# 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%3A2019-20353

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** September 27, 2019
- **Citation:** 84 FR 51230

## 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:

Final rule.

SUMMARY:

The Department of Labor is updating and revising the regulations issued under the Fair Labor Standards Act implementing the exemptions from minimum wage and overtime pay requirements for executive, administrative, professional, outside sales, and computer employees.

DATES:

This final rule is effective on January 1, 2020.

FOR FURTHER INFORMATION CONTACT:

Amy DeBisschop, Director, Division of Regulations, Legislation, and Interpretation, Wage and Hour Division, U.S. Department of Labor, Room S-3502, 200 Constitution Avenue NW, Washington, DC 20210; telephone: (202) 693-0406 (this is not a toll-free number). Copies of this final rule may be obtained in alternative formats (Large Print, Braille, Audio Tape or Disc), upon request, by calling (202) 693-0675 (this is not a toll-free number). TTY/TDD callers may dial toll-free 1-877-889-5627 to obtain information or request materials in alternative formats.

Questions of interpretation and/or enforcement of the agency's regulations may be directed to the nearest 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.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Executive Summary

II. Background

A. The FLSA

B. Regulatory History

C. Overview of Existing Regulatory Requirements

D. The Department's Proposal

E. Final Rule Effective Date

III. Need for Rulemaking

IV. Final Regulatory Revisions

A. Standard Salary Level

B. Special Salary Tests

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

D. Highly Compensated Employees

E. 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. Final Regulatory Flexibility Analysis (FRFA)

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

B. The Agency's Response to Public Comments

C. Comment by the Chief Counsel for Advocacy of the Small Business Administration

D. Description of the Number of Small Entities to Which the Final Rule Will Apply

E. Projected Reporting, Recordkeeping, and Other Compliance Requirements of the Final Rule

F. Steps the Agency Has Taken To Minimize the Significant Economic Impact on Small Entities

G. Identification, to the Extent Practicable, of all Relevant Federal Rules That May Duplicate, Overlap, or Conflict With the Final Rule

VIII. Unfunded Mandates Reform Act Analysis

A. Authorizing Legislation

B. Assessment of Costs and Benefits

C. Response to Comments

D. Least Burdensome Option or Explanation Required

IX. Executive Order 13132, Federalism

X. Executive Order 13175, Indian Tribal Governments

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 of at least 1.5 times the regular rate of pay. Section 13(a)(1) of the FLSA, commonly referred to as the “white collar” or “EAP” exemption, exempts from these minimum wage and overtime pay requirements “any employee employed in a bona fide executive, administrative, or professional capacity.” The statute delegates to the Secretary of Labor (Secretary) the authority to define and delimit the terms of the exemption. Since 1940, the regulations implementing the exemption have generally required each of the following three tests to be met: (1) The employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the “salary basis test”); (2) the amount of salary paid must meet a minimum specified amount (the “salary level test”); and (3) the employee's job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (the “duties test”).

The Department of Labor (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 executive, administrative, or professional employees, and, conversely, that nearly all bona fide executive, administrative, and professional employees 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 inflation reduces the real value of the salary threshold.

The Department increased the standard salary level from $455 per week ($23,660 per year) to $913 per week ($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 because it “makes overtime status depend predominately on a minimum salary level, thereby supplanting an analysis of an employee's job duties.”
Nevada
v.
U.S. Dep't of Labor,
275 F. Supp. 3d 795, 806 (E.D. Tex. 2017). An appeal of that decision to the U.S. Court of Appeals for the Fifth Circuit 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 level that was set in a final rule issued April 23, 2004 (“2004 final rule”).

Taking into account the
Nevada
district court's conclusion with respect to the salary level, public comments received in response to a July 26, 2017 Request for Information (RFI), and feedback received at public listening sessions, the Department has undertaken this rulemaking to revise the part 541 regulations so that they

effectively distinguish between the white collar employees whom Congress intended to be protected by the FLSA's minimum wage and overtime provisions and bona fide executive, administrative, and professional employees whom Congress intended to exempt from those statutory requirements.

The Department published a Notice of Proposed Rulemaking (NPRM) on March 22, 2019. The NPRM stated that the standard salary level needed to exceed $455 per week to more effectively serve its purpose, but that the 2016 final rule's increase to $913 per week was inappropriate because it 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). Noting the conclusions of the district court that invalidated the 2016 final rule, the Department explained that the 2016 final rule's inappropriately high salary level “untethered the salary level test from its historical justification” of “[s]etting a dividing line between nonexempt and potentially exempt employees” by screening out only those employees who, based on their compensation level, are unlikely to be bona fide executive, administrative, or professional employees. To address the district court's and the Department's concern with the 2016 final rule and set a more appropriate salary level, the NPRM proposed to rescind the 2016 final rule and update the salary level by applying the same methodology as the 2004 final rule to current earnings data.

In 2004, the Department set the standard salary level at $455 per week ($23,660 per year), which was approximately the 20th percentile of full-time salaried workers in the South and in the retail industry nationally.
1

Accordingly, in the NPRM, the Department proposed to update the standard salary level to the 20th percentile of full-time salaried workers in the lowest-wage Census Region (the South

)
2
and/or in the retail industry nationally using current data.
3

This methodology resulted in a proposed standard salary level of $679 per week ($35,308 per year). Additionally, the Department proposed special salary levels for U.S. territories and an updated base rate for employees in the motion picture producing industry. The Department also proposed to allow employers to count nondiscretionary bonuses and incentive payments toward satisfying up to ten percent of the standard salary level or any of the special salary levels applicable to U.S. territories, so long as such bonuses are paid at least annually. Further, the Department proposed to update the highly compensated employee (HCE) total annual compensation level—a higher compensation level that is paired with a reduced duties requirement to provide an alternative basis for exemption under section 13(a)(1). The HCE level was set at $100,000 in the 2004 final rule and increased to $134,004 in the 2016 final rule, but the Department has continued to enforce the $100,000 level in light of the district court's invalidation of the 2016 final rule. In the NPRM, the Department proposed to update the HCE level by setting it equal to the annualized value of the 90th percentile of weekly earnings of full-time salaried workers nationally, resulting in a level of $147,414 per year. The Department proposed to project both the standard salary level and HCE total annual compensation level to January 2020, the final rule's anticipated effective date. Finally, the Department explained its commitment to update the standard salary level and HCE total compensation levels more frequently in the future using notice-and-comment rulemaking every four years. The Department proposed no changes to the standard duties tests.

1
69 FR 22171.

2
The South Census Region comprises the following: Alabama, Arkansas, Delaware, District of Columbia, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, Virginia, and West Virginia.

3
In 2004, the Department looked to the 20th percentile of full-time salaried workers in the South and in the retail industry nationally to validate the standard salary level set in the final rule. In this final rule, the Department set 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. Accordingly, the use of “and/or” when describing the salary level methodology in this final rule reflects that this data set includes full-time salaried workers who work: (1) In the South but not in the retail industry; (2) in the retail industry but not in the South; and (3) in the South in the retail industry.

The 60-day comment period on the NPRM ended on May 21, 2019, and the Department received more than 116,000 comments. The vast majority of these comments, including tens of thousands of duplicate or similar submissions, were campaign comments using similar template language.
4

After considering the comments, the Department has decided in this final rule to maintain the proposed methodology for updating the part 541 standard salary level, but not to inflate the salary level to January 2020. The Department is also finalizing the special salary levels for certain U.S. territories as proposed, and updating the base rate for employees in the motion picture producing industry. Additionally, the Department is finalizing its proposal to permit employers to count nondiscretionary bonuses, incentives, and commissions toward up to 10 percent of the standard salary level or the special salary levels applicable to the U.S. territories, so long as employers pay those amounts at least annually. The Department has also decided to set the HCE total annual compensation threshold equal to the 80th percentile of earnings of full-time salaried workers nationally, without inflating the threshold to January 2020. When applied to updated data, these methodologies result in a standard salary level of $684 per week ($35,568 per year) and an HCE total annual compensation level of $107,432. Finally, the Department intends to update these thresholds more regularly in the future.

4
Specifically, one organization submitted spreadsheets containing over 56,000 comments from individuals. Of the comments contained in this submission, more than 34,000 were duplicates of comments that were submitted separately by these individuals. Additionally, numerous individual comments associated with this campaign were submitted multiple times. Together, these comments make up the vast majority of the comments received.

The Department estimates that in 2020, 1.2 million currently exempt employees who earn at least $455 per week but less than the standard salary level of $684 per week will, without some intervening action by their employers, gain overtime eligibility. The Department also estimates that an additional 2.2 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 $684 per week, will have their overtime-eligible status strengthened in 2020 because these employees will now fail both the salary level and duties tests. Lastly, an estimated 101,800 employees who are currently exempt under the HCE test will be affected by the increase in the HCE total annual compensation level. The Department has not made any changes to the duties tests in this final rule.

This rule is considered 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 rule is $534.8 million with 7 percent discounting.

