6 million minus 1.6 million
equals 5.0 million; 6.6 million minus 208,300 equals 6.4 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 28) (applicable to
both methods).

[[Page 32956]]

Table 30--Number of Small Affected Entities and Employees by Industry
and Employer Type
[GRAPHIC] [TIFF OMITTED] TR26AP24.182

[[Page 32957]]

[GRAPHIC] [TIFF OMITTED] TR26AP24.183

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 the most accurate characterization of the effects of the rule
on small employers.\477\ 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.
---------------------------------------------------------------------------

\477\ 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 31, along with summary data of the
impacts.\478\
---------------------------------------------------------------------------

\478\ See section VII.C.3 for a more fulsome discussion on these
costs.

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

[[Page 32958]]

Table 31--Overview of Parameters Used for Costs to Small Businesses and
the Impacts on Small Businesses
[GRAPHIC] [TIFF OMITTED] TR26AP24.184

The Department expects total direct employer costs will range from
$368.7 million to $443.6 million for affected small entities (i.e.,
those with affected employees) in the first year (an average cost of
between $282 to $1,771 per entity) (Table 32). Small entities that do
not employ affected workers will incur $274.9 million to $349.7 million
in regulatory familiarization costs (an average cost of $54.82 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 0.69 percent of
average entity payroll).

[[Page 32959]]

Table 32--Year 1 Small Establishment Direct Costs, Total and per
Establishment, by Industry and Employer Type
[GRAPHIC] [TIFF OMITTED] TR26AP24.185

[[Page 32960]]

[GRAPHIC] [TIFF OMITTED] TR26AP24.186

It is possible that the costs of the 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. Additionally, the Department notes that
the rule is narrow 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
will not be an unreasonable burden on small businesses.
Average weekly earnings for affected EAP workers in small entities
are expected to increase by about $7.06 per week per affected worker,
using the incomplete fixed-job model \479\ described in section
VII.C.4.iii.\480\ This would lead to $577.5 million in additional
annual wage payments to employees in small entities (less than 0.5
percent of aggregate affected establishment payroll; Table 33). The
largest payroll increases per establishment are expected in utilities
(up to $15,500 per entity); hospitals (up to $14,300 per entity); and
manufacturing--durable goods (up to

[[Page 32961]]

$13,000 per entity). However, average payroll increases per entity
would exceed one percent of average annual payroll in only two sectors:
food services and drinking places (2.9 percent) and accommodation (1.1
percent).
---------------------------------------------------------------------------

\479\ 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.
\480\ 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 33--Year 1 Small Establishment Payroll Increases, Total and per
Establishment, by Industry and Employer Type
[GRAPHIC] [TIFF OMITTED] TR26AP24.187

[[Page 32962]]

[GRAPHIC] [TIFF OMITTED] TR26AP24.188

Table 34 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 insurance to $57,200 in hospitals.
Combined costs and payroll increases compose more than two percent of
average annual payroll in one sector, food services and drinking places
(3.6 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.\481\ Using this approximation of annual revenues as a
benchmark, only one sector will have costs and payroll increases
amounting to greater than one percent of revenues, food services and
drinking places (1.1 percent).
---------------------------------------------------------------------------

\481\ The Department used this estimate of revenue, instead of
small business revenue reported directly from the 2017 SUSB so
revenue aligned with payrolls in 2023.

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

[[Page 32963]]

Table 34--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
[GRAPHIC] [TIFF OMITTED] TR26AP24.189

[[Page 32964]]

[GRAPHIC] [TIFF OMITTED] TR26AP24.190

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 1.6 million
affected workers in small entities in Year 1 and 2.2 million in Year
10. Table 35 reports affected workers in these 2 years only.

[[Page 32965]]

Table 35--Projected Number of Affected Workers in Small Entities, by
Industry
[GRAPHIC] [TIFF OMITTED] TR26AP24.191

Direct costs and payroll increases for small entities vary by year
but generally decrease between updates as the real value of the salary
and compensation levels decrease and the number of affected workers
consequently decreases. In updating years, costs will increase due to
newly affected workers and some regulatory familiarization costs.
Direct costs and payroll increases for small businesses will increase
in Year 10 (an automatic update year) compared to Year 1, $946 million
in Year 1 and $1.3 billion in Year 10 (Table 36 and Figure 10).

