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

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URL: https://www.frixlaw.com/law-library/documents/fr%3A2019-04514

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** March 22, 2019
- **Citation:** 84 FR 10900

## Text

DEPARTMENT OF LABOR
Wage and Hour Division
29 CFR Part 541
RIN 1235-AA20
Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees

AGENCY:

Wage and Hour Division, Department of Labor.

ACTION:

Proposed rule and request for comments.

SUMMARY:

Using a longstanding and commonsense methodology and based on broad-based input, the Department of Labor (Department) proposes to update and revise the regulations issued under the Fair Labor Standards Act (FLSA or Act) implementing the exemption from minimum wage and overtime pay requirements for executive, administrative, professional, outside sales, and computer employees.

DATES:

Submit written comments on or before May 21, 2019.

ADDRESSES:

You may submit comments, identified by Regulatory Information Number (RIN) 1235-AA20, by either of the following methods:
Electronic Comments:
Submit comments through the Federal eRulemaking Portal
http://www.regulations.gov.
Follow the instructions for submitting comments.
Mail:
Address written submissions to Melissa Smith, Director of the Division of Regulations, Legislation, and Interpretation, Wage and Hour Division, U.S. Department of Labor, Room S-3502, 200 Constitution Avenue NW, Washington, DC 20210.
Instructions:
Please submit only one copy of your comments by only one method. All submissions must include the agency name and RIN, identified above, for this rulemaking. Please be advised that comments received will become a matter of public record and will be posted without change to
http://www.regulations.gov,
including any personal information provided. All comments must be received by 11:59 p.m. on the date indicated for consideration in this rulemaking. Commenters should transmit comments early to ensure timely receipt prior to the close of the comment period as the Department continues to experience delays in the receipt of mail in our area. For additional information on submitting comments and the rulemaking process, see the “Public Participation” heading of the
supplementary information
section of this document. For questions concerning the interpretation and enforcement of labor standards related to the FLSA, individuals may contact the Wage and Hour Division (WHD) local district offices (see contact information below).
Docket:
For access to the docket to read background documents or comments, go to the Federal eRulemaking Portal at
http://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT:

Robert Waterman, Division of Regulations, Legislation, and Interpretation, Wage and Hour Division, U.S. Department of Labor, Room S-3502, 200 Constitution Avenue NW, Washington, DC 20210; telephone: (202) 693-0406 (this is not a toll-free number). Copies of this proposed 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 WHD district office. Locate the nearest office by calling WHD's toll-free help line at (866) 4US-WAGE ((866) 487-9243) between 8 a.m. and 5 p.m. in your local time zone, or log onto WHD's website for a nationwide listing of WHD district and area offices at
http://www.dol.gov/whd/america2.htm.

Electronic Access and Filing Comments

Public Participation:
This proposed rule is available through the
Federal Register
and the
http://www.regulations.gov
website. You may also access this document via WHD's website at
http://www.dol.gov/whd/.
To comment electronically on Federal rulemakings, go to the Federal eRulemaking Portal at
http://www.regulations.gov,
which will allow you to find, review, and submit comments on Federal documents that are open for comment and published in the
Federal Register
. You must identify all comments submitted by including “RIN 1235-AA20” in your submission. Commenters should transmit comments early to ensure timely receipt prior to the close of the comment period (11:59 p.m. on the date identified above in the
DATES
section); comments received after the comment period closes will not be considered. Submit only one copy of your comments by only one method. Please be advised that all comments received will be posted without change to
http://www.regulations.gov,
including any personal information provided.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Executive Summary

II. Background

A. The FLSA

B. Regulatory History

C. Overview of Existing Regulatory Requirements

III. Need for Rulemaking

IV. Proposed 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. Future Updates to the Earnings Thresholds

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

A. Introduction

B. Methodology To Determine the Number of Potentially Affected EAP Workers

C. Determining the Revised Salary and Compensation Levels

D. Effects of Revised Salary and Compensation Levels

VII. Initial Regulatory Flexibility Analysis (IRFA)

A. Reasons Why Action by the Agency Is Being Considered

B. Statement of Objectives and Legal Basis for the Proposed Rule

C. Description of the Number of Small Entities To Which the Proposed Rule Will Apply

D. Projected Reporting, Recordkeeping, and Other Compliance Requirements of the Proposed Rule

E. Identification, to the Extent Practicable, of All Relevant Federal Rules That May Duplicate, Overlap, or Conflict With the Proposed Rule

VIII. Unfunded Mandates Reform Act Analysis

A. Authorizing Legislation

B. Assessment of Costs and Benefits

C. Least Burdensome Option or Explanation Required

IX. Executive Order 13132, Federalism

X. Executive Order 13175, Indian Tribal Governments

Proposed Amendments to Regulatory Text

I. Executive Summary

The Fair Labor Standards Act (FLSA or Act) requires covered employers to pay employees a minimum wage and, for employees who work more than 40 hours in a week, overtime premium pay at least 1.5-times their regular rate of pay. The FLSA provides a number of exemptions to these two requirements.

Section 13(a)(1) of the FLSA, commonly referred to as the “white collar” or “EAP” exemption, exempts “bona fide” executive, administrative,

professional, outside sales, and computer employees from the minimum wage and overtime requirements of the FLSA. The statute delegates to the Secretary of Labor (the Secretary) the authority to define and delimit the terms of this white collar exemption. Since 1940, the regulations implementing the exemption generally have required three things: (1) The employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the “salary basis test”); (2) the amount of salary paid must meet a minimum specified amount (the “salary level test”); and (3) the employee's job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (the “duties test”).

The Department has long used the salary level test as a tool to help define the white collar exemption on the basis that employees paid less than the salary level are unlikely to be bona fide executives, administrators, or professionals, and, conversely, that nearly all bona fide executives, administrators, and professionals are paid at least that much. The salary level test provides certainty for employers and employees, as well as efficiency for government enforcement agencies. The salary level test's usefulness, however, diminishes as the wages of employees entitled to overtime increase and the real value of the salary threshold falls.

The Department increased the weekly salary level from $455 ($23,660 per year) to $913 ($47,476 per year) in a final rule published May 23, 2016 (“2016 final rule”). That rulemaking was challenged in court, and on November 22, 2016, the U.S. District Court for the Eastern District of Texas enjoined the Department from implementing and enforcing the rule. On August 31, 2017, the court granted summary judgment against the Department, invalidating the 2016 final rule. An appeal of that decision to the United States Court of Appeals for the Fifth Circuit, based on the salary threshold, is being held in abeyance. Currently, the Department is enforcing the regulations in effect on November 30, 2016, including the $455 per week standard salary level, which is the same level set in place during the 2004 final rule.

The Department has reconsidered the $913 per week standard salary level set in the 2016 final rule in light of the district court's decisions, public comments received in response to a July 26, 2017 Request for Information (RFI), and feedback received at public listening sessions the Department held around the country to receive additional public input on issues related to the salary level test.
1

The Department agrees with the vast majority of RFI commenters that the standard salary level needs to exceed $455 per week to more effectively serve its purpose. But the Department now also believes that increasing the standard salary level to $913 per week was inappropriate. The increase excluded from exemption 4.2 million employees whose duties would have otherwise qualified them for exemption, a result in significant tension with the text of section 13(a)(1). As the district court noted in its decision invalidating the 2016 final rule, the increase also untethered the salary level test from its historical justification: Setting a dividing line between nonexempt and potentially exempt employees by screening out from exemption a swath of employees who are unlikely to be bona fide executives, administrators, or professionals because of their compensation level.

1
Timely comments and listening session records may be reviewed at
www.regulations.gov,
docket ID: WHD-2017-0002.

To address the district court's and the Department's concerns with the 2016 final rule and set a more appropriate salary level, the Department proposes to rescind formally the 2016 final rule and simply to update the 2004 standard salary level by applying the same methodology to current data. The 2004 final rule set the standard salary level at approximately the 20th percentile of earnings of full-time salaried workers in the lowest-wage census region (then and now the South) and in the retail sector. This proposed rule would do the same. When this method is applied to 2017 data, and projected forward to January 2020 (the approximate date this rule is anticipated to be effective), it results in a proposed standard salary level of $679 per week ($35,308 per year). The Department anticipates using 2018 data in development of the final rule. The Department estimates that in 2020, 1.1 million currently exempt employees who earn at least $455 per week but less than the proposed standard salary level of $679 per week would, without some intervening action by their employers,
2

gain overtime eligibility.
3

In an attempt to align the regulations better with modern pay practices, the Department also proposes to allow employers to count nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary level test, provided such bonuses are paid annually or more frequently. The Department is not proposing any changes to the standard duties test.

2
Employers may opt to raise salary levels, reorganize workloads, adjust work schedules, or spread work hours in order to avoid payment of overtime pay.

3
The Department also estimates that an additional 2.0 million white collar workers who are currently nonexempt because they do not satisfy the EAP duties tests and currently earn at least $455 per week but less than $679 per week would have their overtime-eligible status strengthened in 2020 because these employees would now fail both the salary level and duties tests.

The Department believes that the proposed update to the standard salary level will maintain the traditional purposes of the salary level test, and will help employers more readily identify exempt employees. In proposing a new salary level, the Department considered the district court's conclusion that the salary level set in the 2016 final rule exceeded the Department's authority by “exclud[ing] so many employees who perform exempt duties” thereby making “salary rather than an employee's duties determinative” of the applicability of the EAP exemption.
4

The Department has also considered the comments received in response to the RFI and those presented by interested parties at the nationwide listening sessions.

4

Nevada
v.
U.S. Dep't of Labor,
275 F. Supp. 3d 795, 807 (E.D. Tex. 2017).

The Department considered other methods for setting the standard salary level, as described in sections IV.A.v and VI.C. The Department seeks comments on these or other methods that would update the standard salary level to reflect wage growth, are consistent with the salary level's purposes, and are reasonable considering the interests of employers and employees.

In the 2004 final rule, the Department for the first time incorporated a Highly Compensated Employee (HCE) test, which paired a reduced duties requirement with a higher compensation level ($100,000). To update the HCE total annual compensation level (set to $100,000 in the 2004 final rule and increased to $134,004 in the 2016 final rule), the Department is adopting the same methodology used in the 2016 final rule. The Department proposes to set the level equivalent to the 90th percentile of full-time salaried workers nationally, similarly projected forward to 2020, which results in an increase in the annual compensation level to $147,414 per year. Without intervening action by their employers, an estimated 201,100 currently exempt workers who earn at least $100,000 per year but less than the

proposed HCE annual compensation level of $147,414 per year, and who meet the HCE duties test but not the standard duties test, would also gain overtime eligibility.

Additionally, the Department is proposing special salary levels for certain U.S. territories and an updated base rate for employees in the motion picture producing industry. Furthermore, to prevent the earnings threshold levels from becoming significantly outdated in the future and to provide predictability and certainty for the benefit of workers and employers, the Department intends to propose updates to these levels every four years through notice-and-comment rulemaking, and solicits comment from the public regarding that intention.

This proposed rule is expected to be an Executive Order 13771 deregulatory action. When the Department uses a perpetual time horizon to allow for cost comparisons under Executive Order 13771, and using the 2016 rule as the baseline, the annualized cost savings of this proposed rule is $224.0 million with 7 percent discounting. The net present value of the cost savings is $3.2 billion using a perpetual time horizon and a 7 percent discount rate.

