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

Federal RegisterApr 23, 2004

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DEPARTMENT OF LABOR

Wage and Hour Division

29 CFR Part 541

RIN 1215-AA14

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

AGENCY:

Wage and Hour Division, Employment Standards Administration, Labor.

ACTION:

Final rule.

SUMMARY:

This document provides the text of final regulations under the Fair Labor Standards Act implementing the exemption from minimum wage and overtime pay for executive, administrative, professional, outside sales and computer employees. These exemptions are often referred to as the “white collar” exemptions. To be considered exempt, employees must meet certain minimum tests related to their primary job duties and, in most cases, must be paid on a salary basis at not less than minimum amounts as specified in pertinent sections of these regulations.

EFFECTIVE DATE:

These rules are effective on August 23, 2004.

FOR FURTHER INFORMATION CONTACT:

Richard M. Brennan, Senior Regulatory Officer, Wage and Hour Division, Employment Standards Administration, U.S. Department of Labor, Room S-3506, 200 Constitution Avenue, NW., Washington, DC 20210. Telephone: (202) 693-0745 (this is not a toll-free number). For an electronic copy of this rule, go to DOL/ESA's Web site (

http://www.dol.gov/esa

), select “

Federal Register

” under “Laws and Regulations,” and then “Final Rules.” Copies of this rule may be obtained in alternative formats (Large Print, Braille, Audio Tape or Disc), upon request, by calling (202) 693-0023 (not a toll-free number). TTY/TDD callers may dial toll-free 1-877-889-5627 to obtain information or request materials in alternative formats.

Questions of interpretation and/or enforcement of regulations issued by this agency or referenced in this notice may be directed to the nearest Wage and Hour Division District Office. Locate the nearest office by calling our toll-free help line at 1-866-4USWAGE (1-866-487-9243) between 8 a.m. and 5 p.m., in your local time zone, or log onto the Wage and Hour Division's Web site for a nationwide listing of Wage and Hour District and Area Offices at:

http://www.dol.gov/esa/contacts/whd/america2.htm.

SUPPLEMENTARY INFORMATION:

I. Summary of Major Changes and Economic Impact

The minimum wage and overtime pay requirements of the Fair Labor Standards Act (FLSA) are among the nation's most important worker protections. These protections have been severely eroded, however, because the Department of Labor has not updated the regulations defining and delimiting the exemptions for “white collar” executive, administrative and professional employees. By way of this rulemaking, the Department seeks to restore the overtime protections intended by the FLSA.

Under section 13(a)(1) of the FLSA and its implementing regulations, employees cannot be classified as exempt from the minimum wage and overtime requirements unless they are guaranteed a minimum weekly salary and perform certain required job duties. The minimum salary level was last updated in 1975, almost 30 years ago, and is only $155 per week. The job duty requirements in the regulations have not been changed since 1949—almost 55 years ago.

Revisions to both the salary tests and the duties tests are necessary to restore the overtime protections intended by the FLSA which have eroded over the decades. In addition, workplace changes over the decades and federal case law developments are not reflected in the current regulations. Under the existing regulations, an employee earning only $8,060 per year may be classified as an “executive” and denied overtime pay. By comparison, a minimum wage employee earns about $10,700 per year. The existing duties tests are so confusing, complex and outdated that often employment lawyers, and even Wage and Hour Division investigators, have difficulty determining whether employees qualify for the exemption. The existing regulations are very difficult for the average worker or small business owner to understand. The regulations discuss jobs like key punch operators, legmen, straw bosses and gang leaders that no longer exist, while providing little guidance for jobs of the 21st Century.

Confusing, complex and outdated regulations allow unscrupulous employers to avoid their overtime obligations and can serve as a trap for the unwary but well-intentioned employer. In addition, more and more, employees must resort to lengthy court battles to receive their overtime pay. In the Department's view, this situation cannot be allowed to continue. Allowing more time to pass without updating the regulations contravenes the Department's statutory duty to “define and delimit” the section 13(a)(1) exemptions “from time to time.”

Accordingly, on March 31, 2003, the Department published a Notice of Proposed Rulemaking (68 FR 15560) suggesting changes to the Part 541 regulations, including the largest increase of the salary levels in the 65-year history of the FLSA. The proposed changes to the duties tests were designed to ensure that employees could understand their rights, employers could understand their legal obligations, and the Department could vigorously enforce the law.

During a 90-day comment period, the Department received 75,280 comments from a wide variety of employees, employers, trade and professional associations, small business owners, labor unions, government entities, law firms and others. In addition, the Department's proposal prompted vigorous public policy debate in Congress and the media. The public commentary revealed significant misunderstandings regarding the scope of the “white collar” exemptions, but also provided many helpful suggestions for improving the proposed regulations.

After carefully considering all of the relevant comments, and as detailed in this preamble, the Department has made numerous changes from the

proposed

rule to the final rule, including the following:

Scope of the Exemptions

• New section 541.3(a) states that exemptions do not apply to manual laborers or other “blue collar” workers who perform work involving repetitive operations with their hands, physical skill and energy. Thus, for example, non-management production-line employees and non-management employees in maintenance, construction and similar occupations such as carpenters, electricians, mechanics, plumbers, iron workers, craftsmen, operating engineers, longshoremen, construction workers and laborers have always been, and will continue to be, entitled to overtime pay.

• New section 541.3(b) states that the exemptions do not apply to police officers, fire fighters, paramedics, emergency medical technicians and similar public safety employees who perform work such as preventing, controlling or extinguishing fires of any type; rescuing fire, crime or accident victims; preventing or detecting crimes; conducting investigations or inspections

for violations of law; performing surveillance; interviewing witnesses; interrogating and fingerprinting suspects; preparing investigative reports; and similar work.

• New section 541.4 clarifies that the FLSA provides minimum standards that may be exceeded, but cannot be waived or reduced. Employers must comply with State laws providing additional worker protections (a higher minimum wage, for example), and the Act does not preclude employers from entering into collective bargaining agreements providing wages higher than the statutory minimum, a shorter workweek than the statutory maximum, or a higher overtime premium (double time, for example).

Salary

• The final rule nearly triples the current $155 per week minimum salary level required for exemption to $455 per week—a $30 per week increase over the proposal and a $300 per week increase over the existing regulations.

• The “highly compensated” test in the final rule applies only to employees who earn at least $100,000 per year, a $35,000 increase over the proposal.

• The “highly compensated” test in the final rule applies only to employees who receive at least $455 per week on a salary basis.

• The final regulation adds a new requirement that exempt highly compensated employees also must “customarily and regularly” perform exempt duties.

Executive

• The final rule deletes the special rules for exemption applicable to “sole charge” executives.

• The final rule adds the requirement that employees who own at least a bona fide 20-percent equity interest in an enterprise are exempt only if they are “actively engaged in its management.”

• The final rule retains the “long” duties test requirement that an exempt executive must have authority to “hire or fire” other employees or must make recommendations as to the “hiring, firing, advancement, promotion or any other change of status” which are “given particular weight,” but provides a new definition of “particular weight.”

Administrative

• The final rule eliminates the proposed “position of responsibility” test for the administrative exemption.

• The final rule eliminates the proposed “high level of skill or training” standard under the administrative exemption.

• The final rule retains the existing requirement (deleted in the proposed regulations) that exempt administrative employees must exercise discretion and independent judgment.

Professional

• The final section 541.301(e)(2) states that licensed practical nurses and other similar health care employees do not qualify as exempt professionals. The final rule retains the provisions of the existing regulations regarding registered nurses.

• As intended in the proposal, the final rule does not make any changes to the educational requirements for the professional exemption. Further, the Department never intended to allow the professional exemption for any employee based on veterans' status. The final rule has been modified to avoid any such misinterpretations. The references to training in the armed forces, attending a technical school and attending a community college have been removed from final section 541.301(d).

• The final rule defines “work requiring advanced knowledge,” one of the three essential elements of the professional primary duties test, as “work which is predominantly intellectual in character, and which includes work requiring the consistent exercise of discretion and judgment.”

As a result of these changes, made in response to public commentary, the final Part 541 regulations strengthen overtime protections for millions of low-wage and middle-class workers, while reducing litigation costs for employers. Both employees and employers benefit from the final rules. Employees will be better able to understand their rights to overtime pay, and employees who know their rights are better able to complain if they are not being paid correctly. Employers will be able to more readily determine their legal obligations and comply with the law. The Department's Wage and Hour Division will be better able to vigorously enforce the law.

The economic analysis found in section VI of this preamble concludes that the final rule guarantees overtime protection for all workers earning less than the $455 per week ($23,660 annually), the new minimum salary level required for exemption. Because of the increased salary level, overtime protection will be strengthened for more than 6.7 million salaried workers who earn between the current minimum salary level of $155 per week ($8,060 annually) and the new minimum salary level of $455 per week ($23,660 annually). These 6.7 million salaried workers include:

• 1.3 million currently exempt white-collar workers who will gain overtime protection;

• 2.6 million nonexempt salaried white-collar workers who are at particular risk of being misclassified; and

• 2.8 million nonexempt workers in blue-collar occupations whose overtime protection will be strengthened because their protection, which is based on the duties tests under the current rules, will be automatic under the final rules regardless of their job duties.

The standard duties tests adopted in the final regulation are equally or more protective than the short duties tests currently applicable to workers who earn between $23,660 and $100,000 per year. The final “highly compensated” test might result in 107,000 employees who earn $100,000 or more per year losing overtime protection.

Because the rules have not been adjusted in decades, the final rule does impose additional costs on employers, including up to $375 million in additional annual payroll and $739 million in one-time implementation costs. However, updating and clarifying the rule will reduce Part 541 violations and are likely to save businesses at least an additional $252.2 million every year that could be used to create new jobs. The final rule is not likely to have a substantial impact on small businesses, state and local governments, or any other geographic or industry sector.

II. Background

The FLSA generally requires covered employers to pay employees at least the federal minimum wage for all hours worked, and overtime premium pay of time-and-one-half the regular rate of pay for all hours worked over 40 in a single workweek. However, the FLSA includes a number of exemptions from the minimum wage and overtime requirements. Section 13(a)(1) of the FLSA provides an exemption from both minimum wage and overtime pay for “any employee employed in a bona fide executive, administrative, or professional capacity * * * or in the capacity of outside salesman (as such terms are defined and delimited from time to time by regulations of the Secretary, subject to the provisions of the Administrative Procedure Act * * *).” 29 U.S.C. 213(a)(1).