[[Page 32966]]

Table 36--Projected Direct Costs and Payroll Increases for Affected
Small Entities, by Industry, Using All Employees in Entity Affected
Method
[GRAPHIC] [TIFF OMITTED] TR26AP24.192

[[Page 32967]]

Figure 10--10-Year Projected Number of Affected Workers in Small
Entities, and Associated Costs and Payroll Increases
[GRAPHIC] [TIFF OMITTED] TR26AP24.193

E. Projected Reporting, Recordkeeping, and Other Compliance
Requirements of the 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 are exempt from others related to pay
and hours worked.\482\ Thus, although this rulemaking does not
introduce any new recordkeeping requirements, employers will 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 rule expands minimum wage and overtime
pay coverage to 4.3 million affected EAP workers, of which 1.6 million
are employed by a small entity. This will result in an increase in
employer burden and was estimated in the PRA portion (section VI) of
this rule.
---------------------------------------------------------------------------

\482\ 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).
---------------------------------------------------------------------------

F. 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 rule and why alternatives were rejected.
In this 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 2023 data,
this results in a salary level of $1,128 per week. This approach will
fully restore the salary level's screening function and, by setting the
salary level above the long test salary level, 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 the short test salary level, the new salary level
allows 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 new salary level
will 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 is not establishing multiple
salary levels based on region, industry, employer size, or any other
factor, which stakeholders have generally agreed would significantly
complicate the regulations.\483\ Instead, the Department is setting the
standard salary level using earnings data from the lowest-wage Census
Region, in part to accommodate small employers and employers in low-
wage industries.\484\
---------------------------------------------------------------------------

\483\ See 84 FR 51239; 81 FR 32411; 69 FR 22171.
\484\ See 84 FR 51238; 81 FR 32527; 69 FR 22237.
---------------------------------------------------------------------------

The Department is setting the HCE total annual compensation level
equal to the 85th percentile of earnings of full-time salaried workers
nationally ($151,164 annually based on 2023 data).

[[Page 32968]]

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 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 HCE threshold in this rule is 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.'' \485\
---------------------------------------------------------------------------

\485\ See 84 FR 51250 (internal citation omitted).
---------------------------------------------------------------------------

1. Differing Compliance and Reporting Requirements for Small Entities
This rule provides no differing compliance requirements and
reporting requirements for small entities. The Department strives to
minimize respondent recordkeeping burden by requiring no specific form
or order of records under the FLSA and its corresponding regulations.
Moreover, employers 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 a key parameter for determining 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 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
is not implementing differing compliance or reporting requirements for
small businesses.
ii. The Clarification, Consolidation, or Simplification of Compliance
and Reporting Requirements for Small Entities
This 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 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, 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.\486\
---------------------------------------------------------------------------

\486\ See 29 U.S.C. 203(s).
---------------------------------------------------------------------------

IX. Unfunded Mandates Reform Act Analysis

The Unfunded Mandates Reform Act of 1995 (UMRA),\487\ requires
agencies to prepare a written statement for 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 $200 million ($100 million in 1995 dollars adjusted for
inflation to 2023) 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. This rule contains unfunded mandates
as described below.
---------------------------------------------------------------------------

\487\ 2 U.S.C. 1501 et seq.
---------------------------------------------------------------------------

A. Authorizing Legislation

This final rule is issued pursuant to section 13(a)(1) of the FLSA,
29 U.S.C. 213(a)(1). The section exempts from the FLSA's minimum wage
and overtime pay requirements ``any employee employed in a bona fide
executive, administrative, or professional capacity (including any
employee employed in the capacity of academic administrative personnel
or teacher in elementary or secondary schools), or in the capacity of
outside salesman (as such terms are defined and delimited from time to
time by regulations of the Secretary, subject to the provisions of [the
Administrative Procedure Act] . . .).'' \488\ The requirements of the
exemption are contained in part 541 of the Department's regulations.
Section 3(e) of the FLSA \489\ 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 \490\ also
defines public agencies to include the government of a state or
political subdivision thereof, or any interstate governmental agency.
---------------------------------------------------------------------------