Because the Department is currently enforcing the 2004 salary level, the economic analysis uses the 2004 rule as the baseline for calculating costs and transfers. The economic analysis quantifies three direct costs resulting from the proposal: (1) Regulatory familiarization costs; (2) adjustment costs; and (3) managerial costs. The Department estimates that annualized direct employer costs in the first 10 years following the rule's effective date will be $120.5 million, including $464.2 million in Year 1 and $67.8 million in Year 10. This proposed rulemaking will also give employees higher earnings in the form of transfers of income from employers to employees. Annualized transfers are estimated to be $429.4 million over the first ten years, including $526.9 million in Year 1. Details on the estimated reduced burdens and cost savings of this proposed rule are in the rule's economic analysis.

II. Background

A. The FLSA

On June 25, 1938, the FLSA was signed into law. 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 at least 1.5-times the regular rate of pay for all hours worked over 40 in a workweek.
5

5
29 U.S.C. 201,
et seq.

The FLSA exempts certain employees from its minimum wage and overtime requirements. Section 13(a)(1) exempts EAP employees from the minimum wage provisions of section 206
6

and the overtime pay provisions of section 207, and delegates to the Secretary the authority to define and delimit the terms of the exemption in regulations.
7

6
“[E]xcept subsection (d) in the case of paragraph (1) of this subsection . . . .” 29 U.S.C. 213(a).

7

Id.

Pursuant to Congress' grant of rulemaking authority, in 1938 the Department issued the first regulations at 29 CFR part 541, defining the scope of the section 13(a)(1) exemptions. Since 1940, the implementing regulations have generally imposed three requirements for the exemption to apply: (1) An 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”).

B. Regulatory History

The first version of part 541, establishing the criteria for exempt status under section 13(a)(1), was promulgated in October 1938.
8

The Department revised its regulations in 1940,
9

1949,
10

1954, 1958,
11

1961, 1963, 1967, 1970, 1973, and 1975.
12

A final rule increasing the salary levels was published on January 13, 1981, but was stayed indefinitely on February 12, 1981.
13

In 1985, the Department published an Advance Notice of Proposed Rulemaking that was never finalized.
14

In 1992, the Department twice revised the part 541 regulations. First, the Department created a limited exception from the salary basis test for public employees.
15

The Department then implemented the 1990 law exempting employees in certain computer-related occupations.
16

8
3 FR 2518 (Oct. 20, 1938).

9
5 FR 4077 (Oct. 15, 1940). The 1940 regulations were informed by what has come to be known as the Stein Report.
See
Executive, Administrative, Professional . . . Outside Salesman Redefined, Wage and Hour Division, U.S. Department of Labor, Report and Recommendations of the Presiding Officer [Harold Stein] at Hearings Preliminary to Redefinition (Oct. 10, 1940) (“Stein Report”).

10
14 FR 7705 (Dec. 24, 1949); 14 FR 7730 (Dec. 28, 1949). The 1949 regulations were informed by what has come to be known as the Weiss Report.
See
Report and Recommendations on Proposed Revisions of Regulations, Part 541, by Harry Weiss, Presiding Officer, Wage and Hour and Public Contracts Divisions, U.S. Department of Labor (June 30, 1949) (“Weiss Report”).

11
23 FR 8962 (Nov. 18, 1958). The 1958 regulations were informed by what has come to be known at the Kantor Report.
See
Report and Recommendations on Proposed Revision of Regulations, Part 541, Under the Fair Labor Standards Act, by Harry S. Kantor, Assistant Administrator, Office of Regulations and Research, Wage and Hour and Public Contracts Divisions, U.S. Department of Labor (Mar. 3, 1958) (“Kantor Report”).

12

See
19 FR 4405 (July 17, 1954); 26 FR 8635 (Sept. 15, 1961); 28 FR 9505 (Aug. 30, 1963); 32 FR 7823 (May 30, 1967); 35 FR 883 (Jan. 22, 1970); 38 FR 11390 (May 7, 1973); 40 FR 7091 (Feb. 19, 1975).

13
46 FR 11972 (Feb. 12, 1981).

14
50 FR 47696 (Nov. 19, 1985).

15
57 FR 37677 (Aug. 19, 1992).

16
57 FR 46742 (Oct. 9, 1992);
see
Sec. 2, Public Law 101-583, 104 Stat. 2871 (Nov. 15, 1990),
codified at
29 U.S.C. 213 Note.

From 1949 until 2004, the part 541 regulations contained two different tests for exemption—a “long” test that paired a more rigorous duties test with a lower salary level, and a “short” test that paired a more flexible duties test with a higher salary level. On April 23, 2004, the Department issued a final rule (2004 final rule), which replaced the “long” and “short” test system for determining exemption status with a single “standard” salary level paired with a “standard” duties test. The Department set the standard salary level at $455 per week.
17

17
69 FR 22122 (Apr. 23, 2004).

On May 23, 2016, the Department issued another final rule (2016 final rule), which raised the standard salary level to $913 per week and instituted a mechanism to automatically update the salary level every three years.
18

The 2016 final rule also permitted employers, for the first time, to satisfy up to 10 percent of the standard salary requirement with nondiscretionary bonuses and incentive payments (including commissions), provided that those forms of compensation were paid at least quarterly. The rule set an effective date of December 1, 2016.

18
81 FR 32391 (May 23, 2016).

On November 22, 2016, the United States District Court for the Eastern District of Texas issued a preliminary injunction, enjoining the Department from implementing and enforcing the 2016 final rule, pending further review.
19

On August 31, 2017, the district court granted summary judgment against the Department of Labor.
20

The court held that the 2016 final rule's salary level exceeded the Department's authority and that the

entire final rule was therefore invalid. The court determined that a salary level that excludes from exemption an unusually high number of employees who pass the duties test stands in tension with Congress's command to exempt bona fide EAP employees.

19

See Nevada
v.
U.S. Dep't of Labor,
218 F. Supp. 3d 520 (E.D. Tex. 2016).

20

See Nevada
v.
U.S. Dep't of Labor,
275 F. Supp. 3d 795 (E.D. Tex. 2017).

On July 26, 2017, the Department published a Request for Information (RFI) asking for public input on what changes the Department should propose in a new NPRM on the EAP exemption.
21

The Department received over 200,000 comments on the RFI, which are discussed below. On October 30, 2017, the Government appealed the district court's summary judgment decision to the United States Court of Appeals for the Fifth Circuit. On November 6, 2017, the Fifth Circuit granted the Government's motion to hold that appeal in abeyance while the Department undertook further rulemaking to redetermine the salary level. Further, between September 7 and October 17, 2018, the Department held listening sessions in all five Wage and Hour regions throughout the country to supplement feedback received as part of the RFI.
22

21
82 FR 34616 (July 26, 2017).

22
Listening Session transcripts may be viewed at
www.regulations.gov,
docket ID WHD-2017-0002.

C. 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, professional, and outside sales employees, as well as teachers and academic administrative personnel. The regulations also define those computer employees who are exempt under section 13(a)(1) and section 13(a)(17). The employer bears the burden of establishing the applicability of any exemption from the FLSA's pay requirements.
23

Job titles, job descriptions, or the payment of salary instead of an hourly rate are insufficient, standing alone, to confer exempt status on an employee.

23

See, e.g., Idaho Sheet Metal Works, Inc.
v.
Wirtz,
383 U.S. 190, 209 (1966);
Walling
v.
Gen. Indus. Co.,
330 U.S. 545, 547-48 (1947).

To qualify for the EAP exemption, employees must meet certain tests regarding their job duties
24

and generally must be paid on a salary basis at least the amount specified in the regulations.
25

Some employees, such as doctors, lawyers, teachers, and outside sales employees, are not subject to salary tests.
26

Others, such as academic administrative personnel and computer employees, are subject to special, contingent earning thresholds.
27

In 2004, the standard salary level for EAP employees was set at $455 per week (equivalent to $23,660 per year for a full-time worker), and the total annual compensation level for highly compensated employees was set at $100,000.
28

In light of the district court's decision invalidating the 2016 final rule, these are the salary levels currently enforced by the Department.
29

24

See
§§ 541.100 (executive employees); 541.200 (administrative employees); 541.300, 541.303-.304 (teachers and professional employees); 541.400 (computer employees); 541.500 (outside sales employees).

25
Alternatively, administrative and professional employees may be paid on a “fee basis” for a single job regardless of the time required for its completion as long as the hourly rate for work performed (
i.e.,
the fee payment divided by the number of hours worked) would total at least the weekly amount specified in the regulation if the employee worked 40 hours.
See
§  541.605.

26

See
§§  541.303(d); 541.304(d); 541.500(c); 541.600(e). Such employees are also not subject to a fee-basis test.

27

See
§  541.600(c)-(d).

28
69 FR 22123.

29
The current text of the Code of Federal Regulations (CFR) reflects the updates made in the 2016 final rule. Therefore, unless otherwise indicated, citations to part 541 refer to the current CFR, and the proposed amendments to the regulatory text reflect the current CFR's inclusion of the 2016 updates. However, because the Department is currently enforcing the 2004 standard salary and total annual compensation levels, the NPRM references the 2004 standard salary and total annual compensation levels.

The 2004 final rule created the “highly compensated employee” (HCE) test for exemption. Under the HCE test, employees who receive at least a specified total annual compensation (which must include at least the standard salary amount 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.
30

The HCE test applies only to employees whose primary duty includes performing office or non-manual work.
31

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.
32

30
§  541.601.

31
§ 541.601(d).

32

Id.

Finally, the FLSA does not preempt stricter state standards. If a State establishes a stricter standard to qualify for exemption from state overtime standards than the corresponding FLSA standard (
e.g.,
higher earnings thresholds or more rigorous duties tests), the stricter standard continues to apply for state law purposes.
33

33

See
29 U.S.C. 218.

III. Need for Rulemaking

The primary goal of this rulemaking is to update the weekly salary amounts used by the Department to help define and delimit the EAP exemption, as required by the Act. In light of the district court's decision ruling that the 2016 final rule was invalid, the Department is currently enforcing the $455 per week standard salary level from the 2004 final rule. The Department recognizes that the $455 per week standard salary level, which the Department has enforced for nearly a decade and a half, should be updated to reflect current wages.

Therefore, the Department's proposed approach for this rulemaking is simple. It proposes to apply the same method used to calculate the salary threshold in 2004 to current data. The Department expects that this method will keep the standard salary level aligned with the intervening years' growth in wages. This approach has withstood the test of time, is familiar to employees and employers, and can be used without causing significant hardship or disruption to employers or the economy, while ensuring overtime-eligible workers continue to receive the protections intended by Congress.

The Department's proposed approach would also address concerns with the 2016 final rule identified by the district court. The salary level test has historically served as a dividing line between nonexempt and potentially exempt employees, excluding from exemption a large swath of employees on the reasoning that employees compensated below the salary level are very unlikely to be employed “in a bona fide executive, administrative, or professional capacity.”
34

Given these purposes, the salary level cannot be set too high, or it would unduly deny exemption to bona fide executive, administrative, and professional employees who, Congress has instructed, “shall not” be subject to the FLSA's overtime and minimum wage requirements.
35

The 2016 final rule went beyond the limited traditional purpose of setting a salary “floor” to identify certain obviously nonexempt employees, and instead excluded from exemption many employees who had previously been, and should have continued to be, exempt by reference to their duties. The Department's proposed

approach in this rulemaking would address that concern.

