# Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2016-11754 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** May 23, 2016 - **Citation:** 81 FR 32391 ## Text DEPARTMENT OF LABOR Wage and Hour Division 29 CFR Part 541 RIN 1235-AA11 Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees AGENCY: Wage and Hour Division, Department of Labor. ACTION: Final rule. SUMMARY: The Fair Labor Standards Act (FLSA or Act) guarantees a minimum wage for all hours worked during the workweek and overtime premium pay of not less than one and one-half times the employee's regular rate of pay for hours worked over 40 in a workweek. While these protections extend to most workers, the FLSA does provide a number of exemptions. In this Final Rule, the Department of Labor (Department) revises final regulations under the FLSA implementing the exemption from minimum wage and overtime pay for executive, administrative, professional, outside sales, and computer employees. These exemptions are frequently referred to as the “EAP” or “white collar” exemptions. To be considered exempt under part 541, employees must meet certain minimum requirements related to their primary job duties and, in most instances, must be paid on a salary basis at not less than the minimum amounts specified in the regulations. In this Final Rule the Department updates the standard salary level and total annual compensation requirements to more effectively distinguish between overtime-eligible white collar employees and those who may be exempt, thereby making the exemption easier for employers and employees to understand and ensuring that the FLSA's intended overtime protections are fully implemented. The Department sets the standard salary level for exempt EAP employees at the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region. The Department also permits employers to satisfy up to 10 percent of the standard salary requirement with nondiscretionary bonuses, incentive payments, and commissions, provided these forms of compensation are paid at least quarterly. The Department sets the total annual compensation requirement for an exempt Highly Compensated Employee (HCE) equal to the annualized weekly earnings of the 90th percentile of full-time salaried workers nationally. The Department also adds a provision to the regulations that automatically updates the standard salary level and HCE compensation requirements every three years by maintaining the earnings percentiles set in this Final Rule to prevent these thresholds from becoming outdated. Finally, the Department has not made any changes in this Final Rule to the duties tests for the EAP exemption. DATES: This Final Rule is effective on December 1, 2016. FOR FURTHER INFORMATION CONTACT: Director, Division of Regulations, Legislation and Interpretation, U.S. Department of Labor, Wage and Hour Division, Room S-3502, 200 Constitution Avenue NW., Washington, DC 20210; telephone: (202) 693-0406 (this is not a toll-free number). Copies of this Final Rule may be obtained in alternative formats (Large Print, Braille, Audio Tape or Disc), upon request, by calling (202) 693-0675 (this is not a toll-free number). TTY/TDD callers may dial toll-free 1-877-889-5627 to obtain information or request materials in alternative formats. Questions of interpretation and/or enforcement of the agency's regulations may be directed to the nearest Wage and Hour Division (WHD) district office. Locate the nearest office by calling the WHD's toll-free help line at (866) 4US-WAGE ((866) 487-9243) between 8 a.m. and 5 p.m. in your local time zone, or log onto WHD's Web site at http://www.dol.gov/whd/america2.htm for a nationwide listing of WHD district and area offices. SUPPLEMENTARY INFORMATION: Table of Contents I. Executive Summary II. Background A. What the FLSA Provides B. Legislative History C. Regulatory History D. Overview of Existing Regulatory Requirements E. Presidential Memorandum F. The Department's Proposal G. Effective Date III. Need for Rulemaking IV. Final Regulatory Revisions A. Standard Salary Level B. Special Salary Tests C. Inclusion of Nondiscretionary Bonuses, Incentive Payments, and Commissions in the Salary Level Requirement D. Highly Compensated Employees E. Automatic Updates F. Duties Requirements for Exemption V. Paperwork Reduction Act VI. Analysis Conducted in Accordance With Executive Order 12866, Regulatory Planning and Review, and Executive Order 13563, Improving Regulation and Regulatory Review VII. Final Regulatory Flexibility Analysis VIII. Unfunded Mandates Reform Act Analysis VIIIX. Executive Order 13132, Federalism IX. Executive Order 13175, Indian Tribal Governments XI. Effects on Families XII. Executive Order 13045, Protection of Children XIII. Environmental Impact Assessment XIV. Executive Order 13211, Energy Supply XV. Executive Order 12630, Constitutionally Protected Property Rights XVI. Executive Order 12988, Civil Justice Reform Analysis Final Amendments to Regulatory Text I. Executive Summary The Fair Labor Standards Act (FLSA or Act) guarantees a minimum wage for all hours worked and limits to 40 hours per week the number of hours an employee can work without additional compensation. Section 13(a)(1) of the FLSA, which was included in the original Act in 1938, exempts from these minimum wage and overtime pay protections “any employee employed in a bona fide executive, administrative, or professional capacity.” The exemption is premised on the belief that these kinds of workers typically earn salaries well above the minimum wage and enjoy other privileges, including above-average fringe benefits, greater job security, and better opportunities for advancement, setting them apart from workers entitled to overtime pay. The statute delegates to the Secretary of Labor the authority to define and delimit the terms of the exemption. The Department has undertaken this rulemaking in order to revise the regulations so that they effectively distinguish between overtime-eligible white collar employees who Congress intended to be protected by the FLSA's minimum wage and overtime provisions and bona fide EAP employees whom it intended to exempt. When the definition becomes outdated, employees who Congress intended to protect receive neither the higher salaries and above-average benefits expected for EAP employees nor do they receive overtime pay, and employers do not have an efficient means of identifying workers who are, and are not, entitled to the FLSA's protections. With this Final Rule, the Department will ensure that white collar employees who should receive extra pay for overtime hours will do so and that the test for exemption remains up-to-date so future workers will not be denied the protections that Congress intended to afford them. In 1938, the Department issued the first regulations at 29 CFR part 541 defining the scope of the section 13(a)(1) white collar exemption. Since 1940, the regulations implementing the exemption have generally required each of three tests to be met for the exemption to apply: (1) The employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the “salary basis test”); (2) the amount of salary paid must meet a minimum specified amount (the “salary level test”); and (3) the employee's job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (the “duties test”). While payment of a salary does not make an employee ineligible for overtime compensation, the Department has nonetheless long recognized the salary level test is the best single test of exempt status for white collar employees. The salary level test is an objective measure that helps distinguish white collar employees who are entitled to overtime from those who may be bona fide executive, administrative, or professional (EAP) employees. If left at the same amount over time, however, the effectiveness of the salary level test as a means of determining exempt status diminishes as the wages of employees increase and the real value of the salary threshold falls. The Department has updated the salary level requirements seven times since 1938, most recently in 2004 when the salary level an employee must be paid to come within the standard test for EAP exemption was set at $455 per week ($23,660 per year for a full-year worker), which nearly tripled the $155 per week minimum salary level required for exemption up to that point. The Department also modified the duties tests in 2004, eliminating the “long” and “short” tests that had been part of the regulations since 1949 and replacing them with the “standard” test. The historic long test paired a lower salary requirement with a stringent duties test including a 20 percent cap on the amount of time most exempt employees could spend on nonexempt duties, while the short test paired a higher salary requirement with a less stringent duties test. In other words, prior to the 2004 Final Rule, to exempt lower-paid employees from receiving overtime the employer would have to meet more rigorous requirements; but for higher-paid employees, the requirements to establish the applicability of the exemption were less rigorous. The standard test established by the Department in the 2004 Final Rule paired a duties test closely based on the less-stringent short duties test with a salary level derived from the lower long test salary level. This had the effect of making it easier for employers to both pay employees a lower salary and not pay them overtime for time worked beyond 40 hours. The 2004 Final Rule also created an exemption for highly compensated employees (HCE), which imposes a very minimal duties test but requires that an employee must earn at least $100,000 in total annual compensation. On March 13, 2014, President Obama signed a Presidential Memorandum directing the Department to update the regulations defining which white collar workers are protected by the FLSA's minimum wage and overtime standards. 79 FR 18737 (Apr. 3, 2014). The memorandum instructed the Department to look for ways to modernize and simplify the regulations while ensuring that the FLSA's intended overtime protections are fully implemented. The Department published a proposal to update the part 541 regulations on July 6, 2015. One of the Department's primary goals in this rulemaking is updating the standard salary requirement, both in light of the passage of time since 2004, and because the Department has concluded that the effect of the 2004 Final Rule's pairing of a standard duties test based on the less rigorous short duties test with the kind of low salary level previously associated with the more rigorous long duties test was to exempt from overtime many lower paid workers who performed little EAP work and whose work was otherwise indistinguishable from their overtime-eligible colleagues. This has resulted in the inappropriate classification of employees as EAP exempt—that is overtime exempt—who pass the standard duties test but would have failed the long duties test. As the Department noted in our proposal, the salary level's function in helping to differentiate overtime-eligible employees from employees who may be exempt takes on greater importance when the duties test does not include a specific limit on the amount of nonexempt works that an exempt employee may perform. In the Notice of Proposed Rulemaking (NPRM), the Department proposed setting the standard salary level at the 40th percentile of weekly earnings of full-time salaried workers nationally and setting the HCE total annual compensation requirement at the annualized value of the 90th percentile of weekly earnings of full-time salaried workers nationally. The Department further proposed to automatically update these levels annually to ensure that they would continue to provide an effective test for exemption. In the NPRM, the Department also asked for the public's comments on whether nondiscretionary bonuses or incentive payments should count toward some portion of the required salary level. Finally, the Department also discussed concerns with the standard duties tests and sought comments on a series of questions regarding possible changes to the tests. After considering the comments, the Department has made several changes from the proposed rule to the Final Rule. In particular, the Department has modified the standard salary level to more fully account for the lower salaries paid in certain regions. In this Final Rule, the Department sets the standard salary level equal to the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region (currently the South). This results in a salary level of $913 per week, or $47,476 annually for a full-year worker, based on data from the fourth quarter of 2015. 1 The Department believes that a standard salary level set at the 40th percentile of full-time salaried employees in the lowest-wage Census Region will accomplish the goal of setting a salary threshold that adequately distinguishes between employees who may meet the duties requirements of the EAP exemption and those who likely do not, without necessitating the reintroduction of a limit on nonexempt work, as existed under the long duties test. The Department sets the HCE total annual compensation level equal to the 90th percentile of earnings of full-time salaried workers nationally ($134,004 annually based on the fourth quarter of 2015), as we proposed. This increase will bring the annual compensation requirement in line with the level established in 2004. The Department believes that this will avoid the unintended exemption of large numbers of employees in high-wage areas—such as secretaries in New York City or Los Angeles—who are clearly not performing EAP duties. 