Congress has never defined the terms “executive,” “administrative,” “professional,” or “outside salesman.” Although section 13(a)(1) was included in the original FLSA enacted in 1938, specific references to the exemptions in the legislative history are scant. The legislative history indicates that the

section 13(a)(1) exemptions were premised on the belief that the workers exempted typically earned salaries well above the minimum wage, and they were presumed to enjoy other compensatory privileges such as above average fringe benefits and better opportunities for advancement, setting them apart from the nonexempt workers entitled to overtime pay. Further, the type of work they performed was difficult to standardize to any time frame and could not be easily spread to other workers after 40 hours in a week, making compliance with the overtime provisions difficult and generally precluding the potential job expansion intended by the FLSA's time-and-a-half overtime premium.

See

Report of the Minimum Wage Study Commission, Volume IV, pp. 236 and 240 (June 1981).

Pursuant to Congress' specific grant of rulemaking authority, the Department of Labor has issued implementing regulations, at 29 CFR Part 541, defining the scope of the section 13(a)(1) exemptions. Because the FLSA delegates to the Secretary of Labor the power to define and delimit the specific terms of these exemptions through notice-and-comment rulemaking, the regulations so issued have the binding effect of law.

See Batterton

Francis

, 432 U.S. 416, 425 n. 9 (1977).

The existing Part 541 regulations generally require each of three tests to be met for the exemption to apply: (1) The employee must be paid a predetermined and fixed salary that is not subject to reductions because of variations in the quality or quantity of work performed (the “salary basis test”); (2) the amount of salary paid must meet minimum specified amounts (the “salary level test”); and (3) the employee's job duties must primarily involve executive, administrative or professional duties as defined by the regulations (the “duties tests”).

A number of states arguably have more stringent exemption standards than those provided by Federal law. The FLSA does not preempt any such stricter State standards. If a State or local law establishes a higher standard than the provisions of the FLSA, the higher standard applies.

See

Section 18 of the FLSA, 29 U.S.C. § 218.

The major substantive provisions of the Part 541 regulations have remained virtually unchanged for 50 years. The FLSA became law on June 25, 1938, and the first version of Part 541 was issued later that year in October. 3 FR 2518 (Oct. 20, 1938). After receiving many comments on the original regulations, the Wage and Hour Division issued revised regulations in 1940. 5 FR 4077 (Oct. 15, 1940).

See also, Roney

United States,

790 F. Supp. 23, 25 (D.D.C. 1992) (Deputy U.S. Marshal entitled to overtime pay where position requires “ ‘physical strength and stamina to perform such activities as long periods of surveillance, pursuing and restraining suspects, carrying heavy equipment’ ” and the employee “ ‘may be subject to physical attack, including the use of lethal weapons’ ”) (citation omitted).

Federal courts have found high-level police and fire officials to be exempt executive or administrative employees only if, in addition to satisfying the other pertinent requirements, such as directing the work of two or more other full time employees as required for the executive exemption, their primary duty is performing managerial tasks such as evaluating personnel performance; enforcing and imposing penalties for violations of the rules and regulations; making recommendations as to hiring, promotion, discipline or termination; coordinating and implementing training programs; maintaining company payroll and personnel records; handling community complaints, including determining whether to refer such complaints to internal affairs for further investigation; preparing budgets and controlling expenditures; ensuring operational readiness through supervision and inspection of personnel, equipment and quarters; deciding how and where to allocate personnel; managing the distribution of equipment; maintaining inventory of property and supplies; and directing operations at crime, fire or accident scenes, including deciding whether additional personnel or equipment is needed.

See, e.g., West

Anne Arundel County, Maryland,

137 F.3d 752 (4th Cir.) (EMT captains and lieutenants),

cert. denied,

525 U.S. 1048 (1998);

Smith

City of Jackson, Mississippi,

954 F.2d 296 (5th Cir. 1992) (fire chiefs);

Masters

City of Huntington,

800 F. Supp. 363 (S.D.W. Va. 1992) (fire deputy chiefs and captains);

Simmons

City of Fort Worth, Texas,

805 F. Supp. 419 (N.D. Tex. 1992) (fire deputy and district chiefs);

Keller

City of Columbus, Indiana,

778 F. Supp. 1480 (S.D. Ind. 1991) (fire captains and lieutenants). Another important fact considered in at least one case is that exempt police and fire executives generally are not dispatched to calls, but rather have discretion to determine whether and where their assistance is needed.

See, e.g., Anderson

City of Cleveland, Tennessee,

90 F. Supp.2d 906, 909 (E.D. Tenn. 2000) (police lieutenants “monitor the radio in order to keep tabs on their men and determine where their assistance is needed”).

Some police officers, fire fighters, paramedics and EMTs treated as exempt executives under the current regulations may be entitled to overtime under the final rule because of the additional requirement in the standard duties test that an exempt executive must have the authority to “hire or fire” other employees or make recommendations given particular weight on hiring, firing, advancement, promotion or other change of status.

A new section 541.4 highlights that the FLSA establishes a minimum standard that may be exceeded, but cannot be waived or reduced.

See Brooklyn Savings Bank

O'Neil,

324 U.S. 697, 706 (1945). Section 18 of the FLSA states that employers must comply “with any Federal or State law or municipal ordinance establishing a minimum wage higher than the minimum * * * or a maximum workweek lower than the maximum workweek established under the Act.” 29 U.S.C. 218. Similarly, employers, on their own initiative or in collective bargaining negotiations with a labor union, are not precluded by the FLSA from providing a wage higher than the statutory minimum, a shorter workweek than provided by the FLSA, or a higher overtime premium (double time, for example) than provided by the FLSA.

See, e.g., Barrentine

Arkansas-Best Freight System, Inc.,

450 U.S. 728, 739 (1981) (“In contrast to the Labor Management Relations Act, which was designed to minimize industrial strife and to improve working conditions by encouraging employees to promote their interests collectively, the FLSA was designed to give specific minimum protections to individual workers and to ensure that each employee covered by the Act would receive ‘[a] fair day's pay for a fair day's work’ and would be protected from ‘the evil of overwork as well as underpay.’ ”) (citation omitted);

NLRB

R & H Coal Co.,

992 F.2d 46 (4th Cir. 1993) (purpose of FLSA is to guarantee minimum level of compensation to workers, regardless of outcome of bargaining process; by contrast, purpose of National Labor Relations Act is to facilitate collective bargaining process and ensure that its outcome is enforced). Thus, the new section 541.4 states: “The Fair Labor Standards Act provides minimum standards that may be exceeded, but cannot be waived or reduced. Employers must comply, for example, with any Federal, State or municipal laws, regulations or ordinances establishing a higher minimum wage or lower maximum workweek than those established under the Act. Similarly, employers, on their own initiative or under a collective bargaining agreement with a labor union, are not precluded by the Act from providing a wage higher than the statutory minimum, a shorter workweek than the statutory maximum, or a higher overtime premium (double time, for example) than provided by the Act. While collective bargaining agreements cannot waive or reduce the Act's protections, nothing in the Act or the regulations in this part relieves employers from their contractual obligations under collective bargaining agreements.”

Subpart B, Executive Employees

Section 541.100 General Rule for Executive Employees

The Department's proposal streamlined the existing regulations by adopting a single standard duties test in proposed section 541.100. The proposed standard duties test provided that an exempt executive employee must: have a primary duty of managing the enterprise in which the employee is employed or of a customarily recognized department or subdivision thereof; customarily and regularly direct the work of two or more other employees; and have the authority to hire or fire other employees or have particular weight given to suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other

employees. This standard test, consisting of the current short test requirements plus a third objective requirement taken from the long test, was more protective than the existing “short” duties test applied to employees earning $250 or more per week ($13,000 annually).

The Department has retained this standard test for the final rule but has made minor changes to section 541.100(a)(2). Subsection 541.100(a)(2) has been modified now to read “whose primary duty is management of the enterprise in which the employee is employed or of a customarily recognized department or subdivision thereof.” This change was made in response to several commenters, such as the AFL-CIO, who felt that the change from “whose” primary duty as written in the existing regulations to “a” primary duty as written in the proposal weakened this prong of the test by allowing for more than one primary duty and not requiring that the most important duty be management. As the Department did not intend any substantive change to the concept that an employee can only have one primary duty, the final rule uses the introductory phrasing from the existing regulations.

Several commenters state that the phrases “change in status” and “particular weight” contained in both the existing regulations and proposed 541.100(a)(4) are vague and should be defined. The Department has added a definition of “particular weight” based on case law, which now appears in section 541.105, as discussed below. Although the Department has not added a definition of “change of status” to the final regulation, the Department intends that this phrase be given the same meaning as that given by the Supreme Court in defining the term “tangible employment action” for purposes of Title VII liability. In

Burlington Industries, Inc.

Ellerth,

524 U.S. 742, 761-62 (1998), the Supreme Court defined “tangible employment action” as “a significant change in employment status, such as hiring, firing, failing to promote, reassignment with significantly different responsibilities, or a decision causing a significant change in benefits.” The Department believes that this discussion provides the necessary guidance to reflect the types of employment actions a supervisor would have to make recommendations regarding, other than hiring, firing or promoting, to meet this prong of the executive test. Because the Department intends to follow the Supreme Court's disjunctive definition of “tangible employment action” in

Ellerth,

we also reject comments from the AFL-CIO and others requesting that proposed subsection 541.100(a)(4) be changed to requiring “hiring

firing

and

advancement, promotion or any other change of status.” An employee who provides guidance on any one of the specified changes in employment status may meet the section 541.100(a)(4) requirement.

The New York State Public Employees Federation suggests that the Department should provide a definition of the phrase “authority to hire or fire” which would require that a significant part of the employee's responsibility must involve either hiring or firing. The Department believes that these terms are straightforward and should be interpreted in accordance with their customary definition,

i.e.

, to engage or disengage an individual for employment. Therefore, the Department has determined that such a definition need not be incorporated into the final regulation.