34
29 U.S.C. 213(a)(1).

35
29 U.S.C. 213(a).

The proposed rule includes several additional updates. The Department proposes updating the HCE total annual compensation threshold to an amount of $147,414. The Department also proposes to allow the inclusion of nondiscretionary bonuses and incentive payments (including commissions) paid on an annual or more-frequent basis to satisfy up to 10 percent of the standard salary level, and to revise the special salary levels provided under part 541. The Department intends to propose an update to the part 541 earnings thresholds every four years to prevent the levels from becoming outdated. More regular updates would promote greater stability, avoiding the disruptive salary level increases that can result from lengthy gaps between updates, and provide appropriate wage protection for those under the threshold.

Summary of Comments on the Request for Information and at the Listening Sessions

On July 26, 2017, WHD published an RFI to solicit public input to inform the Department's work in developing a proposal to revise the part 541 regulations. The RFI solicited feedback on questions related to the salary level test, the duties test, the possibility of multiple salary levels, the inclusion of nondiscretionary bonuses and incentive payments to satisfy a portion of the salary level, the annual compensation test for highly compensated employees, and the automatic updating of the standard salary and HCE annual compensation level tests. The RFI was published in the
Federal Register
with a 60-day public comment period.
36

36
82 FR 34616.

Over 200,000 comments were received from a broad array of stakeholders, including small business owners, large companies, employer and employee associations, state and local governments, unions, higher education institutions, non-profit organizations, law firms, workers, and other interested members of the public.

In the RFI, the Department asked several questions about the standard salary level, seeking input on the appropriate level to fulfill the salary level's historical role in determining exemption status. In particular, the Department asked whether updating the 2004 salary level for inflation or applying the 2004 methodology to current salary data would be appropriate, whether differing standard salary levels should be set for different regions or employer sizes, and whether the Department should set different standard salary levels for the executive, administrative, and professional exemptions. The Department also sought information about the actions taken by employers in anticipation of the 2016 final rule, as well as the effect of increased salary levels on particular occupations.

Commenters expressed diverse views about the standard salary level, but mostly favored increasing the salary level above $455 per week, with only a small minority requesting that the salary level be eliminated or kept at its current amount. Nearly all commenters representing employers opposed the standard salary level of $913 per week set in the 2016 final rule. Many expressed the view that this level conflicted with the salary level's longstanding role of screening out obviously nonexempt employees, and would improperly deny exemption for millions of employees who passed the duties test. Several employers expressed concern that raising the standard salary level as high as $913 per week could lead to significant costs for employers. Many of these commenters also expressed concern that the salary level should account for salaries paid in lower-wage regions and industries. Commenters representing employers offered varied methodologies for setting the salary level, including adjusting the $455-per-week threshold to account for inflation since 2004 and applying the 2004 final rule's salary-setting methodology to contemporary earnings data. In contrast, most commenters who were employees or represented employees urged the Department to implement the $913 per week level adopted in the 2016 final rule, although some commenters urged an even higher threshold. For example, some commenters representing employee interests favored applying the pre-2004 short test methodology, or setting the salary level at the 50th percentile of earnings among full-time salaried workers nationwide.

Most commenters supported the continuation of a single nationwide salary level, and expressed concern that introducing multiple standard salary levels—whether differing by region, industry, employer size, or between the executive, administrative, and professional categories—would complicate the regulations. Some commenters representing employers supported region-specific salary levels, and some stated that regional salary levels would be appropriate if the alternative is a single salary level that is too high in low-wage regions or industries. Relatedly, the Department sought views on whether there should be multiple annual compensation levels (by region or by size of employer) for the HCE exemption. The Department received few comments on this subject, but those that addressed it generally favored a single HCE annual compensation level given its simplicity, and some stated that adding additional levels would increase litigation costs.

The Department also inquired whether it should periodically update the standard salary level and the HCE total annual compensation levels. Most commenters representing employers opposed automatic updating. Commenters in favor of periodic automatic updates, including most commenters representing employees, asserted that updating is needed to preserve a “meaningful” standard salary level. Commenters that opined on the frequency of potential periodic updates generally offered a range of 3 to 5 years for the updates, although some suggested more frequent updates.

In addition to questions regarding the salary level, the Department asked whether it should, as it did with the 2016 final rule, permit nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of an employee's salary for purposes of the salary level test, and whether this was an appropriate limit. Many commenters supported including at least a portion of nondiscretionary bonuses and incentive payments in the standard salary threshold calculation, but there was some disagreement among commenters about the amount of such payments that should be included and the frequency of the relevant bonus payments. Many commenters representing employees supported a 10-percent cap on inclusion of nondiscretionary bonuses (the same cap was part of the 2016 final rule), or alternatively, not counting bonuses toward the salary level at all. Conversely, many commenters representing employers advocated that a higher percentage of nondiscretionary bonuses, or all types of bonuses and incentive payments, should be counted, in part because they asserted that such a cap disadvantages industries that rely on incentive compensation. But not all employers agreed. In particular, some public sector employers and smaller non-profits, whose funding restrictions may preclude them from awarding nondiscretionary bonuses and incentive payments, expressed their view that permitting nondiscretionary bonuses to count toward an employee's salary creates a competitive disadvantage for them.

Finally, the Department inquired whether a test for exemption based solely on employee duties is preferable to the current standard test. Most commenters opposed instituting a duties-only test for the section 13(a)(1) exemptions or returning to the long and short duties test combination that existed before the 2004 final rule. Some of these commenters worried that a duties-only test would result in a more rigid test that includes quantitative limits on the performance of nonexempt work, which they felt would unduly burden business operations and increase litigation costs.

As follow-up to the RFI, between September 7 and October 17, 2018, the Department broadened its outreach and conducted listening sessions in diverse locations around the country.
37

A wide range of stakeholders attended the listening sessions, including higher education, employees, employers, business associations, non-profit organizations, small businesses, employee advocates, unions, state and local government representatives, and members of Congress. At the listening sessions, the Department requested input on the following issues:

37
The Department conducted listening sessions in a representative city from each of WHD's five regions to get diverse input from stakeholders across the country and assess the impact to each region.

1. What is the appropriate salary level (or range of salary levels) above which the overtime exemptions for bona fide executive, administrative, or professional employees may apply? Why?

2. What benefits and costs to employees and employers might accompany an increased salary level? How would an increased salary level affect real wages (
e.g.,
increasing overtime pay for employees whose current salaries are below a new level but above the current threshold)? Could an increased salary level reduce litigation costs by reducing the number of employees whose exemption status is unclear? Could this additional certainty produce other benefits for employees and employers?

3. What is the best methodology to determine an updated salary level? Should the update derive from wage growth, cost-of-living increases, actual wages paid to employees, or some other measure?

4. Should the Department more regularly update the standard salary level and the total-annual-compensation level for highly compensated employees? If so, how should these updates be made? How frequently should updates occur? What benefits, if any, could result from more frequent updates?
38

38
83 FR 49869 (Oct. 3, 2018); 83 FR 43825 (Aug. 28, 2018).

For the most part, feedback provided at the listening sessions was consistent with and reinforced the comments received in response to the RFI. Stakeholders expressed a wide variety of views on the appropriate salary level and salary level methodology, timing for implementing changes, review of the duties tests, and potential impacts of the Department's rulemaking. Stakeholders overwhelmingly supported increasing the salary level. Many commenters expressed concerns about the size of the increase in the 2016 final rule, while others supported the level set in that rule. While the HCE exemption was not a primary focus of any of the listening sessions, a number of business stakeholders supported retaining the $100,000 total annual compensation requirement set in the 2004 final rule.

The Department appreciates and has considered the views of all those who submitted comments in response to the RFI and participated in the listening sessions, and welcomes further input from the public in response to this NPRM. The comments to the RFI and the input from the listening sessions have informed the development of this NPRM and the Department's understanding of the effect of the part 541 regulations in the workplace.

IV. Proposed Regulatory Revisions

The Department proposes to rescind formally the 2016 final rule, replacing it with a new rule that updates the standard salary and HCE annual compensation levels under part 541 by setting the standard salary level using the 2004 methodology applied to current data and setting the HCE annual compensation level using the 2016 methodology applied to current data, and projecting both levels to January 2020. In addition, the Department proposes to apply a special salary level to Puerto Rico, the Virgin Islands, Guam, and the Commonwealth of the Northern Mariana Islands, a separate special salary level to American Samoa, and an updated special weekly “base rate” to the motion picture producing industry. The Department also proposes that nondiscretionary bonuses and incentive payments (including commissions) paid on an annual or more frequent basis may be used to satisfy up to 10 percent of the standard salary level. Finally, moving forward, the Department intends to propose updates to the salary and compensation levels every four years to ensure that these levels continue to provide useful tests for exemption. The Department believes that this proposal addresses the legal concerns that led to the invalidation of the 2016 final rule, and appropriately updates the part 541 regulations.

Given the recent history of litigation in this area, the Department here explains for the benefit of commenters the operative effects of the proposed rule. If finalized, the proposed rule would replace the 2016 final rule functionally by revising the part 541 regulatory text in the Code of Federal Regulations. But a final rule based on this proposal would also formally rescind the 2016 final rule. That rescission would operate independently of the new content in the final rule, as the Department intends it to be severable from the substantive proposal for revising part 541. As explained more fully below, the Department believes that rescission of the 2016 final rule is appropriate, regardless of the new content proposed for its replacement. Thus, even if the substantive provisions of a new final rule revising part 541 were invalidated, enjoined, or otherwise not put into effect, the Department would intend the 2004 final rule to remain operative, not the enjoined 2016 final rule that it now proposes to rescind.

A. Standard Salary Level

i. History of the Standard Salary Level

The first version of part 541, issued in October 1938, set a salary level of $30 per week for executive and administrative employees.
39

The Department updated the salary levels in 1940, maintaining the salary level for executive employees, increasing the salary level for administrative employees, and establishing a salary level for professional employees. In setting those rates, the Department considered surveys of private industry by federal and state government agencies, experience gained under the National Industrial Recovery Act, and Federal Government salaries to identify a salary level that reflected a reasonable “dividing line” between employees performing exempt and nonexempt work.
40

The Department set the salary level for each exemption slightly below the average salary dividing exempt from nonexempt employees, taking into account salaries paid in numerous industries and the percentage of employees earning below these amounts.

39
3 FR 2518 (Oct. 20, 1938).

40
Stein Report at 9, 20-21, 31-32.

In 1949, the Department evaluated salary data from state and federal agencies, including the Bureau of Labor Statistics (BLS). The Department considered wages in small towns and low-wage industries, wages of federal employees, average weekly earnings for exempt employees, starting salaries for college graduates, and salary ranges for different occupations such as bookkeepers, accountants, chemists, and mining engineers.
41

The Department also looked at data showing increases in exempt employee salaries since 1940, and supplemented it with nonexempt employee earnings data to approximate the “prevailing minimum salaries of exempt employees.”
42

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 considered the increase in weekly earnings from 1940 to 1949 for various industries, and then adopted new salary levels at “figure slightly lower than might be indicated by the data” to protect small businesses.
43

Also in 1949, the Department established a second, less-stringent duties test for each exemption, which applied to employees paid at or above a higher “short test” salary level. The original, more-rigorous duties test became known as the “long test.” Apart from the differing salary requirements, the most significant difference between the short test and the long test was that the long test limited the amount of time an exempt employee could spend on nonexempt duties.
44

The short duties tests did not include a specific limit on nonexempt work.