\488\ 29 U.S.C. 213(a)(1).
\489\ 29 U.S.C. 203(e).
\490\ 29 U.S.C. 203(x).
---------------------------------------------------------------------------

B. Costs and Benefits

For purposes of the UMRA, this rule includes a Federal mandate that
is expected to result in increased expenditures by the private sector
of more than $200 million in at least one year and result in increased
expenditures by state, local and tribal governments, in the aggregate,
of $200 million or more in at least one year. Based on the economic
impact analysis of this final rule, the Department determined that Year
1 costs for state and local governments would total $197.7 million, of
which $98.9 million are direct employer costs and $98.8

[[Page 32969]]

million are payroll increases (Table 37). In subsequent years, state
and local governments may experience payroll increases of as much as
$183.7 million (in year 10 of the rule).
The Department estimates that the final rule will result in Year 1
costs to the private sector of approximately $2.7 billion, of which
$1.3 billion are direct employer costs and $1.4 billion are payroll
increases.

Table 37--Summary of Year 1 Impacts by Type of Employer
[GRAPHIC] [TIFF OMITTED] TR26AP24.194

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.\491\
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 $68.4 billion to $136.8 billion
(using 2023 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 rule.
---------------------------------------------------------------------------

\491\ 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 final rule would be approximately $2.7 billion for private
employers and $197.7 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.\492\ First-year state
and local government costs compose 0.004 percent of state and local
government revenues (projected 2023 revenues were estimated to be $5.0
trillion).\493\ Effects of this magnitude will not result in
significant disruptions to typical state and local governments. The
$197.7 million in state and local government costs constitutes an
average of approximately $2,200 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.
---------------------------------------------------------------------------

\492\ 2020 state and local government payrolls were $1.1
trillion, inflated to 2023 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.
\493\ 2020 state and local revenues were $4.3 trillion, inflated
to 2023 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 0.034 percent of
private sector payrolls nationwide.\494\ Total private sector first-
year costs compose 0.006 percent of national private sector revenues
(revenues in 2023 are projected to be $45.3 trillion).\495\ 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.
---------------------------------------------------------------------------

\494\ Private sector payroll costs are projected to be $8.1
trillion in 2023 based on private sector payroll costs of $6.6
trillion in 2017, inflated to 2023 dollars using the GDP deflator.
2017 Economic Census of the United States.
\495\ Private sector revenues in 2017 were $37.0 trillion using
the 2017 Economic Census of the United States. This was inflated to
2023 dollars using the GDP deflator.
---------------------------------------------------------------------------

C. Summary of State, Local, and Tribal Government Input

Prior to issuing the NPRM, 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

[[Page 32970]]

