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

DEPARTMENT OF LABOR

Wage and Hour Division

29 CFR Part 541

RIN 1235-AA39

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

AGENCY:

Wage and Hour Division, Department of Labor.

ACTION:

Notice of proposed rulemaking.

SUMMARY:

In this proposal, the Department of Labor (Department) is updating and revising the regulations issued under the Fair Labor Standards Act implementing the exemptions from minimum wage and overtime pay requirements for executive, administrative, professional, outside sales, and computer employees. Significant proposed revisions include increasing the standard salary level to the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region (currently the South)—$1,059 per week ($55,068 annually for a full-year worker)—and increasing the highly compensated employee total annual compensation threshold to the annualized weekly earnings of the 85th percentile of full-time salaried workers nationally ($143,988). The Department is also proposing to add to the regulations an automatic updating mechanism that would allow for the timely and efficient updating of all the earnings thresholds.

DATES:

Interested persons are invited to submit written comments on this notice of proposed rulemaking (NPRM) on or before November 7, 2023.

ADDRESSES:

You may submit comments, identified by Regulatory Information Number (RIN) 1235-AA39, by either of the following methods:

•

Electronic Comments:

Submit comments through the Federal eRulemaking Portal at

https://www.regulations.gov.

Follow the instructions for submitting comments.

•

Mail:

Address written submissions to: Division of Regulations, Legislation, and Interpretation, Wage and Hour Division, U.S. Department of Labor, Room S-3502, 200 Constitution Avenue NW, Washington, DC 20210.

Instructions:

Response to this NPRM is voluntary. The Department requests that no business proprietary information, copyrighted information, or personally identifiable information be submitted in response to this NPRM. Commenters submitting file attachments on

https://www.regulations.gov

are advised that uploading text-recognized documents—

i.e.,

documents in a native file format or documents which have undergone optical character recognition (OCR)—enable staff at the Department to more easily search and retrieve specific content included in your comment for consideration.

Anyone who submits a comment (including duplicate comments) should understand and expect that the comment, including any personal information provided, will become a matter of public record and will be posted without change to

https://www.regulations.gov.

The Department posts comments gathered and submitted by a third-party organization as a group under a single document ID number on

https://www.regulations.gov.

All comments must be received by 11:59 p.m. ET on November 7, 2023, for consideration in this rulemaking; comments received after the comment period closes will not be considered.

The Department strongly recommends that commenters submit their comments electronically via

https://www.regulations.gov

to ensure timely receipt prior to the close of the comment period, as the Department continues to experience delays in the receipt of mail. Please submit only one copy of your comments by only one method.

Docket:

For access to the docket to read background documents or comments, go to the Federal eRulemaking Portal at

https://www.regulations.gov.

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). Alternative formats are available upon request by calling 1-866-487-9243. If you are deaf, hard of hearing, or have a speech disability, please dial 7-1-1 to access telecommunications relay services.

Questions of interpretation or enforcement of the agency's existing regulations may be directed to the nearest Wage and Hour Division (WHD) district office. Locate the nearest office by calling the WHD's toll-free help line at (866) 4US-WAGE ((866) 487-9243) between 8 a.m. and 5 p.m. in your local time zone, or log onto WHD's website at

https://www.dol.gov/agencies/whd/contact/local-offices

for a nationwide listing of WHD district and area offices.

SUPPLEMENTARY INFORMATION:

I. Executive Summary

The Fair Labor Standards Act (FLSA or Act) requires covered employers to pay employees a minimum wage and, for employees who work more than 40 hours in a week, overtime premium pay of at least 1.5 times the employee's regular rate of pay. Section 13(a)(1) of the FLSA, which was included in the original Act in 1938, exempts from the minimum wage and overtime pay requirements “any employee employed in a bona fide executive, administrative, or professional capacity.”

1

The exemption is commonly referred to as the “white-collar” or executive, administrative, or professional (EAP) exemption. The statute delegates to the Secretary of Labor (Secretary) the authority to define and delimit the terms of the exemption. Since 1940, the regulations implementing the EAP exemption have generally required that each of the following three tests must be met: (1) the employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the salary basis test); (2) the amount of salary paid must meet a minimum specified amount (the salary level test); and (3) the employee's job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (the duties test). The employer bears the burden of establishing the applicability of the exemption.

2

Job titles and job descriptions do not determine EAP exemption status, nor does merely paying an employee a salary.

1

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

2

See, e.g., Idaho Sheet Metal Works, Inc.

v.

Wirtz,

383 U.S. 190, 209 (1966);

Walling

v.

Gen. Indus. Co.,

330 U.S. 545, 547-48 (1947).

Consistent with its broad authority under the statute, the Department is proposing compensation thresholds that will work effectively with the standard duties test and the highly compensated employee duties test to better identify who is employed in a bona fide EAP capacity. Specifically, the Department is proposing to set the standard salary level at the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region ($1,059 per week or $55,068 annually for a full-year worker)

3

and the highly

compensated employee total annual compensation threshold at the annualized weekly earnings of the 85th percentile of full-time salaried workers nationally ($143,988). These proposed compensation thresholds are firmly grounded in the authority that the FLSA grants to the Secretary to define and delimit the EAP exemption, a power the Secretary has exercised for over 80 years.

3

In determining earnings percentiles in its part 541 rulemakings since 2004, the Department has consistently looked at nonhourly earnings for full-time workers from the Current Population Survey (CPS) Merged Outgoing Rotation Group (MORG) data collected by the Bureau of Labor Statistics (BLS). As explained in section VII.B.5, the Department considers data representing compensation paid to nonhourly workers to be an appropriate proxy for compensation paid to salaried workers, although for simplicity the Department

uses the terms salaried and nonhourly interchangeably in this proposal. The Department relied on CPS MORG data for calendar year 2022 to develop this NPRM, including to determine the proposed salary level. In the final rule, the Department will use the most recent data available, which will change the dollar figures. For example, if after consideration of comments received, the final rule were to adopt the proposed salary level of the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census region (currently the South), in the fourth quarter of 2023 the Department projects that the salary threshold could be $1,140 per week or $59,285 for a full-year worker. To calculate this, the Department applied the Congressional Budget Office projections of the employment cost index for wages and salaries of workers in private industry growing by 4.5 percent in 2023 to the 35th percentile of weekly earnings of full-time salaried workers in the South from the fourth quarter of 2022, which was $1,091 per week or $56,732 for a full-year worker. As an additional example, in the first quarter of 2024, the Department projects that the salary threshold could be $1,158 per week or $60,209 for a full-year worker; the Department applied the 4.5 percent growth rate to the 35th percentile of weekly earnings of full-time salaried workers in the South from the first quarter of 2023, which was $1,108 per week or $57,616 for a full-year worker.

The proposed increase in the standard salary level to the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region better fulfills the Department's obligation under the statute to define and delimit who is employed in a bona fide EAP capacity. Upon reflection, the Department has determined that its rulemakings over the past 20 years, since the Department simplified the test for the EAP exemption in 2004 by replacing the historic two-test system for determining exemption status with the single standard test, have vacillated between two distinct approaches: One used in rules in 2004

4

and 2019,

5

that exempted lower-paid workers who historically had been entitled to overtime because they did not meet the more detailed duties requirements of the test that was in place from 1949 to 2004; and one used in a rule in 2016,

6

that restored overtime protection to lower-paid white-collar workers who performed significant amounts of nonexempt work but also removed from the exemption other lower-paid workers who historically were exempt under the prior test, an approach that received unfavorable treatment in litigation.

7

Having grappled with these different approaches to setting the standard salary level, this proposal retains the simplified standard test, the benefits of which were recognized in the Department's 2004, 2016 and 2019 rulemakings,

8

while updating the standard salary level to account for earnings growth since the 2019 rule and adjusting the salary level methodology based on the lessons learned in recent rulemakings.

4

69 FR 22121 (April 23, 2004).

5

84 FR 51230 (Sept. 27, 2019).

6

81 FR 32391 (May 23, 2016).

7

The Department never enforced the 2016 rule because it was invalidated by the U.S. District Court for the Eastern District of Texas.

See Nevada

v.

U.S. Department of Labor,

275 F.Supp.3d 795 (E.D. Tex. 2017).

8

See

84 FR 51243-45; 81 FR 32414, 32444-45; 69 FR 22126-28.

The Department's proposed standard salary level will, in combination with the standard duties test, better define and delimit which employees are employed in a bona fide EAP capacity. By setting a salary level above what the methodology used in 2004 and 2019 would produce using current data, the proposal would ensure that, consistent with the Department's historical approach to the exemption, fewer lower-paid white-collar employees who perform significant amounts of nonexempt work are included in the exemption. At the same time, by setting the salary level below the methodology used in 2016, the proposal would allow employers to continue to use the exemption for many lower-paid white-collar employees who were made exempt under the 2004 standard duties test. The combined effect would be a more effective test for determining who is employed in a bona fide EAP capacity.