41
Weiss Report at 10, 14-17, 19-20.

42

Id.
at 12.

43

Id.
at 8, 14-20. The Department also justified its modest increases by noting evidence of slow wage growth for executive employees “in some areas and some industries.”
Id.
at 14.

44
The Department instituted a 20 percent cap on nonexempt work as part of the long duties test for executive and professional employees in 1940, and for administrative employees in 1949. 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).

In 1958, the Department set the long test salary levels using data collected by WHD on salaries paid to employees who 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 for white collar and manufacturing employees during the period not covered by the Department's investigations.
45

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.”
46

Thus, the Department set the long test salary levels so that about 10 percent of workers performing EAP duties in the lowest-wage regions and industries would not meet the salary level test and would therefore be nonexempt based on their salary level alone.

45
Kantor Report at 6.

46

Id.
at 6-7.

The Department followed a similar methodology when determining the salary level increase in 1963. The Department examined data on salaries paid to exempt workers collected in a 1961 WHD survey.
47

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 per week.
48

The professional salary level was increased to $115 per week when the 1961 survey data showed that 12 percent of establishments surveyed paid one or more professional employees less than $115 per week.
49

The Department noted that these salary levels approximated the same percentages used to update the salary level in 1958.
50

47
28 FR 7002 (July 9, 1963).

48

Id.
at 7004.

49

Id.

50

See id.

The Department applied a similar methodology when adopting salary level increases in 1970. After examining data from WHD investigations, 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, the Department increased the long test salary level for executive employees to $125 per week when the salary level 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.
51

The Department also increased the long test salary levels for administrative and professional employees to $125 and $140 per week, respectively.

51
35 FR 884-85.

In 1975, rather than follow the prior approaches, the Department updated the 1970 salary levels based on increases in the Consumer Price Index, but adjusted downward “to eliminate any inflationary impact.”
52

This resulted in a long test salary level for the executive and administrative exemptions of $155 per week, and $170 per week for the professional exemption. The short test salary level increased to $250 per week in 1975.
53

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.”
54

Although the Department intended to increase the salary levels based on that study of actual salaries paid to employees, the process was never completed, and the “interim” salary levels remained in effect for the next 29 years.

52
40 FR 7091.

53
Each time the short test was increased between 1949 and 1975, it was set significantly higher than the long test salary levels.

54

Id.

In 2004, the Department replaced the separate long and short tests with a single “standard” salary level test of $455 per week, which was paired with a “standard” duties test for executive, administrative, and professional employees, respectively. The Department noted, in accord with numerous comments received during that rulemaking, that as a result of the outdated salary level, “the `long' duties tests [had], as a practical matter, become effectively dormant” because relatively few salaried employees earned below the short test salary level.
55

The Department estimated that 1.3 million workers earning between $155 and $455 per week would become nonexempt under the new standard salary level.
56

55
69 FR 22126.

56

Id.
at 22123.

In setting the new standard salary level in 2004, the Department used Current Population Survey (CPS) Merged Outgoing Rotation Group (MORG) data collected by BLS that encompassed most salaried employees, including nonexempt salaried employees. The Department selected a standard salary level roughly equivalent to earnings at the 20th percentile of two subpopulations: (1) Salaried employees in the South and (2) salaried employees in the retail industry nationwide. Although prior salary levels had been based on salaries of approximately the lowest 10 percent of exempt salaried employees in low-wage regions and industries, the Department explained that the change in methodology was

warranted in part to account for the elimination of the short and long tests, and because the data sample included nonexempt salaried employees, as opposed to only exempt salaried employees.
57

As in the past, the Department used lower-salary data sets to accommodate businesses for which salaries were generally lower due to geographic- or industry-specific reasons.

57

Id.
at 22167.

The Department published a final rule updating the salary level twelve years later, in 2016.
58

The Department set the standard salary level at an amount that would exclude from exemption the bottom 40 percent of full-time salaried workers (exempt and nonexempt) in the lowest-wage Census Region (the South).
59

The Department estimated that increasing the standard salary level from $455 per week to $913 per week would make 4.2 million workers earning between those levels newly nonexempt, absent other changes by their employers.
60

The Department made no changes to the standard duties test. As previously discussed, on August 31, 2017, the U.S. District Court for Eastern District of Texas declared the 2016 final rule invalid, and the Department's appeal of that decision has been held in abeyance. Until the Department issues a new final rule, it is enforcing the part 541 regulations in effect on November 30, 2016, including the $455 per week standard salary level.

58
81 FR 32391.

59

Id.
at 32408.

60

Id.
at 32393.

ii. Purpose of the Salary Level Requirement

The FLSA states that its minimum wage and overtime requirements “shall not apply with respect to . . . any employee employed in a bona fide executive, administrative, or professional capacity . . . (as such terms are defined and delimited from time to time by regulations of the Secretary . . .).”
61

The Department has long used a salary level test as part of its method for defining and delimiting that exemption.

61
29 U.S.C. 213(a)-(a)(1).

In 1949, the Department summarized the role of the salary level tests over the preceding decade. The Department explained:

In this long experience, the salary tests, even though too low in the later years to serve their purpose fully, have amply proved their effectiveness in preventing the misclassification by employers of obviously nonexempt employees, thus tending to reduce litigation. They have simplified enforcement by providing a ready method of screening out the obviously nonexempt employees, making an analysis of duties in such cases unnecessary. The salary requirements also have furnished a practical guide to the inspector as well as to employers and employees in borderline cases. In an overwhelming majority of cases, it has been found by careful inspection that personnel who did not meet the salary requirements would also not qualify under other sections of the regulations as the Divisions and the courts have interpreted them.
62

62
Weiss Report at 8.

The Department again referenced these principles in the Kantor Report, reiterating, for example, that the salary level tests “provide[ ] a ready method of screening out the obviously nonexempt employees,” and that employees “who do not meet the salary test are generally also found not to meet the other requirements of the regulations.”
63

The Department's 2004 final rule likewise referenced these principles.
64

The Department now proposes to update the standard salary level in light of increased employee earnings, so that it maintains its usefulness in “screening out the obviously nonexempt employees.”

63
Kantor Report at 2-3;
see also
U.S. Dep't of Labor,
28th Annual Report of the Secretary of Labor for the Fiscal Year Ended June 30, 1940
(1940), at 236 (“the power to define is the power to exclude”).

64

See
69 FR 22165; 2003 NPRM, 68 FR 15560, 15570 (Mar. 31, 2003).

For over 75 years the Department has used a salary level test as a criterion for identifying bona fide executive, administrative, and professional employees. Some statements in the Department's regulatory history have at times, however, suggested a greater role for the salary level test. The statements include, for instance, from the 1940 Stein Report, that salary is “ `the best single test of the employer's good faith in characterizing the employment as of a professional nature.' ”
65

The Stein Report even went so far as to state that “if an employer states that a particular employee is of sufficient importance . . . to be classified as an `executive' employee and thereby exempt from the protection of the [A]ct, the best single test of the employer's good faith in attributing importance to the employee's services is the amount he pays for them.”
66

65
81 FR 32413 (quoting Stein Report at 42);
see also
69 FR 22165 (quoting Stein Report at 42).

66
Stein Report at 19;
see also id.
at 5 (“the good faith specifically required by the [A]ct is best shown by the salary paid”);
id.
at 19 (salary provides “a valuable and easily applied index to the `bona fide' character of the employment for which exemption is claimed”);
cf.
Weiss Report at 9 (“salary is the best single indicator of the degree of importance involved in a particular employee's job”); Kantor Report at 2 (“[Salary] is an index of the status that sets off the bona fide executive from the working squad-leader, and distinguishes the clerk or sub-professional from one who is performing administrative or professional work.”). The Department “is not bound by the [Stein, Weiss, and Kantor] reports,” though they have been carefully considered. 69 FR 22124.

The district court's invalidation of the 2016 final rule has prompted the Department to clarify these and similar statements in light of the salary level test's purposes and regulatory history. The concept of a “dividing line” should not be misconstrued to suggest that the Department views the salary level test as an effort to divide all exempt white collar employees from all nonexempt employees. A salary level is helpful to determine who is not an exempt executive, administrative or professional employee—the employees who fall beneath it. But the salary level has significantly less probative value for the employees above it. They may be exempt or nonexempt. Above the threshold, the Department evaluates an employee's status as exempt or nonexempt based on an assessment of the duties that employee performs. An approach that emphasizes salary alone, irrespective of employee duties, would stand in significant tension with the Act. Section 13(a)(1) directs the Department to define and delimit employees based on the “capacity” in which they are employed. Salary is a helpful indicator of the capacity in which an employee is employed, especially among lower-paid employees. But it is not “capacity” in and of itself.

The district court's summary judgment decision endorsed the Department's historical approach to setting the salary level and held the 2016 final rule unlawful because it departed from it. The district court approvingly cited the Weiss Report and explained that setting “the minimum salary level as a floor to `screen[ ] out the obviously nonexempt employees' ” is “consistent with Congress's intent.”
67

Further endorsing the Department's earlier rulemakings, the district court stated that prior to the 2016 final rule, “the Department ha[d] used a permissible minimum salary level as a test for
identifying
categories of employees Congress intended to exempt.”
68

The court then explained that in contrast to these acceptable past practices, the 2016 standard salary level of $913 per week was unlawful because

it would exclude from exemption “so many employees who perform exempt duties.”
69

In support, the court cited the Department's estimate that, without some intervening action by their employers, the new salary level would result in 4.2 million workers becoming nonexempt.
70

The court also emphasized the magnitude of the salary level increase, stating that the 2016 final rule “more than double[d] the previous minimum salary level” and that “[b]y raising the salary level in this manner, the Department effectively eliminate[d] a consideration of whether an employee performs `bona fide executive, administrative, or professional capacity duties.' ”
71

The district court declared the final rule invalid because the Department had unlawfully excluded from exemption “entire categories of previously exempt employees who perform `bona fide executive, administrative, or professional capacity' duties.”
72

67
275 F. Supp. 3d at 806 (quoting Weiss Report at 7-8);
see also id.
at 807 at n.6 (supporting salary level that operates “as more of a floor”) (internal quotation marks and citation omitted).

68

Id.
at 806 (emphasis in opinion).

69

Id.
at 807.

70

Id.
at 806.

71

Id.
at 807 (quoting 29 U.S.C. 213(a)(1)).

72

Id.
at 806 (quoting 29 U.S.C. 213(a)(1)).

The Department has reexamined the 2016 final rule in light of the district court's decision. That rule contained language suggesting that the salary level test had a greater role to play than its modest historical function. For example, the Department stated that in light of the new, single standard duties test, “the salary threshold must play a greater role in protecting overtime-eligible employees,” and specifically that “it is necessary to set the salary level higher . . . because the salary level must perform more of the screening function previously performed by the long duties test.”
73

Such language is inconsistent with the salary level's historical purpose of setting a floor for exemption.