Several commenters from the public sector, such as the Metropolitan Transportation Authority, the New York State Police, and the Public Sector FLSA Coalition, indicate that the requirement in the proposal that an employee have the authority to hire or fire will cause many exempt employees to lose exempt status since employees in the public sector do not have authority to make such decisions. According to the Metropolitan Transportation Authority, “the authority to hire or fire (or to have his recommendation to change an employee's employment status given strong consideration) only exists at the highest levels in public employment” because of such factors as “unionization within the state and local public sector and statutory constraints, such as civil service laws, which have been developed to protect employees in the public sector from various factors, including the political process, favoritism or for other reasons.” The Society for Human Resource Management (SHRM) similarly states that this requirement would be “particularly troublesome” for public entities governed by civil service rules that dictate the use of a board to make hiring or firing decisions. SHRM recommends that this requirement be deleted or that the Department define the term “particular weight” in the regulations. The Johnson County Government also asks for clarification of the term “particular weight.” The Department has evaluated these comments and, as noted above, has included a definition of the term “particular weight” in section 541.105. That definition clarifies that an executive does not have to possess full authority to make the ultimate decision regarding an employee's status, such as where a higher level manager or a personnel board makes the final hiring, promotion or termination decision. With this clarification, and with the clarification that this rule encompasses other tangible employment actions, we have determined that this requirement should not pose a hardship since public sector supervisory employees provide recommendations as to hiring, firing or other personnel decisions that are given “particular weight” to the extent allowed under civil service laws and thus may meet this requirement for exemption. As the National School Board Association comments, although state law may vest the school board with the exclusive authority to discharge an employee, such an action is precipitated by a department supervisor who evaluates the employee's performance and recommends the action, and the superintendent's recommendation to the board is based on the department supervisor's recommendations. In addition, such employees may also qualify for exemption as administrative or professional employees.

A number of employer groups urge the Department to eliminate proposed 541.100(a)(4) entirely. These commenters argue that this requirement will cause many employees to lose their exempt executive status because the “hire or fire” requirement is not contained in the current short test and therefore has been effectively dormant for practical purposes as a measure of exempt executive status. The Department carefully reviewed these comments and believes that this requirement may result in some currently exempt employees becoming nonexempt; however, the number is too small to estimate quantitatively. Subsection 541.100(a)(4) is an important and objective measure of executive exempt status which is simple to understand and easy to administer. As the 1940 Stein Report stated at page 12: “[i]t is difficult to see how anyone, whether high or low in the hierarchy of management, can be considered as employed in a bona fide executive capacity unless he is directly concerned either with the hiring or the firing and other change of status of the employees under his supervision, whether by direct action or by recommendation to those to whom the hiring and firing functions are delegated.” Although this new requirement may exclude a few employees from the executive exemption, the Department has determined that it will have a minimal impact on employers. Most supervisors

and managers should at least have their suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees be given particular weight. Further, employees who cannot meet the “hire or fire” requirement in section 541.100(a)(4) may nonetheless qualify for exemption as administrative or professional employees.

Section 541.101 Business Owner

Section 541.101 of the proposed rule provided that an employee “who owns at least a 20-percent equity interest in the enterprise in which the employee is employed, regardless of whether the business is a corporate or other type of organization,” is exempt as an executive employee.

The Department made two modifications to the provision in the final rule. First, we inserted the term “bona fide” before the phrase “20-percent equity interest.” Second, we added a duties requirement that the 20-percent business owner must be “actively engaged in its management.”

These changes were made to address commenter concerns that this section could be subject to abuse. For example, the McInroy & Rigby law firm argues that the exemption would be subject to “great abuse.” The firm speculates that “[s]mall business employers could grant employees an illusory ownership interest and avoid having to even pay the minimum wage to such employees. One would anticipate many sham transactions conveying illusory ownership interests if the provision is adopted.” Adding the modifier “bona fide” before the phrase “20-percent equity interest” serves to emphasize that the employee's ownership stake in the business must be genuine. The AFL-CIO argues that this section “cannot stand” because it would allow the exemption for employees who perform no management duties: “an individual may have a 20 percent interest in an independent gas station, or a small food mart. In order to break even, the business stays open through the night, and as the minority owner that person keeps the operations going during those hours. He makes no management decisions, supervises no one, and has no authority over personnel, and could make less than the minimum wage. Under the Department's proposal, this employee meets the test for the bona fide executive.” The Department agrees that such an employee should not qualify for the exemption. Thus, we have added the duties requirement that the 20-percent owner be actively engaged in management.

See

1949 Weiss Report at 42 (section is “intended to recognize the special status of an owner, or partial owner, of an enterprise

who is actively engaged in its management”)

(emphasis added).

The proposed rule contained no salary level or salary basis requirements for the business owner. The Department requested comments on whether the salary level and/or salary basis tests should be included in the provision. 65 FR 15560, 15565 (March 31, 2003). Commenters typically favor the exemption and agree with the Department that the salary requirements are not necessary, given the likelihood that an employee who owns a bona fide 20-percent equity interest in the enterprise will share in its profits. Thus, this ownership interest is an adequate substitute for the salary requirements. Additionally, several commenters, for example, the Workplace Practices Group, note that business owners at this level are able to receive compensation in other ways and have sufficient control over the business to prevent abuse. Thus, in the final rule, as in the proposal, the salary requirements do not apply to a 20-percent equity owner. However, requiring a “bona fide” ownership interest and that the 20-percent owner be actively engaged in management will prevent abuses such as that described by commenters and in

Lavian

Haghnazari

, 884 F. Supp. 670, 678 (E.D.N.Y. 1995). In

Lavian

, an uncle invested more than $70,000 in his nephew's pharmacy business in exchange for a promise of 49 percent stock ownership interest in the closely-held corporation. After working at the pharmacy for two years without compensation, and never receiving share certificates, the uncle sued. The court denied a motion to dismiss an FLSA claim, noting that the court must accept as true the uncle's allegations that his duties were “clerical, and lacking in actual supervisory and discretionary authority in relation to the enterprise.”

Id.,

at 680. The final rule ensures that employees with such limited job duties in a company would not meet the definition of “actively engaged in its management.”

Section 541.102 Management (Proposed § 541.103, “Management of the Enterprise” and Proposed § 541.102, “Sole Charge Executive”)

The proposed regulations at section 541.102 provided a modified test for the executive exemption for an employee who is in sole charge of an independent establishment or a physically separated branch establishment. Proposed section 541.103 defined the term “management of the enterprise.” For the reasons discussed below, the final rule deletes the “sole charge” provision and renumbers the remaining sections of Subpart B.

Under proposed section 541.102, an employee in sole charge of an independent or branch establishment would qualify for the executive exemption if the employee (1) is compensated on a salary basis at a rate of not less than $425 per week (or $360 per week, if employed in American Samoa by employers other than the Federal Government), exclusive of board, lodging or other facilities; (2) is the top and only person in charge of the company activities at the location where employed; and (3) has authority to make decisions regarding the day-to-day operations of the establishment and to direct the work of any other employees at the establishment or branch. Under the proposal, an “independent establishment or physically separated branch establishment” was defined as “an establishment that has a fixed location and is geographically separated from other company property.” The proposal permitted a leased department to qualify as a physically separated branch establishment when the lessee operated under a separate trade name, with its own separate employees and records, and in other respects conducted its business independent of the lessor's with regard to such matters as hiring and firing of employees, other personnel policies, advertising, purchasing, pricing, credit operations, insurance and taxes.

The final rule deletes this section in its entirety.

Commenters such as the AFL-CIO, the National Employment Law Project, the National Employment Lawyers Association and the Goldstein, Demchak, Baller, Borgen & Dardarian law firm object to this provision as allowing the exemption for employees who perform mostly nonexempt tasks (such as opening and closing up the location, ringing up cash register sales, stocking shelves, answering phones, serving customers, etc.) and few, if any, management functions. These commenters also believe that, when no other employees worked at the establishment, the provision would allow an employee to qualify for the exemption without having supervisory responsibility for any other employees. The International Association of Fire Fighters expresses strong concerns that the sole charge provision would exempt a low-ranking officer in charge of a fire station during a particular shift, even though a higher ranking officer is in charge of the overall management of the station. The Department agrees with these commenter concerns. In addition,

the Department recognizes that, although not intended, section 541.102 as proposed could be construed as allowing the exemption for fairly low-level employees with fewer management duties than those required for “highly compensated” employees in final section 541.601.

Before deciding to eliminate this section entirely, the Department considered comments of groups such as the U.S. Chamber of Commerce, the National Retail Federation, the National Association of Convenience Stores, the Fisher & Phillips law firm, the National Association of Chain Drug Stores, the FLSA Reform Coalition, the Illinois Credit Union League, the Food Marketing Institute, the National Grocers Association, the International Mass Retail Association, the League of Minnesota Cities and others that request changes to expand the “sole charge” provision. For example, these commenters suggest eliminating the salary level and salary basis requirements; including in the exemption all employees who are in charge of an establishment at any time during the day or week; allowing more than occasional visits by the sole charge executive's superior; eliminating the requirement that the independent establishment must be geographically separate from other company property; and eliminating the requirements that a leased department must operate under a separate trade name and be responsible for its own insurance, advertising, taxes, purchasing, pricing and credit operations. In the existing regulations, the “sole charge” rule is an exception from the 20-percent restriction on nonexempt work in the “long” duties test. After considering all comments, and for the reasons stated above, the Department concludes that this rule is not appropriate as a stand-alone test for the executive exemption.

Proposed section 541.103, defining the term “management of the enterprise” as used in subsection 541.100(a)(2), has been renumbered as final section 541.102. The proposed definition of “management” included the following list of activities that would generally meet this definition: “interviewing, selecting, and training of employees; setting and adjusting their rates of pay and hours of work; directing the work of employees; maintaining production or sales records for use in supervision or control; appraising employees' productivity and efficiency; handling employee complaints and grievances; disciplining employees; planning the work; determining the techniques to be used; apportioning the work among the employees; determining the type of materials, supplies, machinery or tools to be used or merchandise to be bought, stocked and sold; controlling the flow and distribution of materials or merchandise and supplies; and providing for the safety of the employees or the property.”

In response to comments, the Department has amended section 541.102 to rename the section as “management,” add language to make clear that the list is not exhaustive, and add the management functions of “planning and controlling the budget” and “monitoring or implementing legal compliance measures.”

Comments from the Fisher & Phillips law firm and the National Association of Convenience Stores ask the Department to change the phrase “management of the enterprise” to “management,” pointing out that the current regulatory section is simply entitled “management” and the name “management of the enterprise” suggests that these management duties apply to an entity broader than that required by section 541.100. Because section 541.100(a)(2) requires that the primary duty of the employee involve management of the “enterprise or of a customarily recognized department or subdivision thereof,” the Department has renamed the section “management” to avoid any confusion.

The Department also received a number of comments, including from the Fisher & Phillips law firm, the National Retail Federation, the National Association of Federal Wage Hour Consultants, the National Council of Chain Restaurants and the National Association of Chain Drug Stores, asking the Department to make clear that the list was not exhaustive and other types of functions could constitute “management” activities. The Department believes that such a change is consistent with the current interpretive guidelines which make clear the factors listed are just examples, and the final rule has been revised accordingly.