The Department is also proposing to increase the salary levels in the U.S territories, which have not been changed since 2004. Traditionally, the Department has set special salary levels only for territories that were not subject to the Federal minimum wage. In the 2004 rule, the Department ended the use of special salary levels for Puerto Rico and the U.S. Virgin Islands, as they had become subject to the Federal minimum wage since the Department last updated the part 541 salary levels, and set a special salary level only for American Samoa, which remained not subject to the Federal minimum wage.

9

In the 2019 rule, however, the Department elected to preserve the salary level set in 2004 ($455 per week) for employees in Puerto Rico, Guam, the U.S. Virgin Islands, and the Commonwealth of the Northern Mariana Islands (CNMI) instead of applying the new standard salary level of $684 per week that applied to employees in the 50 states and the District of Columbia.

10

In doing so, the Department for the first time set a special salary level for employees in territories that were subject to the Federal minimum wage. In accordance with the Department's traditional practice, and in the interest of applying the FLSA uniformly to areas subject to the Federal minimum wage, the Department is proposing to apply the standard salary level to employees in all territories that are subject to the Federal minimum wage and to maintain a special salary level only for employees in American Samoa, because that territory remains subject to special minimum wage rates. The Department is also proposing to update the special base rate for employees in the motion picture industry.

9

69 FR 22172.

10

84 FR 51246.

The Department is also proposing to update the earnings threshold for the highly compensated employee (HCE) exemption, which was added to the regulations in 2004 and applies to certain highly compensated employees and combines a much higher annual compensation requirement with a minimal duties test. The HCE test's primary purpose is to serve as a streamlined alternative for very highly compensated employees because a very high level of compensation is a strong indicator of an employee's exempt status, thus eliminating the need for a detailed duties analysis.

11

In this rulemaking, the Department is proposing to increase the HCE total annual compensation threshold to the annualized weekly earnings amount of the 85th percentile of full-time salaried workers nationally ($143,988). The proposed HCE threshold is high enough to exclude employees who are not “at the very top of [the] economic ladder”

12

and would guard against the unintended exemption of workers who are not bona fide EAP employees, including those in high-income regions and industries.

11

See

69 FR 22173-74.

12

Id.

at 22174.

In each of its part 541 rulemakings since 2004, the Department recognized the need to regularly update the earnings thresholds to ensure that they remain effective in helping differentiate between exempt and nonexempt employees. As the Department observed in these rulemakings, even a well-calibrated salary level that is not kept up to date becomes obsolete as wages for nonexempt workers increase over

time.

13

Long intervals between rulemakings have resulted in eroded earnings thresholds based on outdated earnings data that were ill-equipped to help identify bona fide EAP employees.

13

84 FR 51250-51; 81 FR 32430;

see also

69 FR 22212, 22164.

To address this problem, in the 2004 and 2019 rules the Department expressed its commitment to regularly updating the salary levels.

14

In the 2016 rule, it included a regulatory provision to automatically update the salary levels.

15

Based on its long experience with updating the salary levels, the Department has determined that adopting a regulatory provision for automatically updating the salary levels, with an exception for pausing future updates under certain conditions, is the most viable and efficient way to ensure the EAP exemption earnings thresholds keep pace with changes in employee pay and thus remain effective in helping determine exemption status. The proposed automatic updating mechanism would allow for the timely, predictable, and efficient updating of the earnings thresholds.

14

69 FR 22171; 84 FR 51251-52.

15

81 FR 32430.

The Department estimates that in Year 1, 3.4 million currently exempt employees who earn at least the current salary level of $684 per week but less than the proposed standard salary level of $1,059 per week would, absent the employer paying them at or above the new salary level, gain overtime protection. For more than half of these employees, this proposal would restore overtime protections that the employees would have been entitled to under every rule prior to the 2019 rule. The Department also estimates that 248,900 employees who are currently exempt under the HCE test would be affected by the proposed increase in the HCE total annual compensation level. Absent the employer paying these employees at or above the new HCE level, the exemption status of these employees would turn on the standard duties test (which these employees do not meet) rather than the minimal duties test that applies to employees earning at or above the HCE threshold. The economic analysis of the proposed rule quantifies the direct costs resulting from the rule: (1) regulatory familiarization costs; (2) adjustment costs; and (3) managerial costs. The Department estimates that total annualized direct employer costs over the first 10 years would be $664 million with a 7 percent discount rate. This rulemaking will also give employees higher earnings in the form of transfers of income from employers to employees. The Department estimates annualized transfers would be $1.3 billion, with a 7 percent discount rate.

II. Background

A. The FLSA

The FLSA generally requires covered employers to pay employees at least the Federal minimum wage (currently $7.25 an hour) for all hours worked, and overtime premium pay of one and one-half times the regular rate of pay for all hours worked over 40 in a workweek.

16

However, section 13(a)(1) of the FLSA, codified at 29 U.S.C. 213(a)(1), provides an exemption from both minimum wage and overtime pay for “any employee employed in a bona fide executive, administrative, or professional capacity . . . or in the capacity of [an] outside salesman (as such terms are defined and delimited from time to time by regulations of the Secretary [of Labor], subject to the provisions of [the Administrative Procedures Act] . . .).” The FLSA does not define the terms “executive,” “administrative,” “professional,” or “outside salesman,” but rather delegates that task to the Secretary. Pursuant to Congress's grant of rulemaking authority, since 1938 the Department has issued regulations at 29 CFR part 541 to define and delimit the scope of the section 13(a)(1) exemption.

17

Because Congress explicitly delegated to the Secretary the authority to define and delimit the specific terms of the exemption, the regulations so issued have the binding effect of law.

18

16

See

29 U.S.C. 206(a), 207(a).

17

See Helix Energy Solutions, Group Inc.

v.

Hewitt,

143 S.Ct. 677, 682 (2023) (“Under [section 13(a)(1)], the Secretary sets out a standard for determining when an employee is a bona fide executive.”).

18

See Betterton

v.

Francis,

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

The exemption for executive, administrative, or professional employees (EAP exemption) was included in the original FLSA legislation passed in 1938.

19

It was modeled after similar provisions contained in the earlier National Industrial Recovery Act of 1933 (NIRA) and state law precedents.

20

As the Department has explained in prior rules, the EAP exemption is premised on two policy considerations. First, the type of work exempt employees perform is difficult to standardize to any time frame and cannot be easily spread to other workers after 40 hours in a week, making enforcement of the overtime provisions difficult and generally precluding the potential job expansion intended by the FLSA's time-and-a-half overtime premium.

21

Second, exempted workers typically earn salaries well above the minimum wage and are presumed to enjoy other privileges to compensate them for their long hours of work. These include, for example, above-average fringe benefits and better opportunities for advancement, setting them apart from nonexempt workers entitled to overtime pay.

22

19

See

Fair Labor Standards Act of 1938, Public Law 75-718, 13(a)(1), 52 Stat. 1060, 1067 (June 25, 1938).

20

See

National Industrial Recovery Act, Public Law 73-67, ch. 90, title II, 206(2), 48 Stat 195, 204-5 (June 16, 1933).

21

See

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

22

See id.

Although section 13(a)(1) exempts covered employees from both the FLSA's minimum wage and overtime requirements, its most significant impact is its removal of these employees from the Act's overtime protections. An employer may employ such employees for any number of hours in the workweek without paying the minimum hourly wage or an overtime premium. Some state laws have stricter exemption standards than those described above. The FLSA does not preempt any such stricter state standards. If a state establishes a higher standard than the provisions of the FLSA, the higher standard applies in that state.

23

23

See

29 U.S.C. 218(a).

B. Regulatory History

The Department's part 541 regulations have consistently looked to the duties performed by the employee and the salary paid by the employer in determining whether an individual is employed in a bona fide executive, administrative, or professional capacity. Since 1940, the Department's implementing regulations have generally required each of three tests to be met for the exemption to apply: (1) the employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the salary basis test); (2) the amount of salary paid must meet a minimum specified amount (the salary level test); and (3) the employee's job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (the duties test).

1. The Part 541 Regulations From 1938 to 2004

The Department issued the first version of the part 541 regulations in October 1938.