Because the Department is currently enforcing the 2004 salary level, much of the economic analysis uses the 2004 rule as the baseline for calculating costs and transfers. The economic analysis

quantifies the direct costs resulting from the rule: (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 $173.3 million with 7 percent discounting, including $543.0 million in Year 1 and $99.1 million in Year 10. This rulemaking will also give employees higher earnings in the form of transfers of income from employers to employees. Annualized transfers are estimated to be $298.8 million over the first ten years, with 7 percent discounting, including $396.4 million in Year 1.

II. Background

A. The FLSA

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

However, there are a number of exemptions from the FLSA's minimum wage and overtime requirements. Section 13(a)(1) of the FLSA, codified at 29 U.S.C. 213(a)(1), exempts from both minimum wage and overtime protection “any employee employed in a bona fide executive, administrative, or professional capacity . . . or in the capacity of outside salesman (as such terms are defined and delimited from time to time by regulations of the Secretary, subject to the provisions of [the Administrative Procedure Act] . . .).” The FLSA does not define the terms “executive,” “administrative,” “professional,” or “outside salesman.” Pursuant to Congress's grant of rulemaking authority, since 1938 the Department has issued regulations at 29 CFR part 541 defining the scope of the section 13(a)(1) exemptions. Because Congress explicitly delegated to the Secretary the power to define and delimit the specific terms of the exemptions through notice and comment rulemaking, the regulations so issued have the binding effect of law.
See Batterton
v.
Francis,
432 U.S. 416, 425 n.9 (1977).

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

Employees who meet the requirements of part 541 are not subject to the FLSA's minimum wage and overtime pay requirements. Some state laws have stricter exemption standards than federal law. The FLSA does not preempt any such stricter state standards. If a State establishes a higher standard than the provisions of the FLSA, the higher standard applies in that State.
See
29 U.S.C. 218(a); 29 CFR 541.4.

B. Regulatory History

The Department has consistently used its rulemaking authority to define and clarify the section 13(a)(1) exemptions. The implementing regulations have generally required each of three tests to be met for the exemptions to apply: (1) The salary basis test; (2) the salary level test; and (3) the duties test.

The first version of part 541, establishing the criteria for exempt status under section 13(a)(1), was promulgated in October 1938.
6

The Department revised its regulations in 1940,
7

1949,
8

1954, 1958,
9

1961, 1963, 1967, 1970, 1973, and 1975.
10

A final rule increasing the salary levels was published on January 13, 1981, but was stayed indefinitely on February 12, 1981.
11

In 1985, the Department published an Advance Notice of Proposed Rulemaking that was never finalized.
12

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.
13

The Department then implemented the 1990 law exempting employees in certain computer-related occupations.
14

6
3 FR 2518 (Oct. 20, 1938).

7
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”).

8
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”).

9
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”).

10

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).

11
46 FR 3010 (Jan. 13, 1981); 46 FR 11972 (Feb. 12, 1981).

12
50 FR 47696 (Nov. 19, 1985).

13
57 FR 37677 (Aug. 19, 1992).

14
57 FR 46742 (Oct. 9, 1992);
see
Sec. 2, Pub. L. 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, which replaced the “long” and “short” test system for determining exemption status with a single “standard” salary level paired with a “standard” duties test.
15

The Department set the standard salary level at $455 per week, and made other changes, some of which are discussed below. In the 2004 final rule, the Department also created the HCE test for exemption, which paired a reduced duties requirement with a higher compensation level ($100,000 per year).

15
69 FR 22122 (Apr. 23, 2004).

On May 23, 2016, the Department issued another final rule, which raised the standard salary level to the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, resulting in a salary level of $913 per week. Additionally, the Department set the HCE total annual compensation level equal to the 90th percentile of earnings of full-time salaried workers nationally ($134,004 annually). The Department also included in the final rule a mechanism to automatically update (every three years) the salary and compensation thresholds, and for the first time permitted nondiscretionary bonuses, incentives, and commissions paid at least quarterly to count toward up to 10 percent of the required salary level.

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.
16

On August 31, 2017, the district court granted summary judgment against the Department.
17

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 “supplant[s] an analysis of an employee's job duties” conflicts with Congress's command to exempt bona fide executive, administrative, and professional employees.
18

As a result of these rulings, the Department has continued to enforce the salary level set in 2004.

16

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

17

See
275 F. Supp. 3d 795.

18

Id.
at 806.

On July 26, 2017, the Department published an RFI asking for public input

on what changes the Department should propose in a new NPRM on the EAP exemption.
19

The Department received over 200,000 comments on the RFI. Between September 7 and October 17, 2018, the Department held listening sessions in all five Wage and Hour regions throughout the country, and in Washington, DC, to supplement feedback received as part of the RFI.
20

19
82 FR 34616 (July 26, 2017).

20
Listening Session transcripts may be viewed at
www.regulations.gov,
docket ID WHD-2017-0002.

On October 30, 2017, the Government appealed the
Nevada
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 set a new salary level.

On March 22, 2019, the Department issued its NPRM, proposing to update and revise the EAP regulations.

C. Overview of Existing Regulatory Requirements

The regulations in 29 CFR 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.
21

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

21

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
22

and generally must be paid on a salary basis at least the amount specified in the regulations.
23

Some employees, such as business owners, doctors, lawyers, teachers, and outside sales employees, are not subject to salary tests.
24

Others, such as academic administrative personnel and computer employees, are subject to special, contingent earnings thresholds.
25

In 2004, the standard salary level for EAP employees was set at $455 per week (equivalent to $23,660 per year for a full-year worker), and the total annual compensation level for highly compensated employees was set at $100,000.
26

Due to the district court's decision invalidating the 2016 final rule, these are the salary levels the Department is currently enforcing.
27

22

See
§§  541.100 (executive employees); 541.200 (administrative employees); 541.300-.303 (teachers and professional employees); 541.400 (computer employees); 541.500 (outside sales employees).

23
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.

24

See
§§ 541.101; 541.303(d); 541.304(d); 541.500(c); 541.600(e). Such employees are also not subject to a fee-basis test.

25

See
§ 541.600(c)-(d).

26
69 FR 22123.

27
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 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 final rule references the 2004 standard salary and total annual compensation levels.

The 2004 final rule created the 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.
28

The HCE test applies only to employees whose primary duty includes performing office or non-manual work.
29

Non-management production line workers and employees who perform work involving repetitive operations with their hands, physical skill, and energy cannot be exempt under this section.
30

28
§  541.601.

29
§  541.601(d).

30

Id.

D. The Department's Proposal

On March 22, 2019, the Department issued its proposal to update and revise the regulations issued under section 13(a)(1) of the FLSA.
31

The Department proposed to update the standard salary level by applying to current data the same method as in the 2004 final rule—
i.e.,
by looking at the 20th percentile of earnings of full-time salaried workers in the lowest-wage Census Region (then and now the South) and/or in the retail industry nationwide. The Department also proposed to update the HCE total annual compensation level using the same method used in the 2016 final rule, setting it equivalent to the 90th percentile earnings of full-time salaried workers nationally. The Department proposed to project both levels to January 2020, the anticipated effective date of a final rule. Additionally, the Department proposed a special salary level of $380 per week for American Samoa, a special salary level of $455 per week for Puerto Rico, the U.S. Virgin Islands, Guam, and the Commonwealth of the Northern Mariana Islands, and a special “base rate” threshold of $1,036 for employees in the motion picture producing industry. The Department also proposed to permit employers to use nondiscretionary bonuses and incentive payments to satisfy up to 10 percent of the standard or special salary levels as long as such payments are made at least annually. As to future updates, the Department reaffirmed its commitment to evaluating the part 541 earnings thresholds more frequently, and stated its intent to propose updates to these levels quadrennially. The Department did not propose any changes to the duties tests.

31
84 FR 10900.

The Department received more than 116,000 timely comments on the NPRM during the 60-day comment period that ended on May 21, 2019. The Department received comments from a broad array of constituencies, including small business owners, employer and industry associations, individual workers, worker advocacy groups, unions, non-profit organizations, law firms (representing both employers and employees), educational organizations and representatives, religious organizations, economists, Members of Congress, state and local governments, professional associations, and other interested members of the public. All timely received comments may be viewed on the
http://www.regulations.gov
website, docket ID WHD-2019-0001.

Some of the comments the Department received were general statements of support or opposition, and the Department also received many identical or nearly identical “campaign” comments sent in response to organized comment initiatives. Nearly all commenters favored some change to the currently enforced regulations, and commenters expressed a wide variety of views on the merits of particular aspects of the Department's proposal. Some commenters, including tens of thousands who submitted similar comments as part of a comment

campaign (“Campaign Comments”),
32

requested that the Department reject the proposal and defend the 2016 final rule. The Department has carefully considered the timely submitted comments addressing the proposed changes.

32

See supra
note 4.

Significant issues raised in the comments are discussed below, along with the Department's responses to those comments. Some commenters appear to have mistakenly filed comments intended for this rulemaking into the dockets for the Department's rulemakings concerning the regular rate (docket ID WHD-2019-0002) or joint employer status (docket ID WHD-2019-0003) under the FLSA. The Department did not consider these misfiled comments in this rulemaking.