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 rule.
The Department received mixed feedback on the proposed rule from
state, local, and tribal government commenters. Some state and local
government stakeholders voiced strong support for the proposed rule.
For example, the Coalition of State AGs supported the proposal, stating
that the current salary level is too low and that the proposed updating
mechanism ``is important for employers in our respective states to have
predictability in their labor costs.'' The Washington State Department
of Labor & Industries noted that it implemented a state EAP salary
level through administrative rulemaking which is currently $1,302.40
per week ($67,724.80 annually), stating that ``the State of Washington
considered many of the same factors'' as the Department to set its
salary level. Commenting on behalf of 1.4 million members who are state
and local government employees, AFSCME described the proposed salary
level as ``a modest increase that will nevertheless benefit millions of
workers.''
Other state and local government stakeholders voiced opposition to
the proposed rule. The National Association of Counties asserted that
the proposed threshold increases would have a disproportionate impact
on small and rural county governments, emphasizing that practical and
legal constraints limit the ability of county governments to raise
revenues to account for added labor costs. Similarly, Ohio Township
Association commented that ``[if] townships [do] not wish to raise
taxes or residents reject a property tax levy for such purpose, the
township will be forced to cut or eliminate services.'' See also
Pennsylvania State Association of Township Supervisors (providing
similar feedback). The Mississippi State Personnel Board asserted that
the proposed rule could jeopardize Mississippi's use of telework to
recruit and retain certain employees for the state government.
The Department received one comment from a tribal government
stakeholder--Ho-Chuck Inc., a subsidiary of the Winnebago Tribe of
Nebraska. Explaining that it operates various establishments in the
gaming and retail industries, Ho-Chuck Inc. expressed concern about the
magnitude of the Department's proposed increase to the standard salary
level and of the NPRM's proposed 60-day effective date. Ho-Chuck Inc.
requested the Department to consider a smaller increase, such as a 25
percent increase to the current $684 per week salary level (i.e., $855
per week), with ``staggered increases over a period of 3 to 5 years to
the higher amount.''
As discussed in this final rule,\496\ the Department agrees with
commenters such as the Coalition of State AGs that the updating
mechanism's triennial updates to the earnings thresholds for exemption
will provide greater certainty and predictability for the regulated
community. The Department appreciates that some employers, such as
state, local, and tribal governments, may have less flexibility than
others to account for new labor costs, as well as that employers in
low-wage industries, regions, and in non-metropolitan areas may be more
affected because they typically pay lower wages and salaries. However,
the Department believes that costs and transfers associated with this
rule will be manageable for and will not result in significant
disruptions to state, local, and tribal governments. The Department is
setting the standard salary level using earnings data from the lowest-
wage Census Region, in part to accommodate small employers and
employers in low-wage sectors and regions. As discussed earlier in this
section, the Department estimates that total first-year costs for state
and local governments comprise 0.02 percent of state and local
government payrolls and 0.004 percent of state and local government
revenues. Moreover, as discussed in this final rule,\497\ the
Department has determined, upon consideration of commenter feedback,
that a delayed applicability date is appropriate for the new standard
salary level and the HCE total annual compensation threshold.
Specifically, the new $1,128 per week standard salary level and
$151,164 per year HCE total annual compensation threshold will not be
applicable until January 1, 2025.
---------------------------------------------------------------------------

\496\ See sections V.A.3, VII.C.
\497\ See section IV.
---------------------------------------------------------------------------

D. Least Burdensome Option or Explanation Required

This final rule has described the Department's consideration of
various options throughout the preamble (see section V.B.4.iv) 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 finalized 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. This approach would also effectively place the burden of the move
from a two-test system to a one-test system on employees who
historically were nonexempt because they earned between the long and
short test salary levels but did not meet the long duties test.
Selecting a standard salary level in a one-test system inevitably
affects the impact 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 has 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 will more 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. The Department believes that the final rule reduces burden
on employers of nonexempt workers who earn between the current and
finalized standard salary level. Currently, employers must rely on the
duties test to determine the exemption status of these workers. Under
this final rule, the exemption status of these workers will be
determined based on the simpler salary level test.
The Department is also adopting a mechanism to regularly update the
standard salary level and HCE total compensation requirement for wage
growth, which will ensure that the thresholds continue to work
efficiently to help identify EAP employees. As

[[Page 32971]]

noted above, the history of the part 541 regulations shows multiple,
significant gaps during which the earnings thresholds were not updated
and their effectiveness in helping to define the EAP exemption
decreased as wages increased. Routine updates of the earnings
thresholds to reflect wage growth will bring certainty and stability to
employers and employees alike.

X. Executive Order 13132, Federalism

The Department has reviewed this 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 rule will not have tribal implications under Executive Order
13175 that would require a tribal summary impact statement. The 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 amends Title 29 CFR chapter V, as
follows:

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

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

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

0
2. Add Sec. 541.5 to read as follows:

Sec. 541.5 Severability.