24

The Department's initial regulations included a $30 per

week compensation requirement for executive and administrative employees, as well as a duties test that prohibited employers from using the exemption for executive, administrative, and professional employees who performed “[a] substantial amount of work of the same nature as that performed by nonexempt employees of the employer.”

25

24

3 FR 2518 (Oct. 20, 1938).

25

Id.

The Department issued the first update to its part 541 regulations in October 1940,

26

following extensive public hearings.

27

Among other changes, the 1940 update added the salary basis requirement to the tests for executive, administrative, and professional employees; newly applied the salary level requirement to professional employees; and introduced a 20 percent cap on nonexempt work for executive and professional employees, replacing language which prohibited the performance of a “substantial amount” of nonexempt work.

28

26

5 FR 4077 (Oct. 15, 1940).

27

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).

28

5 FR 4077.

The Department conducted further hearings on the part 541 regulations in 1947,

29

and issued revised regulations in December 1949.

30

The 1949 rulemaking updated the salary levels set in 1940 and introduced a second, less stringent duties test for higher paid executive, administrative, and professional employees.

31

Thus, beginning in 1949, the part 541 regulations contained two tests for the EAP exemption. These tests became known as the “long” test and the “short” test. The long test paired a lower earnings threshold with a more rigorous duties test that generally limited the performance of nonexempt work to no more than 20 percent of an employee's hours worked in a workweek. The short test paired a higher salary level and a less rigorous duties test, with no specified limit on the performance of nonexempt work. From 1958 until 2004, the regulations in place generally set the long test salary level to exclude from exemption approximately the lowest-paid 10 percent of salaried white-collar employees who performed EAP duties in lower wage areas and industries and set the short test salary level significantly higher. The salary and duties components of each test complemented each other, and the two tests worked in combination to determine whether an individual was employed in a bona fide EAP capacity. Lower-paid employees who met the long test salary level but did not meet the higher short test salary level were subject to the long duties test which ensured that employees were, in fact, employed in a bona fide EAP capacity by limiting the amount of time they could spend on nonexempt work. Employees who met the higher short test salary level were considered to be more likely to meet the requirements of the long duties test and thus were subject to a short-cut duties test for determining exemption status.

29

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).

30

See

14 FR 7705 (Dec. 24, 1949).

31

Id.

at 7706.

Additional changes to the regulations, including salary level updates, were made in 1954,

32

1958,

33

1961,

34

1963,

35

1967,

36

1970,

37

1973,

38

and 1975.

39

The Department revised the part 541 regulations twice in 1992 but did not update the salary threshold at that time.

40

None of these updates changed the basic structure of the long and short tests.

32

19 FR 4405 (July 17, 1954).

33

23 FR 8962 (Nov. 18, 1958).

34

26 FR 8635 (Sept. 15, 1961).

35

28 FR 9505 (Aug. 30, 1963).

36

32 FR 7823 (May 30, 1967).

37

35 FR 883 (Jan. 22, 1970).

38

38 FR 11390 (May 7, 1973).

39

40 FR 7091 (Feb. 19, 1975).

40

The Department first created a limited exception from the salary basis test for public employees. 57 FR 37677 (Aug. 19, 1992). The Department also implemented a 1990 law requiring it to promulgate regulations permitting employees in certain computer-related occupations to qualify as exempt under section 13(a)(1) of the FLSA. 57 FR 46744 (Oct. 9, 1992);

see

Public Law 101-583, sec. 2, 104 Stat. 2871 (Nov. 15, 1990).

The Department described the salary levels adopted in the 1975 rule as “interim rates,” intended to “be in effect for an interim period pending the completion of a study [of worker earnings] by the Bureau of Labor Statistics . . . in 1975.”

41

However, those salary levels remained in effect until 2004. The utility of the salary levels in helping to define the EAP exemption decreased as wages rose during this period. In 1991, the Federal minimum wage rose to $4.25 per hour,

42

which for a 40-hour week exceeded the lower long test salary level of $155 per week for executive and administrative employees and equaled the long test salary level of $170 per week for professional employees. In 1997, the Federal minimum wage rose to $5.15 per hour,

43

which for a 40-hour week not only exceeded the long test salary levels, but also was close to the higher short test salary level of $250 per week.

41

40 FR 7091.

42

See

Public Law 101-157, sec. 2, 103 Stat. 938 (Nov. 17, 1989).

43

See

Public Law 104-188, sec. 2104(b), 110 Stat 1755 (Aug. 20, 1996).

2. Part 541 Regulations From 2004 to 2019

The Department issued a final rule in April 2004 (the 2004 rule)

44

that updated the part 541 salary levels for the first time since 1975 and made several significant changes to the regulations. Most significantly, the Department eliminated the separate long and short tests and replaced them with a single standard test. The Department set the standard salary level at $455 per week, which was equivalent to the 20th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region (the South) and in the retail industry nationally. The Department paired the new standard salary level test with a new standard duties test for executive, administrative, and professional employees, respectively, which was substantially equivalent to the short duties test used in the two-test system.

45

44

69 FR 22122.

45

See id.

at 22192-93 (acknowledging “de minimis differences in the standard duties tests compared to the short duties tests”).

In the 2004 rule, the Department acknowledged that the switch from a two-test system to a one-test system was a significant change in the regulatory structure,

46

and noted that the shift to setting the salary level based on “the lowest 20 percent of salaried employees in the South, rather than the lowest 10 percent” of EAP employees was made, in part, “because of the proposed change from the `short' and `long' test structure.”

47

The Department asserted that elimination of the long duties test was warranted because “the relatively small number of employees currently earning from $155 to $250 per week, and thus tested for exemption under the `long' duties test, will gain stronger protections under the increased minimum salary level which . . . guarantees overtime protection for all employees earning less than $455 per week.”

48

The Department acknowledged, however, that the new standard salary level was comparable to the long test salary level used in the two-test system (

i.e.,

if the Department's long test salary level methodology had been applied to contemporaneous

data).

49

Thus, employees who would have been subject to the more rigorous long duties test if the two-test system had been updated were subject to the equivalent of the short duties test under the new standard test. For example, under the 2004 rule's standard test, an employee who earned just over the rule's standard salary threshold of $455 in weekly salary, and who met the standard duties test, was exempt even if they would not have met the previous long duties test because they spent substantial amounts of time performing nonexempt work. If the Department had instead retained the two-test system and updated the long test salary level to $455, that same employee would have been nonexempt because they would have been subject to the more rigorous duties analysis due to their lower salary.

46

See id.

at 22126-28.

47

Id.

at 22167.

48

Id.

at 22126.

49

Id.

at 22169. The Department last set the long and short test salary levels in 1975. Throughout this proposal, when the Department refers to the relationship of salary levels set in 2004, 2016, and 2019 to equivalent long or short test salary levels, it is referring to salary levels based on current (at the relevant point in time) data that, in the case of the long test salary level, would exclude the lowest-paid 10 percent of exempt EAP employees in low-wage industries and areas and, in the case of the short test salary level, would be 149 percent of a contemporaneous long test salary level. The short test salary ratio of 149 percent is the simple average of the 15 historical ratios of the short test salary level to the long test salary level.

See

81 FR 32467 & n.149.

In the 2004 rule, the Department also created a new test for exemption for certain highly compensated employees.

50

The HCE test paired a minimal duties requirement—customarily and regularly performing at least one of the exempt duties or responsibilities of an EAP employee—with a high total annual compensation requirement of $100,000, a threshold that exceeded the annual earnings of approximately 93.7 percent of salaried workers nationwide.

51

The Department also ended the use of special salary levels for Puerto Rico and the U.S. Virgin Islands, as they had become subject to the Federal minimum wage since the Department last updated the part 541 salary levels in 1975, and set a special salary level only for American Samoa, which remained not subject to the Federal minimum wage.

52

The Department expressed its intent “in the future to update the salary levels on a more regular basis, as it did prior to 1975.”

53

50

69 FR 22169.

51

See id.

(Table 3).

52

Id.

at 22172.

53

Id.

at 22171.

In May 2016, the Department issued a final rule (the 2016 rule) that retained the single test system and the standard duties test but increased the standard salary level and provided for regular updating. The 2016 rule (1) increased the standard salary level from the 2004 salary level of $455 to $913 per week, the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region (the South);

54

(2) increased the HCE test total annual compensation amount from $100,000 to $134,004 per year;

55

(3) increased the special salary level for EAP workers in American Samoa;

56

(4) allowed employers, for the first time, to credit nondiscretionary bonuses, incentive payments, and commissions paid at least quarterly towards up to 10 percent of the standard salary level;

57

and (5) added a mechanism to automatically update the part 541 earnings thresholds every 3 years.