1 The Bureau of Labor Statistics (BLS) estimated this value using Current Population Survey (CPS) data for earnings of full-time (defined as at least 35 hours per week) non-hourly paid employees. For the purpose of this rulemaking, the Department considers data representing compensation paid to non-hourly workers to be an appropriate proxy for compensation paid to salaried workers. In order to prevent the salary and compensation levels from becoming outdated, the Department is including in the regulations a mechanism to automatically update the salary and compensation thresholds by maintaining the fixed percentiles of weekly earnings set in this Final Rule. In response to comments, however, the Final Rule provides for updates every three years rather than for annual updates as proposed. The first update will take effect on January 1, 2020. The Department believes that regularly updating the salary and compensation levels is the best method to ensure that these tests continue to provide an effective means of distinguishing between overtime-eligible white collar employees and those who may be bona fide EAP employees. Based on historical wage growth in the South, at the time of the first update on January 1, 2020, the standard salary level is likely to be approximately $984 per week ($51,168 annually for a full-year worker) and the HCE total annual compensation requirement is likely to be approximately $147,524. The Department also revises the regulations to permit employers for the first time to count nondiscretionary bonuses, incentives, and commissions toward up to 10 percent of the required salary level for the standard exemption, so long as employers pay those amounts on a quarterly or more frequent basis. Finally, the Department has not made any changes to the duties tests in this Final Rule. The majority of the revisions occur in §§ 541.600, 541.601, 541.602 and new § 541.607; conforming changes were also made in §§ 541.100, 541.200, 541.204, 541.300, 541.400, 541.604, 541.605, and 541.709. In FY2017, 2 the Department estimates there will be approximately 159.9 million wage and salary workers in the United States, of whom we estimate that 22.5 million will be exempt EAP workers potentially affected by this Final Rule. 3 In Year 1, FY2017, the Department estimates that 4.2 million currently exempt workers who earn at least the current weekly salary level of $455 but less than the 40th earnings percentile in the South ($913) would, without some intervening action by their employers, become entitled to minimum wage and overtime protection under the FLSA (Table ES1). Similarly, an estimated 65,000 currently exempt workers who earn at least $100,000 but less than the annualized earnings of the 90th percentile of full-time salaried workers nationally ($134,004), and who meet the HCE duties test but not the standard duties test, may also become eligible for minimum wage and overtime protection. In Year 10, with triennial automatic updating of the salary and compensation levels, the Department projects that 5.0 million workers will be affected by the change in the standard salary level test and 221,000 workers will be affected by the change in the HCE total annual compensation test. 2 Affected workers, costs, and transfers were estimated for the 2017 fiscal year (“FY2017”) because this will be the first year the updated salary levels will be in effect. FY2017 spans from October 1, 2016 to September 30, 2017. 3 White collar workers not subject to the EAP salary level test include teachers, academic administrative personnel, physicians, lawyers, judges, and outside sales workers. Additionally, the Department estimates that another 5.7 million white collar workers who are currently overtime eligible because they do not satisfy the EAP duties tests and who currently earn at least $455 per week but less than $913 per week will have their overtime protection strengthened in Year 1 because their status as overtime-eligible will be clear based on the salary test alone without the need to examine their duties. Reducing the number of workers for whom employers must apply the duties test to determine exempt status simplifies the application of the exemption and is consistent with the President's directive. The Department quantified three direct costs to employers in this Final Rule: (1) Regulatory familiarization costs; (2) adjustment costs; and (3) managerial costs. Assuming a 7 percent discount rate, the Department estimates that average annualized direct employer costs will total $295.1 million per year (Table ES1). In addition to the direct costs, this Final Rule will also transfer income from employers to employees in the form of higher earnings. We estimate average annualized transfers to be $1,189.1 million. The Department also projects average annualized deadweight loss of $9.2 million, and notes that the projected deadweight loss is small in comparison to the amount of estimated costs. The change to a standard salary level based on the lowest-wage Census Region has decreased the salary amount from the proposal, resulting in a smaller number of affected workers and lower transfers than estimated in the NPRM. Direct costs are higher than predicted in the NPRM, primarily because the Department has increased its estimate of the number of affected workers who work some overtime. Additionally, in response to comments, the Department has increased estimated regulatory familiarization and adjustment costs in the Final Rule. Finally, the impacts of the Final Rule extend beyond those we have estimated quantitatively. The Department discusses other transfers, costs, and benefits in the relevant sections. Table ES1—Summary of Regulatory Costs and Transfers, Standard and HCE Salary Levels [Millions 2017$] Impact Year 1 Future years [ a ] Year 2 Year 10 Average annualized value 3% real rate 7% real rate Affected Workers (1,000s) Standard 4,163 3,893 5,045 HCE 65 73 217 Total 4,228 3,965 5,261 Costs and Transfers (Millions 2017$) [ b ] Direct employer costs 677.9 208.0 284.2 288.0 295.1 Transfers [ c ] 1,285.2 936.5 1,607.2 1,201.6 1,189.1 DWL 6.4 8.7 11.1 9.3 9.2 [ a ] Costs/transfers in years 3 through 9 are within the range bounded by the estimates for years 2 and 10. [ b ] Costs and transfers for affected workers passing the standard and HCE tests are combined. [ c ] This is the net transfer from employers to workers. There may also be transfers of hours and income from some workers to others. II. Background A. What the FLSA Provides The FLSA generally requires covered employers to pay their employees at least the federal minimum wage (currently $7.25 an hour) for all hours worked, and overtime premium pay of one and one-half times the employee's regular rate of pay for all hours worked over 40 in a workweek. 4 However, there are a number of exemptions from the FLSA's minimum wage and overtime requirements. Section 13(a)(1) of the FLSA, codified at 29 U.S.C. 213(a)(1), exempts from both minimum wage and overtime protection “any employee employed in a bona fide executive, administrative, or professional capacity . . . or in the capacity of outside salesman (as such terms are defined and delimited from time to time by regulations of the Secretary, subject to the provisions of [the Administrative Procedure Act] . . .).” The FLSA does not define the terms “executive,” “administrative,” “professional,” or “outside salesman.” Pursuant to Congress' grant of rulemaking authority, the Department in 1938 issued the first regulations at part 541 defining the scope of the section 13(a)(1) exemptions. Because Congress explicitly delegated to the Secretary of Labor the power to define and delimit the specific terms of the exemptions through notice and comment rulemaking, regulations so issued have the binding effect of law. See Batterton v. Francis, 432 U.S. 416, 425 n.9 (1977). 4 As discussed below, the Department estimates that 132.8 million workers are subject to the FLSA and the Department's regulations. Most of these workers are covered by the Act's minimum wage and overtime pay protections. The Department has consistently used our rulemaking authority to define and clarify the section 13(a)(1) exemptions. Since 1940, the implementing regulations have generally required each of three tests to be met for the exemptions to apply: (1) The employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the “salary basis test”); (2) the amount of salary paid must meet a minimum specified amount (the “salary level test”); and (3) the employee's job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (the “duties test”). Employees who meet the requirements of part 541 are exempted from both the Act's minimum wage and overtime pay protections. As a result, an employer may employ such employees for any number of hours in the workweek without paying the minimum hourly wage or an overtime premium. Some state laws have stricter exemption standards than those described above. The FLSA does not preempt any such stricter state standards. If a State establishes a higher standard than the provisions of the FLSA, the higher standard applies in that State. See 29 U.S.C. 218. B. Legislative History Section 13(a)(1) was included in the original Act in 1938 and was based on provisions contained in the earlier National Industrial Recovery Act of 1933 (NIRA) and state law precedents. Specific references in the legislative history to the exemptions contained in section 13(a)(1) are scant. Although section 13(a)(1) exempts covered employees from both the FLSA's minimum wage and overtime requirements, its most significant impact is its removal of these employees from the Act's overtime protections. The requirement that employers pay a premium rate of pay for all hours worked over 40 in a workweek is grounded in two policy objectives. The first is to spread employment (or, in other words, reduce involuntary unemployment) by incentivizing employers to hire more employees rather than requiring existing employees to work longer hours. See, e.g. , Davis v. J.P. Morgan Chase, 587 F.3d 529, 535 (2d Cir. 2009). The second policy objective is to reduce overwork and its detrimental effect on the health and well-being of workers. See, e.g. , Barrentine v. Arkansas-Best Freight System, Inc., 450 U.S. 728, 739 (1981). In contrast, the exemptions contained in section 13(a)(1) were premised on the belief that the type of work exempt employees 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 enforcement of 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). 5 Further, the exempted workers typically earned salaries well above the minimum wage and were presumed to enjoy other privileges to compensate them for their long hours of work, setting them apart from the nonexempt workers entitled to overtime pay. See id. 5 Congress created the Minimum Wage Study Commission as part of the Fair Labor Standards Amendments of 1977. See Sec. 2(e)(1), Public Law 95-151, 91 Stat. 1246 (Nov. 1, 1977). This independent commission was tasked with examining many FLSA issues, including the Act's minimum wage and overtime exemptions, and issuing a report to the President and to Congress with the results of its study. The universe of employees eligible for the section 13(a)(1) exemptions has fluctuated with amendments to the FLSA. Initially, persons employed in a “local retailing capacity” were exempt, but Congress eliminated that language from section 13(a)(1) in 1961 when the FLSA was expanded to cover retail and service enterprises. See Public Law 87-30, 75 Stat. 65 (May 5, 1961). Teachers and academic administrative personnel were added to the exemption when elementary and secondary schools were made subject to the FLSA in 1966. See Sec. 214, Public Law 89-601, 80 Stat. 830 (Sept. 23, 1966). The Education Amendments of 1972 made the Equal Pay provisions, section 6(d) of the FLSA, expressly applicable to employees who were otherwise exempt from the FLSA under section 13(a)(1). See Sec. 906(b)(1), Public Law 92-318, 86 Stat. 235 (June 23, 1972). A 1990 enactment expanded the EAP exemptions to include computer systems analysts, computer programmers, software engineers, and similarly skilled professional workers, including those paid on an hourly basis if paid at least 6 1/2 times the minimum wage. See Sec. 2, Public Law 101-583, 104 Stat. 2871 (Nov. 15, 1990). The compensation test for computer-related occupations was subsequently capped at $27.63 an hour (6 1/2 times the minimum wage in effect at the time) as part of the 1996 FLSA Amendments, when Congress enacted the new section 13(a)(17) exemption for such computer employees. Section 13(a)(17) also incorporated much of the regulatory language that resulted from the 1990 enactment. See 29 U.S.C. 213(a)(17), as added by the 1996 FLSA Amendments (Sec. 2105(a), Public Law 104-188, 110 Stat. 1755 (Aug. 20, 1996)). C. Regulatory History The FLSA became law on June 25, 1938, and the Department issued the first version of the part 541 regulations, setting forth criteria for exempt status under section 13(a)(1), that October. 3 FR 2518 (Oct. 20, 1938). Following a series of public hearings, which were discussed in a report issued by WHD, 6 the Department published revised regulations in 1940, which, among other things, added the salary basis test. 5 FR 4077 (Oct. 15, 1940). Further hearings were convened in 1947, as discussed in a WHD-issued report, 7 and the Department issued revised regulations in 1949, which updated the salary levels required to meet the salary level test for the various exemptions. 14 FR 7705 (Dec. 24, 1949). An explanatory bulletin interpreting some of the terms used in the regulations was published as subpart B of part 541 in 1949. 14 FR 7730 (Dec. 28, 1949). In 1954, the Department issued revisions to the regulatory interpretations of the salary basis test. 19 FR 4405 (July 17, 1954). In 1958, based on another WHD-issued report, 8 the regulations were revised to update the required salary levels. 23 FR 8962 (Nov. 18, 1958). Additional changes, including salary level updates, were made to the regulations in 1961 (26 FR 8635, Sept. 15, 1961), 1963 (28 FR 9505, Aug. 30, 1963), 1967 (32 FR 7823, May 30, 1967), 1970 (35 FR 883, Jan. 22, 1970), 1973 (38 FR 11390, May 7, 1973), and 1975 (40 FR 7091, Feb. 19, 1975). Revisions to increase the salary levels in 1981 were stayed indefinitely by the Department. 46 FR 11972 (Feb. 12, 1981). In 1985, the Department published an Advance Notice of Proposed Rulemaking that reopened the comment period on the 1981 proposal and broadened the review to all aspects of the regulations, including whether to increase the salary levels, but this rulemaking was never finalized. 50 FR 47696 (Nov. 19, 1985). 6 Executive, Administrative, Professional . . . Outside Salesman Redefined, Wage and Hour Division, U.S. Department of Labor, Report and Recommendations of the Presiding Officer (Harold Stein) at Hearings Preliminary to Redefinition (Oct. 10, 1940) (“Stein Report”). 7 Report and Recommendations on Proposed Revisions of Regulations, Part 541, by Harry Weiss, Presiding Officer, Wage and Hour and Public Contracts Divisions, U.S. Department of Labor (June 30, 1949) (“Weiss Report”). 8 Report and Recommendations on Proposed Revision of Regulations, Part 541, Under the Fair Labor Standards Act, by Harry S. Kantor, Presiding Officer, Wage and Hour and Public Contracts Divisions, U.S. Department of Labor (Mar. 3, 1958) (“Kantor Report”). The Department revised the part 541 regulations twice in 1992. First, the Department created a limited exception from the salary basis test for public employees, permitting public employers to follow public sector pay and leave systems requiring partial-day deductions from pay for absences for personal reasons or due to illness or injury not covered by accrued paid leave, or due to budget-driven furloughs, without defeating the salary basis test required for exemption. 