Several commenters did ask that specific functions be added to the list. The Morgan Lewis & Bockius law firm comments that the examples used in this section were too focused on supervision and suggested that this section should recognize management of processes, projects and contracts in addition to employees. The Department agrees that management activities are not limited to supervisory functions. Accordingly, the final rule adds the management functions of “planning and controlling the budget” and “monitoring or implementing legal compliance measures.” Further, the Department notes that management of processes, projects or contracts are also appropriately considered exempt administrative duties. The National Retail Federation asks that the list be “augmented to confirm that additional duties are exempt when performed by retail employees in the course of managing: such as walking the floor, interacting with customers to determine satisfaction * * *, team building, conducting inspections, evaluating efficiency, monitoring or implementing legal compliance measures, training * * *, attending management meetings, planning meetings and developing meeting materials, planning and conducting marketing activities * * *, and investigating or otherwise addressing matters regarding personnel, proficiency, productivity, staffing or management issues.” The National Council of Chain Restaurants suggests that “handling customer complaints” is just as much a management function as handling employee complaints and therefore should be added to the list of examples, along with “coaching employees in proper job performance techniques and procedures.” The Department believes that it is not appropriate to further augment the list. Although many of these suggestions are appropriate examples of “management” functions, some appear duplicative of functions already included in the section and others, such as “handling customer complaints” and “conducting inspections,” are functions that could qualify as either management or production type functions depending on the specific facts involved. A case-by-case analysis would be more appropriate to determine whether such functions meet the definition of “management.” Moreover, because the Department has added language to make clear that the list is not exhaustive, such functions could be considered management functions in appropriate circumstances. For example, a customer service representative may routinely handle customer complaints but not be acting in a management capacity. In contrast, a manager in a restaurant may be the person responsible for handling such complaints as the individual responsible for the functioning of the operation and therefore would be operating in a management capacity.

Finally, the management function listed as “appraising their productivity and efficiency” has been augmented with the phrase from the current regulations, “for the purpose of recommending promotions or other changes in their status.” The AFL-CIO argues that the elimination of this

phrase would allow the definition of management to include low-level personnel functions. As the Department did not intend to change the meaning of this phrase, this language has been added to the final rule.

Section 541.103 Department or Subdivision (Proposed § 541.104)

Proposed section 541.104 stated that the phrase “department or subdivision” is “intended to distinguish between a mere collection of employees assigned from time to time to a specific job or series of jobs and a unit with permanent status and function.” The section defined “department or subdivision” as requiring “a permanent status and a continuing function.” Proposed subsection 541.104(b) recognized that “when an enterprise has more than one establishment, the employee in charge of each establishment may be considered in charge of a recognized subdivision of the enterprise.” Proposed subsection 541.104(c) stated that “a recognized department or subdivision need not be physically within the employer's establishment and may move from place to place” and provided that the “mere fact that the employee works in more than one location does not invalidate the exemption if other factors show that the employee is actually in charge of a recognized unit.” Finally, proposed subsection 541.104(d) stated that “continuity of the same subordinate personnel is not essential to the existence of a recognized unit with a continuing function. An otherwise exempt employee will not lose the exemption merely because the employee draws and supervises workers from a pool or supervises a team of workers drawn from other recognized units, if other factors are present that indicate that the employee is in charge of a recognized unit with a continuing function.”

The only changes to proposed section 541.104 are to renumber the section as 541.103 in the final rule, and to delete the sentence in subsection (b) that “[t]he employee also may qualify for the sole charge exemption, if all of the requirements of § 541.102 are satisfied.” This sentence is no longer necessary because of the deletion of the “sole charge” exemption in proposed section 541.102. No other changes have been made.

Several commenters request that the Department expand or clarify the phrase “department or subdivision.” The Morgan Lewis & Bockius law firm asks the Department to expand the phrase “department or subdivision” to include “grouping.” The Public Sector FLSA Coalition suggests that the phrase be broadened to account for a functional unit which would provide for a more flexible or fluid organizational philosophy. The National Council of Chain Restaurants asks for confirmation of the Department's historic enforcement position that “front of the house” and “back of the house” are recognized subdivisions. The U.S. Chamber of Commerce states that the phrase “department or subdivision” is outdated and the applicable units should provide for project teams. Finally, the League of Minnesota Cities questions whether a subdivision would include supervision of a day shift.

The Department has decided not to expand the term “department or subdivision” because the phrase has not caused confusion or excessive litigation. Expanding the definition would unduly complicate this requirement and likely lead to unnecessary litigation. Indeed, the courts already have provided clarification of the phrase on a number of occasions. For example, several courts have stated that a shift can constitute a department or subdivision, which responds to the question raised by the League of Minnesota Cities.

See West

Anne Arundel County, Maryland

, 137 F.3d 752, 763 (4th Cir. 1998);

Joiner

City of Macon

, 647 F. Supp. 718, 721-22 (M.D. Ga. 1986);

Molina

Sea Land Services, Inc.

, 2 F. Supp. 2d 185, 188 (D.P.R. 1998). The Department notes that the issue identified by the National Retail Federation as to whether “front of the house” in a store constitutes a department or subdivision was answered by at least one court in the affirmative.

See Debartolo

Butera Finer Foods

, 1995 WL 516990, at *4 (N.D. Ill. 1995). Finally, the Department observes that “groupings” or “teams” may constitute a department or subdivision under the existing definition, but a case-by-case analysis is required.

See Gorman

Continental Can Co.

, 1985 WL 5208, at *6 (N.D. Ill. 1985) (department or subdivision can “include small groups of employees working on a related project within a larger department, such as a group leader of four draftsmen in the gauge section of a much larger department”). The Department believes these cases correctly define and delimit the term “department or subdivision.”

Section 541.104 Two or More Other Employees (Proposed § 541.105)

Proposed section 541.105 defined the term “two or more other employees” to mean “two full-time employees or their equivalent. One full-time and two half-time employees, for example, are equivalent to two full-time employees. Four half-time employees are also equivalent.” Proposed section 541.105(b) stated that the “supervision can be distributed among two, three or more employees, but each such employee must customarily and regularly direct the work of two or more other full-time employees or the equivalent. Thus, for example, a department with five full-time nonexempt workers may have up to two exempt supervisors if each such supervisor customarily and regularly directs the work of two of those workers.” However, under proposed subsections (c) and (d), an “employee who merely assists the manager of a particular department and supervises two or more employees only in the actual manager's absence does not meet this requirement,” and “[h]ours worked by an employee cannot be credited more than once for different executives.” Thus, “a shared responsibility for the supervision of the same two employees in the same department does not satisfy this requirement.”

Except for renumbering the section as 541.104, no other changes were made.

In its proposal, the Department invited comments on whether the supervision of “two or more employees” required for exemption should be modified to include “the customary or regular leadership, alone or in combination with others, of two or more other employees.”

See

61 FR 15565 (March 31, 2003). In response to this request, the Department received a large number of comments both in support of and against the modification. Commenters such as the U.S. Chamber of Commerce, the National Association of Manufacturers, the League of Minnesota Cities, the Financial Services Roundtable, the National Automobile Dealers Association, the State of Oklahoma, the State of Kansas Department of Administration Division of Personnel Services, the Tennessee Valley Authority, the Public Sector FLSA Coalition, and the FLSA Reform Coalition support the modified language as more applicable to the realities of the modern workforce. In contrast, other commenters believe this language would compromise the executive exemption or create confusion. For example, the National Employment Lawyers Association “disputes that there is any need for modification changing the long-established requirement that an exempt executive must supervise two or more employees” because those “who supervise fewer than two employees are, as [a] practical matter, clearly not performing exempt activity at a level that could conceivably justify their characterization as bona

fide executives.” The Contract Services Association of America states that the “word ‘leadership’ has too many connotations to be practical in the work environment.”

After full consideration of these comments, the Department has decided to retain the existing and proposed language that the employee direct the work of “two or more other employees” to qualify as an executive under the final rule. The Department agrees with the comments opposing this change, and has rejected the “leadership” modification because the present requirement provides a well established, easily applied, bright-line test for exemption, and the ambiguity attached to the term “lead,” the Department believes, could spark needless litigation. Also, an employee whose primary duty is management and who customarily and regularly leads other employees, alone or with another, may qualify for exemption under the administrative exemption.

The Department also received a number of other comments and requests for clarification on this section. The FLSA Reform Coalition asks that the Department clarify what the term “full-time” means, and requests that the clarification include a statement that the term should be defined by the employer's practices. The Department does not believe additional clarification is necessary, and stands by its current interpretation that an exempt supervisor generally must direct a total of 80 employee-hours of work each week. As the Wage and Hour Division's Field Operations Handbook (FOH) states, however, circumstances might justify lower standards. For example, firms in some industries have standard workweeks of 37

1/2

hours or 35 hours for their full-time employees. In such cases, supervision of employees working a total of 70 or 75 hours in a workweek will constitute the equivalent of two full-time employees. FOH 22c00.

Several commenters, such as the Financial Services Roundtable and the Mortgage Bankers Association of America, urge the Department to clarify the phrase “in the manager's actual absence” in subsection (c). The Department continues to believe that the phrase provides useful guidance in defining the exempt executive, and intends that this phrase be interpreted to mean that an employee who simply supervises on a short-term basis, such as during a lunch break or while a manager is on vacation, is not meeting the requirement of customarily and regularly supervising two or more employees.

Several commenters ask that the requirement of directing two or more employees be eliminated. Other commenters state that the requirement should be lowered to directing only one other employee. Yet others argue that the number of employees supervised should be raised. For example, the National Association of Federal Wage Hour Consultants states that the requirement should be five employees while the Labor Board, Inc. suggests the number should be four employees. The Department continues to believe that the current requirement of directing two or more employees is an appropriate measure of exempt status and to raise the threshold would disproportionately harm small businesses that may not have a large number of employees.

See

1940 Weiss Report at 45-46.

Several commenters question whether the requirement that an employee direct two or more other “employees” includes employees of a contractor. Several commenters also urge the Department to expand this requirement to two or more “individuals” so as to count the supervision of volunteers, contractors, and other non-employees. The Department has evaluated these comments and determined that no changes should be made. The FLSA itself defines the term “employee” as an “individual employed by an employer,” and this definition has been subject to extensive judicial interpretation.

See

29 U.S.C. § 203(e)(1). The Department also observes, however, that the administrative exemption may apply to the employee who supervises contractors, volunteers or other non-employees if the other requirements for that exemption are met.