The Department received a number of comments that are beyond the scope of this rulemaking. These include, for example, a request that the Department reconsider the scope of the exemption at 29 U.S.C. 207(i) for certain employees of retail and service establishments, and a request for tax write-offs for businesses that pass an annual audit by the Department. In addition, some non-profit organizations asked the Department to work with other federal agencies to create a mechanism that non-profits with government grants and contracts could use to adjust reimbursement rates to cover unanticipated increased costs, such as labor costs due to this rule. For example, in a joint comment, the National Council of Nonprofits and others recommended addressing this issue through changes to the relevant Federal Acquisition Regulations. The Department does not address such issues in this final rule.

Some commenters raised miscellaneous issues that more directly relate to other parts of the Department's regulations. For example, one commenter urged the Department to amend its regular rate regulations to allow the exclusion of any payments that do not count toward the salary level test; one commenter requested that private colleges and universities be permitted to use compensatory time off instead of cash payments for overtime hours; two commenters requested a safe harbor from joint-employment liability for franchisors who help their franchisees implement this rule; and one commenter asked the Department to permit hourly paid employees (beyond just computer employees) to qualify for the exemption. Some commenters requested that the Department make changes to the duties test, either as an alternative to raising the salary level more significantly or regardless of what salary level applies. The Department did not propose any of these changes in the NPRM, and declines to make such changes in this final rule.

A number of commenters asked the Department to provide guidance on how the FLSA applies to non-profit organizations.
See, e.g.,
Colorado Nonprofit Association; Independent Sector; National Council of Nonprofits. The Department notes that the FLSA does not provide special rules for non-profit organizations or their employees, nor does this final rule.
33

33
The Department has issued specific guidance on the application of the FLSA to non-profit entities.
See
Fact Sheet #14A: Non-Profit Organizations and the Fair Labor Standards Act (FLSA), available at:
https://www.dol.gov/whd/regs/compliance/whdfs14a.pdf.

E. Final Rule Effective Date

In the NPRM, the Department referenced an anticipated effective date of January 2020 for purposes of projecting forward the proposed standard salary level and proposed HCE total annual compensation level. Many commenters, while not expressly referencing the effective date, conveyed their view that updates to these regulations are “long overdue.”
See, e.g.,
Legal Aid at Work; Public Housing Authorities Directors Association; Washington State Budget and Policy Center. Similarly, a few commenters encouraged the Department to increase the standard salary threshold, or to promulgate a final rule, “as soon as possible.”
See, e.g.,
International Foodservice Distributors Association; Sergeants Benevolent Association.

Other commenters did specifically address the final rule's effective date. Nearly all of these commenters conveyed the need for employers to have sufficient time to adjust to and implement the rule, but they disagreed on how much time the Department should provide. The National Association of Landscape Professionals favored a period of 90 to 120 days between the rule's publication and its effective date, while several other commenters favored a minimum of 120 days, which was the applicable period of time in the 2004 final rule.
See, e.g.,
Seyfarth Shaw LLP (Seyfarth Shaw); Society for Human Resource Management (SHRM). SHRM thought the effective date should be at least 120 days from the date of publication of the final rule, but acknowledged that the proposed regulations are far more familiar to employers than the changes made in 2004. Other commenters favored a longer period, ranging from six to eighteen months from publication. The U.S. Public Interest Research Group suggested a two-year delay for public interest advocacy groups. Several employer representatives who opposed the proposed HCE level stated that adjusting to the new level would be particularly burdensome. For example, the National Association of Manufacturers stated that the proposed increase would require employers to spend significant time determining whether employees who previously met the HCE test satisfy the standard duties test (and thus remain exempt), and requested that if the Department were to finalize that increase as proposed, it should set a future compliance date that provides sufficient time for employers to adjust to the new HCE level.

Relatedly, multiple commenters requested that the Department “phase in” any new salary/compensation levels over a period of time. Suggested phase-in periods varied widely. Independent Sector and the National Council of Young Men's Christian Associations of the United States of America (YMCA) favored a two-year phase-in period. An individual employee commenter proposed a 3- to 5-year phase-in period for non-profit organizations. Some commenters who requested a phase-in period did not specify a particular timeframe. Many commenters who supported a phase-in cited the importance of providing sufficient time for employers to adapt to and implement the new levels.
See, e.g.,
Lutheran Services in America; National Grocers Association (NGA).

The Department has set an effective date of January 1, 2020, for the final rule. The Department agrees with the commenters who expressed the view that this update to the regulations is “long overdue,” and with those who encouraged the Department to increase the salary level as soon as possible. The time between this rule's publication and effective date exceeds the 30-day minimum required under the Administrative Procedure Act (APA), 5 U.S.C. 553(d), and the 60 days mandated for a “major rule” under the Congressional Review Act, 5 U.S.C. 801(a)(3)(A). While the 2004 rule provided for 120 days between the rule's publication and effective date,
34

the Department agrees with commenters who acknowledged that this final rule will be far more familiar to employers than the substantial changes provided in the 2004 final rule.
35

Additionally, while the 2016 rule provided 192 days from the rule's publication until its effective date, the salary level increase in this rule is more modest, and affects fewer workers—two factors that favor a shorter period. Moreover, given that the Department is currently enforcing the 2004 standard salary level, which an overwhelming majority of commenters agreed needs to be updated, the Department concludes that a lengthier delayed effective date would be imprudent. Additionally, a January 1 date may be convenient for those employers who use the calendar year as their fiscal year, or who use budgets, software systems, or other practices on a calendar-year basis. The Department is also declining to delay the effective date, or create a phase-in, specifically for non-profits. As discussed in more detail in the standard salary level discussion below, consistent with past practice, the Department is declining to create special rules for the application of the part 541 exemptions to non-profits.

34

See
79 FR 22126.

35
The 2004 final rule included several significant changes, including: (1) A significant percentage increase in the salary threshold; (2) a significant

reorganization of the part 541 regulations; (3) the elimination of the short and long test structure that had been in place for more than 50 years and the creation of a single standard test; and (4) the creation of a new test for highly compensated employees. In contrast, here the Department is not changing the standard duties test or reorganizing the regulations, and so this rule will be much less complicated for employers to implement.

While some employer representatives expressed concern that the proposed HCE level increase would pose unique challenges for employers compared to the change to the standard salary level, given the change in methodology for setting the HCE threshold in the final rule, discussed in further detail below, the Department does not believe a delayed effective date for this provision is necessary. The Department believes that the January 1, 2020 effective date will provide employers adequate time to make any changes that are necessary to comply with the final regulations, and for similar reasons concludes that a phase-in of the new thresholds is not warranted. The Department will also provide significant outreach and compliance assistance, and will issue a number of guidance documents in connection with the publication of this final rule.

III. Need for Rulemaking

The primary goal of this rulemaking is to update the standard salary level that helps define and delimit the EAP exemption. This will ensure that the level works effectively with the standard duties test to distinguish potentially exempt EAP employees from overtime-protected white collar workers. Due to the
Nevada
district court's decision invalidating the 2016 final rule, the Department has been enforcing the standard salary level of $455 a week. The Department recognizes that this level should be updated to reflect current earnings. In the NPRM, the Department proposed using the methodology from the 2004 final rule to calculate the salary threshold using current data. The Department explained that this method would keep the standard salary level aligned with the intervening years' growth in earnings. It further stated that the 2004 approach has withstood the test of time, would restore the salary level to its traditional purpose of serving as a dividing line between nonexempt and potentially exempt employees, would address concerns that led to the 2016 rule's invalidation, and would ensure that the FLSA's intended overtime protections are fully implemented.

The Department is also updating the total annual compensation requirement for the HCE test for exemption to ensure that this threshold remains a meaningful and appropriate standard when paired with the more-lenient HCE duties test. In an effort to modernize the part 541 regulations to account for changing methods of workplace compensation, the Department also proposed allowing nondiscretionary bonuses and incentive payments (including commissions) to count toward up to 10 percent of the standard or special salary levels. Finally, in its proposal the Department explained the importance of updating the salary thresholds more frequently. Regular updates promote greater stability, avoid the disruptive salary level increases that can result from lengthy gaps between updates, and provide appropriate wage protection for those under the threshold. With these goals in mind, in the NPRM, the Department affirmed its intention to issue a proposal to update the earnings thresholds every four years, unless the Secretary determines that economic or other factors warrant forestalling such an update.

IV. Final Regulatory Revisions

The Department is formally rescinding the 2016 final rule and is replacing it with a new rule that updates the part 541 earnings thresholds. The Department is setting the standard salary level by applying the methodology from the 2004 final rule to current data, resulting in a new standard salary level of $684 per week. In addition, the Department is setting a special salary level of $455 per week for Puerto Rico, the U.S. Virgin Islands, Guam, and the Commonwealth of the Northern Mariana Islands; a special salary level of $380 per week for American Samoa; and an updated weekly “base rate” of $1,043 per week for the motion picture producing industry. 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 or the special salary levels applicable to the U.S. territories. The Department is also setting the HCE annual compensation amount at the 80th percentile of full-time salaried workers nationally, resulting in a new HCE level of $107,432. These revisions are discussed in further detail below.

A. Standard Salary Level

i. History of the Standard Salary Level

Congress enacted the FLSA on June 25, 1938, and the first version of part 541, which the Department issued in October 1938, set a salary level of $30 per week for executive and administrative employees.
36

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.
37

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

36
3 FR 2518.