57 FR 37677 (Aug. 19, 1992). The Department also implemented the 1990 law requiring it to promulgate regulations permitting employees in certain computer-related occupations to qualify as exempt under section 13(a)(1) of the FLSA. 57 FR 46744 (Oct. 9, 1992); see Sec. 2, Public Law 101-583, 104 Stat. 2871 (Nov. 15, 1990). On March 31, 2003, the Department published a Notice of Proposed Rulemaking proposing significant changes to the part 541 regulations. 68 FR 15560 (Mar. 31, 2003). On April 23, 2004, the Department issued a Final Rule (2004 Final Rule), which raised the salary level for the first time since 1975, and made other changes, some of which are discussed below. 69 FR 22122 (Apr. 23, 2004). Current regulations retain the three tests for exempt status that have been in effect since 1940: a salary basis test, a salary level test, and a job duties test. D. Overview of Existing Regulatory Requirements The regulations in part 541 contain specific criteria that define each category of exemption provided by section 13(a)(1) for bona fide executive, administrative, and professional employees (including teachers and academic administrative personnel), and outside sales employees. The regulations also define those computer employees who are exempt under section 13(a)(1) and section 13(a)(17). See §§ 541.400-.402. The employer bears the burden of establishing the applicability of any exemption from the FLSA's pay requirements. Job titles and job descriptions do not determine exempt status, nor does paying a salary rather than an hourly rate. To qualify for the EAP exemption, employees must meet certain tests regarding their job duties and generally must be paid on a salary basis of not less than $455 per week. 9 In order for the exemption to apply, an employee's specific job duties and salary must meet all the requirements of the Department's regulations. The duties tests differ for each category of exemption. 9 Alternatively, administrative and professional employees may be paid on a “fee basis.” This occurs where an employee is paid an agreed sum for a single job regardless of the time required for its completion. See § 541.605(a). Salary level test compliance for fee basis employees is assessed by determining whether the hourly rate for work performed ( i.e., the fee payment divided by the number of hours worked) would total at least $455 per week if the employee worked 40 hours. See § 541.605(b). Some employees, such as doctors and lawyers (§ 541.600(e)), teachers (§§ 541.303(d); 541.600(e)), and outside sales employees (§ 541.500(c)), are not subject to a salary or fee basis test. Some, such as academic administrative personnel, are subject to a special, contingent salary level. See § 541.600(c). There is also a separate salary level in effect for workers in American Samoa (§ 541.600(a)), and a special salary test for motion picture industry employees (§ 541.709). The Department last updated the part 541 regulations in the 2004 Final Rule. Prior to 2004, employers could assert the EAP exemption for employees who satisfied either a “long” test—which paired a more restrictive duties test with a lower salary level—or a “short” test—which paired less stringent duties requirements with a higher salary level. 10 In the 2004 Final Rule the Department abandoned the concept of separate long and short tests, opting instead for one “standard” test, and set the salary level under the new standard duties test at $455 per week for executive, administrative, and professional employees. 10 From 1949 until 2004 the regulations contained both long and short tests for exemption. Under the current part 541 regulations, an exempt executive employee must be compensated on a salary basis at a rate of not less than $455 per week and have a primary duty of managing the enterprise or a department or subdivision of the enterprise. See § 541.100(a)(1)-(2). An exempt executive must also customarily and regularly direct the work of at least two employees and have the authority to hire or fire, or the employee's suggestions and recommendations as to the hiring, firing, or other change of status of employees must be given particular weight. See § 541.100(a)(3)-(4). An exempt administrative employee must be compensated on a salary or fee basis at a rate of not less than $455 per week and have a primary duty of 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. See § 541.200. An exempt administrative employee's primary duty must include the exercise of discretion and independent judgment with respect to matters of significance. See id. An exempt professional employee must be compensated on a salary or fee basis at a rate of not less than $455 per week and have a primary duty of (1) work requiring knowledge of an advanced type in a field of science or learning customarily acquired by prolonged, specialized, intellectual instruction and study, or (2) work that is original and creative in a recognized field of artistic endeavor, or (3) teaching in a school system or educational institution, or (4) work as a computer systems analyst, computer programmer, software engineer, or other similarly-skilled worker in the computer field. See §§ 541.300; 541.303; 541.400. An exempt professional employee must perform work requiring the consistent exercise of discretion and judgment, or requiring invention, imagination, or talent in a recognized field of artistic endeavor. See § 541.300(a)(2). The salary requirements do not apply to certain licensed or certified doctors, lawyers, and teachers. See §§ 541.303(d); 541.304(d). An exempt outside salesperson must be customarily and regularly engaged away from the employer's place of business and have a primary duty of making sales, or obtaining orders or contracts for services or for the use of facilities. See § 541.500. There are no salary or fee requirements for exempt outside sales employees. See id. The 2004 Final Rule also created a test for exemption of highly compensated executive, administrative, and professional employees. Under the HCE exemption, employees who are paid total annual compensation of at least $100,000 (which must include at least $455 per week paid on a salary or fee basis) are exempt from the FLSA's overtime requirements if they customarily and regularly perform at least one of the exempt duties or responsibilities of an executive, administrative, or professional employee identified in the standard tests for exemption. See § 541.601. The HCE exemption applies only to employees whose primary duty includes performing office or non-manual work; non-management production line workers and employees who perform work involving repetitive operations with their hands, physical skill, and energy are not exempt under this section no matter how highly paid. See id. Finally, in the 2004 Final Rule, the Department, mindful that nearly 30 years had elapsed between salary level increases, and in response to commenter concerns that similar lapses would occur in the future, expressed an intent to “update the salary levels on a more regular basis.” 69 FR 22171. E. Presidential Memorandum On March 13, 2014, President Obama signed a Presidential Memorandum directing the Department to update the regulations defining which “white collar” workers are protected by the FLSA's minimum wage and overtime standards. See 79 FR 18737 (Apr. 3, 2014). The memorandum instructed the Department to look for ways to modernize and simplify the regulations while ensuring that the FLSA's intended overtime protections are fully implemented. As the President noted at the time, the FLSA's overtime protections are a linchpin of the middle class, and the failure to keep the salary level requirement for the white collar exemption up to date has left millions of low-paid salaried workers without this basic protection. 11 The current salary level threshold for exemption of $455 per week, or $23,660 annually, is below the 2015 poverty threshold for a family of four. 12 11 See http://www.whitehouse.gov/the-press-office/2014/03/13/fact-sheet-opportunity-all-rewarding-hard-work-strengthening-overtime-pr. 12 See http://www.census.gov/hhes/www/poverty/data/threshld/index.html (the 2015 poverty threshold for a family of four with two related children) . The 2015 poverty threshold for a family of four with two related people under 18 in the household is $24,036. Following issuance of the memorandum, the Department embarked on an extensive outreach program, meeting with over 200 organizations in Washington, DC and several other locations, as well as by conference call. A wide range of stakeholders attended the listening sessions: employees, employers, business associations, non-profit organizations, employee advocates, unions, state and local government representatives, tribal representatives, and small businesses. In these sessions the Department asked stakeholders to address, among other issues: (1) What is the appropriate salary level for exemption; (2) what, if any, changes should be made to the duties tests; and (3) how can the regulations be simplified. The stakeholders shared their concerns with various aspects of the current regulations, suggestions for changes, and general concerns about the scope of the exemption. The Department greatly appreciated the wide range of views that were shared during the outreach sessions. The information shared during those sessions informed the Department's NPRM. The Department's outreach also made clear, however, that there are some widespread misconceptions about overtime eligibility under the FLSA, some of which were echoed in the comments received on the NPRM. For example, many employers and employees mistakenly believe that payment of a salary automatically disqualifies an employee from entitlement to overtime compensation irrespective of the duties performed. Many employees are also unaware of the duties required to be performed in order for the exemption to apply. Additionally, many employers seem to mistakenly believe that newly overtime- eligible employees ( i.e., those earning between the current and new salary levels) must be converted to hourly compensation. 13 Similarly, some employers erroneously believe that they are prohibited from paying nondiscretionary bonuses to EAP employees, given that they cannot be used to satisfy the salary requirement. Some employers also mistakenly believe that the EAP regulations limit their ability to permit white collar employees to work part-time or job share. 14 13 Such misconceptions are not new. In 1949 the Department noted “the failure of some employers to realize that salary is not the sole test of exemption.” Weiss Report at 8 n. 27. In 1940 the Department responded to the assertion that employers would convert overtime-eligible white collar employees to hourly pay instead of more secure salaries, stating: “Without underestimating the general desirability of weekly or monthly salaries which enable employees to adjust their expenditures on the basis of an assured income (so long as they remain employed), there is little advantage in salaried employment if it serves merely as a cloak for long hours of work. Further, such salaried employment may well conceal excessively low hourly rates of pay.” Stein Report at 7. 14 As the Department has previously explained, there is no special salary level for EAP employees working less than full-time. See 69 FR 22171. Employers, however, can pay white collar employees working part-time or job sharing a salary of less than the required EAP salary threshold and will not violate the Act so long as the salary equals at least the minimum wage for all hours worked and the employee does not work more than 40 hours a week. See FLSA2008-1NA (Feb. 14, 2008). See also section IV.A.iv. F. The Department's Proposal On July 6, 2015, in accordance with the Presidential Memorandum, the Department published a Notice of Proposed Rulemaking to propose revisions to the part 541 regulations. See 80 FR 38516 (July 6, 2015). The Department's proposal focused primarily on updating the salary and HCE compensation levels by proposing that the standard salary level be set at the 40th percentile of weekly earnings of full-time salaried workers, proposing to increase the HCE annual compensation requirement to the annualized value of the 90th percentile of weekly earnings of full-time salaried workers, and proposing a mechanism for automatically updating the salary and compensation levels going forward to ensure that they will continue to provide a useful and effective test for exemption. While the primary regulatory changes proposed were in §§ 541.600 and 541.601, the Department proposed additional conforming changes to update references to the salary level throughout part 541 as well as to update the special salary provisions for American Samoa and the motion picture industry. In addition to these proposed changes, the Department also discussed whether to include nondiscretionary bonuses in determining whether the standard salary level is met and whether changes to the duties tests are warranted, but did not propose specific regulatory revisions on these issues. More than 270,000 individuals and organizations timely commented on the NPRM during the sixty-day comment period that ended on September 4, 2015. The Department received comments from a broad array of constituencies, including small business owners, Fortune 500 corporations, employer and industry associations, individual workers, worker advocacy groups, unions, non-profit organizations, law firms (representing both employers and employees), educational organizations and representatives, religious organizations, economists, Members of Congress, federal government agencies, state and local governments and representatives, tribal governments and representatives, professional associations, and other interested members of the public. All timely received comments may be viewed on the www.regulations.gov Web site, docket ID WHD-2015-0001. Several organizations' submissions included attachments from their individual members generally using substantively identical form comments: For example, AFSCME (24,122 comments), Center for American Progress (6,697 comments from two submissions), CREDO Action (58,927 comments), Democracy for America (34,932 comments), Economic Policy Institute (72,131 comments from five submissions), Faculty Forward and SEIU (515 comments), Jobs with Justice (5,136 comments), Mom's Rising (16,114 comments from three submissions), National Partnership for Women and Families (21,192 comments from two submissions), National Restaurant Association (2,648 comments), National Women's Law Center (6,753 comments from two submissions), Partnership to Protect Workplace Opportunity (1,770 comments from five submissions), Social Security Works (15,575 comments), Society for Human Resource Management (827 comments from two