73
81 FR 32412, 32465-66.

The 2016 final rule's approach—under which salary alone would determine exempt status in many more instances—also led to a result in tension with the Act. As the district court recognized, the 2016 final rule removed the EAP exemption from 4.2 million workers who would have otherwise been exempt because they passed the salary basis and duties tests established under the 2004 final rule. In contrast, had the Department simply applied the 2004 methodology to set the standard salary level, the 2016 final rule would have resulted in approximately 683,000 workers who satisfied the duties test becoming nonexempt.
74

The Department has long recognized that the salary level test is “a dividing line [that] cannot be drawn with great precision but can at best be only approximate,”
75

and so any salary level set by the Department will exclude from exemption some employees who pass the duties test. But a salary level that exempts an unusually high number of those employees—as occurred with the 2016 final rule
76

—stands in tension with Congress's command to exempt bona fide EAP employees. A salary level set that high does not further the purpose of the Act, and is inconsistent with the salary level test's useful, but limited, role in defining the EAP exemption.

74

See
81 FR 32504 (Table 32).

75
Weiss Report at 11.

76
The Department explained that (at the time of the analysis) 12.2 million salaried white collar workers earned more than $455 per week but were overtime eligible because they failed the duties test, while 838,000 salaried white collar workers were overtime eligible because even though they passed the standard duties test they earned below $455 per week. The Department then estimated that a $913-per-week salary level would result in 6.5 million salaried white collar workers who failed only the duties test, and increase to 5.0 million the number of salaried white collar workers who passed the duties test but would be overtime eligible because they failed the salary level test.
See
81 FR 32464-65;
see also id.
at 32413.

The Department justified the change in the 2016 final rule in part by explaining that when the salary level increases, “it is inevitable that `some employees who have been classified as exempt under the present salary tests will no longer be within the exemption under any new tests adopted.' ”
77

However, this consequence (which follows any salary level increase) does not itself inform what salary level the Department should set. The Department also stated in 2016 that the new salary level would narrow the gap between the number of workers who are nonexempt because they fail only the salary level test and those who are nonexempt because they fail only the duties test.
78

But the Department has never compared the number of employees who are nonexempt based exclusively on the salary or duties tests, respectively, to determine the effectiveness of the salary level. To the contrary, parity between these groups would create tension with the salary level's historical purpose of “screening out the obviously nonexempt employees.”

77

Id.
at 32413 (quoting Kantor Report at 5).

78

See supra
n.76 (citing 81 FR 32464-65; 81 FR 32413).

The Department also justified the 2016 final rule's salary level by stating that it was correcting a “mismatch” between the 2004 final rule's salary level and the standard duties test. The Department stated that while it historically had paired a more rigorous duties test (the long test) with a lower salary level and a less rigorous duties test (the short test) with a higher salary level, the 2004 final rule paired a less rigorous duties test with a lower salary level:

Because the long duties test included a limit on the amount of nonexempt work that could be performed, it could be paired with a low salary that excluded few employees performing EAP duties. In the absence of such a limitation in the duties test, it is necessary to set the salary level higher (resulting in the exclusion of more employees performing EAP duties) because the salary level must perform more of the screening function previously performed by the long duties test. Accordingly the salary level set in this Final Rule corrects for the mismatch in the 2004 Final Rule between a low salary threshold and a less rigorous duties test.
79

79
81 FR 32409.

The Department's solution to the purported mismatch, however, introduced a new issue. The 2016 final rule's salary level, which was “at the low end of the historical salary range of short test salary levels,”
80

failed to account for the absence of a long test that employers could use to claim the exemption for lower-paid white collar workers who were traditionally exempt. The Department's analysis did not sufficiently account for this change, and as a result, the $913 per week standard salary level deviated from the Department's longstanding policy of setting a salary level that does not “disqualify[ ] any substantial number of” bona fide executive, administrative, and professional employees from exemption.
81

80

Id.
at 32414.

81
Kantor Report at 5.

More fundamentally, except at the relatively low levels of compensation where EAP employees are unlikely to be found, the salary level is not a substitute for an analysis of an employee's duties. It is, at most, an indicator of those duties. For most white collar, salaried employees, the exemption should turn on an analysis of their actual functions, not their salaries, as Congress commanded. The salary level test's primary and modest purpose is to identify potentially exempt employees by screening out obviously nonexempt employees.

The mismatch rationale also failed to account fully for the Department's part 541 exemption history. The standard duties test was introduced by the 2004 final rule and has been in effect for 15 years. The short duties test, which it is similar to, was functionally the

predominant test in use for the preceding 13 years, since the 1975 long test salary levels were equaled or surpassed by the FLSA minimum wage in 1991.
82

Altogether, most employers and employees have effectively been covered by this one-test system for over 25 years. This practice is highly relevant to any update by the Department's approach.

82
In 1975, the Department set a long test salary level of $155 per week for executive and administrative employees, and of $170 per week for professional employees.
See
40 FR 7092. On April 1, 1991, the federal minimum wage increased to $4.25 per hour, which equals $170 for a 40-hour workweek.
See
Sec. 2, Public Law 101-157, 103 Stat. 938 (Nov. 17, 1989).

In light of the considerations above, the Department concludes that, while an increase in the standard salary level from $455 per week was warranted, the increase to $913 per week was inappropriate. As the district court stated, that increase departed from the salary level's purpose as a floor to “ `screen[ ] out the obviously nonexempt employees.' ”
83

The Department is engaging in this rulemaking to realign the salary level with its appropriate limited purpose, to address the concerns about the 2016 final rule identified by the district court, and to update the salary level in light of increased employee earnings.

83

Nevada
v.
U.S. Dep't of Labor,
275 F. Supp. 3d at 806 (quoting Weiss Report at 7-8).

iii. Salary Level Methodology

The Department, nearly all RFI commenters, and almost all those who spoke during the Department's listening sessions agree that the salary level must exceed $455 per week to achieve its intended purpose. Most commenters to the RFI and in the listening sessions favored the simplicity of a single nationwide salary level over varying region-specific levels, and urged the Department not to return to its past practice of setting different salary levels for executive, administrative, and professional employees. However, some commenters representing employers supported establishing multiple salary levels based on region, industry, or employer size. Nearly all commenters opposed reinstating separate long and short tests with corresponding salary levels and duties tests.

After considering the issues at length, reviewing public comments responding to the RFI, and considering comments provided in the listening sessions, the Department is proposing simply to update the standard salary level set in 2004 using current data. The Department believes that adherence to the 2004 final rule's methodology is reasonable and appropriate. The Department has enforced the 2004 final rule's salary level for nearly 15 years—the second-longest period (after the salary levels set in 1975) for any part 541 salary level. The Department paired that level with the standard duties test when it was enacted, and revisions to the standard duties test are not proposed as part of this rulemaking. After so many years, workers and employers are familiar with a single standard weekly salary level and a single standard duties test. Notably, the 2004 final rule has never been challenged in court. Using the 2004 salary level methodology as the basis for determining an updated salary level thus promotes familiarity and stability for the workplace, ensures workers the important wage protections contained in the Act, and minimizes the uncertainty and potential legal vulnerabilities that could accompany a novel and untested approach.

There are other reasons for this simple approach. The method proposed here is straightforward and avoids new regulatory burdens. It is consistent with the Department's established belief that adopting different salary levels for different areas of the country would create significant administrative difficulties “because of the large number of different salary levels this would require,”
84

and would create undue regulatory complexity. Furthermore, as discussed below, the Department believes that the proposed salary level accounts for nationwide differences in employee earnings and would work appropriately with the standard duties test.The proposed standard salary level also addresses the concerns raised in the district court's summary judgment decision. The $913 per week standard salary level set in the 2016 final rule more than doubled the 2004 final rule's salary level of $455 per week, which the district court concluded resulted in “entire categories of previously exempt employees” being disqualified from exemption “based on salary alone.”
85

The Department proposes to address this problem by setting a salary level that would more appropriately identify obviously nonexempt employees, without including too great a proportion of employees who would otherwise be exempt. This is consistent with the Department's understanding that salary may be used to identify a category of employees who are not bona fide executive, administrative, and professional employees without unduly excluding employees from the exemption. The proposed $679 per week standard salary level would preserve the 2004 methodology—which was based on salaries in the South and in the low-wage retail industry—while updating that salary level to reflect the growth of nominal wages and salaries.

84
69 FR 22171.

85
275 F. Supp. 3d at 806. Moreover, the Department estimated in the 2016 final rule that the salary level would rise to $984 per week in January 2020. 81 FR 32393.

The appropriateness of the proposed salary level is further supported by the number of workers it would affect—
i.e.,
the number of employees who currently pass the standard duties test and earn between $455 and $679 per week, and thus would become nonexempt absent some intervening action by their employers. The district court's decision raised concerns regarding the large number of exempt workers—4.2 million—who earned between $455 and $913 per week and thus would “automatically become eligible” for overtime under the $913 per week standard salary level.
86

The district court noted that this relatively high number indicated that the salary level was displacing the role of the duties test in determining exemption status. The Department acknowledges these concerns and, additionally, in this proposal seeks to update the standard salary level in a manner that does not unduly disrupt employers' operations; dramatically shift employee salaries, hours, or morale; or result in adverse economic effects.

86
275 F. Supp. 3d at 806-07.

As for the details of the methodology, the Department has followed the methodology it used in 2004. In 2004, the Department set the standard salary level at approximately the 20th percentile of earnings for full-time salaried workers in the lowest-wage Census region (the South) and in the retail sector. The Department set the salary level using the 2002 CPS MORG dataset (the most recent CPS dataset practically available), after excluding from the dataset certain classes of workers that are exempt from the FLSA or its salary-level test.
87

87

See
69 FR 22168.

In this proposed rulemaking, the Department used pooled CPS MORG data for 2015-2017, adjusted to reflect 2017 (hereafter referred to as pooled CPS MORG data;
see
Section VI.B.ii for full description). This is the most recently available data. If this approach is adopted in the final rule, the Department anticipates using 2018 CPS data. The Department believes the CPS dataset would be the most appropriate dataset to use to ascertain worker earnings because of its size (approximately 60,000 households

monthly; 15,000 in the MORG dataset) and its breadth of detail (
e.g.,
occupation classifications, salary, hours worked, and industry). Consistent with its proposal to update the salary levels for workers subject to them, the Department analyzed a subset of this CPS MORG data, composed of employed workers age 16 years and older who are covered by the FLSA; subject to the part 541 salary tests; not in “named occupations”
88

; and not exempt from the FLSA due to the agricultural or transportation exemptions. Thus, the subset excluded 27.9 million workers.

88
This includes teachers, physicians, lawyers, judges, and outside sales workers who pass the standard duties test.

Using this subset of the CPS MORG data, the Department proposes to set the standard salary level at approximately the 20th percentile of earnings for full-time salaried workers in the lowest-wage Census region, again the South in this case, and/or in the retail sector.
89

Normally, this would result in a weekly salary level of $641 per week ($33,332 annually), which is also approximately the 20th percentile of both: (1) Earnings for full-time salaried workers in the South, and (2) earnings for full-time salaried workers in the retail sector. However, the Department proposes to inflate this figure to reflect anticipated wage growth through January 2020. This results in the standard salary level proposed in this NPRM, which is $679 per week ($35,308 annually).