37
Stein Report at 9, 20-21, 30-31.

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.
38

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.”
39

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 a “figure slightly lower than might be indicated by the data” to protect small businesses.
40

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, while the short duties test did not include a specific limit on nonexempt work.
41

38
Weiss Report at 10, 14-17, 19-20.

39

Id.
at 12.

40

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.

41
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.
42

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.”
43

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.

42
Kantor Report at 6.

43

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.
44

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.
45

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.
46

The Department noted that these salary levels approximated the same percentages used to update the salary level in 1958.
47

44
28 FR 7002 (July 9, 1963).

45

Id.
at 7004.

46

Id.

47

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.
48

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

48
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.”
49

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.
50

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.”
51

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.

49
40 FR 7091.

50

Id.
at 7092. Each time the short test was increased between 1949 and 1975, it was set significantly higher than the long test salary levels.

51

Id.
at 7091.

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.
52

The Department estimated that 1.3 million workers earning between $155 and $455 per week would become nonexempt under the new standard salary level.
53

52
69 FR 22126.

53

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 of $455 per week, which at the time was 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.
54

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.

54

Id.
at 22167.

The Department published a final rule updating the salary level twelve years later, in 2016.
55

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).
56

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.
57

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 is being 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.

55
81 FR 32391 (May 23, 2016).

56

Id.
at 32408.

57

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 . . .).”
58

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

58
29 U.S.C. 213(a)-(a)(1).

In 1949, the Department summarized the role of the salary level tests over the preceding decade, explaining:

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.
59

59
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.”
60

The 2003-2004 rulemaking also referenced these principles.
61

Likewise, this final rule updates the standard salary level in light of increased employee earnings, so that it maintains its usefulness in “screening out the obviously nonexempt employees.”

60
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 (“[T]he power to define is the power to exclude.”).

61

See
69 FR 22165; 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. These include, for instance, a statement 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.' ”
62

The Stein Report also stated 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.”
63

62
81 FR 32413 (quoting Stein Report at 42);
see also
69 FR 22165 (quoting Stein Report at 42).

63
Stein Report at 19;
see also id.
at 5 (“[T] he 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 (“[S]alary 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 subprofessional 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.

As explained in the NPRM, the
Nevada
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 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.”
64

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.”
65

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.”
66

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 who meet the duties test becoming nonexempt.
67

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.”
68

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.”
69

64
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).

65

Id.
at 806 (emphasis in original).

66

Id.
at 807.

67

Id.
at 806.

68

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

69

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

By excluding from exemption, without regard to their duties, 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, the 2016 final rule was in tension with the Act and with 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.
70

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.

70
Kantor Report at 5. 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.
See
81 FR 32504 (Table 32).

The Department has therefore reexamined the 2016 final rule in light of the district court's decision and the salary level's historical purpose. The district court's decision underscores that 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 instructed. The salary level test's primary and modest purpose is to identify potentially exempt employees by screening out obviously nonexempt employees.

In light of these considerations, as noted in the NPRM, the Department has concluded that, while an increase in the standard salary level from $455 per week is warranted, the increase to $913 per week in the 2016 final rule was inappropriate. The Department has therefore engaged 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.

iii. Standard Salary Level Proposal

In its NPRM, the Department proposed to rescind formally the 2016 final rule and to update the salary level by setting the salary level equal to the 20th percentile of earnings of full-time salaried workers in the lowest-wage region (the South) and/or in the retail industry nationally. The Department applied this method to pooled CPS MORG data for 2015 to 2017, adjusted to 2017, producing a level of $641 per week. To reflect employees' anticipated compensation at the time the rule would become effective, the Department then inflated this level to January 2020 using the compound annual growth rate in earnings since the 2004 rule. This methodology resulted in a proposed salary level of $679 per week ($35,308 per year). The Department estimated that at this level, 1.1 million employees who earn at least $455 per week but less than $679 per week would, without some intervening action by their employers, gain overtime eligibility.

The Department also stated that applying the 2004 final rule's methodology to set the salary level would ensure that overtime-eligible workers continue to receive the protections Congress intended, while avoiding the concerns that led to the invalidation of the 2016 rule. 84 FR 10903. The Department explained that adhering to the 2004 final rule's methodology was reasonable and appropriate, noting that it 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 test.
Id.
at 10909. The Department stated that applying this well-established method would also promote familiarity and stability in the workplace, without causing significant hardship or disruption to the economy.
Id.
The Department also noted that the 2004 final rule has never been challenged, and so applying the 2004 salary level methodology would minimize the uncertainty and potential legal vulnerabilities that could accompany a novel and untested approach.
Id.

iv. Standard Salary Level Final Rule

In the final rule, the Department adopts its proposed methodology for setting the standard salary level, with one minor modification. The Department will set the salary level equal to the 20th percentile of earnings of full-time salaried workers in the lowest-wage region (the South) and/or in the retail industry nationally. To calculate the salary level, the Department used updated CPS earnings data that BLS has compiled since the Department drafted its proposal. Specifically, the Department applied the adopted methodology to pooled CPS MORG data for July 2016 to June 2019, adjusted to reflect 2018/2019. As discussed below, rather than projecting the salary level to January 2020, as proposed in the NPRM, the Department has instead used the most recent data available at the time the Department drafted this final rule. This results in a salary level of $684 per week.

The Department believes that this method will set an appropriate dividing line between nonexempt and potentially exempt employees by screening out from exemption employees who, based on their compensation, are unlikely to be bona fide executive, administrative, or professional employees. In addition, the use of earnings data from the South and the retail industry will ensure that the salary level is suitable for employees in low-wage regions and industries. This approach will also maintain the prominence of the duties test by ensuring that the salary level alone does not disqualify from exemption a substantial number of employees who meet the duties test. This is consistent with the duties test's historical function, and will alleviate a major concern—overemphasis on the salary level test—that led to the 2016 rule's invalidation.

Once this rule is effective, white collar employees who are subject to the salary level test and earn less than $684 per week will not qualify for the EAP exemption, and therefore will be entitled to overtime pay. Employees earning this amount or more on a salary or fee basis will be exempt if they meet the standard duties test. As a result of this updated salary level, 1.2 million currently exempt employees who earn at least $455 but less than the updated standard salary level of $684 per week will, without some intervening action by their employers, gain overtime eligibility. In addition, 2.2 million white collar workers earning within this salary range who are currently nonexempt because they do not meet the standard duties test will have their overtime-eligible status strengthened because their exemption status will be clear based on their salary alone.

v. Discussion of Comments

1. Threshold Issues

As was the case in the responses to the July 26, 2017 RFI and in feedback received at the public listening sessions, commenters to the NPRM overwhelmingly agreed that the salary

level should be increased from the currently enforced level of $455 per week, which was set in 2004. Only a few commenters asserted that the salary level should not be updated; these commenters generally expressed concern that it would be difficult for employers to absorb any increase to the salary level.
See
Home Care Association of America; South Butler Community Library. Fisher & Phillips LLP and the National Federation of Independent Business (NFIB), however, questioned whether the Department has authority to set a salary level at all.

The vast majority of commenters also agreed that the Department should continue to set the salary level on a nationwide basis rather than having different salary levels that vary by region, industry, or some other factor.
See, e.g.,
Associated General Contractors of America (AGC); National Council of Nonprofits; National Employment Law Project (NELP); National Propane Gas Association; Partnership to Protect Workplace Opportunity (PPWO). A few commenters suggested that the Department set multiple salary levels, such as by region or state or for urban and rural areas.
See
Council for Christian Colleges and Universities; Idaho Division of Human Resources; Lutheran Services in America. A few other commenters advocated for industry-specific salary levels,
see
National Newspaper Association, or exemptions from the salary level test for specific industries,
see
Family Focused Treatment Association, or for “seasonal” employers,
see
Corps Network. Special Olympics sought a special salary level for non-profits, while the National Council of Nonprofits opposed such a carve-out.

The Department maintains that the FLSA's delegation of authority to the Secretary to “define[ ] and delimit[ ]” the terms of the section 13(a)(1) exemption includes the authority to set a salary level. While the language of section 13(a)(1) precludes the Department from adopting a salary-only test because salary “is not 'capacity' in and of itself,” 84 FR 10907;
see also
81 FR 32429; 69 FR 22173, the Department's broad authority to “define and delimit” the terms of the EAP exemption permits it to use a salary level test as one criterion for identifying bona fide executive, administrative, and professional employees. The Department has used such a test for over 75 years, and its authority to establish a salary level is well-established.
See, e.g., Wirtz
v.
Miss. Publishers Corp.,
364 F.2d 603, 608 (5th Cir. 1966);
Fanelli
v.
U.S. Gypsum Co.,
141 F.2d 216, 218 (2d Cir. 1944);
Walling
v.
Yeakley,
140 F.2d 830, 832-33 (10th Cir. 1944). As noted in the NPRM, “[a] salary level is helpful to determine who is not an executive, administrative or professional employee” because it “is a helpful indicator of the capacity in which an employee is employed, especially among lower-paid employees.” 84 FR 10907.