58

The standard salary level was set at the low end of the historical range of short test salary levels used in the pre-2004 two-test system.

59

The 2016 rule did not change any of the standard duties test criteria.

60

The 2016 rule was scheduled to take effect on December 1, 2016.

54

81 FR 32550.

55

Id.

56

Id.

at 32551.

57

See id.

58

See id.

at 32550-51 (§ 541.602(a)(3)).

59

Id.

at 32405 (noting the historical range of short test salary levels was $889 to $1,231 based on an application of the short test methodology to contemporaneous data).

60

Id.

at 32444.

On November 22, 2016, the U.S. District Court for the Eastern District of Texas issued an order preliminarily enjoining the Department from implementing and enforcing the 2016 rule.

61

On August 31, 2017, the district court granted summary judgment to the plaintiff challengers, holding that the 2016 rule's salary level exceeded the Department's authority and invalidating the rule.

62

On October 30, 2017, the Department of Justice appealed to the U.S. Court of Appeals for the Fifth Circuit, which subsequently granted the Department's motion to hold that appeal in abeyance while the Department of Labor undertook further rulemaking. Following an NPRM published on March 22, 2019,

63

the Department published a final rule on September 27, 2019 (the 2019 rule),

64

which formally rescinded and replaced the 2016 rule.

61

See Nevada

v.

U.S. Department of Labor,

218 F. Supp. 3d 520 (E.D. Tex. 2016).

62

See Nevada,

275 F.Supp.3d 795 (E.D. Tex. 2017).

63

See

84 FR 10900 (Mar. 22, 2019).

64

See

84 FR 51230.

The 2019 rule (1) raised the standard salary level from the 2004 salary level of $455 to $684 per week, the 20th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region (the South) and in the retail industry nationally; (2) increased the HCE total annual compensation threshold from $100,000 to $107,432; (3) allowed employers to credit nondiscretionary bonuses and incentive payments (including commissions) paid at least annually to satisfy up to 10 percent of the standard salary level; and (4) established special salary levels for all U.S. territories.

65

The 2019 rule did not make changes to the standard duties test.

66

While utilizing the same methodology used in the 2004 rule to set the salary threshold, the Department did not assert that this methodology constituted the outer limit for defining and delimiting the salary threshold. Rather, the Department reasoned the 2004 methodology was well-established, reasonable, would minimize uncertainty and potential legal challenge, and would address the concerns of the district court that the 2016 rule over-emphasized the salary level.

67

The Department acknowledged that the new salary level was below the long test salary level used in the pre-2004 two-test system.

68

As in its 2004 rule, the Department “reaffirm[ed] its intent to update the standard salary level and HCE total annual compensation threshold more regularly in the future using notice-and-comment rulemaking.”

69

The Department noted that large gaps between rulemakings did not serve employer or employee interests and diminished the usefulness of the salary level test, and that regular increases promoted predictable and incremental change.

70

The 2019 rule took effect on January 1, 2020.

71

65

The Department established special salary levels of $455 per week for Puerto Rico, Guam, the U.S. Virgin Islands, and the CNMI (effectively continuing the 2004 salary level); it also maintained the 2004 rule's $380 per week special salary level for employees in American Samoa. 84 FR 51246.

66

See id.

at 51241-43.

67

See id.

at 51242.

68

Id.

at 51244.

69

Id.

at 51251.

70

See id.

at 51251-52.

71

A lawsuit challenging the 2019 rule was filed in August 2022 and, at the time this proposal was drafted, remains pending in the U.S. District Court for the Western District of Texas.

Mayfield

v.

U.S. Department of Labor,

Case No. 1:22-cv-00792.

C. Overview of Existing Regulatory Requirements

The part 541 regulations contain specific criteria that define each category of exemption provided for in section 13(a)(1) for bona fide executive, administrative, professional, and outside sales employees, as well as teachers and academic administrative personnel. The regulations also define exempt computer employees under

sections 13(a)(1) and 13(a)(17). The employer bears the burden of establishing the applicability of any exemption from the FLSA's pay requirements.

72

Job titles and job descriptions do not determine exemption status, nor does merely paying an employee a salary rather than an hourly rate.

72

See, e.g., Idaho Sheet Metal,

383 U.S. at 209;

Walling,

330 U.S. at 547-48.

To satisfy the EAP exemption, employees must meet certain tests regarding their job duties

73

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

74

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

75

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

76

The standard salary level for the EAP exemption is currently $684 per week (equivalent to $35,568 per year), and the total annual compensation level for highly compensated employees under the HCE test is currently $107,432.

77

A special salary level of $455 per week applies to employees in Puerto Rico, Guam, the U.S. Virgin Islands, and the CNMI;

78

a special salary level of $380 per week applies to employees in American Samoa;

79

and employers can pay a special weekly “base rate” of $1,043 per week to employees in the motion picture producing industry.

80

Nondiscretionary bonuses and incentive payments (including commissions) paid on an annual or more frequent basis may be used to satisfy up to 10 percent of the standard or special salary levels.

81

73

For a description of the duties that are required to be performed under the EAP exemption,

see

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

74

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.

75

See

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

76

See

§ 541.600(c) and (d).

77

See

§§ 541.600(a); 541.601(a)(1).

78

See

§§ 541.100; 541.200; 541.300.

79

See id.

80

See

§ 541.709.

81

§ 541.602(a)(3).

Under the HCE test, employees who receive at least $107,432 in total annual compensation are exempt from the FLSA's overtime requirements if they customarily and regularly perform at least one of the exempt duties or responsibilities of an executive, administrative, or professional employee identified in the standard tests for exemption.

82

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

83

Employees qualifying for exemption under the HCE test must receive at least the $684 per week standard salary portion of their pay on a salary or fee basis without regard to the payment of nondiscretionary bonuses and incentive payments.

84

82

§ 541.601.

83

§ 541.601(d).

84

See

§ 541.601(b)(1);

see also

84 FR 51249.

III. Need for Rulemaking

The goal of this rulemaking is to set effective earnings thresholds to help define and delimit the FLSA's EAP exemption. To this end, the Department is proposing to make appropriate increases to the standard salary level and the HCE test's total annual compensation requirement, apply the standard salary level to territories subject to the Federal minimum wage, and update the special salary levels for American Samoa and the motion picture industry. The Department is also proposing to maintain the effectiveness of these earnings thresholds by adding a provision to automatically update the standard salary level and the HCE annual compensation threshold every 3 years with current wage data (which would also have the effect of updating the levels in American Samoa and for the motion picture industry). The updating mechanism would also temporarily delay a scheduled automatic update if, and while, the Department engages in notice-and-comment rulemaking to change the salary level methodology and/or the updating mechanism.

The part 541 regulations have always included salary requirements. From the beginning, there has been “wide agreement” that the amount paid to an employee is “a valuable and easily applied index to the `bona fide' character of the employment for which [the] exemption is claimed.”

85

Because EAP employees “are denied the protection of the Act,” they are “assumed [to] enjoy compensatory privileges” which distinguish them from nonexempt employees, including substantially higher pay.

86

The Department has long recognized that the salary level test is a useful criterion for identifying bona fide EAP employees and providing a practical guide for employers and employees, thus tending to reduce litigation and ensuring nonexempt employees receive the overtime protection to which they are entitled.

87

The salary level test also facilitates application of the exemption by saving employees and employers from having to apply the more time-consuming duties analysis to a large group of employees who do not meet the duties test.

88

For these reasons, the salary level test has been a key part of how the Department defines and delimits the EAP exemption since the beginning of its rulemaking on the EAP exemption.

89

However, the Department has always recognized that any salary level will result in some employees who meet the duties test but do not earn enough to meet the salary level test, and thus are nonexempt and therefore eligible for overtime by virtue of their pay.

90

This is simply a feature of a salary level test; it does not undermine the efficacy of the salary level test but instead is taken into account in determining where the salary level is set.

85

Stein Report at 19.

86

Id.; see also

Report of the Minimum Wage Study Commission, Volume IV, p. 236 (“Higher base pay, greater fringe benefits, improved promotion potential and greater job security have traditionally been considered as normal compensatory benefits received by EAP employees, which set them apart from non-EAP employees.”).

87

See

84 FR 51237; Weiss Report at 8.

88

Report and Recommendations on Proposed Revision of Regulations, Part 541, Under the Fair Labor Standards Act, by Harry S. Kantor, Assistant Administrator, Office of Regulations and Research, Wage and Hour and Public Contracts Divisions, U.S. Department of Labor (Mar. 3, 1958) (Kantor Report) at 2-3; 69 FR 22165; 84 FR 51280.