89
In the 2004 final rule the Department selected a standard salary level roughly equivalent to earnings at the 20th percentile of two subpopulations: (1) Full-time salaried employees in the South and (2) full-time salaried employees in the retail industry nationwide. In this rulemaking, the Department is setting the standard salary level at the 20th percentile of the combined subpopulations of full-time salaried employees in the South and full-time salaried employees in the retail industry nationwide. This is a change from how the Department modeled the 2004 methodology in the 2016 final rule, when it used combined subpopulations of full-time salaried employees in the South and full-time salaried employees in leisure and hospitality, other services, and public administration. 81 FR 32462.

The Department proposes this small adjustment to better reflect employees' anticipated compensation at the time the rule becomes effective. In the 2004 final rule, the Department set the salary level using earning percentiles as they were two years earlier (2002) than the rule's effective date (2004), since the 2002 data was the most recent practically available data. In contrast, this proposed rule would set its salary level with a projection to January 2020, the approximate date this proposed rule is expected to become effective. The projection would ensure that the standard salary level reflects the 20th percentile of salaried workers in the South and/or in retail when the rule becomes effective, rather than the 20th percentile as of a year or two earlier. The Department acknowledges that the projected number may differ slightly from the results of comprehensive salary data when that data becomes available, but the Department believes that a modest projection is preferable to relying on data that could be a year or two old by the time the final rule becomes effective.

The Department has inflated the salary level by estimating the compound annual growth rate from the standard salary level set in 2004 ($455) to the standard salary level as it would be using the same methodology in 2017 ($641), then used that growth rate to project the standard salary level forward to January 2020. The Department considered alternative indices for inflation. The reasons for not using them are described below.

v. Alternatives Considered

In determining a proposed salary level, the Department considered the methodologies applied in past rulemakings and other alternatives such as using an index to inflate the 2004 salary level to 2017 and to project it forward to 2020.

The Department considered using price indices such as the Personal Consumption Expenditures Price Index (PCEPI), the Consumer Price Index for All Urban Consumers (CPI-U), and the Chained CPI-U; as well as a wage-based measure such as the Employment Cost Index (ECI). The PCEPI measures the change in the nominal prices of goods and services (1) purchased directly by U.S. households and by nonprofit institutions serving U.S. households and (2) purchased by firms and governments on behalf of U.S. households (
e.g.,
medical expenditures paid by Medicare, Medicaid, or private insurance plans). The Consumer Price Index for All Urban Consumers (CPI-U) measures the change in nominal prices for a constant-quality market basket of goods and services purchased by urban consumers, who represent 93 percent of the U.S. population.
90

The Bureau of Labor Statistics also developed the Chained CPI-U in 2002 as an alternative to the CPI-U that would provide a better approximation of cost-of-living for all urban consumers by accounting for a substitution effect.
91

90

See
the Bureau of Labor Statistics Handbook of Methods, updated February 14, 2018, p. 2, at
https://www.bls.gov/opub/hom/pdf/homch17.pdf
(“A unifying framework for dealing with practical questions that arise in the construction of the CPI is provided by the concept of the cost-of-living index (COLI).”).

91

See
Cage et al.,
Introducing the Chained Consumer Price Index. https://www.bls.gov/cpi/additional-resources/chained-cpi-introduction.pdf.

The Department considered the Employment Cost Index (ECI) for wages and salaries of either all civilian workers or just for private sector workers.
92

The ECI is calculated on a quarterly basis by the BLS using the results of the National Compensation Survey (NCS), a survey of non-Federal employers that gathers comprehensive data on employee salaries, wages, and benefits.
93

The ECI measures changes over time in wages and salaries across the overall non-Federal civilian workforce generally and among different subgroups.

92

See generally
Bureau of Labor Statistics, Employment Cost Trends, How to Use the Employment Cost Index for Escalation,
https://www.bls.gov/ncs/ect/escalator.htm.

93

See
Bureau of Labor Statistics, National Compensation Survey,
https://www.bls.gov/ncs/.

The Department has decided against proposing these alternatives for three reasons. The paramount reason is that none is as straightforward, consistent, or accurate as using current salary data. Each is a projection of what current costs are likely to be; however, such costs can be more readily ascertained simply by measuring them. Second, each is a cost index, (albeit to measure wages) rather than a measure of actual salaries. Third, each of the alternatives (and this would hold for any other alternative as well) would be a significant departure from the methodology that served well in 2004—the methodology the Department is proposing to employ again here with minor adjustments and improvements. For the reasons stated earlier—including familiarity, stability, and the standard duties test that accompanied the standard salary level set in 2004—the Department believes an approach that simply updates the 2004 level with current data is preferable to an entirely new methodology.

The Department also considered these same indices for inflating a 2017 salary level (set using the 2004 final rule's methodology and current data) to January 2020. So used, PCEPI would result in a salary level of $671 per week, the C-CPI-U would result in $671 per week, the CPI-U would result in $675 per week, the ECI for civilian workers would result in $678 per week, and the ECI for private sector workers would result in $679 per week.

The Department did not choose to propose any of these alternatives for two reasons. First, the approach being proposed is the most straightforward

and consistent using current salary data. It measures the actual wage growth between the 2004 final rule salary level and the 2017 salary level and applies that growth rate to current data; essentially assuming that wage growth will continue at the same pace. Second, there are disadvantages to some of the other indices described above. The PCEPI, CPI-U, and Chained CPI-U, for example, measure the nominal prices of goods and services to consumers, whereas the standard salary level is meant to demarcate worker salaries. It seems more sensible to use data that measures worker compensation than consumers' cost of living to set such a level. Additionally, the Department notes that use of the ECI for all private sector workers comes to the same result as the methodology chosen.

The salary level increase proposed here would, as discussed in detail in the economic analysis, section VI, result in approximately 1.1 million affected workers losing exempt status (absent other action from their employers). The Department recognizes that any increase to the standard salary level would increase the number of workers who pass the duties test but are paid below the standard salary level; however, the $679-per-week salary level, while necessarily imprecise, would identify a large number of obviously nonexempt employees “without disqualifying any substantial number of” bona fide executive, administrative, and professional employees from exemption.
94

Additionally, the 1.1 million workers likely to be affected by this rule's proposed increase to the standard salary level is close to the 1.3 million workers who were affected by the 2004 final rule's salary level increase.
95

The Department also anticipates that 3.6 million employees paid between $455 and $679 per week who fail the standard duties test (
i.e.,
that are and will remain nonexempt)—2.0 million salaried white collar workers and 1.6 million salaried blue collar workers—will have their nonexempt status made clearer because their salary will fall below the proposed threshold.

94
Kantor Report at 5.

95
69 FR 22213. The 2004 rule estimated that 1,297,855 workers would, without some intervening action by their employers, lose exempt status as a result of the $455 standard salary level set at that time.
See
69 FR 22213, 22253.

vi. Summary of Standard Salary Level Proposal

For the reasons discussed above, the Department proposes to set the standard salary level to qualify for exemption from the FLSA's minimum wage and overtime requirements as an executive, administrative, or professional employee at $679 per week. The Department believes that the proposed standard salary level would help employers identify a large group of employees who perform nonexempt duties, would aid in identifying bona fide EAP employees, and would address the legal concerns that led to the invalidation of the salary level set in the 2016 final rule. The Department invites comments on this proposed salary level and on any alternative salary level or methodology, including but not limited to whether the use of the indices described above, would be more appropriate.

B. Special Salary Tests

i. Puerto Rico, Virgin Islands, Guam, and the Commonwealth of the Northern Mariana Islands
96

96
Under the proposal, the special salary tests would not apply to employees of the Federal government employed in Puerto Rico, the U.S. Virgin Islands, Guam, the Commonwealth of the Northern Mariana Islands, and American Samoa.

Since 2004, the Department has applied the standard salary level to Puerto Rico.
97

After the Department published the 2016 final rule, Congress passed the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA).
98

Section 404 of PROMESA states that “any final regulations issued related to” the Department's 2015 overtime rule NPRM—
i.e.,
the 2016 final rule—“shall have no force or effect” in Puerto Rico until the Comptroller General of the Unites States completes and transmits a report to Congress assessing the impact of applying the final regulations to Puerto Rico, and the Secretary of Labor, “taking into account the assessment and report of the Comptroller General, provides a written determination to Congress that applying such rule to Puerto Rico would not have a negative impact on the economy of Puerto Rico.”
99

97

See
69 FR 22172.

98

See
Public Law 114-187, 130 Stat. 549 (June 30, 2016).

99

See
48 U.S.C. 2193(a)-(b). The Comptroller General's report was published on June 29, 2018 and is available at:
https://www.gao.gov/products/GAO-18-483.

The Department believes that PROMESA does not apply to this NPRM because it is a new rulemaking and thus is not “related to” the 2015 overtime rule NPRM within the meaning of PROMESA. Nonetheless, section 404 reflects Congress' concern with increasing the salary level in Puerto Rico, and Puerto Rico's current economic climate reinforces the importance of the Department exercising caution on this issue. Accordingly, the Department proposes to set a special salary level in Puerto Rico of $455 per week—the level that currently applies under PROMESA. The Department seeks comments on this proposal.

The Department currently applies the standard salary level to the Virgin Islands, Guam, and the Commonwealth of the Northern Mariana Islands (CNMI).
100

The Department understands that U.S. territories face their own economic challenges and that an increase in the salary level affects them differently than the States. In recognition of these challenges and to promote special salary level consistency across U.S. territories, the Department is proposing to also set a special salary level of $455 per week for the Virgin Islands, Guam, and the CNMI. The Department seeks comment on whether this special salary level is appropriate, or whether instead the Department should continue applying the standard salary level to these U.S. territories.

100
In Guam and the CNMI, the Department has applied the salary level test(s) applicable to the States. In the Virgin Islands, the Department applied a special salary level test prior to 2004, but applied the standard salary level beginning in 2004.

ii. American Samoa

The Department has historically applied a special salary level test to employees in American Samoa because minimum wage rates there have remained lower than the federal minimum wage.
101

The Fair Minimum Wage Act of 2007, as amended, provides that industry-specific minimum wages rates in American Samoa will increase every three years until each equals the federal minimum wage.
102

The disparity with the federal minimum wage is expected to remain for the foreseeable future. Accordingly, the Department proposes to maintain a special salary level for employees in American Samoa.

101

See
69 FR 22172.

102

See
Sec. 1, Public Law 114-61, 129 Stat. 545 (Oct. 7, 2015).

The special salary level test for employees in American Samoa has historically equaled approximately 84 percent of the standard salary level.
103

The Department proposes to maintain this percentage and considered whether to set the special salary level in American Samoa equal to 84 percent of the proposed standard salary level ($679 per week)—resulting in a special salary level of $570 per week—or to set it equal to approximately 84 percent of the proposed special salary level applicable to the other U.S. territories ($455 per week)—resulting in a special salary

level of $380 per week. The Department is proposing to set a special salary level of $380 per week in American Samoa. This approach not only maintains the special salary level that the Department is currently enforcing in American Samoa, but also ensures that American Samoa, which has a lower minimum wage than the other U.S. territories, does not have a higher special salary level. The Department seeks comments on this proposal.