submissions), and others. Other organizations attached membership signatures to their comments. These included Care2 (37,459 signatures), the International Franchise Association (17 signatures), Organizing for Action (76,625 signatures), and 15 different post-doctoral associations (560 signatures). Many of the comments the Department received were: (1) Very general statements of support or opposition; (2) personal anecdotes that did not address a specific aspect of the proposed changes; or (3) identical or nearly identical “campaign” comments sent in response to comment initiatives sponsored by various groups. A large number of commenters favored some change to the existing regulations, and commenters expressed a wide variety of views on the merits of particular aspects of the Department's proposal. Some commenters requested that the Department withdraw the proposal. Acknowledging that there are strong views on the issues presented in this rulemaking, the Department has carefully considered the timely submitted comments addressing the proposed changes. Significant issues raised in the timely received comments are discussed below, together with the Department's response to those comments and a topical discussion of the changes that have been made in the Final Rule and its regulatory text. The Department also received a number of submissions after the close of the comment period, including some campaign comments, from a range of commenters representing both employers and employees. Late comments were not considered in the development of this Final Rule, and are not discussed in this Final Rule. In instances where an organization submitted both timely and untimely comments, only the timely comments were considered. The Department received a number of comments that are beyond the scope of this rulemaking. These include, for example, comments asking the Department to issue a rule requiring employers to provide employees with “clear pay stubs,” and requesting that the Department clarify the definition of “establishment” under the exemption for seasonal amusement or recreational establishments. The Department does not address such issues in this Final Rule. A number of commenters asked the Department to provide guidance on how the FLSA applies to non-profit organizations. See, e.g. , Alliance for Strong Families and Communities (describing “a tremendous amount of confusion in the non-profit sector concerning who is currently covered by FLSA”); Independent Sector (stating that this rulemaking process has “highlighted a lack of clarity regarding when and how the Fair Labor Standards Act applies to the nonprofit sector workforce”); Alliance of Arizona Nonprofits. Some commenters, such as CASA, asserted that most charitable organizations are not covered enterprises under the FLSA and, as a result, this rulemaking “will not reach a very sizable number of employees of not-for-profit organizations.” Other commenters stated that non-profit employees may be individually covered because they engage in interstate commerce. A comment submitted on behalf of 57 professors specializing in employment and labor law, however, asserted that the “overwhelming majority of the millions of employees excluded from FLSA coverage because their not-for-profit employers are not subject to enterprise coverage also are not subject to individual FLSA coverage,” and Economic Policy Institute (EPI) asserted that non-profit employers can limit the number of employees covered on an individual basis by managing interstate commerce activity. The Department notes that the FLSA does not provide special rules for non-profit organizations or their employees, nor does this Final Rule. Nevertheless, we agree that it is important for such organizations to understand their obligations under the Act. As a general matter, non-profit charitable organizations are not covered enterprises under the FLSA unless they engage in ordinary commercial activities (for example, operating a gift shop). See 29 U.S.C. 203(r)-(s), 206(a), 207(a). For a non-profit organization, enterprise coverage applies only to the activities performed for a business purpose; it does not extend to the organization's charitable activities. An organization that performs only charitable services, such as providing free food to the hungry, is not a covered enterprise; however, an employee of such a non-profit employer may nevertheless be covered on an individual basis. See 29 U.S.C. 206(a), 207(a). The FLSA covers an employee on an individual basis—that is, an individual is protected by the FLSA regardless of whether the individual works for a covered enterprise—if he or she engages in interstate commerce through activities such as making out-of-state phone calls, sending mail, or handling credit card transactions. This individual coverage applies even if the employee is not engaging in such activities for a business purpose. For example, if an employee regularly calls an out-of-state store and uses a credit card to purchase food for a non-profit that provides free meals for the homeless, that employee is protected by the FLSA on an individual basis, even though the non-profit may not be covered as an enterprise. WHD, however, will not assert that an employee who on isolated occasions spends an insubstantial amount of time performing such work is individually covered by the FLSA. The Department also refers interested stakeholders to guidance on the application of the FLSA to non-profit organizations available in WHD Fact Sheet #14A: Non-Profit Organizations and the Fair Labor Standards Act; 15 see also Fact Sheet #14: Coverage Under the Fair Labor Standards Act (FLSA). 16 Additional information regarding the applicability of the FLSA to non-profits can be found in the WHD Administrator's blog post. 17 Moreover, a number of WHD Opinion Letters address the applicability of the FLSA to non-profits. See, e.g., FLSA2009-20 (Jan. 16, 2009); FLSA2008-8 (Sept. 29, 2008); FLSA2005-52 (Nov. 14, 2005); FLSA2005-8NA (Sept. 2, 2005); FLSA2005-12NA (Sept. 23, 2005); FLSA2004-29NA (Nov. 30, 2004). 18 Finally, the Department is issuing additional guidance for the non-profit sector in connection with the publication of this Final Rule. 15 Available at: http://www.dol.gov/whd/regs/compliance/whdfs14a.pdf. 16 Available at: http://www.dol.gov/whd/regs/compliance/whdfs14.pdf. 17 Available at: http://blog.dol.gov/2015/08/26/non-profits-and-the-proposed-overtime-rule/. 18 Available at: http://www.dol.gov/whd/opinion/flsa.htm; http://www.dol.gov/whd/opinion/flsana.htm. Commenters also asked for guidance on the application of the EAP exemption to educational institutions. See, e.g. , College and Universities Human Resources Executives; Michigan Head Start; Savannah-Chatham County Public School System. Preschools, elementary and secondary schools, and institutions of higher education are covered by the FLSA, and nothing in this Final Rule changes that coverage. 29 U.S.C. 203(r)(2)(A). Employees of such institutions therefore are generally protected by the FLSA's minimum wage and overtime provisions; however, special provisions apply to many personnel at these institutions that make them overtime exempt. Although the EAP exemption expressly applies to an “employee employed in the capacity of academic administrative personnel or teacher” 29 U.S.C. 213(a)(1); see §§ 541.204, .303, the salary level and salary basis requirements do not apply to bona fide teachers. § 541.303(d), .600(e). Accordingly, the increase in the standard salary level in this Final Rule will not affect the overtime eligibility of bona fide teachers. Commenters such as the NEA asked the Department to clarify which workers qualify as bona fide teachers. Teachers are exempt if their primary duty is teaching, tutoring, instructing or lecturing in the activity of imparting knowledge, and if they are employed and engaged in this activity as a teacher in an educational establishment. § 541.303(a). An educational establishment is “an elementary or secondary school system, an institution of higher education or other educational institution.” 19 § 541.204(b). Teachers may include professors, adjunct instructors, primary and secondary school teachers, and teachers of skilled and semi-skilled trades and occupations. Preschool and kindergarten teachers may also qualify for exemption under the same conditions as teachers in elementary and secondary schools. See Fact Sheet #46: Daycare Centers and Preschools Under the Fair Labor Standards Act. In addition, coaches may qualify for the exemption if their primary duty is teaching as opposed to recruiting students to play sports or performing manual labor. Some commenters addressed other non-teaching staff. For example, CUPA-HR commented about workers including academic affairs counselors and advisors, textbook managers, and managers in food service, security, and building and grounds, among other employees working at colleges and universities. Academic administrative personnel subject to the exemption include: Superintendents; principals and vice-principals; department heads in institutions of higher education; academic counselors and advisors; and other employees with similar responsibilities. Academic administrative employees are subject to the salary basis requirement, but the Department notes that a special provision allows this requirement to be met if such employees are paid “on a salary basis which is at least equal to the entrance salary for teachers in the educational establishment by which [they are] employed.” § 541.204(a)(1). To the extent that this entrance salary is below the salary level established in this rule, academic administrative personnel will be exempt if their salary equals or exceeds the entrance salary. Employees whose work relates to general business operations, building management and maintenance, or the health of students and staff (such as lunch room managers), do not perform academic administrative functions. § 541.204(c). 19 For purposes of the exemption, no distinction is drawn between public and private schools, or between those operated for profit and those that are not for profit. § 541.204(b). The Department also received several comments about postdoctoral scholars. See, e.g. , Association of American Medical Colleges; National Postdoctoral Association; UAW Local 5810. Postdoctoral scholars who do not have a primary duty of teaching are not considered bona fide teachers; these employees would generally meet the duties test for the learned professional exemption and would be subject to the salary basis and salary level tests. Finally, the Council on Government Relations commented that “it is our understanding that the Wage and Hour Division does not assert an employee-employer relationship for graduate students who are simultaneously performing research under faculty supervision.” The Department views graduate students in a graduate school engaged in research under the supervision of a member of the faculty and in the course of obtaining advanced degrees as being in an educational relationship and not in an employment relationship with either the school or of any grantor funding the research, even though the student may receive a stipend for performing the research. 1994 WL 1004845 (June 28, 1994). In an effort to assist the educational sector with the issues addressed above, the Department is issuing additional guidance for this sector in connection with the publication of this Final Rule. Lastly, in an attempt to address concerns that the terms exempt and nonexempt were not sufficiently descriptive or intuitive, in the NPRM the Department used the terms “overtime-protected” and “overtime-eligible” as synonyms for nonexempt, and “not overtime-protected” and “overtime-ineligible” as synonyms for exempt. 20 The Department received very few comments on this new terminology. The Department believes that these new terms are less confusing to the public and continues to use them in this Final Rule. 20 The Department is using the more precise term “overtime exempt” rather than “overtime-ineligible” in this Final Rule. G. Effective Date The Department received a number of comments concerning the effective date of the Final Rule. Citing the need to reduce the burden of implementation, many commenters representing employers requested a delayed effective date following publication of the Final Rule. Commenters including the Fisher & Phillips law firm, the National Association of Independent Schools and the National Association of Business Officers, requested an effective date at least 120 days after publication as was done in the Department's 2004 rulemaking. Other commenters requested a longer period. The American Car Rental Association (ACRA), Dollar Tree, and the Retail Industry Leaders Association (RILA) each requested a delayed effective date of at least six months following publication of the Final Rule. The United States Chamber of Commerce (Chamber), the Food Marketing Institute (FMI), H-E-B, Island Hospitality Management, the National Association of Landscape Professionals (NALP), the National Council of Chain Restaurants (NCCR), the National Retail Federation (NRF), and the Securities Industry and Financial Markets Association (SIFMA) each requested a one-year delayed effective date. Finally, Laff and Associates, the National Association for Home Care and Hospice, and American Network of Community Options and Resources (ANCOR), which coordinated with more than three dozen home health care organizations, submitted comments requesting an effective date at least two years following publication of the Final Rule, to afford states sufficient time to allocate and appropriate funding. More than 55,000 individuals submitted comments coordinated by the Center for American Progress, EPI, and MomsRising, requesting that the salary level be raised without delay. Many labor organizations and social justice and women's advocacy organizations, including the Center for Law and Social Policy, the Center for Popular Democracy, the First Shift Justice Project, the Institute for Women's Policy Research (IWPR), the Leadership Conference on Civil and Human Rights, the National Education Association (NEA), the National Coalition of Classified Education Support Employees Union, the National Urban League, the Public Justice Center, the United Automobile, Aerospace and Agricultural Implement Workers of America (UAW), Women Employed, and others, similarly urged the Department to implement the Final Rule as soon as possible. The Department has set an effective date of December 1, 2016 for the Final Rule. As several commenters noted, the Department's 2004 Final Rule set an effective date 120 days following publication of the final rule. See 79 FR 22126 (April 23, 2004). Explaining that a 120-day effective