89

See

84 FR 51237.

90

See, e.g.,

Kantor Report at 5.

The Department continues to believe that the amount paid to an employee is important evidence that they are employed in a bona fide EAP capacity, and that the salary level test “is a vital element in the regulations.”

91

The salary level test benefits employees and employers alike, which is why—despite disagreement over the appropriate magnitude of the part 541 earnings thresholds—an “overwhelming majority” of stakeholders have supported the retention of such thresholds in prior part 541 rulemakings.

92

91

Weiss Report at 9.

92

84 FR 51235;

see also

Stein Report at 5, 19; Weiss Report at 9.

The Department's authority to set a salary level is not without limits, and the salary test's role in defining and delimiting the scope of the EAP exemption must allow for additional examination of employee duties for employees whose salary exceeds the

salary level.

93

Examination of duties for such employees is necessary in part because the salaries earned by employees who do and do not perform exempt job duties overlap. As explained in greater detail below, the proposed standard salary level set at the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region ($1,059 per week, $55,068 annually) would, in combination with the standard duties test, better identify which employees are employed in a bona fide EAP capacity in a one-test system. By setting a salary level above what would currently be the equivalent of the long test salary level ($925 per week), the proposal would restore the right to overtime pay for salaried white-collar employees who prior to the 2019 rule were always considered nonexempt if they earned below the long test (or long test-equivalent) salary level and ensure that fewer white-collar employees who perform significant amounts of nonexempt work and earn between the long and short test salary levels are included in the exemption. At the same time, by setting the standard salary level well below what would currently be the equivalent of the short test salary level ($1,378 per week),

94

the proposal would address the concerns that have been raised about excluding from the EAP exemption too many white-collar employees solely based on their salary level. As discussed in section IV.A.4 below, the duties test would continue to determine exemption status for almost three-quarters of all salaried white-collar employees subject to the part 541 regulations, allowing employers to continue to use the exemption for 24.5 million salaried white-collar workers who earn at least the proposed salary level and meet the standard duties test.

95

The proposed salary level would also reasonably distribute between employees and their employers what the Department now understands to be the impact of the shift from a two-test to a one-test system on employees earning between the long and short test salary levels.

93

84 FR 51238 (noting salary's “useful, but limited, role”).

94

During the period from 1949 to 2004, the ratio of the short test salary level to the long test salary levels ranged from approximately 130 percent to 180 percent.

See

81 FR 32403. The simple average of the 15 historical ratios of the short test salary level to the long test salary level is 149 and the Department calculates the short test salary level as 149 percent of the long test salary level.

See id.

at 32467 & n.149.

95

This number does not include the additional 8.1 million workers employed in occupations that are not subject to the salary level test, such as doctors, lawyers, and teachers. Such employees are unaffected by this rulemaking because their exemption status is always determined by the duties test.

Since switching from a two-test to a one-test system for defining and delimiting the EAP exemption in 2004, the Department has followed different approaches to set the single standard salary level. In 2004, the Department set the new standard salary level roughly equivalent to the 20th percentile of weekly earnings of full-time salaried workers in the South and in the retail industry nationwide ($455 per week).

96

This approach produced a salary level amount that was equivalent to the lower long test salary level under the two-test system.

97

Because it was equivalent to the long test salary level, employees who historically earned less than the long test salary level continued to be entitled to overtime compensation because they earned below the new standard salary level. However, because the new standard duties test was substantially equivalent to the less rigorous short duties test,

98

employees who were paid the equivalent of the lower long test salary level and who met the less rigorous short duties test also now met the standard duties test and were not entitled to overtime compensation. This approach broadened the EAP exemption because all employees between the long and short test salary levels who historically had not been considered bona fide EAP employees because they did not meet the long duties test became exempt. The Department followed this same methodology to set the standard salary level in 2019, although applying the 2004 rule's methodology resulted in a salary level that was a lower amount than what would have been the equivalent of the long test salary level.

99

This broadened the EAP exemption even further by, for the first time, setting a salary level that exempted a group of white-collar employees earning below the equivalent of the long test salary level (based on contemporaneous data). Both the 2004 and 2019 rules thus effectively placed the impact of the shift from a two-test to a one-test system on lower-salaried white-collar employees—both those who earned below the short test salary level and were traditionally protected by the more rigorous long duties test (

i.e.,

because they performed substantial amounts of nonexempt work), and, in the case of the 2019 rule, those who had previously been protected by a salary level set at or equivalent to the long test salary.

96

See

69 FR 22168.

97

See id.

at 22168-69.

98

Id.

at 22214.

99

See

84 FR 51260 (Table 4) (showing that the salary level derived from the Department's long test methodology would have been $724 per week rather than the finalized $684 per week amount).

To address the concern that the 2004 rule did not provide overtime compensation for lower-salaried white-collar employees performing large amounts of nonexempt work who historically were not considered bona fide EAP employees, in 2016 the Department set the standard salary level at the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region (the South), which produced a salary level that was at the low end of the historical range of short test salary levels.

100

This approach restored overtime protection to white-collar employees who perform substantial amounts of nonexempt work and earned between the equivalent of the long test salary level and the short test salary level. However, this approach also made nonexempt some employees who had previously met the long duties test—employees who earned between the long test salary level and the low end of the short test salary range and performed only a limited amount of nonexempt work. Until 2004 employers could use the long test to exempt these employees, and under the 2004 rule these employees remained exempt under the one-test system. Thus, the impact of the 2016 rule was that employers could not use the exemption for certain white-collar employees who earned between the long and short test salary levels and would have met the more rigorous long duties test.

101

In the challenge to the 2016 rule, the district court expressed concern that the 2016 rule conferred overtime eligibility based on salary level alone to a substantial number of employees who would otherwise be exempt.

102

100

81 FR 32405.

101

See

84 FR 10908; 84 FR 51242.

102

See Nevada,

275 F.Supp.3d. at 806.

Having grappled with the different approaches that it has used to set the standard salary level since switching to a one-test system in 2004, the Department's goal in this rulemaking is not only to update the single standard salary level to account for earnings growth since the 2019 rule, but also to build on the lessons learned in its most recent rulemakings to more effectively define and delimit employees employed in a bona fide EAP capacity. Consistent with its broad authority under the statute, the Department is proposing a standard salary level test that would work effectively with the standard duties test to help achieve these objectives and would also reasonably distribute the impact of the switch to a one-test system across white-collar

employees earning between the long and short test salary levels and their employers. In 2004 and 2019, setting the salary level equivalent to or below the lower long test salary level resulted in the exemption of lower-salaried employees who perform large amounts of nonexempt work, in effect significantly broadening the exemption compared to under the two-test system. This approach included in the exemption lower-salaried employees whom the Department had long considered not to be employed in a bona fide EAP capacity because they performed substantial amounts of nonexempt work. Under the 2016 approach, setting the salary level equivalent to the low end of the higher short test salary range would have restored overtime protections to those employees who perform substantial amounts of nonexempt work and earned between the long test salary level and the low end of the short test salary levels. However, it also would have resulted in denying employers the use of the exemption for many lower-salaried employees who traditionally were exempt under the long test, which raised concerns that the Department was in effect narrowing the exemption compared to the two-test system.

103

In this rulemaking, the Department proposes setting a standard salary level that would better define and delimit the EAP exemption by more effectively accounting for the switch from a two-test to a one-test system, and reasonably distribute the impact of the shift by ensuring overtime protection for some lower-salaried employees without excluding from exemption too many white-collar employees solely based on their salary level.

104

103

See

84 FR 51242.

104

See

section IV.A.3.

In addition, consistent with its previously stated intent, the Department is undertaking this rulemaking to keep the earnings thresholds up to date. Four years have passed since the 2019 rule, during which time salaried workers in the U.S. economy have experienced a rapid growth in their nominal wages, which lessens the effectiveness of the current salary level threshold. Reapplying the same methodology that was used to set the standard salary level in 2019 to recent earnings data would result in a new threshold of $822 per week—a 20.2 percent increase over the current $684 per week standard salary level.

105

Applying the long test salary methodology to current data would result in a salary threshold of $925 per week—a 35.2 percent increase over the current salary level.

105

See

section VII.C.5 (applying CPS MORG data from calendar year 2022).