Section 541.105 Particular Weight

Section 541.105 of the final rule contains a new definition of the phrase “particular weight” as follows:

To determine whether an employee's suggestions and recommendations are given “particular weight,” factors to be considered include, but are not limited to, whether it is part of the employee's job duties to make such suggestions and recommendations; the frequency with which such suggestions and recommendations are made or requested; and the frequency with which the employee's suggestions and recommendations are relied upon. Generally, an executive's suggestions and recommendations must pertain to employees whom the executive customarily and regularly directs. It does not include an occasional suggestion with regard to the change in status of a co-worker. An employee's suggestions and recommendations may still be deemed to have “particular weight” even if a higher level manager's recommendation has more importance and even if the employee does not have authority to make the ultimate decision as to the employee's change in status.

This definition has been added in response to comments received from groups such as the Society for Human Resource Management, Leggett & Platt, the Food Marketing Institute, the League of Minnesota Cities and the American Council of Engineering Companies, who indicate that this phrase is extremely vague and needs clarification. As one of the Department's goals is to provide clarity to the terms contained in the regulations, we have defined “particular weight” by incorporating factors relied on by the courts to define this term under the current regulations.

See, e.g., Baldwin

Trailer Inns, Inc.

, 266 F.3d 1104, 1116 (9th Cir. 2001);

Molina

Sea Land Services, Inc.

, 2 F. Supp. 2d 185, 188 (D.P.R. 1998);

Wendt

New York Life Insurance Co.

, 1998 WL 118168, at *6 (S.D.N.Y. 1998);

Passer

American Chemical Society

, 749 F. Supp. 277, 280 (D.D.C. 1990);

Wright

Zenner & Ritter, Inc.

, 1986 WL 6152, at *2 (W.D.N.Y. 1986);

Kuhlmann

American College of Cardiology

, 1974 WL 1344, at *1 (D.D.C. 1974);

Marchant

Sands Taylor & Woods Co.

, 75 F. Supp. 783, 786 (D. Mass. 1948);

Anderson

Federal Cartridge Corp.

, 62 F. Supp. 775, 781 (D. Minn. 1945).

As illustrated by these cases, factors such as the frequency of making recommendations, frequency of an employer's relying on an employee's recommendations, as well as evidence that the employee's job duties explicitly include the responsibility to make such recommendations, are important considerations in determining whether “particular weight” is given to the employee's recommendations. Thus, for example, an employee who provides few recommendations which are never followed would not meet the “hire or fire” requirement in final section 541.100(a)(4). Evidence that an employee's recommendation are given “particular weight” could include witness testimony that recommendations were made and considered; the exempt employee's job description listing responsibilities in this area; the exempt employee's performance reviews documenting the employee's activities in this area; and other documents regarding promotions, demotions or other change of status that reveal the employee's role in this area.

Section 541.106 Concurrent Duties (Proposed §§ 541.106 and 541.107)

Proposed section 541.106 entitled “Working supervisors” stated: “Employees, sometimes called ‘working foremen’ or ‘working supervisors,’ who

have some supervisory functions, such as directing the work of other employees, but also perform work unrelated or only remotely related to the supervisory activities are not exempt executives if, instead of having management as their primary duty as required in § 541.100, their primary duty consists of either the same kind of work as that performed by their subordinates; work that, although not performed by their own subordinates, consists of ordinary production or sales work; or routine, recurrent or repetitive tasks.” Proposed section 541.107 entitled “Supervisors in retail establishments” stated: “Supervisors in retail establishments often perform work such as serving customers, cooking food, stocking shelves, cleaning the establishment or other nonexempt work. Performance of such nonexempt work by a supervisor in a retail establishment does not disqualify the employee from the exemption if the requirements of § 541.100 are otherwise met. Thus, an assistant manager whose primary duty includes such activities as scheduling employees, assigning work, overseeing product quality, ordering merchandise, managing inventory, handling customer complaints, authorizing payment of bills or performing other management functions may be an exempt executive even though the assistant manager spends the majority of the time on nonexempt work.”

As the Department explained in the preamble to the proposed rule, both proposed section 541.106 and proposed section 541.107 were meant to address the difficult issue of classifying employees who have both exempt supervisory duties and nonexempt duties. The Department invited comments on whether these sections have appropriately distinguished exempt and nonexempt employees. 61 FR 15565.

Based on the comments received, the Department has decided to combine these two proposed sections into one section entitled “concurrent duties.” The Department believes that a unified section on this topic will better illustrate when an employee satisfies the requirements of the executive exemption. The final section 541.106 incorporates the general principles and examples from both proposed section 541.106 and proposed section 541.107. The final section 541.106(a) thus provides: “Concurrent performance of exempt and nonexempt work does not disqualify an employee from the executive exemption if the requirements of § 541.100 are otherwise met.” To further distinguish exempt executives from nonexempt workers, the final subsection 541.106(a) also states: “Generally, exempt executives make the decision regarding when to perform nonexempt duties and remain responsible for the success or failure of business operations under their management while performing the nonexempt work. In contrast, the nonexempt employee generally is directed by a supervisor to perform the exempt work or performs the exempt work for defined time periods. An employee whose primary duty is ordinary production work or routine, recurrent or repetitive tasks cannot qualify for exemption as an executive.” Final subsections 541.106(b) and (c) contain examples to further illustrate these general principles.

The final section provides, as in the current regulations, that an employee with a primary duty of ordinary production work is not exempt even if the employee also has some supervisory responsibilities. As explained in the preamble to the proposed rule, this situation often occurs in a factory setting where an employee who works on a production line also has some responsibility to direct the work of other production line workers. Another example is an employee whose primary duty is to work as an electrician, but who also directs the work of other employees on the job site, orders parts and materials for the job, and handles requests from the prime contractor. Nonexempt employees do not become exempt executives simply because they direct the work of other employees upon occasion or provide input on performance issues from time to time because such employees typically do not meet the other requirements of section 541.100, such as having a primary duty of management.

The Department decided to combine proposed sections 541.106 and 541.107 into one section on “concurrent duties” in response to a number of comments indicating that the proposed separate sections were duplicative and not helpful in understanding the distinction between exempt and nonexempt employees. The National Council of Chain Restaurants argues that proposed section 541.106 should be eliminated because of confusion created by having two separate sections. The Fisher & Phillips law firm and the National Association of Convenience Stores argue that proposed section 541.106 should be eliminated as no longer necessary because that section has always related to the percentage limitations on nonexempt work from the existing long test. Similar comments were received from the U.S. Chamber of Commerce. The Workplace Practices Group argues for the elimination of proposed section 541.106 and suggests that proposed section 541.107 apply to all supervisors, as both working supervisors and retail supervisors have the same or very similar responsibilities such as scheduling employees, assigning work and overseeing product quality. The County of Culpeper, Virginia, argues that proposed section 541.106 ignored the realities of small governments where department heads have to perform both exempt management duties and nonexempt work.

Some commenters, including the New Jersey Business & Industry Association, the National Retail Federation and the HR Policy Association, commend the Department for recognizing the special circumstances of retail supervisors. In contrast, the Society for Human Resource Management, Senator Orrin G. Hatch and others argue that a distinction between retail and non-retail supervisors does not exist. The American Hotel & Lodging Association, the International Franchise Association, the FLSA Reform Coalition, the National Association of Chain Drug Stores and the International Mass Retail Association argue that proposed section 541.107 should be modified to cover both retail and service establishments.

Other commenters state that the description of “working supervisors” was too broad. Such commenters argue that fast-food managers who spend the majority of their time on nonexempt work should not be exempt. The National Employment Law Project states that the proposed language would make it possible to exempt all line employees, provided they met the requirements of proposed section 541.100. The McInroy & Rigby law firm argues that proposed section 541.107 should be eliminated since there was no policy justification for assistant managers in fast-food establishments to be exempt from FLSA requirements. The Communications Workers of America similarly opposes any diminution of the existing regulatory standards for exempt executives.

The Department believes that the proposed and final regulations are consistent with current case law which makes clear that the performance of both exempt and nonexempt duties concurrently or simultaneously does not preclude an employee from qualifying for the executive exemption. Numerous courts have determined that an employee can have a primary duty of management while concurrently performing nonexempt duties.

See, e.g., Jones

Virginia Oil Co.,

2003 WL 21699882, at *4 (4th Cir. 2003) (assistant manager who spent 75 to 80 percent of

her time performing basic line-worker tasks held exempt because she “could simultaneously perform many of her management tasks”);

Murray

Stuckey's, Inc.,

939 F.2d 614, 617-20 (8th Cir. 1991) (store managers who spend 65 to 90 percent of their time on “routine non-management jobs such as pumping gas, mowing the grass, waiting on customers and stocking shelves” were exempt executives);

Donovan

Burger King Corp.,

672 F.2d 221, 226 (1st Cir. 1982) (“an employee can manage while performing other work,” and “this other work does not negate the conclusion that his primary duty is management”);

Horne

Crown Central Petroleum, Inc.,

775 F. Supp. 189, 190 (D.S.C. 1991) (convenience store manager held exempt even though she performed management duties “simultaneously with assisting the store clerks in waiting on customers”). Moreover, courts have noted that exempt executives generally remain responsible for the success or failure of business operations under their management while performing the nonexempt work.

See Jones

Virginia Oil Co.,

2003 WL 21699882, at *4 (“Jones” managerial functions were critical to the success' of the business);

Donovan

Burger King Corp.,

675 F.2d 516, 521 (2nd Cir. 1982) (the employees' managerial responsibilities were “most important or critical to the success of the restaurant”);

Horne

Crown Central Petroleum, Inc.,

775 F. Supp. at 191 (nonexempt tasks were “not nearly as crucial to the store's success as were the management functions”).

The Department continues to believe that this case law accurately reflects the appropriate test of exempt executive status and is a practical approach that can be realistically applied in the modern workforce, particularly in restaurant and retail settings. Since all of the prongs of the executive test need to be met to classify an employee as an exempt executive, the Department believes the final rule has sufficient safeguards to protect nonexempt workers.

The Department also received more specific comments on the language contained in proposed sections 541.106 and 541.107. The National Retail Federation argues that the time spent “multi-tasking” should also be considered exempt work. A comment from the Food Marketing Institute argues that it is critically important that proposed section 541.107 state unequivocally that managers shall not be subject to arbitrary percentage time limits on nonexempt work. The Department believes that sufficient language already is included in this section to make clear that, as stated in current case law, an otherwise exempt supervisory employee does not lose the exemption simply because the employee is simultaneously performing exempt and nonexempt work. The Department also believes that the final section 541.700, defining “primary duty,” states clearly that there is no strict percentage limitation on the performance of nonexempt work.