date exceeds the 30-day minimum required under the Administrative Procedure Act (APA), 5 U.S.C. 553(d), and the 60 days mandated for a “major rule” under the Congressional Review Act, 5 U.S.C. 801(a)(3)(A), we concluded at that time that “a period of 120 days after the date of publication will provide employers ample time to ensure compliance with the final regulations.” Id. The changes provided in the 2004 Final Rule were more extensive and more complicated for employers to implement—the 2004 Final Rule included several significant changes: (1) A significant percentage increase in the salary threshold; (2) a significant reorganization of the part 541 regulations; (3) the elimination of the short and long test structure that had been in place for more than 50 years and the creation of a single standard test; and (4) the creation of a new test for highly compensated employees. In light of the Department's decision not to make changes to the standard duties test at this time, the primary change in this Final Rule is the revision to the salary level test and, therefore, this rule will be much less complicated for employers to implement. Accordingly, the Department believes that the December 1, 2016 effective date for this Final Rule (more than 180 days after publication) will provide ample time for employers to ensure compliance. Multiple commenters also requested a delayed enforcement period or some form of safe harbor following the effective date of the Final Rule ranging from six months to two years. See, e.g. , ACRA; American Insurance Association and the Property Casualty Insurers Association of America (AIA-PCI); AT&T; Chamber; Dollar Tree; International Franchise Association (IFA); the Littler Mendelson law firm; RILA; the Wessels Sherman law firm; World Travel. Several commenters also asked the Department to provide compliance assistance, whether related specifically to the changes implemented by the Final Rule or more broadly to the FLSA's white collar regulations in general. See, e.g., Chamber; Dollar Tree; IFA; Littler Mendelson; RILA. The Department appreciates employer concerns regarding compliance and enforcement in light of this rulemaking. As explained above, the Department believes that the December 1, 2016 effective date will provide employers ample time to make any changes that are necessary to comply with the final regulations. The Department will also provide significant outreach and compliance assistance, and will issue a number of guidance documents in connection with the publication of this Final Rule. III. Need for Rulemaking One of the Department's primary goals in this rulemaking is updating the section 13(a)(1) exemption's standard salary level requirement. A salary level test has been part of the regulations since 1938 and has been long recognized as “the best single test” of exempt status. Stein Report at 19, 42; see Weiss Report at 8-9; Kantor Report at 2-3. The salary an employer pays an employee provides “a valuable and easily applied index to the `bona fide' character of the employment for which exemption is claimed” and ensures that section 13(a)(1) of the FLSA “will not invite evasion of section 6 [minimum wage] and section 7 [overtime] for large numbers of workers to whom the wage-and-hour provisions should apply.” Stein Report at 19. The salary level's function in differentiating exempt from overtime-eligible employees takes on greater importance when there is only one duties test that has no limitation on the amount of nonexempt work that an exempt employee may perform, as has been the case since 2004. Historically, the Department set two different salary tests that were paired with different duties tests. The long test salary level set at the low end of salaries paid to exempt employees imposed a cap on the amount of nonexempt work that an exempt employee could perform. This aspect of the long duties test made it effective in distinguishing lower-paid exempt EAP employees from overtime-eligible employees. In effect, the long duties test ensured that employers could not avoid paying overtime by assigning lower-paid employees a minimal amount of exempt work. The short test salary level, which was historically set at a level between 130 and 180 percent of the long test salary level, did not impose any specific limit on the amount of nonexempt work since that distinction was not considered necessary to aid in classifying higher-paid exempt EAP employees. In eliminating the two salary tests in 2004, the Department instead set the single standard salary level equivalent to the historic levels of the former long test salary, but paired it with a standard duties test based on the short duties test, which did not include a limit on nonexempt work. The effect of this mismatch was to exempt from overtime many lower-wage workers who performed little EAP work and whose work was otherwise indistinguishable from their overtime-eligible colleagues. The Department has now concluded that the standard salary level we set in 2004 did not account for the absence of the more rigorous long duties test and thus has been less effective in distinguishing between EAP employees who are exempt from overtime and overtime-eligible employees. Additionally, the salary level required for exemption under section 13(a)(1) is currently $455 a week and has not been updated in more than 10 years. The annual value of the salary level ($23,660) is now lower than the poverty threshold for a family of four. As the relationship between the current standard salary level and the poverty threshold shows, the effectiveness of the salary level test as a means of helping determine exempt status diminishes as the wages of employees entitled to overtime pay increase and the real value of the salary threshold falls. By way of this rulemaking, the Department seeks to update the standard salary level to ensure that it works effectively with the standard duties test to distinguish exempt EAP employees from overtime-protected white collar workers. This will make the exemptions easier for employers and workers to understand and ensure that the FLSA's intended overtime protections are fully implemented. The Department also proposed to update the total annual compensation required for the HCE exemption, because it too has been unchanged since 2004 and must be updated to avoid the unintended exemption of employees in high-wage areas who are clearly not performing EAP duties. In a further effort to respond to changing conditions in the workplace, the Department's proposal also requested comment on whether to allow nondiscretionary bonuses and incentive payments to satisfy some portion of the standard test salary requirement. Currently, such bonuses are only included in calculating total annual compensation under the HCE test, but some stakeholders have urged broader inclusion, pointing out that in some industries significant portions of salaried EAP employees' earnings may be in the form of such bonuses. The Department also proposed automatically updating the salary and compensation levels to prevent the levels from becoming outdated. The Department proposed to automatically update the standard salary test, the total annual compensation requirement for highly compensated employees, and the special salary levels for American Samoa and for motion picture industry employees, in order to ensure the continued utility of these tests over time. As the Department explained in 1949, the salary test is only a strong measure of exempt status if it is up to date, and a weakness of the salary test is that increases in wage rates and salary levels over time gradually diminish its effectiveness. See Weiss Report at 8. A rule providing for automatic updates to the salary level using a consistent methodology that has been subject to notice and comment rulemaking will maintain the utility of the dividing line set by the salary level without the need for frequent rulemaking. This modernization of the regulations will provide predictability for employers and employees by replacing infrequent, and thus more drastic, salary level increases with gradual changes occurring at set intervals. Finally, the Department has always recognized that the salary level test works in tandem with the duties tests to identify bona fide EAP employees. The Department discussed concerns with the duties test for executive employees in the NPRM. The proposal also included questions about the duties tests including requiring exempt employees to spend a specified amount of time performing their primary duty ( e.g., a 50 percent primary duty requirement as required under California state law) or otherwise limiting the amount of nonexempt work an exempt employee may perform, and adding to the regulations additional examples illustrating how the exemption may apply to particular occupations. The Department's proposal sought feedback on whether such revisions to the duties tests are needed to ensure that these tests fully reflect the purpose of the exemption. IV. Final Regulatory Revisions A. Standard Salary Level i. History of the Standard Salary Level The FLSA became law on June 25, 1938, and the first version of part 541, issued later that year, set a minimum salary level of $30 per week for exempt executive and administrative employees. See 3 FR 2518. Since 1938, the Department has increased the salary levels seven times: in 1940, 1949, 1958, 1963, 1970, 1975, and 2004. See Table A. While the Department has refined the method for calculating the salary level to fulfill its mandate, the purpose of the salary level requirement has remained consistent—to define and delimit the scope of the executive, administrative, and professional exemptions. See 29 U.S.C. 213(a)(1). The Department has long recognized that the salary paid to an employee is the “best single test” of exempt status, Stein Report at 19, and that the salary level test furnishes a “completely objective and precise measure which is not subject to differences of opinion or variations in judgment.” Weiss Report at 8-9. The Department reaffirmed this position in the 2004 Final Rule, explaining that the “salary level test is intended to help distinguish bona fide executive, administrative, and professional employees from those who were not intended by Congress to come within these exempt categories,” and reiterating that any increase in the salary level must “have as its primary objective the drawing of a line separating exempt from nonexempt employees.” 69 FR 22165. Table A—Weekly Salary Levels for Exemption Date enacted Long test Executive Administrative Professional Short test (all) 1938 $30 $30 1940 30 50 $50 1949 55 75 75 $100 1958 80 95 95 125 1963 100 100 115 150 1970 125 125 140 200 1975 155 155 170 250 Standard Test 2004 $455 In 1940, the Department maintained the $30 per week salary level set in 1938 for executive employees, increased the salary level for administrative employees, and established a salary level for professional employees. The Department used salary surveys from federal and state government agencies, experience gained under the National Industrial Recovery Act, and federal government salaries to determine the salary level that was the “dividing line” between employees performing exempt and nonexempt work. See Stein Report at 9, 20-21, 31-32. The Department recognized that the salary level falls within a continuum of salaries that overlaps the outer boundaries of exempt and nonexempt employees. Specifically, the Department stated: To make enforcement possible and to provide for equity in competition, a rate should be selected in each of the three definitions which will be reasonable in the light of average conditions for industry as a whole. In some instances the rate selected will inevitably deny exemption to a few employees who might not unreasonably be exempted, but, conversely, in other instances it will undoubtedly permit the exemption of some persons who should properly be entitled to the benefits of the act. Id. at 6. Taking into account the average salary levels for employees in numerous industries, and the percentage of employees earning below these amounts, the Department set the salary level for each exemption slightly below the “dividing line” suggested by these averages. In 1949, the Department again looked at salary data from state and federal agencies, including the Bureau of Labor Statistics (BLS). The data reviewed included wages in small towns and low-wage industries, earnings of federal employees, average weekly earnings for exempt employees, starting salaries for college graduates, and salary ranges for different occupations such as bookkeepers, accountants, chemists, and mining engineers. See Weiss Report at 10, 14-17, 19-20. The Department noted that the “salary level adopted must exclude the great bulk of nonexempt persons if it is to be effective.” Id. at 18. Recognizing that the “increase in wage rates and salary levels” since 1940 had “gradually weakened the effectiveness of the present salary tests as a dividing line between exempt and nonexempt employees,” the Department calculated the percentage increase in weekly earnings from 1940 to 1949, and then adopted new salary levels “at a figure slightly lower than might be indicated by the data” in order to protect small businesses. Id. at 8, 14. The Department also cautioned that “a dividing line cannot be drawn with great precision but can at best be only approximate.” Id. at 11. Also in 1949, the Department established a second, less-stringent duties test for each exemption, but only for those employees paid at or above a higher “short test” salary level. Those paid above the higher salary level were exempt if they also met a “short” duties test, which lessened the duties requirements for exemption. 21 The original, more thorough duties test became known as the “long” test, and remained for more than 50 years the test employers were required to satisfy for those employees whose salary was insufficient to meet the higher short test salary level. Apart from the differing salary requirements, the most significant difference between the short test and the long test was the long test's limit on the amount of time an exempt employee could spend on nonexempt duties while allowing the employer to claim the exemption. A bright-line, 20 percent cap on nonexempt work was instituted as part of the long duties test in 1940 for executive and professional employees, and in 1949 for administrative employees. 