The Department is also proposing to increase the HCE total annual compensation threshold to the annualized weekly earnings amount of the 85th percentile of full-time salaried workers nationally ($143,988). Reapplying the 2019 methodology (annualized weekly earnings of the 80th percentile of full-time salaried workers nationally) to current earnings data results in a threshold of $125,268 per year—a 16.6 percent increase over the current threshold of $107,432. Other data further supports that the HCE test's current total annual compensation requirement has become outdated. When it was created in 2004, the HCE test featured a $100,000 threshold that exceeded the annual earnings of approximately 93.7 percent of salaried workers nationwide.

106

More recently in the 2019 rule, the Department set the HCE test threshold so it would be equivalent to the annual earnings of the 80th percentile of full-time salaried workers nationwide. Today, however, the $107,432 HCE threshold is approximately the 72nd percentile of annual earnings of full-time salaried workers nationwide. The Department's proposed increase from the 80th to the 85th percentile is high enough to exclude employees who are not “at the very top of [the] economic ladder”

107

and would ensure that this test for exemption continues to serve its intended function.

106

See

69 FR 22169 (Table 3).

107

Id.

at 22174.

The salary levels applicable to the U.S. territories have not increased since 2004. In 2004, the Department ended the use of special salary levels in territories that had become subject to the Federal minimum wage since the salary levels were last set in 1975, and applied a special salary level of $380 per week only to employees in American Samoa, who were subject to special minimum wage rates below the Federal minimum wage.

108

In 2019, however, the Department established a special salary level of $455 per week for employees in Puerto Rico, Guam, the U.S. Virgin Islands, and the CNMI, for the first time setting a special salary level in territories that were subject to the Federal minimum wage.

109

The Department also maintained the special salary level for American Samoa at $380 per week, the level set in 2004. There is thus a compelling need to increase the salary levels applicable to employees in U.S. territories, particularly employees in those territories that are subject to the Federal minimum wage.

108

See id.

at 22172.

109

See

84 FR 51246.

Finally, the Department proposes to adopt a mechanism to automatically update the earnings thresholds in the part 541 regulations in future years. In its three most recent part 541 rulemakings, the Department has expressed its commitment to keeping the salary level tests up to date. In its 2004 rule, the Department conveyed its intent “in the future to update the salary levels on a more regular basis.”

110

In its 2016 rule, the Department adopted a mechanism to automatically update the salary level on a triennial basis. In 2019, after initially proposing to codify its commitment to updating the threshold every 4 years through rulemaking, the Department affirmed in its final rule that it “intends to update these thresholds more regularly in the future.”

111

As noted above, however, the history of the part 541 regulations shows multiple, significant gaps during which the salary levels were not updated and their effectiveness in helping to define the EAP exemption decreased as wages increased. While the Department increased its part 541 earnings thresholds every 5 to 9 years in the 37 years between 1938 and 1975, more recent decades have included long periods without raising the salary level, resulting in significant erosion of the real value of the threshold levels followed by unpredictable increases. As explained in greater detail in section IV.D, employees and employers alike would benefit from the certainty and stability of regularly scheduled updates.

110

69 FR 22171.

111

84 FR 51251-52.

IV. Discussion of Proposed Rule

Consistent with its statutory duty to define and delimit the EAP exemption, the Department is proposing increases to the earnings thresholds provided in the part 541 regulations. As explained in greater detail below, the Department proposes to increase the standard salary level to the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region (currently the South). The Department also proposes to apply this updated standard salary level to the four U.S. territories that are subject to the Federal minimum wage—Puerto Rico, Guam, the U.S. Virgin Islands, and the CNMI—and to update the special salary levels for American Samoa and the motion picture industry in relation to the new standard salary level. The Department additionally proposes raising the HCE test's total annual compensation

requirement to the annual equivalent of the 85th percentile of weekly earnings of full-time salaried workers nationally ($143,988). Finally, the Department proposes a new mechanism to automatically update the standard salary level and the HCE total annual compensation threshold every 3 years to ensure that they remain effective tests for exemption.

While the primary regulatory changes proposed are in §§ 541.600, 541.601, 541.709, and newly-added § 541.607, additional conforming changes are proposed to update references to the salary level throughout part 541. The Department is not proposing any changes to the salary basis or duties test requirements in this rulemaking. The Department welcomes comments on all aspects of this proposal.

A. Standard Salary Level

The salary level test is grounded in the text of section 13(a)(1). The Secretary's expressly-delegated authority to “define[]” and “delimit[]” the terms of the EAP exemption includes the authority to use a salary level test as one criterion for identifying employees who are employed in a “bona fide executive, administrative, or professional capacity.” The Department has used a salary level test since the first part 541 regulations in 1938. From the FLSA's earliest days, stakeholders have generally favored the use of a salary test,

112

and the Department's authority to use a salary test has been repeatedly upheld.

113

112

See

Stein Report at 5, 19.

113

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).

Despite numerous amendments to the FLSA over the past 85 years, Congress has not restricted the Department's use of the salary level tests. Significant regulatory changes involving the salary requirements since 1938 include adding a separate salary level for professional employees in 1940, adopting a two-test system with separate short and long test salary levels in 1949, and creating a single standard salary level test and establishing a new HCE exemption test in 2004. These changes were all made through regulations issued pursuant to the Secretary's authority to define and delimit the exemption. Despite having amended the FLSA numerous times over the years, Congress has not amended section 13(a)(1) to alter these regulatory salary requirements.

The FLSA delegates to the Secretary the power to “define[ ]” and “delimit[ ]” the terms “bona fide executive, administrative, or professional capacity” through regulation. Congress thus “provided that employees should be exempt who fell within certain general classifications”—those employed in a bona fide executive, administrative, or professional capacity—and authorized the Secretary “to define and delimit those classifications by reasonable and rational specific criteria.”

114

Therefore, the Department “is responsible not only for determining which employees are entitled to the exemption, but also for drawing the line beyond which the exemption is not applicable.”

115

114

Walling,

140 F.2d at 831-32;

see Ellis

v.

J.R.'s Country Stores, Inc.,

779 F.3d 1184, 1199 (10th Cir. 2015) (approvingly quoting

Walling

);

see also Auer

v.

Robins,

519 U.S. 452, 456 (1997) (“The FLSA grants the Secretary broad authority to `defin[e] and delimi[t]' the scope of the exemption for executive, administrative, and professional employees.”).

115

Stein Report at 2.

As the Department stated in its 2019 rule, an employee's salary level “is a helpful indicator of the capacity in which an employee is employed, especially among lower-paid employees.”

116

The amount an employee is paid is also a “valuable and easily applied index to the `bona fide' character of employment for which exemption is claimed,” as well as the “principal[ ]” “delimiting requirement” “prevent[ing] abuse” of the exemption.

117

As the Department has explained, if an employee “is of sufficient importance . . . to be classified as a bona fide” executive employee, for example, and “thereby exempt from the protection of the [A]ct, the best single test of the employer's good faith in attributing importance to the employee's services is the amount [it] pays for them.”

118

Employee compensation is a relevant indicator of exemption status given that the EAP exemption is premised on the understanding that individuals who are employed in a bona fide executive, administrative, or professional capacity typically earn higher salaries and enjoy other privileges to compensate them for their long hours of work, setting them apart from nonexempt employees entitled to overtime pay.

119

116

84 FR 51239 (internal quotation marks omitted).

117

Stein Report at 19, 24;

see also

81 FR 32422.

118

Stein Report at 19, 24;

see also id.

at 26 (“[A] salary criterion constitutes the best and most easily applied test of the employer's good faith in claiming that the person whose exemption is desired is actually of such importance to the firm that he is properly describable as an employee employed in a bona fide administrative capacity.”).

119

See

Report of the Minimum Wage Study Commission, Vol. IV, at 236, 240;

see also, e.g.,

Stein Report at 19 (explaining that the “term `executive' implies a certain prestige, status, and importance” denoted by pay “substantially higher than” the Federal minimum wage).

Consistent with the Department's longstanding approach, the proposed rule ensures that the salary level test and duties test continue to complement each other to define and delimit the EAP exemption and that the salary level does not play an outsized role in determining whether an individual is employed in a bona fide EAP capacity.

120

In part because of the overlap in the salaries earned by employees who do and do not perform exempt job duties, the salary level must allow for appropriate examination of duties. As discussed in section IV.A.4, under the Department's proposed standard salary level, the duties test will determine the exemption status for most white-collar employees.

120

The Department has consistently stated that salary alone cannot define who is a bona fide EAP employee.