The Department agrees with the vast majority of commenters who supported increasing the salary level. The currently enforced level of $455 was set a decade and a half ago in 2004. Like all previous salary levels, its effectiveness as a dividing line between nonexempt and potentially exempt employees has diminished over time, and the level should therefore be updated to align with growth in earnings in the intervening years. While the Department is sensitive to the views of commenters who contended that any increase would be challenging for businesses, historical experience has shown that incremental, reasonable salary level increases such as the one in this final rule are feasible and do not have significant adverse economic consequences. Additionally, as discussed below, the salary level set in this final rule takes these commenters' concerns into account by using wages in the South and the retail industry.

As in the past, the Department chooses to set a nationwide salary level and declines to establish multiple salary levels based on region, industry, employer size, or any other factor. Having multiple salary levels would make the regulations more complicated; for example, regional variations would introduce unnecessary complexity, particularly for employers and employees who operate or work across state lines. As the Department has explained when previously rejecting regional salary thresholds, adopting multiple different salary levels would, at minimum, create significant administrative difficulties “because of the large number of different salary levels this would require.” 69 FR 22171; 81 FR 32411. Likewise, the Department declines to set any additional industry-specific salary levels. The Department has rarely created such levels.
71

Instead, as the Department has previously noted, the 2004 methodology “addresses the concerns” of commenters advocating for multiple salary levels “by looking toward the lower end of the salary levels and considering salaries in the South and in the retail industry.” 69 FR 22171. This approach avoids the new compliance burdens that multiple salary levels would entail, while ensuring that the salary level is low enough that it exempts bona fide EAP employees in those regions and industries.
72

71
A special level for the motion picture producing industry has been in place for over six decades due to the “peculiar employment conditions existing in the industry.” 18 FR 2881. Academic administrative employees meet the compensation requirement if they are paid on a salary basis “at a rate at least equal to the entrance salary for teachers in the educational establishment by which the employee is employed.” 29 CFR 541.600(c). The Department has otherwise refrained from setting industry-specific salary levels.

72
Some commenters asked the Department to permit employers to prorate the salary level for part-time employees.
See, e.g.,
College and University Professional Association for Human Resources (CUPA-HR); Council for Christian Colleges and Universities; Idaho Division of Human Resources. The Department has never prorated the salary level for part-time positions, and it specifically considered and rejected similar requests in its 2004 and 2016 final rules.
See
81 FR 23422; 69 FR 22171. As the Department has previously explained, employees hired to work part time, by most definitions, do not work in excess of 40 hours in a workweek, and overtime pay is not at issue for these employees. An employer may pay a nonexempt employee a salary to work part time without violating the FLSA, so long as the salary equals at least the minimum wage when divided by the actual number of hours (40 or fewer) the employee worked.
See
FLSA2008-1NA (Feb. 14, 2008). To the extent that commenters are concerned about the exemption status of seasonal employees, the Department notes that “[e]xempt employees need not be paid for any workweek in which they perform no work.” 29 CFR 541.602(a)(1).

2. The New Salary Level

Commenters diverged regarding the appropriate level at which to set the new salary level. As a general matter, with some exceptions, employer representatives supported the Department's proposal, while employee representatives opposed it and favored a level at least as high as the one set in the 2016 final rule.

The vast majority of employer representatives supported the Department's proposal to use the 2004 methodology to update the salary level.
See, e.g.,
HR Policy Association; National Association of Home Builders (NAHB); Small Business Legislative Council; PPWO; Wage and Hour Defense Institute. Employer representatives who supported the proposed level generally agreed with the Department's assessment that the 2004 methodology was faithful to the salary level's purpose of screening out only those employees who are obviously nonexempt, while avoiding a de facto salary-only test that would impermissibly replace the role of the duties test.
See, e.g.,
Bloomin' Brands; Job Creators Network; National Retail Federation (NRF); PPWO; Seyfarth Shaw.

Commenters who supported the proposal also stated that unlike the 2016 final rule, the proposal was suitable and manageable for low-wage regions and

industries, and for small businesses.
See, e.g.,
American Hotel and Lodging Association (AHLA); American Society of Travel Advisors (ASTA); CUPA-HR; LeadingAge; Society of Independent Gasoline Marketers of America (SIGMA); YMCA. Many also conveyed that the proposed level would not produce the same negative effects—
e.g.,
increased employer burdens and diminished workplace flexibility—as the 2016 final rule.
See, e.g.,
National Association of Landscape Professionals; Seyfarth Shaw. Some also noted that the 2004 rule has withstood the test of time for the past 15 years and has never been challenged in court.
See, e.g.,
Job Creators Network; SIGMA. Additionally, many of these commenters agreed with the Department that the proposed rule was responsive to the district court's concerns that led to the invalidation of the 2016 final rule.
See, e.g.,
Ogletree, Deakins, Nash, Smoak & Stewart, P.C.; SHRM.

Many employer representatives maintained that the proposed rule's salary level resulted in a more appropriate number of employees who would become newly nonexempt—1.1 million in the first year—compared to the 2016 final rule, which would have resulted in 4.2 million such workers in the first year. They noted that the smaller number of newly nonexempt employees would make it easier for employers to absorb the costs of compliance,
see
U.S. Small Business Administration Office of Advocacy (SBA Advocacy), would lessen the legal risk associated with the rule,
see
National Restaurant Association (NRA); Wage and Hour Defense Institute, and would ensure that the salary level maintains its historic screening function,
see
AGC; Chamber of Commerce of the United States of America (Chamber); NRF.

A few commenters, while generally supportive of the Department's approach in the NRPM, advocated for a salary level lower than the one proposed. These stakeholders maintained that to ensure that the salary level could accommodate low-wage regions and industries, the Department should exclude higher-wage states from the earnings data used to set the salary level. For example, some commenters urged the Department to include only the East South Central and West South Central Census Divisions, which include the lower-wage states of Kentucky, Tennessee, Alabama, Mississippi, Louisiana, Arkansas, Oklahoma, and Texas,
see
Chamber; Food Marketing Institute (FMI); International Franchise Association (IFA); NRA, while AHLA recommended excluding Maryland, Virginia, and the District of Columbia from the data set. Others suggested generally that the Department use a narrower geographic area than the entire South, using the East South Central Census Division (Alabama, Kentucky, Mississippi, and Tennessee) as an example.
See
Kentucky Retail Federation; SBA Advocacy.

Employee representatives, conversely, generally stated that the salary level should be raised significantly above the level proposed in the NPRM or that the duties test should be significantly strengthened.
See, e.g.,
National Women's Law Center (NWLC); Public Justice Center; UnidosUS. Many commenters supported the level in the 2016 final rule or something similar to it.
See, e.g.,
American Association of Retired Persons (AARP); American Federation of State, County, and Municipal Employees (AFSCME); Campaign Comments; International Union, United Automobile, Aerospace & Agricultural Implement Workers of America (UAW). A few advocated that the salary level be set even higher, at $1,176 per week ($61,152 per year), using median earnings data.
See
National Employment Lawyers Association (NELA); Nichols Kaster, PLLP (Nichols Kaster); Rudy, Exelrod, Zieff & Lowe, LLP (Rudy Exelrod); Texas Employment Lawyers Association (TELA).

Many employee representatives maintained that the salary level proposed in the NPRM is inconsistent with the purpose of the FLSA and the EAP exemption. In general, these commenters contended that the proposed salary level was too low to adequately distinguish between bona fide EAP employees and those who were intended to be eligible for overtime, and that the rule would result in the exemption of lower-wage workers with limited bargaining power, whom the statute was designed to protect.
See, e.g.,
NELP; NELA; Texas RioGrande Legal Aid; Washington State Budget and Policy Center. Several commenters stated that the proposal would inappropriately exempt employees who perform significant amounts of nonexempt work.
See, e.g.,
National Council of Jewish Women; Women Employed. The American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) disagreed that the salary level test's primary purpose is to screen out obviously nonexempt employees, contending that statements to that effect in the Weiss and Stein reports were “not proposals for setting the long duties salary threshold” but “defending the salary tests against criticism,” and that the salary levels described in those reports as having “screening” functions were accompanied by the more rigorous long duties test.

Commenters also noted that according to the Department's own estimates, 84 FR 10951, the proposed rule would result in 2.8 million fewer workers newly entitled to overtime pay in the first year than the 2016 final rule.
See
Joint Comment from 77 Members of Congress; National Partnership for Women and Families; Nichols Kaster. Many of these commenters also cited estimates by EPI, which projected that the proposed rule, compared to the 2016 final rule, would result in $1.2 billion fewer dollars in earnings transfers to employees and would affect 8.2 million fewer workers, including 3.1 million workers who would have gained the right to overtime pay and 5.1 million workers who are already overtime-eligible but would have had their overtime protections strengthened by the 2016 final rule's higher salary level because of a reduced risk of misclassification. These commenters stated that the narrowed scope of the proposed rule would be detrimental to these employees, who include millions of women, people of color, and parents of children under 18.
See
EPI; National Partnership for Women and Families. Some maintained, for example, that a higher salary level that would affect more workers would provide such workers with more income, improve upward mobility, and/or provide workers with more time to spend with their families.
See
AARP; Campaign Comments. Several commenters highlighted the lower number of affected employees (compared to the 2016 final rule) in their particular states.
See, e.g.,
Maryland Center on Economic Policy; Washington State Budget and Policy Center.