One commenter suggests that the Department include in the final rule language from the current interpretive guidelines at 541.119(c) stating that the short test for highly compensated executives cannot be applied to the trades. The final rule, however, includes even stronger language in new section 541.3, which states that none of the section 13(a)(1) exemptions apply to the skilled trades, no matter how highly compensated they are. Thus, the Department believes that no further clarification is needed.

The State of Kansas Department of Administration, Division of Personnel Services, argues that proposed section 541.107 conflicts with language under the administrative exemption regarding project leaders. The Department does not believe that there is any conflict because the executive and administrative exemptions are independently defined and applied, and whether one or both of the exemptions apply will depend on the specific job duties the employee performs.

The Information Technology Industry Council, the U.S. Chamber of Commerce and the Morgan Lewis & Bockius law firm argue that language regarding performance of production or sales work should be eliminated from proposed section 541.106, as it continues to emphasize the production versus staff dichotomy. This language has been removed from the final rule. The Department has combined and streamlined proposed sections 541.106 and 541.107, and we do not believe that this phrase was instructive in clarifying the concept of concurrent duties.

Subpart C, Administrative Employees

Section 541.200 General Rule for Administrative Employees

As in the executive exemption, the proposed regulations streamlined the current regulations by adopting a single standard duties test in proposed section 541.200. The proposed standard duties test provided that an exempt administrative employee must have “a primary duty of the performance of office or non-manual work related to the management or general business operations of the employer or the employer's customers,” and hold “a position of responsibility with the employer.”

The final rule modifies both of the proposed requirements for the administrative exemption. First, the final rule provides that an exempt administrative employee is one “whose primary duty is the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer's customers.” Second, the final rule deletes the proposed “position of responsibility” requirement and instead reinserts the current requirement that an exempt administrative employee's primary duty include “the exercise of discretion and independent judgment with respect to matters of significance.”

In addition to the “discretion and independent judgment” requirement discussed more fully below, the final rule makes two changes to the proposed primary duty test.

First,

as under the executive exemption, the AFL-CIO and other commenters state that changing from “whose” primary duty as written in the current regulations to the proposed language of “a” primary duty was a major weakening of the test because it allows for more than one primary duty. As the Department did not intend any substantive change, the final rule uses the existing language “whose primary duty.”

Second,

the final rule reinserts language from the current regulation that the work must be “

directly

” related to management or general business operations. Commenters such as the National Treasury Employees Union, the National Employment Lawyers Association, the American Federation of Television and Radio Artists, the Stoll, Stoll, Berne, Lokting & Shlachter law firm, and the Rudy, Exelrod & Zieff law firm oppose the deletion of the word “directly,” stating that an employee whose duties relate only indirectly or tangentially to administrative functions should not qualify for exemption. As the Department did not intend any substantive change by deletion of the word “directly,” we have reinserted this term to ensure that the administrative primary duty test is not interpreted as allowing the exemption to apply to employees whose primary duty is only remotely or tangentially related to exempt work. The same change has been made in other sections where the term is used.

The final rule, however, retains the proposed primary duty language that the exempt employee's work must be related to “management or general business operations,” rather than the

“management policies” language of the existing regulations. Although some commenters object to this change, other commenters, such as the FLSA Reform Coalition, the HR Policy Association, and the Fisher & Phillips law firm, approve of the proposed deletion of the word “policies” as recognizing that while management policies are one component of management, there are many other administrative functions that support managing a business. The Department agrees and has retained the proposed language in the final regulation. As explained in the 1949 Weiss Report, the administrative operations of the business include the work of employees “servicing” the business, such as, for example, “advising the management, planning, negotiating, representing the company, purchasing, promoting sales, and business research and control.” 1949 Weiss Report at 63. Much of this work, but not all, will relate directly to management policies. As the current regulations state at section 541.205(c), exempt administrative work includes not only those who participate in the formulation of management policies or in the operation of the business as a whole, but it “also includes a wide variety of persons who either carry out major assignments in conducting the operations of the business, or whose work affects business operations to a substantial degree, even though their assignments are tasks related to the operation of a particular segment of the business.” Therefore, the Department considers the primary duty test for the administrative exemption to be as protective as the existing regulations.

In addition to the primary duty test, the proposed general rule for the administrative exemption also required that an employee hold a “position of responsibility.” The proposal at section 541.202 further defined “position of responsibility” as performing “work of substantial importance” or “work requiring a high level of skill or training.” The proposal also eliminated the current requirement that an exempt administrative employee perform work “requiring the exercise of discretion and independent judgment.” The Department specifically invited comments on these changes, including whether the “discretion and independent judgment” requirement should be deleted entirely; retained as a third alternative for meeting the “position of responsibility” requirement; or retained in place of the “position of responsibility requirement,” but modified to provide better guidance on distinguishing exempt administrative employees.

The Department received numerous, widely divergent comments on these proposed changes. Commenters such as the FLSA Reform Coalition, the U.S. Chamber of Commerce, the HR Policy Association, the National Retail Federation, the Morgan, Lewis & Bockius law firm, and the National Association of Federal Wage Hour Consultants generally approve of the “position of responsibility” requirement, preferring it to the mandatory “discretion and independent judgment” requirement of the existing regulations. They support, in particular, the proposal that employees with a “high level of skill or training” can qualify as exempt administrative employees, even if they use reference manuals to provide guidance in addressing difficult or novel circumstances. For example, the Morgan, Lewis & Bockius law firm states that, “in today's regulatory climate, few employers can leave highly complex issues totally to the discretion of even high level employees.” The HR Policy Association states that this “new requirement that an employee have a ‘high level of skill or training’ distinguishes employees who are merely looking up information from those who use the information in an analytical way.”

However, even commenters who generally support the “position of responsibility” structure also express concerns about the vagueness and subjectivity of the new terms. For example, the National Association of Manufacturers (NAM) states that it “is not sure what ‘position of responsibility’ means and fears that the Department is substituting one vague term for another.” NAM also notes that, “using the term ‘skill’ in the administrative employee definition can be problematic. The term is often associated with nonexempt trade occupations—

i.e.

, people who perform work and are not exempt from the FLSA's wage and overtime rules.” NAM states that “care should be used when introducing into the white-collar exemption definitions a term that has been historically associated with nonexempt workers.” Similarly, the American Bakers Association states that the position of responsibility standard “is somewhat vague and subjective” and that it “appears to invite another generation of court litigation to clarify the meaning of its key terms.” The FLSA Reform Coalition expresses concern that the standard would be applied to the disadvantage of large companies, stating that “small fish in big ponds” might not be found exempt even if they had the same degree of responsibility as employees working for small companies. Other commenters object to the implication that some employees do not have responsibility at work. For example, the Society for Human Resource Management states that, “each and every position in an organization is one of responsibility * * *.” Similarly, the Workplace Practices Group recommends eliminating the term “position of responsibility” because a “basic tenet of modern management philosophy is empowering employees to see their position in an organization, whatever it might be, as one of responsibility. This is true whether the position held is receptionist or customer service agent.” Finally, the American Corporate Counsel Association, while approving of the abandonment of the “discretion and independent judgment” requirement, suggests that the “position of responsibility” test has “the potential to result in significant uncertainty and continued litigation. Employers often seek to foster an atmosphere and develop workplace programs emphasizing that the work of every employee involves a degree of responsibility and contributes something substantially important to the success of the enterprise. Thus, it appears to us that both ‘white collar’ and ‘blue collar’ positions may be positions of responsibility for which work of substantial importance is being performed.”

Other commenters strongly oppose the new “position of responsibility” requirement as inappropriately weakening the requirements for exemption. For example, the AFL-CIO states that neither “work of substantial importance” nor “work requiring a high level of skill or training” was an adequate substitute for the “discretion and independent judgment” test. Similarly, the Rudy, Exelrod & Zieff law firm states that the FLSA does not exempt highly skilled or trained employees, and such a regulatory change would allow employers to misclassify employees with duties related to the production of the company's goods and services. In addition, the firm argues that such a provision effectively and unreasonably broadens the professional exemption, by eliminating the advanced degree requirement. Professor David Walsh similarly comments that the proposed language is not more easily applied than the existing standard and “seems to conflate the administrative and professional exemptions.” Commenters such as the American Federation of

State, County and Municipal Employees, the Communications Workers of America, the National Treasury Employees Union, the American Federation of Television and Radio Artists, the National Employment Lawyers Association, and the Goldstein, Demchak, Baller, Borgen & Dardarian law firm express similar views, stating that the “position of responsibility” test is not an equivalent substitute for the “discretion and independent judgment requirement.” These commenters also state that all workers possess skills and training in one form or another.

Many commenters view the “discretion and independent judgment” standard of the existing regulations as vague, ambiguous and unworkable. Commenters such as the FLSA Reform Coalition, the Society for Human Resource Management, the HR Policy Association, the Fisher & Phillips law firm, the National Retail Federation, the National Association of Chain Drug Stores, and the National Council of Chain Restaurants state that the “discretion and independent judgment” requirement is the cause of confusion and unnecessary litigation. Such commenters commend the Department for eliminating “discretion and independent judgment” as a required element of the test for exemption. The Fisher & Phillips law firm, for example, states that this standard “has been an unending source of confusion, ambiguity, and dispute.”

Nevertheless, many of these same commenters support inclusion of the “discretion and independent judgment” standard as a third alternative to satisfy the “position of responsibility” test. For example, the National Association of Manufacturers suggests that the Department retain “discretion and independent judgment” as an optional independent alternative to the “position of responsibility” requirement. These commenters state that decades of court decisions and opinion letters provide guidance on its interpretation. Retaining the standard as an alternative would thus provide a level of continuity between the existing regulations and the new regulations, and avoid re-litigation of jobs already held to be exempt under the current “discretion and independent judgment” test.

Other commenters such as the AFL-CIO, the American Federation of State, County and Municipal Employees, the Communications Workers of American, the National Treasury Employees Union, the New York Public Employees Federation, the National Employment Lawyers Association, the Rudy, Exelrod & Zieff law firm and Women Employed oppose the deletion of the “discretion and independent judgment” standard as a required element for exemption. Such commenters view deletion of this test as a substantial expansion of the exemption. They cite the 1940 Stein Report and 1949 Weiss Report as stating that the “discretion and independent judgment” requirement was necessary to minimize the opportunity for employer abuse in categorizing the diverse group of employees who might be labeled as administrative. Moreover, such commenters generally view the requirement as considerably more precise than the proposed “position of responsibility” replacement, and note that the “discretion and independent judgment” concept is also used under the National Labor Relations Act. Such commenters often state that the need to address developing case law prohibiting the use of manuals by exempt employees does not necessitate the entire abandonment of the “discretion and independent judgment” standard. Finally, these commenters also state that decades of jurisprudence would be lost if the “discretion and independent judgment” requirement is eliminated. Accordingly, the commenters recommend retention of the “discretion and independent judgment” standard as an independent requirement for exemption.