22 The short duties tests did not include a specific limit on nonexempt work. 23 The rationale for the less rigorous short duties test was that employees who met the higher salary level were more likely to meet “all the requirements for exemption . . . including the requirement with respect to nonexempt work.” Id. at 22-23. Thus, a “short-cut test for exemption . . . would facilitate the administration of the regulations without defeating the purposes of section 13(a)(1).” Id. 21 These higher salary levels are presented under the “Short Test” heading in Table A. 22 By statute, beginning in 1961, retail employees could spend up to 40 percent of their hours worked performing nonexempt work and still be found to meet the duties tests for the EAP exemption. See 29 U.S.C. 213(a)(1). 23 For example, the long duties test in effect from 1949 to 2004 for administrative employees required that an exempt employee: (1) Have a primary duty consisting of the performance of office or non-manual work directly related to management policies or general business operations of the employer or the employer's customers; (2) customarily and regularly exercise discretion and independent judgment; (3) regularly and directly assist a proprietor or a bona fide executive or administrative employee, or perform under only general supervision work along specialized or technical lines requiring special training, experience, or knowledge, or execute under only general supervision special assignments and tasks; and (4) not devote more than 20 percent (or 40 percent in a retail or service establishment) of hours worked in the workweek to activities that are not directly and closely related to the performance of the work described above. See § 541.2 (2003). By contrast, the short duties test in effect during the 1949 to 2004 period provided that an administrative employee paid at or above the short test salary level qualified for exemption if the employee's primary duty consisted of the performance of office or non-manual work directly related to management policies or general business operations of the employer or the employer's customers which includes work requiring the exercise of discretion and independent judgment. See id. In contrast to the Department's extensive discussion of the methodology for setting the long test salary level, the Department's rulemakings have included comparatively little discussion of the methodology for setting the short test levels. While the Department set the long test salary level based on an analysis of the defined sample, we set the short test salary level in relation to the long test salary, and the initial short test salary set in 1949 was 133 percent of the highest long test salary (administrative and professional). In 1958, the Department rejected the suggestion that the short test salary level should be increased by the same dollar amount that the highest long test salary levels were increased and instead increased the short test salary to maintain the “percentage differential in relation to the highest [long test] salary requirement.” See Kantor Report at 10. In 1970, the Department adopted a “slightly higher percentage differential” between the “basic and [short test] salary figures,” than previously existed, resulting in an approximately 143 percent ratio between the highest long test salary level (professional) and the short test. 35 FR 885. From 1949 to 1975 the Department set a single short test salary level that applied to all categories of EAP employees while maintaining multiple long test salary levels that applied to the different categories. The ratio of the short test salary level to the long test salary levels ranged from approximately 130 percent to 180 percent over this period. 24 The existence of separate short and long tests remained part of the Department's regulations until 2004. See Table A. 24 The smallest ratio occurred in 1963 and was between the long test salary requirement for professionals ($115) and the short test salary level ($150). The largest ratio occurred in 1949 and was between the long test salary requirement for executives ($55) and the short test salary level ($100). In setting the long test salary level in 1958, the Department considered data collected during 1955 WHD investigations on the “actual salaries paid” to employees who “qualified for exemption” ( i.e., met the applicable salary and duties tests), grouped by geographic region, broad industry groups, number of employees, and city size, and supplemented with BLS and Census data to reflect income increases of white collar and manufacturing employees during the period not covered by the Department's investigations. Kantor Report at 6. The Department then set the long test salary levels for exempt employees “at about the levels at which no more than about 10 percent of those in the lowest-wage region, or in the smallest size establishment group, or in the smallest-sized city group, or in the lowest-wage industry of each of the categories would fail to meet the tests.” Id. at 6-7. In other words, the Department set the long test salary level so that only a limited number of workers performing EAP duties (about 10 percent) in the lowest-wage regions and industries would fail to meet the salary level test and therefore be overtime protected. In laying out this methodology, the Department echoed comments from the Weiss Report that the salary tests “simplify enforcement by providing a ready method of screening out the obviously nonexempt employees,” and that “[e]mployees that do not meet the salary test are generally also found not to meet the other requirements of the regulations.” Id. at 2-3. The Department also noted that in our experience misclassification of overtime-protected employees occurs more frequently when the salary levels have “become outdated by a marked upward movement of wages and salaries.” Id. at 5. The Department followed a similar methodology when determining the appropriate long test salary level increase in 1963, using data regarding salaries paid to exempt workers collected in a 1961 WHD survey. See 28 FR 7002. The salary level for executive and administrative employees was increased to $100 per week, for example, when the 1961 survey data showed that 13 percent of establishments paid one or more exempt executives less than $100 per week, and 4 percent of establishments paid one or more exempt administrative employees less than $100 a week. See 28 FR 7004. The professional exemption salary level was increased to $115 per week, when the 1961 survey data showed that 12 percent of establishments surveyed paid one or more professional employees less than $115 per week. See id. The Department noted that these salary levels approximated the same percentages used in 1958: Salary tests set at this level would bear approximately the same relationship to the minimum salaries reflected in the 1961 survey data as the tests adopted in 1958, on the occasion of the last previous adjustment, bore to the minimum salaries reflected in a comparable survey, adjusted by trend data to early 1958. At that time, 10 percent of the establishments employing executive employees paid one or more executive employees less than the minimum salary adopted for executive employees and 15 percent of the establishments employing administrative or professional employees paid one or more employees employed in such capacities less than the minimum salary adopted for administrative and professional employees. Id. The Department continued to use a similar methodology when updating the long test salary levels in 1970. After examining data from 1968 WHD investigations, 1969 BLS wage data, and information provided in a report issued by the Department in 1969 that included salary data for executive, administrative, and professional employees, 25 the Department increased the long test salary level for executive employees to $125 per week when the salary data showed that 20 percent of executive employees from all regions and 12 percent of executive employees in the West earned less than $130 a week. See 35 FR 884-85. The Department also increased the long test salary levels for administrative and professional employees to $125 and $140, respectively. 25 Earnings Data Pertinent to a Review of the Salary Tests for Executive, Administrative and Professional Employees As Defined in Regulations Part 541, (1969), cited in 34 FR 9935. In 1975, instead of following these prior approaches, the Department set the long test salary levels based on increases in the Consumer Price Index (CPI), although the Department adjusted the salary level downward “in order to eliminate any inflationary impact.” 40 FR 7091. As a result of this recalibration of the 1970 levels, the long test salary level for the executive and administrative exemptions was set at $155, while the professional level was set at $170. The salary levels adopted were intended as interim levels “pending the completion and analysis of a study by [BLS] covering a six month period in 1975,” and were not meant to set a precedent for future salary level increases. Id. at 7091-92. Although the Department intended to revise the salary levels after completion of the BLS study of actual salaries paid to employees, the envisioned process was never completed, and the “interim” salary levels remained unchanged for the next 29 years. As reflected in Table A, the short test salary level increased in tandem with the long test level throughout the various rulemakings since 1949. Because the short test was designed to capture only those white collar employees whose salary was sufficiently high to indicate a stronger likelihood of exempt status and thus warrant a less stringent duties requirement, the short test salary level was always set significantly higher than the long test salary levels. Thus, in 1975 while the long test salary levels ranged from $155 to $170, the short test level was $250. The salary level test was most recently updated in 2004, when the Department abandoned the concept of separate long and short tests, opting instead for one “standard” test, and set the salary level associated with the new standard duties test at $455 for executive, administrative, and professional employees. Due to the lapse in time between the 1975 and 2004 rulemakings, the salary threshold for the long duties tests ( i.e., the lower salary level) did not reflect salaries being paid in the economy and had become ineffective at distinguishing between overtime-eligible and overtime exempt white collar employees. For example, at the time of the 2004 Final Rule, the salary levels for the long duties tests were $155 for executive and administrative employees and $170 for professional employees, while a full-time employee working 40 hours per week at the federal minimum wage ($5.15 per hour) earned $206 per week. See 69 FR 22164. Even the short test salary level at $250 per week was not far above the minimum wage. The Department in the 2004 Final Rule based the new “standard” duties tests on the short duties tests (which did not limit the amount of nonexempt work that could be performed), and tied them to a single salary test level that was updated from the long test salary (which historically had been paired with a cap on nonexempt work). See 69 FR 22164, 22168-69; see also 68 FR 15570 (“Under the proposal, the minimum salary level to qualify for exemption from the FLSA minimum wage and overtime requirements as an executive, administrative, or professional employee would be increased from $155 per week to $425 per week. This salary level would be referred to as the `standard test,' thus eliminating the `short test' and `long test' terminology.”). The Department concluded that it would be burdensome to require employers to comply with a more complicated long duties test given that the passage of time had rendered the long test salary level largely obsolete. See 69 FR 22164; 68 FR 15564-65. The Department stated at the time that the new standard test salary level accounted for the elimination of the long duties test. See 69 FR 22167. In determining the new salary level in 2004, the Department reaffirmed our oft-repeated position that the salary level is the “best single test” of exempt status. See 69 FR 22165. Consistent with prior rulemakings, the Department relied on actual earnings data. However, instead of using salary data gathered from WHD investigations, as was done under the Kantor method, the Department used Current Population Survey (CPS) data that encompassed most salaried employees. The Department also set the salary level to exclude roughly the bottom 20 percent of these salaried employees in each of the subpopulations: (1) The South and (2) the retail industry. Thus in setting the standard salary level, the Department was consistent with our previous practice of setting the long test salary level near the lower end of the current range of salaries. Although prior long test salary levels were based on salaries of approximately the lowest 10 percent of exempt salaried employees in low-wage regions and industries (the Kantor long test method), the Department stated that the change in methodology was warranted in part to account for the elimination of the short and long duties tests, and because the utilized data sample included nonexempt salaried employees, as opposed to only exempt salaried employees. However, as the Department acknowledged, the salary arrived at by this method was, in fact, equivalent to the salary derived from the Kantor long test method. See 69 FR 22168. Based on the adopted methodology, the Department ultimately set the salary level for the new standard test at $455 per week. In summary, the regulatory history reveals a common methodology used, with some variations, to determine appropriate salary levels. In almost every case, the Department examined a broad set of data on actual wages paid to salaried employees and then set the long test salary level at an amount slightly lower than might be indicated by the data. In 1940 and 1949, the Department set the long test salary levels by looking to the average salary paid to the lowest level of exempt employees. Beginning in 1958, the Department set the long test salary levels to exclude approximately the lowest-paid 10 percent of exempt salaried employees in low-wage regions, employment size groups, city sizes, and industry sectors, and we followed a similar methodology in 1963 and 1970. The levels were based on salaries in low-wage categories in order to protect the ability of employers in those areas and industries to utilize the exemptions and in order to mitigate the impact of salaries in higher-paid regions and sectors. In 1975, the Department increased the long test salary levels based on changes in the CPI, adjusting downward to eliminate any potential inflationary impact. See 40 FR 7091 (“However, in order to eliminate any inflationary impact, the interim rates hereinafter specified are set at a level slightly below the rates based on the CPI.”). In each of these rulemakings, the Department set the short test salary level in relation to, and