103

See, e.g.,
69 FR 22172.

iii. Motion Picture Producing Industry

The Department has permitted employers to classify as exempt employees in the motion picture producing industry who are paid a specified base rate per week (or a proportionate amount based on the number of days worked), so long as they meet the duties tests for the EAP exemption.
104

This exception from the “salary basis” requirement was created in 1953 to address the “peculiar employment conditions existing in the [motion picture producing] industry,” and applies, for example, when a motion picture producing industry employee works less than a full workweek and is paid a daily base rate that would yield the weekly base rate if 6 days were worked.
105

Consistent with its practice since the 2004 final rule, the Department proposes to increase the required base rate proportionally to the proposed increase in the standard salary level test, resulting in a proposed base rate of $1,036 per week (or a proportionate amount based on the number of days worked).
106

The Department seeks comments on this proposal.

104

See
§ 541.709.

105
18 FR 2881 (May 19, 1953).

106
The Department calculated this figure by dividing the proposed weekly salary level ($679) by $455, and then multiplying this result (rounded to the nearest hundredth) by the base rate set in the 2004 final rule ($695 per week). This produces a new base rate of $1,036 (per week), when rounded to the nearest whole dollar.

C. Inclusion of Nondiscretionary Bonuses, Incentive Payments, and Commissions in the Salary Level Requirement

Since 1940, the part 541 regulations have required that exempt EAP employees be paid on a salary basis. Historically, the Department assessed compliance with the salary level test by looking only at the salary or fee payments made to employees and, with the exception of the total annual compensation requirement of the highly compensated employee (HCE) test introduced in 2004, did not include bonus payments of any kind in this calculation. The Department's longstanding position has been to allow employers to pay additional compensation in the form of bonuses, but those payments did not count toward the payment of the required minimum salary.

During public listening sessions held by the Department prior to issuing the 2015 proposal, stakeholders encouraged the Department to consider including nondiscretionary bonuses in determining whether the salary level is met.
107

The stakeholders noted that such bonuses can be a significant part of exempt employees' compensation, and therefore supported the inclusion of bonuses in determining whether the salary level is met.
108

In the 2016 final rule, the Department for the first time allowed employers to use nondiscretionary bonuses and incentive payments that were paid quarterly or more frequently to satisfy up to 10 percent of the standard salary level.
109

Although the 2016 final rule was invalidated,
110

the Department believes that there are benefits to this approach because such bonuses and incentives are an important part of many employers' compensation systems.

107
80 FR 38516, 38521 (July 6, 2015).

108

Id.

109
81 FR 32423-27.

110

See
275 F. Supp. 3d at 808. The nondiscretionary bonuses provision was not discussed in the decision.

In the 2017 RFI and the listening sessions, many commenters reiterated the view that nondiscretionary bonuses and incentive payments should count toward the salary threshold to some degree, although commenters disagreed about the percentage allowance, and some opposed counting such payments toward the salary level at all. Some RFI commenters also expressed concern about the 2016 final rule's requirement that such bonuses be paid at least quarterly to count toward the salary level. These commenters explained that annual bonuses can be substantial, and employers would be penalized if those bonuses were only creditable in the quarter in which they were paid. Having considered these comments, and consistent with its goal of modernizing the part 541 regulations, the Department proposes to permit nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary level test for the executive, administrative, and professional exemptions, provided that such bonuses or payments are paid annually or more frequently.
111

Such payments may include, for example, nondiscretionary incentive bonuses tied to productivity and profitability.
112

111
The employer may use any 52-week period, such as a calendar year, a fiscal year, or an anniversary of the hire year. The Department recognizes that some businesses pay significantly larger bonuses. Where larger bonuses are paid, the amount attributable toward the EAP standard salary level requirement would be capped at 10 percent of the salary level.

112
The Department notes that nonexempt employees may also receive such bonuses. Where nondiscretionary bonuses or incentive payments are made to nonexempt employees, the payments must be included in the regular rate when calculating overtime pay. The Department's regulations at §§ 778.208—.210 explain how to include nondiscretionary bonuses in the regular rate calculation. One way to calculate and pay such bonuses is as a percentage of the employee's total earnings. Under this method, the payment of the bonus includes the simultaneous payment of overtime due on the bonus payment.
See
§ 778.210.

The Department believes this approach is appropriate because such payments have become associated with EAP duties, such as the exercise of independent judgment and management skills. However, the Department received information during the 2016 rulemaking from State and local governments and nonprofits stating that they do not traditionally use such pay methods and might be at a competitive disadvantage if the overtime rule allowed a significant portion of the salary level to be met through such bonus payments. The Department accordingly determined that limiting the amount of the salary requirement that may be satisfied through such payments to 10 percent would help maintain parity between industries that use such pay methods and those that traditionally have not done so, such as nonprofit organizations, and ensure that exempt employees are paid regularly, as required by regulation. The Department did receive comments in the 2016 rulemaking that bonuses are an important part of compensation for some exempt employees. But the standard salary level test is meant to identify a class of nonexempt employees. The Department believes that employees with wages below the proposed standard salary level, who would be nonexempt by definition, also do not typically receive a substantial portion of their wages through bonuses. While the Department proposes to allow employers up to one year to apply nondiscretionary bonus or incentive payments to satisfy 10 percent of the standard salary level, the remaining 90 percent must be paid on a salary or fee basis in accordance with the regulations.

Finally, the Department proposes to permit employers to make a final “catch-up” payment within one pay period after the end of each 52-week period to bring an employee's

compensation up to the required level. Under the proposal, each pay period an employer must pay the exempt executive, administrative, or professional employee 90 percent of the standard salary level ($611.10 per week), and if at the end of the 52-week period the salary paid plus the nondiscretionary bonuses and incentive payments (including commissions) paid does not equal the standard salary level for 52 weeks ($35,308), the employer would have one pay period to make up for the shortfall (up to 10 percent of the standard salary level, $3,530.80). Any such catch-up payment would count only toward the prior year's salary amount and not toward the salary amount in the year in which it was paid.
113

113
Because employers may use nondiscretionary bonuses to satisfy the vast majority of the total annual compensation paid to HCEs, such bonuses will not be permitted to satisfy the standard salary level portion of their compensation.

The Department seeks comments on its proposal to permit nondiscretionary bonuses and incentive payments (including commissions) to satisfy part of the standard salary level. The Department further requests comment on whether the proposed 10 percent cap is appropriate, or if a higher or lower cap is preferable.
114

114
The Department is not considering changing the exclusion of board, lodging, or other facilities from the salary calculation, a position that it has held consistently since the salary requirement was first adopted.
See
§ 541.600. Similarly, the Department also declines to consider including in the salary requirement payments for medical, disability, or life insurance, or contributions to retirement plans or other fringe benefits.
See
§ 541.601(b)(1).

D. Highly Compensated Employees

The 2004 final rule created a new test under the EAP exemption, known as the highly compensated employee (HCE) test. The HCE test is based on the rationale that it is unnecessary to apply the standard duties test to employees who earn at least a certain amount annually—an amount substantially higher than the annual equivalent of the weekly standard salary level—because such employees “have almost invariably been found to meet all the other requirements of the regulations for exemption.”
115

Thus, the HCE test combines a high compensation requirement with a less-stringent, more-flexible duties test.

115
69 FR 22174 (quoting Weiss Report at 22);
see
§ 541.601(c) (“A high level of compensation is a strong indicator of an employee's exempt status, thus eliminating the need for a detailed analysis of the employee's job duties.”).

To be exempt under the HCE test, an employee must earn at least the amount specified in the regulations in total annual compensation and must customarily and regularly perform any one or more of the exempt duties or responsibilities of an executive, administrative, or professional employee.
116

The HCE test applies “only to employees whose primary duty includes performing office or non-manual work.”
117

Additionally, such an employee must receive at least the standard salary level per week on a salary or fee basis, while the remainder of the employee's total annual compensation may include commissions, nondiscretionary bonuses, and other nondiscretionary compensation.
118

Total annual compensation does not include board, lodging, and other facilities, and does not include payments for medical insurance, life insurance, retirement plans, or other fringe benefits.
119

An employer is permitted to make a final “catch-up” payment “during the last pay period or within one month after the end of the 52-week period” to bring an employee's compensation up to the required level.
120

If an employee works for less than a full year, the employee may still qualify for exemption under the HCE test if the employee receives a pro rata portion of the required annual compensation, based upon the number of weeks of employment.
121

116
§ 541.601(a).

117
§ 541.601(d).

118
§ 541.601(b)(1).

119

Id.

120
§ 541.601(b)(2).

121
§ 541.601(b)(3). Similar to employees who work for a full year, one final “catch-up” payment may be made “within one month after the end of employment.”
Id.

The 2004 final rule set the HCE total annual compensation amount at $100,000. In the 2016 final rule, the Department reaffirmed the appropriateness of the HCE test, and increased the total annual compensation requirement to reflect increases in salaries.
122

The Department explained that like the standard salary level, the 2004 HCE total annual compensation value had “eroded over time” and that the share of full-time salaried workers with salaries exceeding $100,000 in fiscal year 2017 was predicted to be about three times the share who earned that amount in 2004.
123

In response, the Department increased the total annual compensation requirement for the HCE test to the annualized weekly earnings of the 90th percentile of full-time salaried workers nationally, which was $134,004 based on the fourth quarter of 2015.
124

As a result of the district court's decision invalidating the 2016 final rule, the Department is currently enforcing the 2004 final rule, including its $100,000 total annual compensation level and the requirement that $455 per week must be paid on a salary or fee basis.
125

122
81 FR 32428-29.

123

Id.
at 32429. Whereas approximately 6.3 percent of full-time salaried workers had salaries exceeding $100,000 in 2004,
see
69 FR 22169, this number was predicted to be approximately 20 percent by fiscal year 2017,
see
81 FR 32429. By January 2021, this number is expected to be approximately 26 percent.

124
81 FR 32429.

125
The district court's decision did not specifically discuss the HCE test; however, the decision invalidated the entire 2016 final rule.

The Department continues to believe that the HCE test is a useful alternative to the standard salary level and duties tests for highly compensated employees. The Department also believes that the HCE compensation level set in 2004, $100,000 per year, was an appropriate level at the time, given that only roughly 10 percent of likely exempt employees who were subject to the salary tests earned at least that amount annually.
126

However, as with the standard salary level, the HCE total annual compensation level must be updated to ensure that it remains a meaningful and appropriate standard when paired with the more-flexible HCE duties test. In 2004, the Department concluded that the HCE compensation level was appropriate because “white collar” employees who earn such high salaries would nearly always satisfy any duties test, and “in the rare instances when these employees do not meet all other requirements of the regulations, a determination that such employees are exempt would not defeat the objectives of section 13(a)(1) of the Act.”
127

Accordingly, it is important to ensure that the HCE total annual compensation level keeps pace with growth in nominal wages and salaries so that it applies only to those employees for whom it was originally intended, namely, those “at the very top of [the] economic ladder.”
128

Additionally, setting an appropriately high total annual compensation level for highly compensated employees ensures that employers continue to apply the standard duties test to employees whose exemption status is less clear.