The commenters' widely divergent views demonstrate the difficult task of clearly defining and delimiting the administrative exemption. The GAO Report documented the difficulty of applying the “discretion and independent judgment” standard consistently, causing uncertainty for good faith employers attempting to classify employees correctly. Even the 1949 Weiss Report noted that this standard “is not as precise and objective as some other terms in the regulations.” 1949 Weiss Report at 65. Numerous commenters concur with our observation in the proposal that this requirement has generated significant confusion and litigation. However, most commenters generally view both the “position of responsibility” and the “high level of skill or training” standards as similarly vague, ambiguous and subjective. Most of the commenters state that the “discretion and independent judgment” standard should be retained in some form, although there was sharp disagreement on whether the standard should be a mandatory requirement. Despite sharp criticism of both the current “discretion and independent judgment” requirement and the proposed “position of responsibility” standard, the comments contain very few suggestions for clear and objective alternative language.

After careful consideration of the public comments submitted, the Department agrees that the “position of responsibility” standard does little to bring clarity and certainty to the administrative exemption. In the proposal, the Department attempted to articulate a clear, simple, common sense test for exemption, but most commenters believe that we were not fully successful. Further, many commenters believe that the term “position of responsibility” greatly expanded the scope of the exemption—a result which the Department did not intend. In addition, the Department agrees with the concerns of the National Association of Manufacturers and other commenters that the “high level of skill or training” standard is problematic because it is too closely associated with nonexempt “blue collar” skilled trade occupations.

Accordingly, the final rule deletes the proposed “position of responsibility” requirement and its definition at proposed section 541.202 as “work of substantial importance” or “work requiring a high level of skill or training.” Instead, as the second requirement for the administrative exemption, the final rule requires that exempt administrative employees exercise “discretion and independent judgment with respect to matters of significance.” Thus, consistent with the current short test, the final rule contains two independent, yet related, requirements for the administrative exemption. First, the employee must have a primary duty of performing office or non-manual work “directly related to management or general business operations.” This first requirement refers to the type of work performed by the employee, and is further defined at section 541.201. Second, the employee's primary duty must include “the exercise of discretion and independent judgment with respect to matters of significance.” As discussed below, the exercise of discretion and independent judgment “involves the comparison and the evaluation of possible courses of conduct and acting or making a decision after the various possibilities have been considered.” The term “matters of significance” refers to the level of importance or consequence of the work performed. These terms are further defined at final section 541.202.

See, e.g., Bothell

Phase Metrics, Inc.,

299 F.3d 1120, 1125-26 (9th Cir. 2002) (looking to both the “types of activities” and the importance of the work).

Section 541.201 Directly Related to Management or General Business Operations

The proposed section 541.201 defined the phrase “related to the management or general business operations” as referring “to the type of work performed by the employee” and requiring that the exempt administrative employee “perform work related to assisting with the running or servicing of the business, as distinguished, for example, from working on a manufacturing production line or selling a product.” The proposal also provided examples of the types of work that generally relate to management or general business operations, including work in areas such as tax, finance, accounting, auditing, quality control, advertising, marketing, research, safety and health, personnel management, human resources, labor relations, and others. Finally, the proposal stated that an employee also may qualify for the administrative exemption if the “employee performs work related to the management or general business operations of the employer's customers,” such as employees acting as advisers and consultants to their employer's clients or customers.

The Department made two changes in the final subsection 541.201(a).

First

, for the reasons discussed above, the final rule reinserts the word “directly” throughout this section. Some commenters argue that the deletion of the word “directly” from the existing regulations would allow the exemption for an employee whose duties relate only indirectly or tangentially to administrative functions. The Department did not intend any substantive change by deletion of the word “directly” in the proposal, and thus has reinserted this term to ensure that the administrative duties test is not interpreted as allowing the exemption to apply to employees whose primary duty is only remotely or tangentially related to exempt work.

Second,

the words “retail or service establishment” have been reinserted from the current rule in the phrase: “as distinguished, for example, from working on a manufacturing production line or selling a product

in a retail or service establishment.

” This addition returns the regulatory text more closely to the current section 541.205(a): “as distinguished from ‘production’ or, in a retail or service establishment, ‘sales’ work.” Commenters state that deletion of the words “retail or service establishment” could be interpreted as denying the administrative exemption to any employee engaged in any sales, advertising, marketing or promotional activities. Because no such categorical change was intended, or is supported by current case law, the Department has restored the language from the current regulations.

See, e.g., Reich

John Alden Life Insurance Co

., 126 F.3d 1, 9-10 (1st Cir. 1997) (promoting sales in the insurance industry is exempt administrative work). The Department also notes that this phrase begins with the words “for example.” This final phrase in section 541.201(a) provides non-exclusive examples. Thus, the concern of commenters such as the Rudy, Exelrod & Zieff law firm that the reference to “working on a manufacturing production line” suggests that “working on what might be termed a ‘white collar production line’ is different from working on a manufacturing production line for purposes of the exemption” is unfounded.

The primary focus of most comments on subsection 541.201(a) dealt with the so-called ‘production versus staff’ dichotomy. The preamble to the proposal stated that the Department intended “to reduce the emphasis on the so-called “production versus staff” dichotomy in distinguishing between exempt and nonexempt workers, while retaining the concept that an exempt administrative employee must be engaged in work related to the management or general business operations of the employer or of the employer's customers.”

Many commenters, including the Society for Human Resource Management (SHRM), the FLSA Reform Coalition, the National Association of Manufacturers (NAM), the U.S. Chamber of Commerce (Chamber), the HR Policy Association, the Morgan, Lewis & Bockius law firm and the Fisher & Phillips law firm, strongly support the proposal's intended diminution of the production versus staff dichotomy, which they believe has little value in today's service-oriented economy. For example, the Chamber states that the dichotomy “does not fit in today's workplace” because the “decline in manufacturing and the rise in the service and information industries has rendered the production dichotomy an artifact of a different age.” SHRM “applauds the Department's elimination of much of the ‘production v. staff’ language” but also “recognizes that the production versus staff in some circumstances can be a helpful aid in determining whether an employee fits under the administrative exemptions and, therefore, supports the proposed language. * * * This language strikes a proper balance between retaining this concept and ensuring that it is not so strictly construed so as to deny the exemption to an employee who should be exempt.” Similarly, NAM supports the proposed rule's attempt to “reduce the emphasis on the production versus staff dichotomy.”

However, many of these commenters believe that the proposal did not go far enough, and that the final rule should strive to eliminate the dichotomy entirely. For example, the FLSA Reform Coalition states that the dichotomy should be eliminated by allowing an employee to qualify for the exemption either by performing work related to management or general business operations, or by doing any work that includes the exercise of discretion and independent judgment: “Thus, even if the employee's work could arguably be characterized as “production,” he or she would nonetheless be an exempt administrative employee if his or her job is a responsible, non-manual one that includes the exercise of ‘discretion and independent judgment.’ ” Similarly, the HR Policy Association recommends that the Department “eliminate the production dichotomy from the administrative exemption” because the confusion it causes is too great and it is difficult to apply with uniformity. The Fisher & Phillips law firm also states that the Department should “eliminate the ‘dichotomy’ altogether.”

The primary focus of these comments was the last sentence in proposed subsection (a), which states that the administrative exemption does not apply if an employee is “working on manufacturing production line or selling a product.” Numerous commenters ask for clarification about the scope and meaning of the statement. For example, the Morgan, Lewis & Bockius law firm requests clarification that not all sales work is excluded from exemption, such as advertising, marketing and promotional activities, and for confirmation that some individuals who work on a production line, such as a safety and health administrator or quality control specialist, may still be exempt. The U.S. Chamber of Commerce also states that the Department should “revisit its approach, especially with regard to treatment of employees who may be involved in some aspect of sales,” and should clarify that sales work is not inherently inconsistent with exempt work. The HR Policy Association recommends that the Department delete the “working on a manufacturing production line or selling a product” phrase, or else clarify its meaning either in the regulations or this preamble.

A large number of commenters have the opposite view about the “production versus staff” dichotomy, stating that minimizing or deleting the dichotomy would deprive the administrative exemption of its meaning. Such commenters, including the AFL-CIO, the National Treasury Employees Union, the American Federation of State, County and Municipal Employees, the Rudy, Exelrod & Zieff law firm, the National Employment Lawyers Association, the American Federation of Television and Radio Artists, the National Partnership for Women and Families and the Stoll, Stoll, Berne Lokting & Shlachter law firm, believe that the courts have found the dichotomy to be a useful and appropriate tool in analyzing workers in a broad variety of non-manufacturing contexts. They oppose any indication that the Department is minimizing the dichotomy.

For example, the AFL-CIO notes that the 1949 Weiss report explained that the phrase “directly related to management policies or general business operations” describes those activities “relating to the administrative as distinguished from the ‘production’ operations of a business.” Similarly, the 1940 Stein Report described administrative exempt employees as “those who can be described as staff rather than line employees, or functional rather than departmental heads.” The AFL-CIO quotes

Reich

New York

, 3 F.3d 581, 588 (2nd Cir. 1993),

cert. denied

, 510 U.S. 1163 (1994), stating that the dichotomy “has repeatedly proven useful to courts in a variety of non-manufacturing settings,” and cites a number of court decisions applying the dichotomy in a variety of government and service sector contexts. The National Treasury Employees Union states that the “distinction which the Department would so casually discard is a key tool to help identify the specific class of office workers that Congress intended to exempt: support staff contributing to business operations and management. It is imperative to keep this narrow focus rather than blur the distinction between support staff and line workers * * *.” The Rudy, Exelrod & Zieff law firm notes that, prior to 1940, the Department did not separately define the administrative exemption from the executive exemption, because the Department recognized that the administrative exemption “was intended to cover no more than a small subclass of ‘executive’ employees.” The firm states that the 1940 Stein Report concluded that the employees whom the administrative exemption was intended to cover had “functional rather than departmental authority,” meaning they did not “give orders to individuals.” The firm argues that nothing in the modern workplace, involving production of services instead of manufactured goods, makes it improper to continue to draw the line between employees who help to administer an employer's general business operations and those employees whose duties are related to the day-to-day production of the goods or services the employer sells.