Some commenters also asserted that the proposed salary level would result in a higher risk of misclassification relative to the 2016 final rule, as well as more litigation, because more employees' exempt status would turn on the duties test rather than the salary level test.
See
NELA; Winebrake & Santillo LLC. A group of 14 state attorneys general and the Attorney General for the District of Columbia (State AGs) stated that these misclassification consequences would extend to state wage-and-hour laws that contain EAP exemptions that track the federal standard.

Commenters who opposed the proposed rule also criticized the Department's reliance on the reasoning of the
Nevada
district court's decision.

See
AFL-CIO; EPI; NELP; NWLC; State AGs. These commenters took issue with the district court's conclusion that the 2016 final rule's salary level was too high because it classified as nonexempt over 4 million previously exempt workers based on their salaries alone, and as a result impermissibly displaced the role of the duties test. AFL-CIO and EPI asserted that the raw number of newly nonexempt workers under a new salary test should not determine the test's appropriateness since that number depends on several factors, such as the amount of time since the previous update and whether the methodology used in the last update was sound. Relatedly, the AFL-CIO stated that it is unclear why the 2016 final rule's salary level, which would have resulted in 4.2 million newly nonexempt employees, was impermissibly high, but the proposed rule's salary level, which would result in 1.1 million (the Department's estimate) to 1.4 million (EPI's estimate) newly nonexempt employees, is not. The AFL-CIO also asserted that the Department preemptively responded to the district court's views in the 2016 final rule, while it and other employee representatives contended that the rationale that the Department put forth in support of the 2016 final rule was more persuasive than the district court decision that invalidated it.
See
AFL-CIO; EPI; NELP; NWLC.

Many employee commenters asserted that if the Department did not substantially raise the salary level above the proposed level, it should establish a more rigorous duties test such as the former long test, which set specific limits on the performance of nonexempt work.
See, e.g.,
AARP; House and Senate Democratic Caucuses of the Michigan Legislature; National Council of Jewish Women; Women Employed. Some commenters recommended instituting a more rigorous duties test regardless of the salary level the Department adopts.
See
AFL-CIO; State of Wisconsin Department of Workforce Development.

Finally, several employee representatives also asserted that by adopting the 2004 methodology in the NPRM, the Department perpetuated a methodological error that the 2016 final rule characterized as a “mismatch.”
See
AFL-CIO; Economic Policy Institute (EPI); NELP; NWLC; 81 FR 34400. According to this view, while the Department had historically used two 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 less rigorous duties test with a higher salary level—in 2004, the Department instead paired a less rigorous duties test with a lower salary level, resulting in historically nonexempt workers being instead classified as exempt. These commenters stated that the 2004 methodology failed to adjust for changes from the long/short test structure, and that a significantly higher salary level is necessary to account for the absence of the long duties test, which restricted the amount of nonexempt work lower-wage white collar employees could perform while still being classified as exempt. Some of these commenters contended that, as a result, the 2004 methodology results in a salary level that exempts certain historically nonexempt employees because employees who traditionally passed the long salary test and failed the long duties test became exempt under the 2004 final rule's standard salary level and duties tests.
See, e.g.,
NELA; Nichols Kaster; Senator Patty Murray. Some commented that the Department unreasonably relied on the functional dormancy of the long test to justify its adoption of the standard test in 2004, given that the Department did not update the short and long test thresholds between 1975 and 2004. One commenter, EPI, noted that the Department did not include the methodology for the Kantor long test, which used the lowest 10 percent of exempt salaried employees in low-wage regions and industries, as an alternative in the NPRM or elsewhere in the proposal.

Conversely, employer representatives disagreed with the “mismatch” rationale. They stated, for example, that the standard duties test is not identical to the short duties test, and that in 2004, the Department accounted for its change in the structure and data set used for the EAP exemption by adjusting the percentile used for determining the salary level.
See
Chamber; NRA. More generally, nearly all employer representatives opposed any changes to the standard duties test.
See, e.g.,
Bowling Proprietors Association of America; NGA; PPWO.

The Department appreciates the thoughtful comments it received regarding the salary level. After considering these comments, the Department has decided to retain the approach from the proposed rule with one small change. As proposed, the Department is using CPS earnings data to set the salary level equal to the 20th percentile of full-time salaried workers in the lowest-wage Census Region (the South) and/or the retail industry nationwide. To set the salary level, the Department applied this methodology to pooled CPS MORG data for July 2016 to June 2019, adjusted to reflect 2018/2019. This results in a final rule salary level of $684 per week ($35,568 for a full-year worker). For the reasons discussed below, the Department is not inflating the salary level forward to January 2020 as was proposed in the NPRM, but instead has used the most recent available actual wage data.

As an initial matter, the Department believes that the proposed salary level is consistent with, and faithful to, the FLSA's purpose. As noted in the NPRM, the FLSA explicitly directs that bona fide executive, administrative, and professional employees “shall not” be subject to the statute's minimum wage and overtime requirements. 29 U.S.C. 213(a)(1); 84 FR 10903. As such, when defining the contours of the EAP exemption, while the Department must, of course, ensure that employees who are subject to the Act's coverage receive its benefits, it must also ensure that employees whom Congress has directed “shall” be exempt from coverage are, in fact, exempt. The 2016 final rule was in tension with this purpose, as it would have newly disqualified 4.2 million workers from exemption simply because of their salaries, regardless of their duties.

The Department believes that this final rule strikes the appropriate balance by using the salary level, in line with its historical purpose, to screen out obviously nonexempt employees. As explained above, the Department articulated this purpose in the Weiss Report in 1949, when it explained that the salary level tests “prevent[ed] the misclassification by employers of obviously nonexempt employees, thus tending to reduce litigation” and “simplified enforcement by providing a ready method of screening out the obviously nonexempt employees” who, “[i]n an overwhelming majority of cases . . . would also not qualify under other sections of the regulations as the Divisions and the courts have interpreted them.” Weiss Report at 8. Likewise, in the Kantor Report, the Department stated 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.” Kantor Report at 2-3. The Department referenced the screening function again in the 2004 final rule.
See
69 FR 22165. This principle has been at the heart of the Department's interpretation of the EAP exemption for over 75 years.

The Department disagrees with the proposition advanced by some employee representatives that this

articulation of the salary level's modest purpose misreads the Weiss and Kantor reports, or that it applies only when paired with the long duties test. Both reports explicitly characterize the minimum salary level as “simplif[ying] enforcement by providing a ready method of screening out the obviously exempt employees.” Kantor Report at 3; Weiss Report at 8. And both confirm that under an appropriate salary level test, employees earning below the salary level generally would not meet the requirements of the duties test.
73

While these reports were written while a more rigorous duties test was in effect, they nonetheless affirm that a minimum salary level's purpose is to serve as a “screening” mechanism.

73

See
Kantor Report at 3 (“Employees who do not meet the salary test are generally also found not to meet the other requirements of the regulations.”); Weiss Report at 8 (“In an overwhelming majority of cases, it has been found by careful inspection that personnel who did not meet the salary requirements would also not qualify under other sections of the regulations as the Divisions and the courts have interpreted them.”).

Conversely, as explained in the NPRM, the 2016 final rule went beyond this purpose, and instead suggested that the salary level had a much greater role to play in determining exempt status. For example, in the 2016 final rule the Department took the position that, in light of the single standard duties test that is less rigorous than the long duties test, “the salary threshold must play a greater role in protecting overtime-eligible employees,” and that “it [was] 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.” 81 FR 32412, 32465-66.
74

74
As noted in the NRPM, 84 FR 10908 n.76, the Department explained in the 2016 final rule that at the time of its 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. As the Department noted, however, it “has never compared the number of employees who are nonexempt based exclusively on the salary or duties test, respectively, to determine the effectiveness of the salary level.” 84 FR 10908.

As a result, the $913 per week salary level newly excluded 4.2 million salaried workers from exemption regardless of the duties they performed. The district court concluded that this would exclude from exemption “so many employees who perform exempt duties,” and in fact excluded “entire categories of previously exempt employees who perform `bona fide executive, administrative, or professional capacity' duties[.]” 275 F. Supp. 3d at 806-7. Accordingly, it invalidated the rule.

In sum, as explained in the NPRM, the Department believes that the 2016 final rule “untethered the salary level test from its historical justification[,]” 84 FR 10901, and that this resulted in its invalidation by the district court. For this reason, the Department declines to return to the 2016 methodology or to set an even higher salary level. In contrast, as noted in the NPRM, the methodology in the 2004 final rule, which the Department is applying in this rule, “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.”
Id.
at 10903.

The Department also believes that the number of workers affected by the salary level set in this final rule confirms that the level is appropriate. The Department estimates that the final rule will result in 1.2 million workers who will be newly overtime-eligible in the first year as a result of the increased salary level. The number of affected workers is very similar to the 1.3 million workers affected by the 2004 rule's salary level increase.
Id.
at 10911 (citing 69 FR 22213, 22253). This similarity to the 2004 rule, which has never been challenged in court, is consistent with the Department's view that the salary level set in this final rule is reasonable and legally sound.