See

84 FR 51239; 81 FR 32429; 69 FR 22173.

The Department's proposed standard salary level will, in combination with the standard duties test, better define and delimit which employees are employed in a bona fide EAP capacity in a one-test system. By setting a salary level above the equivalent of the long test salary level, the proposal would (unlike the 2004 and 2019 rules) ensure that not all lower-paid white-collar employees who perform significant amounts of nonexempt work, and were historically considered by the Department not to be employed in a bona fide EAP capacity because they failed the long duties test, are included in the exemption. At the same time, by setting it well below the equivalent of the short test salary level, the proposal would address potential concerns that the salary level test should not be determinative of EAP exemption status for too many white-collar employees. The combined effect would be a more effective test for exemption. The proposed salary level would also reasonably distribute between employees and their employers what the Department now understands to be the impact of the 2004 shift from a two-test to a one-test system on employees earning between the long and short test salary levels.

1. History of the Salary Level

The first version of the part 541 regulations, issued in 1938, set a minimum compensation requirement of $30 per week for executive and administrative employees.

121

Since then, the Department has increased the

salary levels eight times—in 1940, 1949, 1958, 1963, 1970, 1975, 2004, and 2019.

121

3 FR 2518.

In 1940, the Department maintained the $30 per week salary level for executive employees but established a higher $200 per month salary level test for administrative and professional employees. In selecting these thresholds, the Department used salary surveys from Federal and State Government agencies, experience gained under NIRA, and Federal Government salaries to determine the salary level that was a reasonable “dividing line” between employees performing exempt and nonexempt work.

122

122

See

Stein Report at 20-21, 31-32.

In 1949, recognizing that the “increase in wage rates and salary levels” since 1940 had “gradually weakened the effectiveness of the present salary tests as a dividing line between exempt and nonexempt employees,” the Department calculated the percentage increase in weekly earnings from 1940 to 1949, and then adopted new salary levels “at a figure slightly lower than might be indicated by the data” to protect small businesses.

123

In 1949, the Department also established a short test for exemption, which paired a higher salary level with a less rigorous duties test. The justification for this short test was that employees who met the higher salary level were more likely to meet all the requirements of the exemption (including the 20 percent limit on nonexempt work), and thus a “short-cut test of exemption . . . would facilitate the administration of the regulations without defeating the purposes of section 13(a)(1).”

124

Employees who met only the lower long test salary level, and not the higher short test salary level, were still required to satisfy the long duties test, which included a limit on the amount of nonexempt work that an exempt employee could perform. The two-test system remained part of the Department's regulations until 2004.

123

Weiss Report at 8, 14.

124

Id.

at 22-23.

In 1958, the Department reiterated that salary is a “mark of [the] status” of an exempt employee and reinforced the importance of salary as an enforcement tool, adding that the Department had “found no satisfactory substitute for the salary tests.”

125

To set the salary levels, the Department considered data collected during 1955 WHD investigations on the “actual salaries paid” to employees who “qualified for exemption” (

i.e.,

met the applicable salary and duties tests in place at the time) and set the salary levels at $80 per week for executives and $95 per week for administrative and professional employees.

126

The Department set the long test salary levels so that only a limited number of employees performing EAP duties (about 10 percent) in the lowest-wage regions and industries would fail to meet the new salary level and therefore become entitled to overtime pay.

127

In laying out this methodology, often referred to as the “Kantor” methodology and generally referenced in this NPRM as the “long test” methodology, the Department echoed its prior comments stating that the salary tests “simplify enforcement by providing a ready method of screening out the obviously nonexempt employees.”

128

125

Kantor Report at 2-3.

126

Id.

at 6, 9.

127

Id.

at 6-7.

128

Id.

at 2-3;

see

Weiss Report at 8.

The Department followed a similar methodology when determining the appropriate long test salary level in 1963, using data regarding salaries paid to exempt workers collected in a 1961 WHD survey.

129

The salary level for executive and administrative employees was increased to $100 per week, and the professional exemption salary level was increased to $115 per week.

130

The Department noted that these salary levels approximated the methodology used in 1958 to set the long test salary levels.

131

129

28 FR 7002 (July 9, 1963).

130

Id.

at 7004.

131

Id.

The Department continued to use a similar methodology when it updated the salary levels in 1970. After examining data from 1968 WHD investigations, 1969 BLS wage data, and information provided in a report issued by the Department in 1969 that included salary data for executive, administrative, and professional employees,

132

the Department increased the long test salary level for executive and administrative employees to $125 per week and increased the long test salary level for professional employees to $140 per week.

133

132

See

34 FR 9934, 9935 (June 24, 1969).

133

35 FR 885.

In 1975, instead of following the previous long test methodology, the Department set the long test salary levels “slightly below” the amount suggested by adjusting the 1970 salary levels for inflation based on increases in the Consumer Price Index (CPI).

134

The long test salary level for executive and administrative employees was set at $155, while the professional level was set at $170. The salary levels adopted were intended to be interim levels “pending the completion and analysis of a study by [BLS] covering a six month period in 1975[,]” and were not meant to set a precedent for future salary level increases.

135

The envisioned process was never completed, however, and the “interim” salary levels remained unchanged for the next 29 years.

134

40 FR 7091.

135

Id.

at 7091-92.

The short test salary level increased in tandem with the long test level throughout the various rulemakings between 1949 and 2004. Because the short test was designed to capture only those white-collar employees whose salary was high enough to indicate a stronger likelihood of being employed in a bona fide EAP capacity and thus warrant a less stringent duties requirement, the short test salary level was always set significantly higher than the long test salary level.

When the Department updated the part 541 regulations in 2004, it opted to create a single standard test for exemption instead of retaining the two-test system from prior rulemakings. The Department set the new standard salary level at $455 per week and paired it with a duties test that was substantially equivalent to the less rigorous short duties test. In setting the new standard salary level, the Department looked at nonhourly earnings from the CPS MORG data collected by BLS.

136

The Department set a salary level that would exclude from exemption roughly the bottom 20 percent of full-time salaried employees in each of two subpopulations: (1) the South and (2) the retail industry nationally. In setting the salary level the Department looked to earnings data for all white-collar workers—exempt and nonexempt—and looked to a higher percentile than the long test methodology (10th percentile of exempt workers in low-wage industries and areas). The Department acknowledged, however, that the salary arrived at by this method was, at the time, equivalent to the salary derived from the long test method using current data.

137

136

See

69 FR 22166-67.

137

Id.

at 22168. The 2004 methodology used the 20th percentile of a data set of all full-time salaried workers and the long test methodology looked to the lowest-paid 10 percent of exempt salaried workers. The two methodologies resulted in equivalent salary levels because exempt salaried workers generally have higher earnings than nonexempt salaried workers.

In the 2016 rule, the Department again used CPS MORG data but set the standard salary level equal to the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region (the South),

resulting in a standard salary level of $913 per week, which was at the low end of the historic range of short test salary levels. The Department explained that the increase in the standard salary level was needed because the 2004 rule exempted lower-salaried employees performing large amounts of nonexempt work who should be covered by the overtime compensation requirement.

138

Since the standard duties test was equivalent to the short duties test, the Department asserted that a salary level in the short test salary range was necessary to address this effect of the 2004 rule. As explained earlier, the U.S. District Court for the Eastern District of Texas held the 2016 rule invalid.

138

81 FR 32405.

In updating the standard salary level in 2019, the Department reapplied the methodology from the 2004 rule, setting the salary level equal to the 20th percentile of weekly earnings of full-time salaried workers in the South and in the retail sector nationwide.

139

This methodology addressed concerns that had been raised that the 2016 methodology excluded too many employees from the exemption based on their salary alone. Unlike in 2004, however, where the 20th percentile of weekly earnings of full-time salaried workers in the South and retail nationally was essentially the same as the long test, this methodology now produced a salary level amount that was lower than the equivalent of the long test salary level using contemporaneous data. This methodology produced the current standard salary level of $684 per week (equivalent to $35,568 per year).

140

139

See

84 FR 51260 (Table 4).

140

Id.

at 51238.

2. Salary Level Test Function and Effects

Since 1940, the Department's regulations have consistently looked at both the duties performed by the employee and the salary paid by the employer in defining and delimiting who is a bona fide executive, administrative, or professional employee exempt from the FLSA's minimum wage and overtime protections. From 1949 to 2004, the Department determined EAP exemption status using a two-test system comprised of a long test (a lower salary level paired with a more rigorous duties test that limited performance of nonexempt work to no more than 20 percent for most employees) and a short test (a higher salary level paired with a less rigorous duties test that looked to the employee's primary duties and did not have a numerical limit on the amount of nonexempt work). The two-test system facilitated the determination of whether white-collar workers across the income spectrum were employed in a bona fide EAP capacity, and employees who met either test could be classified as EAP exempt.