Commenters, thus, have very different perspectives about how the Department should approach the “production versus staff” dichotomy and apply it to the modern workplace. Except as stated above, we have not adopted any of the commenters' suggestions for substantial changes to the primary duty standard in section 541.201(a). The Department believes that our proposal struck the proper balance on the “production versus staff” dichotomy. We do not believe that it is appropriate to eliminate the concept entirely from the administrative exemption, but neither do we believe that the dichotomy has ever been or should be a dispositive test for exemption. The Department believes that the dichotomy is still a relevant and useful tool in appropriate cases to identify employees who should be excluded from the exemption. As the Department recognized in the 1949 Weiss Report at 63, this exemption is intended to be limited to those employees whose duties relate “to the administrative as distinguished from the ‘production’ operations of a business.” Thus, it relates to employees whose work involves servicing the business itself—employees who “can be described as staff rather than line employees, or as functional rather than departmental heads.” 1940 Stein Report at 27. The 1940 Stein Report further described the exemption as being limited to employees who have “miscellaneous policy-making or policy-executing responsibilities” but who do not give orders to other employees. 1940 Stein Report at 4. Based on these principles, the Department provided in proposed section 541.201(a) that the administrative exemption covers only employees performing a particular type of work—work related to assisting with the running or servicing of the business. The examples the Department provided in proposed section 541.201(b) were intended to identify departments or subdivisions that generally fit this rule.

The Department's view that the “production versus staff” dichotomy has always been illustrative—but not dispositive—of exempt status is supported by federal case law. In

Bothell

Phase Metrics

, Inc., 299 F.3d 1120 (9th Cir. 2002), for example, the Ninth Circuit found the dichotomy “useful only to the extent that it helps clarify the phrase ‘work directly related to the management policies or general business operations.’ ”

Id.

at 1126 (citation omitted). The court further stated:

The other pertinent cases from our sister circuits similarly regard the administration/production dichotomy as but one piece of the larger inquiry, recognizing that a court must ‘construe the statutes and applicable regulations as a whole.’ Indeed, some cases analyze the primary duty test without referencing the § 541.205(a) dichotomy at all. This approach is sometimes appropriate because, as we have said, the dichotomy is but one analytical tool, to be used only to the extent that it clarifies the analysis. Only when work falls ‘squarely on the production side of the line,’ has the administration/production dichotomy been determinative.

Moreover, the distinction should only be employed as a tool toward answering the ultimate question, whether work is ‘directly related to management policies or general business operations,’ not as an end in itself.

Id.

at 1127 (citations omitted).

See, e.g., Piscione

Ernst & Young, L.L.P.,

171 F.3d 527, 538-39 (7th Cir. 1999) (even though the employee “produced” some reports and filings, and such work might be viewed as production work, the work was directly related to the management or general business operations);

Spinden

GS Roofing Products Co.,

94 F.3d 421, 428 (8th Cir. 1996) (employee held administratively exempt despite the fact that he “produced” certain specific outputs),

cert. denied,

520 U.S. 1120 (1997).

The final regulation is consistent with the Ninth Circuit's approach in

Phase Metrics:

the “production versus staff” dichotomy is “one analytical tool” that should be used “toward answering the ultimate question,” and is only determinative if the work “falls squarely on the production side of the line.”

As noted above, proposed section 541.201(b) provided an illustrative list of the types of functional areas or departments, including accounting, auditing, marketing, human resources and public relations, typically administrative in nature. The commenters generally found this illustrative list to be accurate and helpful. For example, the FLSA Reform Coalition states that it supported the Department's efforts to clarify the administrative exemption by “focusing on the function performed by the employee and providing examples of exempt, administrative functions.” The AFL-CIO comments that the list includes areas “which are clearly

encompassed within the servicing functions of a business, and which substantially overlap with the servicing examples set forth in current section 541.205(b).” The U.S. Chamber of Commerce also notes that the list is similar to the examples in the existing regulations and agrees that all of the areas listed in the proposed regulation “are proper illustrations of exempt administrative work.” Some commenters suggest a variety of additional areas of work that should be added to the illustrative list. However, the National Treasury Employees Union cautions against exempting workers based upon their job area or title. Other commenters similarly suggest that the Department should include fewer categories in the list, because employees doing routine work may be misperceived as exempt simply because they work in an area like marketing, human resources, or research.

In light of these comments, we have added the language, “but is not limited to,” to emphasize that the list is intended only to be illustrative. It is not intended as a complete listing of exempt areas. Nor is it intended as a listing of specific jobs; rather, it is a list of functional areas or departments that generally relate to management and general business operations of an employer or an employer's customers, although each case must be examined individually. Within such areas or departments, it is still necessary to analyze the level or nature of the work (

i.e.

, does the employee exercise discretion and independent judgment as to matters of significance) in order to assess whether the administrative exemption applies. Commenters recommend the inclusion of several areas that we think are appropriate as additional examples of areas that generally relate to management and general business operations. Therefore, we are adding computer network, internet and database administration; legal and regulatory compliance; and budgeting to the illustrative list.

Finally, proposed section 541.201(c) provided that employees who perform work related to the management or general business operations of the employer's customers, such as advisers and consultants, also may qualify for the administrative exemption. The proposed rule included language from existing sections 541.2(a)(2) and 541.205(d), and no substantive changes were intended. The commenters express few substantive concerns with this provision. A small number of commenters suggest that the regulation should provide that the employer's customer could be an individual, while commenter Karen Dulaney Smith urges the Department to insert the word ‘business’ to clarify that the exemption does not apply to “individuals, whose “business” is purely personal.” The Department has not made either change. Nothing in the existing or final regulations precludes the exemption because the customer is an individual, rather than a business, as long as the work relates to management or general business operations. As stated by commenter Smith, the exemption does not apply when the individual's ‘business’ is purely personal, but providing expert advice to a small business owner or a sole proprietor regarding management and general business operations, for example, is an administrative function. The 1949 Weiss Report stated that the administrative exemption should not be read to exclude “employees whose duties relate directly to the management policies or to the general business operations of their employers' customers. For example, many bona fide administrative employees perform important functions as advisors and consultants but are employed by a concern engaged in furnishing such services for a fee * * *. Such employees, if they meet the other requirements of the regulations, should qualify for exemption regardless of whether the management policies or general business operations to which their work is directly related are those of the employers' clients or customers, or those of their employer.” 1949 Weiss Report at 65. Weiss also noted that a consultant employed by a firm of consultants is exempt if the employee's “work consists primarily of analyzing, and recommending changes in, the business operations of his employer's client.” 1949 Weiss Report at 56. This provision is meant to place work done for a client or customer on the same footing as work done for the employer directly, regardless of whether the client is a sole proprietor or a Fortune 500 company, as long as the work relates to “management or general business operations.”

Section 541.202 Discretion and Independent Judgment (Proposed “Position of Responsibility”)

As discussed above, the Department has decided to eliminate the proposed “position of responsibility” requirement. Thus, the final rule deletes proposed section 541.202 defining “position of responsibility,” proposed section 541.203 defining “substantial importance,” and proposed section 541.204 defining “high level of skill or training.” Instead, the final rule reinserts the “discretion and independent judgment” requirement, and defines that term at final section 541.202. Some of the language in proposed sections 541.203 and 541.204 was retained from the existing regulations and also appears in the final regulations as described below. The language from proposed section 541.204 regarding the use of manuals has been moved to a new section in Subpart H, Definitions and Miscellaneous Provisions, and is discussed under that subpart.

The Department continues to believe, as most commenters confirm, that the current discretion and independent judgment standard has caused confusion and unnecessary litigation. Even in the 1949 Weiss Report, the Department recognized that the “discretion and independent judgment” standard was somewhat subjective, and the difficulty of applying the standard consistently has increased with the passing decades. As evidenced by the increasing court litigation, it has become progressively more difficult to apply the standard with the creation of many new jobs that did not exist 50 years ago. Nonetheless, the vast majority of commenters express concern that abandoning the “discretion and independent judgment” standard entirely would create even more uncertainty and litigation. We also recognize the benefit of retaining the standard in some form so as not to jettison completely decades of federal court decisions and agency opinion letters.

Accordingly, while retaining this standard from the existing regulations, final section 541.202 clarifies the definition of discretion and independent judgment to reflect existing federal case law and to eliminate outdated and confusing language in the existing interpretive guidelines. The Department intends the final rule to clarify the existing standard and to make the standard easier to understand and apply to the 21st Century workplace.

Final section 541.202(a) thus restates the requirement that the exempt administrative employee's primary duty must “include” the exercise of discretion and independent judgment and includes the general definition of this term, taken word-for-word from the existing interpretive guideline at subsection 541.207(a): “In general, the exercise of discretion and independent judgment involves the comparison and the evaluation of possible courses of conduct and acting or making a decision after the various possibilities have been considered.” The requirement that the primary duty must “include” the

exercise of discretion and independent judgment—rather than “customarily and regularly” exercise discretion and independent judgment—is not a change from current law. Although the Department is aware that there has been some confusion regarding the appropriate standard under the existing “short” duties test, federal court decisions have recognized that the current “short” duties test does not require that the exempt employee “customarily and regularly” exercise discretion and independent judgment, as does the effectively dormant “long” test.

See, e.g., O'Dell

Alyeska Pipeline Service Co.,

856 F.2d 1452, 1454 (9th Cir. 1988) (district court erred in not applying more lenient “includes” standard under short test which made a difference in determining whether employee was exempt);

Dymond

United States Postal Service,

670 F.2d 93, 95 (8th Cir. 1982) (while the “long” duties test for the administrative exemption requires that the employee “customarily and regularly” exercise discretion and independent judgment, when an employee makes more than $250 a week, “that requirement is reduced to requiring that the employee's primary duty simply ‘includes work requiring the exercise of discretion and independent judgment”').

Also retained from existing subsection 541.207(a), the final subsection 541.202(a) provides that discretion and independent judgment must be exercised “with respect to matters of significance.” Final subsection 541.202(a) states that the term “matters of significance” refers to “the level of importance or consequence of the work performed.” This concept of the importance or high level of work performed does not appear as a regulatory requirement in existing section 541.2, but is included twice in the existing interpretive guidance. Existing section 541.205(a), defining the primary duty requirement, states that the administrative exemption is limited “to persons who perform

work of substantial importance

to the management or operation of the business.” This language was the basis of the “work of substantial importance” option in the proposed definition of “position of responsibility.” Existing section 541.207(a),

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