Moreover, as the Department explained in the NPRM, because the 2016 final rule set the salary level “at the low end of the historical salary range of short test salary levels,” 81 FR 32414, it failed to account for the absence of a long test that historically exempted white collar workers with lower salaries but whose duties confirmed they were bona fide EAP employees. Thus, the impact of the 2016 final rule would have been the inverse of the “mismatch” the Department sought to correct. It would have resulted in employees who, due to the nature of their duties, have historically been classified as exempt suddenly becoming nonexempt simply because of their salaries.

As a result, the 2016 final rule was in tension with the salary level's limited role in defining the EAP exemption, as it conflicted with the Department's longtime practice of setting a salary level that did not “disqualify[ ] any substantial number of” bona fide executive, administrative, and professional employees from exemption, Kantor Report at 5, leading directly to the district court's invalidation of the rule. While the Department has long recognized that it is inevitable that some employees will be incorrectly excluded from exemption since the salary level is “a dividing line [that] cannot be drawn with great precision but can at best be only approximate[,]” Weiss Report at 11, the Department may not disregard Congress's express directive to exempt bona fide EAP employees. Conversely, the 1.2 million lower-income workers who will become nonexempt as a result of this rule's increase to the standard salary level will not include a substantial number of workers whose duties have historically qualified them as bona fide EAP employees.

Thus, while employee representatives criticized the narrower scope of this rule compared to the 2016 final rule, the fact that this final rule affects considerably fewer employees than the 2016 final rule confirms, rather than undermines, its appropriateness. Given that the 2016 final rule was invalidated due to its overbreadth, that rule is not a reasonable benchmark for concluding that the number of affected employees under this rule is too low.

As noted above, employee commenters also objected to the Department's reliance on the
Nevada
district court's decision invalidating the 2016 final rule. The Department believes that its reliance on the reasoning of the district court is well-founded.

Such reliance is reasonable and prudent as it reduces the vulnerability of new rules to legal challenges or injunctions, and maximizes the likelihood that a new rule can be implemented immediately. Notably, it has been over three years since the 2016 rule was published, and nearly three years since its stated effective date. Because of the rule's invalidation, however, the currently enforced salary level remains at $455 per week, which the Department and nearly all commenters agree must be updated. Adoption of a salary level that reduces, to the extent possible, the likelihood that the rule will be enjoined is the best way to ensure that workers can reap the rule's benefits as soon as possible rather than waiting for the outcome of potentially lengthy litigation. The Department believes that the salary level in this final rule accomplishes that objective, particularly given the district court's implicit endorsement of the 2004 methodology.
See
275 F. Supp. 3d at

807 n.6 (noting the court's earlier observation that an updated 2004 salary level likely would have not prompted the litigation that invalidated the 2016 final rule because it “would still be operating . . . as more of a floor”) (internal quotation marks and citation omitted).

Additionally, the Department is mindful of the concerns the district court cited. As articulated in the NPRM and above, the 2016 final rule was, at minimum, in tension with the FLSA because it resulted in 4.2 million employees, including employees who were historically exempt under the long test, becoming nonexempt based on their salaries alone, even though the Act directs that the EAP exemption be based on “capacity.” This threatened to make “salary rather than an employee's duties determinative” of an employee's status under the EAP exemption.
75

While the 2016 final rule naturally contains language disagreeing with these propositions, for the reasons explained above, the Department has reexamined the 2016 final rule in light of the district court's decision and the public comments it has received in response to the RFI and the NPRM, and ultimately finds that the concerns voiced by the district court and by many public commenters warrant adopting a lower salary level.

75
275 F. Supp. 3d at 807.

The Department disagrees with the employee commenters who asserted that the 2004 methodology created a “mismatch” that must be corrected by a salary level comparable to the one from the 2016 final rule or a restoration of the long duties test.
See, e.g.,
EPI (“The methodology for setting the standard salary threshold in the 2004 rule was fundamentally flawed.”); NELP. The 2004 final rule explained that it was difficult to coherently apply the long duties test's requirement that an EAP employee perform no more than 20 percent nonexempt work.
76

Consequently, the Department switched from the long and short duties tests to a single duties test that, like the previous short duties test, did not include a quantitative limit on the percentage of time performing nonexempt work. And the Department set a standard salary level that was similar to that of the long test.

76
69 FR 22127 (“When employers, employees, as well as Wage and Hour Division investigators applied the `long' test exemption criteria in the past, distinguishing which specific activities were inherently a part of an employee's exempt work proved to be a subjective and difficult evaluative task that prompted contentious disputes.”).

The commenters relying on the “mismatch” theory appear to assert that the 2004 final rule should have paired the single duties test with a higher salary threshold such as the short test because the Department was obligated to preserve the previous structure of pairing a more rigorous duties test with a lower salary level test, or a less rigorous duties test with a higher salary level.
See, e.g.,
AFL-CIO, EPI. But the previous structure had been created by the Department as one among many permissible policy choices. It was not required by the statutory text. Indeed, the statutory text does not require the Department to determine any salary level. As such, the Department was under no legal obligation to preserve the previous salary/duties structure in the 2004 final rule.

Moreover, the Department believes it would have been inappropriate to adopt the higher short test salary level after removing the long duties test in the 2004 final rule.
See
84 FR 10908. The long duties test ensured that white collar employees would not become nonexempt simply because their salaries fell below the short test's higher threshold, if their duties clearly indicated bona fide EAP status. If the 2004 final rule had adopted the short test's higher salary threshold after eliminating the long duties test, such employees would have been reclassified as nonexempt solely because of their salary level. This approach would have departed from the historical role of using the salary level to screen out only obviously nonexempt employees, and would have risked violating the statutory requirement to base EAP status on the “capacity” in which the employee is employed. 29 U.S.C. 213(a)(1). Therefore, the Department believes that its' decision in 2004 not to pair the higher short test salary level with the standard duties test was a necessary measure to maintain policy consistency and follow statutory requirements.

Indeed, the 2016 final rule's attempt to correct the “mismatch” by setting the salary level “at the low end of the historical range of short test salary levels,” 81 FR 32409, created the precise legal risks that the 2004 final rule attempted to avoid. While the Department previously relied on the mismatch theory in defending the 2016 final rule in litigation, the district court, in declaring the 2016 final rule invalid for the reasons set forth above, implicitly rejected application of the mismatch theory in reaching its conclusion. As explained above, the district court found that the salary level set by the 2016 final rule improperly substituted employee salaries for an analysis of employees' duties.
77

275 F. Supp. 3d at 806. In contrast, the 2004 methodology has never even been challenged in court—let alone invalidated—during the 15 years it has been enforced by the Department.

77
Some commenters contend that the district court's decision was flawed because it did not address the “mismatch” theory in its opinion, even though it was the central theory behind the 2016 final rule.
See
AFL-CIO; NELP. However, as noted above, the district court implicitly rejected the mismatch theory.

Additionally, as noted in the NPRM, the mismatch rationale failed to account for the substantial number of years during which the long duties test was effectively dormant. 84 FR 10908-09;
see also
69 FR 22126 (explaining that “the `long' duties test [had], as a practical matter, become effectively dormant” due to outdated salary levels, and quoting commenters who described the long duties test as “inoperative,” “rarely, if ever, used,” “largely . . . dormant,” and “lack[ing] current relevance”). The long test salary levels set in 1975 were equaled or surpassed by the minimum wage in 1991.
78

Thus, since at least 1991, the short duties test and salary level determined whether workers qualified for the EAP exemption. Employers and employees alike have effectively operated for 28 years under a single-test system. Thus, although, as noted above, some employee commenters asserted that the 2004 methodology exempts certain historically nonexempt employees (
i.e.,
those who had passed the long salary test and failed the long duties test), any of these employees who were nonexempt in the years leading up to 2004 were nonexempt because their salaries fell below the short test's salary threshold. It therefore appears that these commenters are requesting that the Department set the salary threshold at the historical short test level. The Department attempted to do this in the 2016 final rule, but as explained above, this approach created legal risks, as evidenced by the district court's conclusion.

78
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).

The Department continues to believe that the post-1991 landscape is “highly relevant” to its approach here, 84 FR 10909, and disagrees with the employee representatives contending otherwise. The one-test system effectively in place for the nearly three decades has created significant reliance interests and

understandings in the workplace under which employees and employers alike recognize certain positions as exempt. As the
Nevada
district court recognized, a salary level that deviates substantially from recent practice would result in “entire categories of previously exempt employees who perform `bona fide executive, administrative, or professional capacity' duties” becoming nonexempt. 275 F. Supp. 3d at 806 (quoting 29 U.S.C. 213(a)(1)). Numerous employers indicated that they anticipated significant adverse effects from the 2016 final rule as a result of this widespread reclassification, including not only increased compliance costs but decreased employee flexibility, reduced morale, and increased employee turnover.
See
Independent Electrical Contractors; National Association of Truck Stop Operators; National Multifamily Housing Council and the National Apartment Association; PPWO; SBA Advocacy; Seyfarth Shaw.