significantly higher than, the long test salary levels (ranging from approximately 130 to 180 percent of the long test salary levels). In 2004, the Department eliminated the short and long duties tests in favor of a standard duties test (that was similar to the prior less rigorous short test) for each exemption and a single salary level for executive, administrative, and professional employees. This most recent revision established a standard salary level of $455 per week using earnings data of full-time salaried employees (both exempt and nonexempt) in the South and in the retail sector. As in the past, the Department used lower-salary data sets to accommodate those businesses for which salaries were generally lower due to geographic or industry-specific reasons. ii. Standard Salary Level Proposal To restore the effectiveness of the salary test, in the NPRM the Department proposed to set the standard salary level equal to the 40th percentile of weekly earnings of full-time salaried workers nationally. Using salary data from 2013, the proposed methodology resulted in a standard salary level of $921 per week, or $47,892 annually. The Department estimated that, by the time of publication of a Final Rule, the proposed methodology would result in a standard salary level of approximately $970 per week, or $50,440 annually. In proposing to update the salary threshold, the Department sought to reflect increases in actual salary levels nationwide since 2004. As the Department explained in the NPRM, when left at the same amount over time, the effectiveness of the salary level test as a means of determining exempt status diminishes as the wages of employees entitled to overtime increase and the real value of the salary threshold falls. See 80 FR 38517. The Department also sought to adjust the salary level to address our conclusion that the salary level we set in 2004 was too low given the Department's elimination of the more rigorous long duties test. As discussed above, for many decades the long duties test—which limited the amount of time an exempt employee could spend on nonexempt duties and was paired with a lower salary level—existed in tandem with a short duties test—which did not contain a specific limit on the amount of nonexempt work and was paired with a salary level that was approximately 130 to 180 percent of the long test salary level. In 2004, the Department eliminated the long and short duties tests and created the new standard duties test, based on the short duties test. The creation of a single standard test that did not limit nonexempt work caused new uncertainty as to what salary level is sufficient to ensure that employees intended to be overtime-protected are not subject to inappropriate classification as not overtime-protected, while minimizing the number of employees disqualified from the exemption even though their primary duty is EAP exempt work. As the Department had observed in 1975, if the salary level associated with such a test is too low, employers may use it to inappropriately classify as exempt employees who would not meet the more rigorous long duties test. 40 FR 7092 (“[T]here are indications that certain employers are utilizing the high salary test to employ otherwise nonexempt employees ( i.e., those who perform work in excess of the 20 percent tolerance for nonexempt work or the 40 percent tolerance allowed in the case of executive and administrative employees in retail and service establishments) for excessively long workweeks.”). Rather than pair the standard duties test with a salary level based on the higher short test salary level, however, we tied the new standard duties test to a salary level based on the long duties test. This resulted in a standard salary level that, even in 2004, was too low to effectively screen out from the exemption overtime-eligible white collar employees. The importance of ensuring that the standard duties test is not paired with too low of a salary level is illustrated by the Department's Burger King litigation in the early 1980's, when the short and long tests were still actively in use. The Department brought two actions arguing that Burger King assistant managers were entitled to overtime protection. Sec'y of Labor v. Burger King Corp., 675 F.2d 516 (2d Cir. 1982); Sec'y of Labor v. Burger King Corp., 672 F.2d 221 (1st Cir. 1982). One group of assistant managers satisfied the higher short test salary level and was therefore subject to the less rigorous short duties test; the other group was paid less and was therefore subject to the long duties test with its limit on nonexempt work. All of the assistant managers performed the same duties, which included spending significant amounts of time performing the same routine, nonexempt work as their subordinates. Both appellate courts found that the higher paid employees were not overtime protected—even though they performed substantial amounts of nonexempt work—because they satisfied the short duties test. The lower paid employees, however, were overtime-protected by application of the more rigorous long duties test. If the long test's lower salary threshold had been paired with a duties test that did not limit nonexempt work—as the Department did in 2004—the lower paid assistant managers would have also lost overtime protection. In this rulemaking, the Department sought to correct the mismatch between the standard salary level (based on the old long test) and the standard duties test (based on the old short test). As we noted in the NPRM, we are concerned that at the current low salary level employees in lower-level management positions who would have failed the long duties test may be inappropriately classified as ineligible for overtime. At the same time, the Department proposed a lower salary level than the average salary traditionally used for the short duties test in order to minimize the potential that bona fide EAP employees, especially in low-wage regions and industries, might become overtime-protected because they fall below the proposed salary level. As the Department explained, an up-to-date and effective salary level protects against the misclassification of overtime-eligible workers as exempt and simplifies application of the exemption for employers and employees alike. Consistent with prior rulemakings, the Department reached the proposed salary level after considering available data on actual salary levels currently being paid in the economy. Specifically, as we did in 2004, the Department used CPS data comprising full-time nonhourly employees to determine the proposed salary level. Unlike in the 2004 rulemaking, however, the Department did not further restrict the data by filtering out various employees based on statutory and regulatory exclusions from FLSA coverage or the salary requirement (such as federal employees, doctors, lawyers, and teachers). The Department proposed to set the salary level as a percentile rooted in the distribution of earnings rather than a specific dollar amount. Because earnings are linked to the type of work salaried workers perform, a percentile serves as an appropriate proxy for distinguishing between overtime-eligible and overtime exempt white collar workers. Based on the historical relationship of the short test salary level to the long test salary level, the Department determined that a salary between approximately the 35th and 55th percentiles of weekly earnings of full-time salaried workers nationwide would work appropriately with the standard duties test. The Department proposed to set the salary level at the low end of this range—the 40th percentile of weekly earnings of full-time salaried workers nationally—to account for low-wage regions and industries and for the fact that employers no longer have a long duties test to fall back on for purposes of exempting lower-salaried workers performing bona fide EAP duties. The Department explained, however, that a standard salary threshold significantly below the 40th percentile would require a more rigorous duties test than the current standard duties test in order to effectively distinguish between white collar employees who are overtime protected and those who may be bona fide EAP employees. See 80 FR 38519, 38532, 38543. iii. Final Revisions to the Standard Salary Level The Final Rule adopts the proposed methodology for setting the standard salary level as a percentile of actual salaries currently being paid to full-time nonhourly employees, as reported by BLS based on data obtained from the CPS. However, we have adjusted the data set used in response to a substantial number of comments asserting that the salary level proposed would render overtime-eligible too many bona fide EAP employees in low-wage areas. Rather than set the salary level at the 40th percentile of weekly earnings of full-time salaried workers nationally, this Final Rule sets the salary level at the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region. Census Regions are groupings of states and the District of Columbia that subdivide the United States for the presentation of data by the United States Census Bureau. The current Census Regions are: The Northeast, the Midwest, the South, and the West. 26 The Department determined the “lowest-wage Census Region” by examining the 40th percentile of weekly earnings of full-time salaried workers based on CPS data in each region. For the purposes of this rulemaking, we define the “lowest-wage Census Region” as the Census Region having the lowest 40th percentile of weekly earnings of full-time salaried workers, which currently is the South. 27 26 See https://www.census.gov/geo/reference/gtc/gtc_census_divreg.html . 27 For simplicity, in this rulemaking we refer to the lowest-wage Census Region and the South interchangeably. In keeping with our practice, the Department relies on the most up-to-date data available to derive the final salary level from this methodology. See 69 FR 22168. In the NPRM, the Department utilized 2013 salary data for estimating the salary level resulting from the proposed methodology, which was current at the time the Department developed the proposal. In this Final Rule, we rely on salary data from the fourth quarter of 2015, as published by BLS, to set the salary level. 28 Using this data, the Department has determined that the required standard salary level will be $913 per week, or $47,476 annually, based on the 40th percentile of weekly earnings of full-time salaried workers in the South. The $913 salary level that results from the methodology is at the low end of the historical range of short test salary levels, based on the historical ratios between the short and long test salary levels ($889-$1231). See section VI.C.iii. 28 BLS currently publishes this data at: http://www.bls.gov/cps/research_series_earnings_nonhourly_workers.htm . White collar employees subject to the salary level test earning less than $913 per week will not qualify for the EAP exemption, and therefore will be eligible for overtime, irrespective of their job duties and responsibilities. Employees earning this amount or more on a salary or fee basis will qualify for exemption only if they meet the standard duties test, which is unchanged by this Final Rule. As a result of this increase, 4.2 million employees who meet the standard duties test will no longer fall within the EAP exemption and therefore will be overtime-protected. Additionally, 8.9 million employees paid between $455 and $913 per week who do not meet the standard duties test—5.7 million salaried white collar employees and 3.2 million salaried blue collar employees—will now face a lower risk of misclassification. iv. Discussion of Comments 1. Proposed Increase in the Standard Salary Level The overwhelming majority of commenters agreed that the standard salary level needs to be increased, including many commenters writing on behalf of employers, such as the Business Roundtable, Catholic Charities USA, College and University Professional Association for Human Resources (CUPA-HR), CVS Health, the National Restaurant Association (NRA), and the Northeastern Retail Lumber Association. Multiple commenters echoed the Department's observation in the NPRM that the current standard salary level of $455 per week, or $23,660 annually, is below the 2014 poverty threshold for a family of four. 29 The American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) pointed out that the current salary level is only slightly higher than the state minimum wage for forty hours of work in several states, and noted that it has long been widely recognized that workers whose pay is “close to the minimum wage” are “not the kind of employees Congress intended to deny overtime protection” (citing Stein Report at 5). Some salaried employees currently classified as exempt managers commented that they earn less per hour than the employees they supervise. 