The provisions of this part are separate and severable and operate
independently from one another. 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:

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. 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 amount set forth in paragraphs (a)(1) through
(3) of this section, exclusive of board, lodging or other facilities,
unless paragraph (b) or (c) of this section applies. Administrative and
professional employees may also be paid on a fee basis, as defined in
Sec. 541.605.
(1) Beginning on July 1, 2024, $844 per week (the 20th percentile
of weekly earnings of full-time nonhourly workers in the lowest-wage
Census Region and/or retail industry nationally).
(2) Beginning on January 1, 2025, $1,128 per week (the 35th
percentile of weekly earnings of full-time nonhourly workers in the
lowest-wage Census Region).
(3) As of July 1, 2027, the level calculated pursuant to Sec.
541.607(b)(1).
(b) Commonwealth of the Northern Mariana Islands, Guam, Puerto
Rico, U.S. Virgin Islands. To qualify as an exempt executive,
administrative, or professional employee under section 13(a)(1) of the
Act, an employee in the Commonwealth of the Northern Mariana Islands,
Guam, Puerto Rico, or the U.S. Virgin Islands employed by employers
other than the Federal Government must be compensated on a salary basis
at a rate of not less than $455 per week, exclusive of board, lodging
or other facilities. Administrative and professional employees may also
be paid on a fee basis, as defined in Sec. 541.605.
(c) 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 employed by employers other than the
Federal Government must be compensated on a salary basis at a rate of
not less than $380 per week, exclusive of board, lodging or other
facilities. Administrative and professional employees may also be paid
on a fee basis, as defined in Sec. 541.605.
(d) Frequency of payment. The salary level requirement may be
translated into equivalent amounts for periods longer than one week.
For example, the $1,128 per week requirement described in paragraph
(a)(2) of this section would be met if the employee is compensated
biweekly on a salary basis of not less than $2,256, semimonthly on a
salary basis of not less than $2,444, or monthly on a salary basis of
not less than $4,888. However, the shortest period of payment that will
meet this compensation requirement is one week.
(e) Alternative salary level for academic administrative employees.
In

[[Page 32972]]

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).
(f) 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).
(g) 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 revising paragraph (a), the first sentence of
paragraph (b)(1), and paragraph (b)(2) to read as follows:

Sec. 541.601 Highly compensated employees.

(a) An employee shall be exempt under section 13(a)(1) of the Act
if the employee receives total annual compensation of not less than the
amount set forth in paragraph (a)(1) through (4) of this section, 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:
(1) Beginning on July 1, 2024, $132,964 per year (the annualized
earnings amount of the 80th percentile of full-time nonhourly workers
nationally).
(2) Beginning on January 1, 2025, $151,164 per year (the annualized
earnings amount of the 85th percentile of full-time nonhourly workers
nationally).
(3) As of July 1, 2027, the total annual compensation level
calculated pursuant to Sec. 541.607(b)(2).
(4) Where the annual period covers periods during which multiple
total annual compensation levels apply, 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)(1) through (3) paid
on a salary or fee basis as set forth in Sec. Sec. 541.602 and
541.605, except that Sec. 541.602(a)(3) shall not apply to highly
compensated employees. * * *
(2) If an employee's total annual compensation does not total at
least the amount set forth in paragraph (a) of this section by the last
pay period of the 52-week period, the employer may, during the last pay
period or within one month after the end of the 52-week period, make
one final payment sufficient to achieve the required level. For
example, for a 52-week period beginning January 1, 2025, an employee
may earn $135,000 in base salary, and the employer may anticipate based
upon past sales that the employee also will earn $20,000 in
commissions. However, due to poor sales in the final quarter of the
year, the employee only earns $14,000 in commissions. In this
situation, the employer may within one month after the end of the year
make a payment of at least $2,164 to the employee. Any such final
payment made after the end of the 52-week period may count only toward
the prior year's total annual compensation and not toward the total
annual compensation in the year it was paid. If the employer fails to
make such a payment, the employee does not qualify as a highly
compensated employee, but may still qualify as exempt under subpart B,
C, or D of this part.
* * * * *

0
10. Amend Sec. 541.602 by revising the first sentence of paragraph
(a)(3) and the first sentence of paragraph (a)(3)(i) to read as
follows:

Sec. 541.602 Salary basis.

* * * * *
(a)(3) Up to ten percent of the salary amount required by Sec.
541.600(a) through (c) may be satisfied by the payment of
nondiscretionary bonuses, incentives, and commissions, that are paid
annually or more frequently. * * *
(i) If by the last pay period of the 52-week period the sum of the
employee's weekly salary plus nondiscretionary bonus, incentive, and
commission payments received is less than 52 times the weekly salary
amount required by Sec. 541.600(a) through (c), the employer may make
one final payment sufficient to achieve the required level no later
than the next pay period after the end of the year. * * *
* * * * *

0
11. 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 and additions read as follows:

Sec. 541.604 Minimum guarantee plus extras.