Regarding EPI's request that the Department “include the value of the Kantor long test in the final rule,” as explained below and as described in more detail in the economic analysis, the Department has considered the Kantor long test methodology as an alternative. But as the 2004 final rule explained, the Kantor method, which uses the lowest 10 percent of exempt salaried employees in low-wage regions and industries, requires “uncertain assumptions regarding which employees are actually exempt[.]” 69 FR 22167. It is also more complex to model and thus is less accessible and transparent. And it presents a circularity problem: The Kantor method would determine the population of exempt salaried employees, while being determined by the make-up of that population. The 2004 methodology of setting the minimum salary level based on the lowest 20 percent of
all
salaried employees in the South and retail industry avoids these problems.
See id.
Additionally, as discussed in the economic analysis below, upon consideration of the Kantor method, the Department found that it would result in a salary threshold that differs from the level set in this final rule by $40 per week. EPI similarly estimated that the Kantor method would result in a salary threshold that deviates from the level proposed in the NPRM by $33 per week. The Department does not believe this fairly small difference justifies reverting back to the Kantor method, particularly because the 2004 methodology is familiar to employers and employees, does not require uncertain and circular assumptions, and has never been challenged in court.

The Department also disagrees with commenters who stated that a significantly higher salary level is justified in order to reduce further the risk of employee misclassification. The Department recognizes that, in addition to conferring minimum wage and overtime protections on newly nonexempt employees, an updated salary level clarifies and strengthens the nonexempt status of employees who fail the duties test and earn between the previous salary level and the new one (
i.e.,
those who are and will remain nonexempt), and thereby reduces the risk that those employees will be misclassified as exempt. Indeed, this final rule clarifies and strengthens the nonexempt status of 2.2 million salaried white collar workers and 1.9 million salaried blue collar workers earning between $455 and $684 per week.
See infra
§§ VI.A.iii, VI.D.iii.3.

But the laudable goal of reducing misclassification cannot overtake the statutory text, which grounds an analysis of exemption status in the “capacity” in which someone is employed—
i.e.,
that employee's duties. Accordingly, the salary level test's limited purpose is to screen out only those employees who are not performing bona fide EAP duties.
See
Weiss Report at 8 (noting that the salary levels “have amply proved their effectiveness in preventing the misclassification by employers of
obviously nonexempt
employees”) (emphasis added). As explained at length above, if the salary level is too high, as was the case in the 2016 final rule, it results in a substantial number of historically
exempt
bona fide EAP employees being classified as
nonexempt
without any examination of their duties. Such action is inconsistent with the section 13(a)(1) exemption. The Department believes that potential misclassification of nonexempt employees as exempt is most appropriately addressed through compliance assistance and, if necessary, enforcement by the Department or private parties, rather than through an artificial increase to the salary level.
79

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Regarding the view of the state attorneys general that the new salary level does not do enough to prevent misclassification under their states' wage-and-hour laws that track FLSA exemptions, nothing in this rule prevents any state from enacting a higher salary level, or a more restrictive duties test, than the FLSA if it believes it is necessary to prevent misclassification under state law.

The Department also declines to adopt a lower salary level than the one proposed in the NPRM, as some employer representatives suggested. As explained above, by setting the salary level at the low end—the 20th percentile—of the earnings of full-time salaried employees in the South and/or retail industry, the Department, consistent with its historical practice, has tailored the salary level to the needs of the lowest-wage regions and industries. While some employer representatives stated that the Department could use an even narrower subset of data by eliminating from consideration higher-wage states, the Department believes that using the entire South—the lowest-wage Census Region—in addition to the retail industry nationwide strikes the appropriate balance by setting a salary level that is based on low-wage areas but can still serve as a meaningful dividing line in higher-wage areas as well.
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The Chamber stated that the 2004 rule and the Department's application of that rule (in the NPRM) used different groups of states, and that the 2004 rule used only a subset of states in the South Census Region. The Chamber's characterization of the data set used in the 2004 rule is incorrect, as both this rule and the 2004 final rule used the entire South Census Region in setting the salary level.

In sum, after considering the comments received, the Department has decided to update the salary level by applying the 2004 methodology to current data. As noted in the NPRM, using this methodology “promotes familiarity and stability for the workplace, ensures workers the important wage protections contained in the Act, . . . minimizes the uncertainty and potential legal vulnerabilities that could accompany a novel and untested approach,” “avoids new regulatory burdens,” and sets a salary level that “accounts for nationwide differences in employee earnings and . . . work[s] appropriately with the standard duties test.” 84 FR 10909.

The Department declines to make any changes to the duties test, such as adopting a duties test similar to the long duties test, which some employee representatives advocated as an alternative or complement to a higher salary level. As explained above, the standard duties test has been in effect for 15 years, and the short duties test, to which it is similar, was functionally the predominant test in use for the preceding 13 years. This approach has never been challenged. As a result, both employees and employers are accustomed to these tests. Moreover, a large body of jurisprudence interprets these duties tests, and so changing these tests could increase regulatory uncertainty and result in costly litigation. The Department also remains

mindful of employer concerns that reinstating the long test's cap on nonexempt work could introduce new compliance burdens.
See, e.g.,
National Association of Truck Stop Operators; NRF;
see also
81 FR 32446; 69 FR 22127. Finally, the Department did not propose any changes to the duties test in the NPRM and does not believe that it would be appropriate to institute such a significant change to the part 541 exemptions in this final rule.

Accordingly, the Department declines to return to the more complicated long duties test. The Department believes that the standard duties test, which focuses on whether an employee's “primary duty” consists of EAP tasks, can appropriately distinguish bona fide EAP employees from nonexempt workers.

The Department considered a number of alternatives to the salary level in this final rule.
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First, the Department considered not changing the salary level from the currently enforced level of $455 per week. The Department rejected this option because, as discussed above, the Department concluded that the $455 salary level set fifteen years ago no longer reflects current earnings and must be updated to serve as a meaningful dividing line between nonexempt and potentially exempt employees. The Department also considered maintaining the average minimum wage protection in place since 2004 by using the weighted average of hours at minimum wage and overtime pay represented by the minimum salary level (
i.e.,
the $455 weekly threshold represented 72.2 hours at minimum wage and overtime pay at the minimum wage in 2004; currently, that salary level represents 55.2 hours at minimum wage and overtime pay; the weighted average is 59.5 hours, which yields a salary of $502 per week). The Department rejected this option because it would not adequately address wage growth since 2004.

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The salary levels that would result from each of the alternatives are set forth in section VI.C.

In light of comments from some employer representatives, the Department also considered using the 2004 methodology but eliminating the District of Columbia, Maryland, and Virginia from the data set used to determine the salary level due to their higher levels of employee earnings. However, as discussed above, the Department believes that using the entire South and the retail industry nationwide results in an appropriate nationwide salary level that is based on low-wage regions but can still serve as a meaningful dividing line in higher-wage regions. Using the entire South is also consistent with the methodology used in the 2004 final rule.

In response to a comment from EPI, the Department also considered adopting the methodology that was used to derive the long test salary level prior to 2004 (the Kantor long test method), which used the lowest 10 percent of exempt salaried employees in low-wage regions and industries. However, as explained in greater detail above, the Department declined to do so because while the Kantor methodology produces a salary level that differs from the level set in this final rule by less than 6 percent, it depends on uncertain and circular assumptions, and is more complex to model and thus less accessible and transparent.

Finally, the Department considered using the methodology from the 2016 final rule to set the salary level, as suggested by many employee representatives. However, as explained at length above, the Department believes that methodology was inappropriate because it resulted in too many employees being newly classified as nonexempt based on their salaries alone, thus supplanting the role of the duties test. Moreover, the district court invalidated the 2016 final rule. Therefore, the Department has chosen to use the 2004 methodology, which, as noted above, screens out obviously nonexempt workers, works well with the standard duties test, and has never been challenged during the fifteen years in which it has been enforced by the Department.

3. Proposed Inflation to January 2020

The Department proposed to inflate the salary level to reflect anticipated wage growth to January 2020, the final rule's estimated effective date. Most commenters did not address this aspect of the proposal, but some employer representatives opposed it. A few stated that the proposed approach was inconsistent with the Department's past practice of setting the salary level using the most recent available data on actual salaries paid to employees, rather than inflationary metrics.
See, e.g.,
Center for Workplace Compliance; Chamber; FMI.

In the final rule, instead of projecting the salary level to January 2020, the Department has set the salary level using the most recent data available at the time the Department has drafted the final rule. The Department is using pooled CPS MORG data from July 2016 to June 2019, adjusted to reflect 2018/2019. As some commenters noted, using recent actual wage data is consistent with the approach the Department has taken in prior rulemakings.
See
81 FR 32403 (noting regulatory history reveals that in most prior rulemakings “the Department examined a broad set of data on actual wages paid to salaried employees” to set the salary level),
id.
at 32051 (“In keeping with our practice, the Department relies on the most up-to-date data available to derive the final salary level[.]”).

It is also consistent with the Department's historical practice (with only one exception, in 1975) of declining to use inflation to adjust the salary level for the part 541 exemption.
See
69 FR 12167 (noting the Department's “long-standing tradition of avoiding the use of inflation indicators for automatic adjustments to these salary requirements”). Ad

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2019-20353. Public record. Not legal advice.