126
69 FR 22174.

127

Id.
(quoting Weiss Report at 22-23).

128

Id.

The Department proposes to update the HCE test by setting it at the 90th percentile of all full-time salaried workers nationally using 2017 CPS data, then inflated to January 2020. This is similar to the method used in the 2016 final rule, which likewise set the HCE threshold at the 90th percentile of all full-time salaried workers. The inflation

to January 2020 is proposed for the same reason as inflating the standard salary level: To more accurately reflect the salaries of employees at the time the rule becomes effective, rather than at the time data was collected. This results in a proposed HCE total annual compensation level of $147,414, of which $679 must be paid weekly on a salary or fee basis.
129

Notably, this proposed HCE threshold is slightly lower in relative terms than when the HCE threshold was initially adopted in 2004, when it covered 93.7 percent of all full-time salaried workers.
130

But the Department continues to believe that this simpler approach—
i.e.,
pegging the HCE threshold to the 90th percentile of all full-time salaried earnings nationwide—would result in a threshold high enough to “ensure that virtually every salaried white collar employee [above it] would satisfy any duties test.”
131

129
Although the Department is proposing that employers may use nondiscretionary bonuses to satisfy up to 10 percent of the weekly standard salary level when applying the standard salary and duties tests, the Department's proposal does not permit employers to use nondiscretionary bonuses to satisfy the weekly standard salary level requirement for HCE workers. Employers may use commissions, nondiscretionary bonuses, and other nondiscretionary compensation to satisfy the remaining portion of the HCE total annual compensation amount. Because employers may use nondiscretionary bonuses to satisfy the vast majority of the total annual compensation paid to HCE employees, it is not necessary to permit the use of such bonuses to satisfy the standard salary level portion of their compensation.

130
The $100,000 annual compensation level set in 2004 corresponded to approximately 89.8 percent of likely exempt employees and 93.7 percent of full-time salaried workers.
See
69 FR 22169-70 (Tables 3 and 4).

131
81 FR 32429.

Additionally, as with the standard salary level, to ensure that the Department regularly reviews the appropriateness of the HCE total annual compensation amount, the Department intends to propose an update to the level every four years, as discussed further in section IV.E below. The Department estimates that 201,100 workers—those who earn between $100,000 and the proposed HCE total annual compensation level and pass the HCE duties test, but not the standard duties test—would, without some intervening action by their employers, be affected by the increase in the HCE compensation level.

E. Future Updates to the Earnings Thresholds

Congress has instructed the Department to define and delimit the overtime and minimum wage exemptions “from time to time.”
132

The rationale for updating the standard salary and HCE total compensation levels is straightforward: As employees' earnings rise over time, they begin surpassing the earnings thresholds set in the past; the earnings thresholds thus become a less useful measure of employees' relative earnings, and a less useful method for identifying exempt employees. As the Department noted in 2004, outdated regulations “allow unscrupulous employers to avoid their overtime obligations and can serve as a trap for the unwary but well-intentioned employer”; they can also lead increasing numbers of nonexempt employees to “resort to lengthy court battles to receive their overtime pay.”
133

Moreover, lengthy delays between updates to the earnings thresholds may necessitate disruptively large increases when the thresholds are updated.

132
29 U.S.C. 213(a)(1);
see also
FLSA Amendments of 1961, Public Law 87-30; 75 Stat. 65 (May 5, 1961).

133
69 FR 22122.

While the need to update the part 541 earnings thresholds on a regular basis is clear, the method and frequency of doing so has been contested. The Department has historically used notice-and-comment rulemaking to update the salary level tests, but various stakeholders throughout the years have submitted comments asking the Department to establish a mechanism to update the thresholds automatically. In the 1970 final rule, the Department remarked that one commenter's suggestion to implement automatic annual updates to the salary tests based on BLS earnings data “appear[ed] to have some merit” given the delays between some of the Department's earlier updates, but ultimately concluded that “such a proposal [would] require further study.”
134

In the 2004 final rule, the Department declined commenter requests to create an automatic updating mechanism. Instead, the Department expressed its intent “in the future to update the salary levels on a more regular basis.”
135

134
35 FR 884.

135
69 FR 22171-72.

When the Department next revisited the part 541 regulations in 2016, however, it adopted a mechanism to automatically update the earnings thresholds every three years, applying the same methodology used to initially set each threshold in that rulemaking.
136

The stated purpose of the 2016 final rule's updating mechanism was to “ensure that the salary test level is based on the best available data (and thus remains a meaningful, bright-line test), produce more predictable and incremental changes in the salary required for the EAP exemption, and therefore provide certainty to employers, and promote government efficiency.”
137

The district court's summary judgment decision invalidating the 2016 final rule stated that because the standard salary level established by the 2016 final rule was unlawful, the mechanism to automatically update that standard salary level was “similarly . . . unlawful.”
138

136
Specifically, the mechanism provided for using the 40th percentile of non-hourly earnings in the lowest-wage Census Region to automatically update the standard salary level, the 90th percentile of non-hourly earnings nationwide to automatically update the HCE total annual compensation threshold, and making proportionate increases to the special salary levels provided elsewhere in part 541.

137
81 FR 32430.

138
275 F. Supp. 3d at 808.

In light of the district court's decision and the concerns about lengthy delays between updates to the part 541 earnings thresholds, the Department asked for feedback in the 2017 RFI on how the salary and compensation levels should be updated going forward.
139

Responses to this question were mixed. Proponents of an automatic updating mechanism cited lengthy delays between earlier salary level updates, disruptively large increases necessitated by such delays, and the desire for added certainty. Other stakeholders, however, argued that the Department lacked the authority to update the salary level automatically, that an automatic updating mechanism might not be sufficiently flexible to account for unique economic circumstances, and that affected members of the public would not have any influence over the magnitude or timing of future salary level updates. Commenters generally agreed that the earning thresholds should be updated more frequently than to date, but some commenters were concerned that frequent updating would be unduly disruptive.

139
82 FR 34619.

After considering the feedback provided in response to the RFI and at the listening sessions, the Department is committing to evaluate more frequently the part 541 earnings thresholds going forward. Specifically, the Department believes that the standard salary level and the HCE total annual compensation threshold should be proposed to be updated on a quadrennial basis (
i.e.,
once every four years) through an NPRM published in the
Federal Register
, followed by notice-and-comment rulemaking. The Department intends to propose such updates using the same

methodology as the most recent final rule, meaning, in the first instance, the methodology employed by the final rule for which this NPRM is providing notice and opportunity to comment. In these future rulemakings, the Department also intends to seek comment on whether to update the special salary levels that apply to the U.S. territories. Proposed quadrennial updates would ensure public input on how earning thresholds could continue to be up-to-date, while giving businesses sufficient time to adjust to these more frequent (and thus smaller) increases. The Secretary, however, may forestall proposing updates if economic or other factors so indicate. Accordingly, the Department proposes to delete the current (though not enforced) § 541.607, while affirming its intention to propose increasing the earnings thresholds every four years.
140

The Department seeks comment from the public regarding this proposal.

140
Were the Department to codify this commitment in the final rule, the codified provision could have the following two features. First, it could provide that the Department publish a Notice of Proposed Rulemaking in the
Federal Register
in January 2023, and every four years thereafter, proposing an update to the standard salary level and highly compensated employee threshold in accord with the same methodology in the Department's most recent final rule establishing that salary level and threshold (the Notice would propose to retain the most recent levels set for the special salary levels applicable to U.S. territories, while inviting comment on whether to change them). And second, it could provide that the Secretary may, in his or her sole discretion, decline to publish the Notice of Proposed Rulemaking due to economic or other factors, with an accompanying notice published in the
Federal Register
giving the reason or reasons for declining.

V. Paperwork Reduction Act

The Paperwork Reduction Act of 1995 (PRA), 44 U.S.C. 3501
et seq.,
and its attendant regulations, 5 CFR part 1320, require the Department to consider the agency's need for its information collections, their practical utility, as well as the impact of paperwork and other information collection burdens imposed on the public, and how to minimize those burdens. The PRA typically requires an agency to provide notice and seek public comments on any proposed collection of information contained in a proposed rule.
See
44 U.S.C. 3506(c)(2)(B); 5 CFR 1320.8. Persons are not required to respond to the information collection requirements until the Office of Management and Budget (OMB) approves them under the PRA. This NPRM would revise the existing information collection requirement previously approved under OMB control number 1235-0018 (Records to be Kept by Employers—Fair Labor Standards Act) and OMB control number 1235-0021 (Employment Information Form) in that employers would need to maintain records of hours worked for more employees and more employees may file complaints to recover back wages under the overtime pay provision. As required by the PRA, the Department has submitted the information collection revisions to OMB for review to reflect changes that would result from this proposed rule were it to be adopted.

Summary:
FLSA section 11(c) requires all employers covered by the FLSA to make, keep, and preserve records of employees and of wages, hours, and other conditions of employment. An FLSA-covered employer must maintain the records for such period of time and make such reports as prescribed by regulations issued by the Secretary of Labor. The Department has promulgated regulations at 29 CFR part 516 to establish the basic FLSA recordkeeping requirements. This NPRM, if adopted, would not impose any new information collection requirements; rather, using the currently enforced 2004 salary level as the baseline, burdens under existing requirements are expected to increase as more employees receive minimum wage and overtime protections. More specifically, the proposed changes in this NPRM may cause an increase in burden on employers because they will have additional employees to whom certain long-established recordkeeping requirements apply (
e.g.,
maintaining daily records of hours worked by employees who are not exempt from the both minimum wage and overtime provisions). Additionally, the proposed changes in this NPRM may cause an increase in burden if more employees file a complaint with WHD to collect back wages under the overtime pay requirements. The Department anticipates that this increased burden will wane over time as employers adjust to the new rule.

Purpose and Use:
WHD and employees use employer records to determine whether covered employers have complied with various FLSA requirements. Employers use the records to document compliance with the FLSA, including showing qualification for various FLSA exemptions. Additionally, WHD uses the Employment Information form to document allegations of non-compliance with labor standards the agency administers.

Technology:
The regulations prescribe no particular order or form of records, and employers may preserve records in forms of their choosing provided that facilities are available for inspection and transcription of the records.

Minimizing Small Entity Burden:
Although the FLSA recordkeeping requirements do involve small businesses, including small state and local government agencies, the Department minimizes respondent burden by requiring no specific order or form of records in responding to this information collection. Burden is reduced on complainants by providing a template to guide answers.

Public Comments:
As part of its continuing effort to reduce paperwork and respondent burden, the Department conducts a preclearance consultation program to provide the general public and Federal agencies with an opportunity to comment on proposed and continuing collections of information in accordance with the PRA. This program helps to ensure that requested data can be provided in the desired format, reporting burden (time and financial resources) is minimized, collection instruments are clearly understood, and the impact of collection requirements on respondents can be properly assessed. The Department seeks public comments regarding the burdens imposed by the information collections associated with this NPRM. Commenters may send their views about this information collection to the Department in the same manner as all other comments (
e.g.,
through the
regulations.gov
website). All comments received will be made a matter of public record and posted without change to
http://www.regulations.gov,
including any personal information provided.

As previously noted, an agency may not conduct an information collecti

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2019-04514. Public record. Not legal advice.