(a) * * * Thus, for example under the salary requirement described
in Sec. 541.600(a)(2), an exempt employee guaranteed at least $1,128
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
$1,128 each week paid on a salary basis. Similarly, the exemption is
not lost if an exempt employee who is guaranteed at least $1,128 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 under the salary requirement described
in Sec. 541.600(a)(2), an exempt employee guaranteed compensation of
at least $1,210 for any week in which the employee performs any work,
and who normally works four or five shifts each week, may be paid $350
per shift without violating the $1,128 per week salary basis
requirement. * * *

0
12. Amend Sec. 541.605 by revising paragraph (b) to read as follows:

Sec. 541.605 Fee basis.

* * * * *
(b) To determine whether the fee payment meets the minimum amount
of salary required for exemption under these regulations, the amount
paid to the employee will be tested by determining the time worked on
the job and whether the fee payment is at a rate that would amount to
at least the minimum salary per week, as required by Sec. Sec.
541.600(a) through (c) and 541.602(a), if the employee worked 40 hours.
Thus, for example under the salary requirement described in Sec.
541.600(a)(2), an artist paid $600 for a picture that took 20 hours to
complete meets the $1,128 minimum salary requirement for exemption
since earnings at this rate would yield the artist $1,200 if 40 hours
were worked.

0
13. Add Sec. 541.607 to read as follows:

[[Page 32973]]

Sec. 541.607 Regular updates to amounts of salary and compensation
required.

(a) Initial update--(1) Standard salary level. Beginning on July 1,
2024, the amount required to be paid per week to an exempt employee on
a salary or fee basis, as applicable, pursuant to Sec. 541.600(a)(1)
will be not less than $844.
(2) Highly compensated employees. Beginning on July 1, 2024, the
amount required to be paid in total annual compensation to an exempt
highly compensated employee pursuant to Sec. 541.601(a)(1) will be not
less than $132,964.
(b) Future updates--(1) Standard salary level. (i) As of July 1,
2027, 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.
(ii) The Secretary will determine the future update amounts by
applying the methodology in effect under Sec. 541.600(a) at the time
the Secretary issues the notice required by paragraph (b)(3) of this
section to current earnings data.
(2) Highly compensated employees. (i) As of July 1, 2027, and every
3 years thereafter, the amount required to be paid in total annual
compensation to an exempt highly compensated employee pursuant to Sec.
541.601(a) will be updated to reflect current earnings data.
(ii) The Secretary will determine the future update amounts by
applying the methodology used to determine the total annual
compensation amount in effect under Sec. 541.601(a) at the time the
Secretary issues the notice required by paragraph (b)(3) of this
section to current earnings data.
(3) Notice. (i) Not fewer than 150 days before each future update
of the earnings requirements under paragraphs (b)(1) and (2) of this
section, the Secretary will publish a notice in the Federal Register
stating the updated amounts based on the most recent available 4
quarters of CPS MORG data, or its successor publication, as published
by the Bureau of Labor Statistics.
(ii) No later than the effective date of the updated earnings
requirements, the Wage and Hour Division will publish on its website
the updated amounts for employees paid pursuant to this part.
(4) Delay of updates. A future update to the earnings thresholds
under this section 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 update is set to take effect, proposing changes to the
earnings threshold(s) and/or updating mechanism due to unforeseen
economic or other conditions. The Secretary must state in the notice
issued pursuant to paragraph (b)(3)(i) of this section that the
scheduled update is delayed in accordance with this paragraph (b)(4).
If the Secretary does not issue a final rule affecting the scheduled
update to the earnings thresholds by the end of the 120-day extension
period, the updated amounts published in accordance with paragraph
(b)(3) 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 updates of the
earnings requirements under this section.

Signed this 11th day of April, 2024.
Jessica Looman,
Administrator, Wage and Hour Division.
[FR Doc. 2024-08038 Filed 4-24-24; 8:45 am]
BILLING CODE 4510-27-P