29 The 2015 poverty threshold for a family of four with two related people under 18 in the household is $24,036. Available at: http://www.census.gov/hhes/www/poverty/data/threshld/index.html . The Department also received multiple comments, including comments from the American Sustainable Business Council and the Heartland Alliance for Human Needs and Human Rights, expressing concern that the current salary level facilitates the misclassification of overtime-eligible employees as overtime exempt. The RAND Corporation submitted a study estimating that 11.5 percent of salaried workers are misclassified as exempt—and therefore do not receive overtime compensation—even though their primary duty is not exempt work or they earn less than the current salary level, while a human resource professional from Florida “estimate[d] that 40 percent of those employees my clients class[ify] as . . . exempt are really non-exempt.” A few commenters, however, such as the National Grocers Association (NGA), urged the Department to maintain the current salary level of $455 per week. For example, the National Lumber and Building Material Dealers Association stated that the current salary level is appropriate for managers in many sectors and regions. Mutual of Omaha requested that the Department create a “grandfathered exemption,” by applying the current salary level to currently exempt employees. The Department received a significant number of comments in response to our proposal to set the standard salary level equal to the 40th percentile of weekly earnings of full-time salaried employees nationally (estimated to be $970 per week, or $50,440 per year, in 2016). Many commenters endorsed the proposed salary level as an appropriate dividing line between employees performing exempt and overtime-protected work, but others objected that it was either too low or too high. The majority of employees and commenters representing employees believed the proposed salary level amount was appropriate or should be increased, while the majority of employers and commenters representing them believed the salary level amount should be lower than the threshold the Department proposed. A large number of commenters supported the proposed salary level either by explicitly endorsing the proposed increase or supporting the Department's proposed rule generally. Commenters who supported the salary level included thousands of individual employees, writing independently or as part of comment campaigns, and organizations representing employees (such as the American Association of Retired Persons (AARP), the Coalition of Labor Union Women, National Council of La Raza, the National Domestic Workers Alliance (NDWA), the National Partnership for Women & Families (Partnership), Service Employees International Union (SEIU), the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union (USW), and many others). Some employers and human resource professionals also supported the proposed increase. For example, the owner of a hardware store in Minneapolis explained that he had observed “large businesses abuse their employees for many years by misclassifying them as exempt from overtime,” and stated that the Department's proposal would “help bring things back in line.” H-E-B stated that it pays “competitive wages,” and is “supportive of doubling the minimum salary threshold to the proposed amount of $50,400,” although it urged the Department to consider making regional adjustments because other retailers pay lower wages based on geographic differences. Some Members of Congress expressed support for the Department's proposal, although other Members of Congress opposed it. The Department received many comments from those who endorsed the proposal (as well as those seeking a higher salary level) asserting that a significant increase to the current salary level is necessary to effectuate Congress' intent to extend the FLSA's wage and hour protections broadly to most workers in the United States. See, e.g. , Comment from 57 labor law professors; AFL-CIO; Equal Justice Center; National Employment Lawyers Association (NELA); Nichols Kaster law firm; SEIU. AFL-CIO stated that Congress intended the EAP exemptions to apply only to employees who have sufficient bargaining power such that they do not need the Act's protections against overwork and who perform work that cannot be easily spread to other workers. AFL-CIO and the EPI further stated that Congress knew from experience with Depression-era worker protection legislation that employers sometimes misclassified ordinary workers as managers to evade paying overtime premiums, and as a result, exempted only “bona fide” executive, administrative, and professional employees. The National Employment Law Project (NELP) commented that the Department set the salary level too low in 2004, especially when paired with a more lenient duties test than the prior long duties test. A comment submitted on behalf of 57 labor law professors noted that, even if the Department had paired the $455 per week standard salary level set in 2004 with a more rigorous duties test, it was still lower than necessary to achieve a threshold equivalent to the inflation-adjusted amount of the 1975 long test salary level. The Department agrees with commenters that a significant increase in the salary threshold is required to ensure the FLSA's overtime protections are fully implemented. The salary level test should provide an “index to the `bona fide' character of the employment for which exemption is claimed” and ensure that the EAP exemption “will not invite evasion” of the FLSA's minimum wage and overtime requirements “for large numbers of workers to whom the wage-and-hour provisions should apply.” Stein Report at 19. The current salary level, however, is less than the 10th percentile of weekly earnings of full-time salaried workers both nationally and in the South. The salary threshold's function in differentiating exempt from nonexempt employees takes on greater importance, moreover, when there is only one standard duties test that has no limitation on the amount of nonexempt work that an exempt employee may perform, as has been the case since 2004. As the Department has long recognized, if too low a salary level accompanies a duties test that does not limit nonexempt work, employers may utilize the salary test to employ “otherwise nonexempt employees,” who perform large amounts of nonexempt work, “for excessively long workweeks.” 40 FR 7092. The Department believes that the effect of the 2004 Final Rule's pairing of a standard duties test based on the short duties test (for higher paid employees) with a salary test based on the long test (for lower paid employees) was to exempt from overtime many lower paid workers who performed little EAP work and whose work was otherwise indistinguishable from their overtime-eligible colleagues. 30 This has resulted in the inappropriate classification of employees as EAP exempt who pass the standard duties test but would have failed the long duties test. A significant increase from the 2004 threshold is therefore necessary, not only to account for the declining real value of the salary threshold, but also to correct for the fact that the Department set the standard salary level in 2004 without adjusting for the elimination of the more rigorous long duties test. 30 Jobs With Justice illustrated this phenomenon in its comment by recounting the experience of a store manager who was classified as exempt even though she made only $34,700 per year and regularly worked 70 hours per week, spending her time performing routine tasks such as “unloading merchandise from trucks, stocking shelves and ringing up purchases.” See also In re Family Dollar FLSA Litigation, 637 F.3d 508, 511, 516-18 (4th Cir. 2011) (holding that a retail manager paid $655 per week plus bonus was an exempt executive even though she “devoted most of her time to doing . . . mundane physical activities” such as unloading freight, stocking shelves, working the cash register, or sweeping the floors); Soehnle v. Hess Corp., 399 Fed. App'x 749, 750 (3d Cir. 2010) (holding that a gas station manager who was paid an annual salary of $34,000, worked approximately 70 hours per week, and spent 85 percent of time operating a cash register was an exempt executive). Many commenters (including some that believe that the proposed salary level is reasonable) urged the Department to choose a method that results in a higher salary level. The vast majority of these commenters, including NELA, Nichols Kaster, the Rudy, Exelrod, Zieff & Lowe law firm, the Texas Employment Lawyers Association, and the United Food and Commercial Workers International Union (UFCW), asserted that the Department should set the standard salary level equal to the 50th percentile of earnings of full-time salaried workers nationally. The Center for Effective Government stated that the Department should set the standard salary level equal to the 60th percentile of earnings of full-time salaried workers nationally. NELP recommended that the Department adjust for inflation the short test salary level adopted by the Department in 1975, or in the alternative, adopt a threshold of $1,122 per week. Commenters, such as the UFCW, pointed out that the Department's proposed salary is lower than the average historical salary ratio associated with the short duties test, which is the basis for the standard duties test. Multiple commenters noted that the proposed salary level covers a smaller share of all salaried workers (40 percent) than the 1975 short test salary level, which covered 62 percent of full-time salaried employees. See, e.g. , AFL-CIO; NELA; Rudy, Exelrod, Zieff & Lowe. NELA stated that the 1975 short test salary level was 1.57 times the median wage of all full-time wage and salary workers, a ratio which they asserted would result in a current salary threshold of over $65,000 per year based on first quarter 2015 data. EPI commented that the proposed salary level is lower than the short test salary levels adopted by the Department in the 1960s and 1970s, when adjusted for inflation to 2013 dollars. EPI also asserted that the salary threshold should be higher than the inflation-adjusted amounts of short test salary levels from the past in part to account for the fact that management and professional salaries grew faster than the rate of inflation after 1970, noting that CEO pay among the top 350 U.S. corporations was almost 11 times higher in 2014 than it was in 1978, after adjusting for inflation. Other commenters, including USW, similarly cited the large growth in high-level executive pay in recent decades in support of the Department's proposal. Commenters urging a higher salary level also asserted that the Department's proposed salary level excludes from overtime protection too large a percentage of employees in traditionally nonexempt occupations and is too low to adequately minimize the risk of inappropriately classifying overtime-eligible workers as overtime exempt. AFL-CIO stated that the Department has previously set the long test salary level at an amount about 25 percent higher than the average starting salary for newly hired college graduates, and they asserted that this would yield a standard salary level of $52,000 per year. AFL-CIO contended that the salary test must be set at a “high enough level that large numbers of eligible workers are not stranded above the threshold.” NELA likewise urged the Department to “aim for a threshold where the number of non-exempt employees earning salaries above the threshold equals the number of otherwise exempt employees earning less than the threshold”—an amount we estimated in the NPRM would be roughly equal to the 50th percentile of weekly earnings of full-time salaried workers nationally. See 80 FR 38560. The Department understands commenters' concerns that the proposed standard salary level was lower than the 50th percentile of full-time salaried workers ($1,065 based on 2013 data) and updating the 1975 short test salary ($1,083 based on 2013 data). As the Department stated in the NPRM, however, we are concerned that a standard salary threshold at that level, in the absence of a lower salary long test to fall back on, would deny employers the ability to use the exemption for too many employees in low-wage areas and industries who perform EAP duties. In contrast to commenters representing employees, a great number of commenters representing employers and many individual employers objected that the Department's proposed salary level was too high. While commenters supporting the proposed threshold or advocating for a higher threshold asserted that the proposal is lower than indicated by historical short test levels, commenters advocating for a lower threshold asserted that the proposed threshold is out of step with historical long test levels. For example, the Jackson Lewis law firm asserted that the proposed threshold is higher than any past long test salary level for the executive exemption, when adjusted for inflation to 2015 dollars. The Chamber stated that the ratio of the proposed salary level to the minimum wage is too high, based on an analysis they performed that weighted the historic long test salary levels three times more heavily than historic short test salary levels. Some commenters requesting a lower salary threshold, such as the American Association of Orthopaedic Executives, Associated Builders and Contractors (ABC), and the Montana Conservation Corps, urged the Department to instead adjust the 2004 salary level for inflation. Many others stated that the Department should set the salary level at the 20th percentile of earnings of full-time salaried employees in the South and in the retail industry, as we did in 2004. See, e.g. , American Hotel and Lodging Association (AH&LA); Dollar Tree; NRF. The NRA stated that it could support Alternative 3 in the NPRM, a salary level derived from the Kantor long test method taking the 10th percentile of earnings of likely exempt employees in low-wage regions, employment size groups, city sizes, and industries. Fisher & Phillips urged the Department to set the salary level at the 20th percentile of earnings of exempt employee salaries “in the lowest geographical and industry sectors.” Some commenters suggested a lower percentile of full-time salaried workers nationwide than the Department proposed. For example, the Chamber, which preferred that the Department use a different data source set to set the salary level, stated in the alternative that a salary level at up to the 30th percentile of earnings of full-time salaried workers nationally would “better reflect the actual dividing line between exempt and non-exempt employees.” In addition, several commenters focused on the salary level amount rather than, or in addition to, the methodology used to derive the level. For example, a non-profit organization providing senior care recommended a salary level of up to $40,000; FMI stated that most of its grocer members would not see a significant disruption at a salary level of up to $38,376; and the BOK Financial Corporation advocated for a $30,000 salary level. Finally, some commenters, such as the Partnership to Protect Workplace Opportunity (PPWO) and IFA, asserted that the Department's proposed salary level should be lower, but declined to propose a specific number or method. Most of these suggestions do not represent a meaningful departure from the methodology the Department has historically used to set the lower long test salary level, and the Department does not believe that these suggested salary levels are sufficient to account fully for the elimination of the long duties test, as explained below. The Department received many comments stating that by using a nationwide data set, the proposal fails to adequately account for salary disparities among regions and areas, industries, and firms of different sizes. Some commenters, including the Assisted Living Federation of America and the American Seniors Housing Association (ALFA), Jackson Lewis, and PPWO, asserted that adopting the proposal would effectively eliminate the exemption for certain industries or in certain parts of the country and, as a result, would exceed the Department's statutory authority. Multiple commenters asserted that the proposed salary level is too high for low-wage regions. See, e.g. , Chamber; FMI; International Association of Amusement Parks and Attractions; King's Daughters' School; NRF; PPWO; Society for Human Resource Management (SHRM); and many individual commenters. Several commenters cited to an analysis condu [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2016-11754. Public record. Not legal advice.