In a two-test system, the long test salary level screens from the exemption the lowest-paid white-collar employees, thereby ensuring their right to overtime compensation. The Department has often referred to many of the employees who are screened from the exemption by virtue of their earning below the lower long test salary level as “ `obviously nonexempt employees[.]' ”

141

The long test salary level helped distinguish employees who were not employed in a bona fide EAP capacity because the Department found that employees who were screened from exemption by the long test salary level generally did not meet the other requirements for exemption.

142

Since 1958, the long test salary level was generally set to exclude from exemption approximately the lowest-paid 10 percent of salaried white-collar employees who performed EAP duties in the lowest-wage regions and industries.

143

The long test salary level also served as a line delimiting the population of white-collar employees for whom the duties test determined their exemption status. In the two-test system, this duties analysis included an examination of the amount of nonexempt work performed, which ensured that employees earning lower salary levels were, in fact, employed in a bona fide EAP capacity by limiting the amount of time they could spend on nonexempt work. Thus, the Department long recognized that lower salaried workers should be subject to a test that placed significant limits on the amount of nonexempt work they perform. The duties and salary level tests worked in tandem to properly define and delimit the exemption: lower-paid workers had to satisfy a more rigorous duties test with strict limits on nonexempt work; higher paid employees were subject to a less rigorous duties test because they were more likely to satisfy all the requirements of the exemption (including the limit on nonexempt work).

144

141

See id.

at 51237 (quoting Kantor Report at 2-3).

142

See

Kantor Report at 2-3; Weiss Report at 8 (“In an overwhelming majority of cases, it has been found by careful inspection that personnel who did not meet the salary requirements would also not qualify under other sections of the regulations[.]”).

143

See

84 FR 51236.

144

Weiss Report at 22-23.

Because employees who met the short test salary level were paid well above the long test salary level, the short test salary level did not perform the same function as the long salary level of screening obviously nonexempt employees. Instead, the short test salary level was used to determine whether the full duties test or the short-cut duties test would be applied to determine EAP exemption status. The exemption status of employees paid more than the long and less than the short test salary levels was determined by applying the more rigorous long duties test that ensured overtime protections for employees who performed substantial amounts of nonexempt work. The exemption status of employees paid at or above the higher short test salary level was determined by the less rigorous short duties test that looked to the employee's primary duty and did not cap the amount of nonexempt work an employee could perform. The short test thus provided a faster and more efficient duties test based on the Department's experience that employees paid at the higher short test salary level “almost invariably” met the more rigorous long duties test, including its 20 percent limit on nonexempt work, and therefore a shortened analysis of duties was a more efficient test for exemption status.

145

145

Id.

In 2004, rather than update the two-test system, the Department chose to establish a new single-test system for determining exemption status. The new single standard test for exemption used a duties test that was substantially equivalent to the less rigorous short duties test in the two-test system.

146

Since the creation of the standard test, the Department has taken two different approaches to set the standard salary level that pairs with the standard duties test.

146

69 FR 22214.

In 2004, as noted above, the Department set the new salary level roughly equivalent to the 20th percentile of weekly earnings of full-time salaried workers in the South and in the retail industry nationwide.

147

The Department acknowledged that the salary level ($455 per week) was, in fact, equivalent to the lower long test salary level amount under the two-test system using contemporaneous data.

148

Because it was equivalent to the long test salary level, the standard salary test continued to perform the same initial screening function as the long test salary level and employees who historically were entitled to overtime compensation

because they earned below the long test salary level remained nonexempt under the new standard test. Without a higher salary short test, however, all employees who met the standard salary level were subject to the same duties test. The single standard duties test was equivalent to the short duties test, and so some employees who previously did not meet the long duties test met the standard duties test. As a result, the shift from a two-test to a one-test system significantly broadened the EAP exemption because employees who historically had not been considered bona fide EAP employees—in particular, those lower-paid employees who did not meet the long duties test because they performed substantial amounts of nonexempt work—were now defined as falling within the exemption and would not be eligible for overtime compensation.

147

See id.

at 22168-69.

148

See id.

This broadening specifically impacted lower-paid, salaried white-collar employees who earned between the long and short test salary levels and performed substantial amounts of nonexempt work. Under the two-test system, these employees had been entitled to overtime compensation if their nonexempt duties exceeded the long test's strict limit on such work. Under the 2004 standard test, these employees became exempt because they met both the low standard salary level and the less rigorous standard duties test. The Department's discussion of the elimination of the long duties test in 2004 focused primarily on the minimal role played by the long test at that time due to the erosion of the long salary level, and on the difficulties employers would face if they were again required to track time spent on nonexempt work when the dormancy of the long duties test meant that they had generally not been performing such tracking for many years.

149

While asserting that employees who were then subject to the long test would be better protected under the higher salary level of the new standard test, the Department did not compare the protection lower salaried employees would receive under the standard test with the protection they would have received under an updated long test with a salary level based on contemporary data and the existing long duties test.

149

See

69 FR 22126-27.

To address the concern that lower-salaried employees performing large amounts of nonexempt work historically were not considered bona fide EAP employees and thus should be entitled to overtime compensation, in 2016 the Department set the standard salary level at the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region (the South). This methodology produced a salary level ($913 per week) that was at the low end of the historical range of short test salary levels.

150

This approach restored overtime protection for employees performing substantial amounts of nonexempt work who earned between the long and short test salary levels, as they failed the new salary level test. However, this approach generated potential concerns that the salary level test should not be determinative of exemption status for too many individuals.

150

81 FR 32405.

Due to the 2016 rule's narrowing of the exemption, employers were unable to use the exemption for employees who earned between the long test salary level and the low end of the short test salary range and would have met the more rigorous long duties test. Prior to 2004 employers could use the long test to exempt these employees, and under the 2004 rule these employees remained exempt under the one-test system. Thus, while the 2016 rule accounted for the absence of the long duties test by restoring overtime protections to employees earning between the long test salary level and the low end of the short test salary range who perform significant amounts of nonexempt work, it also made a group of employees who had been exempt under the two-test system newly nonexempt under the one-test system: employees earning between the long test level and the short test salary range who perform only limited nonexempt work.

In its 2019 rule, the Department determined that the 2016 rule had not sufficiently considered the impact of the increased standard salary level on employers' ability to use the exemption for this group of employees.

151

The Department emphasized that “[f]or most . . . employees the exemption should turn on an analysis of their actual functions, not their salaries,” and that the 2016 rule's effect of making nonexempt all lower-paid, white-collar employees who traditionally were exempt under the long test “deviated from the Department's longstanding policy of setting a salary level that does not `disqualify[ ] any substantial number of' bona fide executive, administrative, and professional employees from exemption.”

152

To address these concerns, the Department simply returned to the 2004 rule's methodology for setting the salary threshold. In responding to comments that the proposed salary level did not account for the absence of the more rigorous long duties test, the 2019 rule reiterated the statements made in the 2004 rule and asserted that the 2016 rule did not adequately account for the absence of the lower long test salary level.

153

Applying the 2004 method to the earnings data available in 2019 produced a standard salary level of $684 per week, which was even below the equivalent of what the long test salary level would have been using contemporaneous data ($724 per week).

154

151

84 FR 10908.

152

Id.

(quoting Kantor Report at 5).

153

See

84 FR 51243.

154

Id.

at 51260.

The 2019 rule thus had the same impact as the 2004 rule of exempting all employees who earned between the long and short test salary levels and who performed too much nonexempt work to meet the long duties test, but passed the short duties test. The 2019 rule also for the first time permitted the exemption of a group of low-paid white-collar employees (those earning between $684 and $724 per week) who had always been protected by the salary level test's initial screening function—either under the long test, or under the 2004 rule salary level that was equivalent to the long test salary level. The Department stated that the standard salary level's “fairly small difference” from the long test level did not justify using the long test methodology to set the salary level, and emphasized that its approach preserved the salary level's principal function as a tool for screening from exemption obviously nonexempt employees.

155

In response to commenter concerns about the rule exempting employees who traditionally earned between the long and short test salary levels and received overtime compensation because they did not meet the long duties test, the Department cited the legal risks posed by the 2016 methodology (as evidenced by the district court's decisions) and explained that such employees were already exempt in the years leading up to 2004 because the Department's outdated salary levels had rendered the long test with its more rigorous duties requirement largely dormant.

156

As in the 2004 rule, the Department did not address the protection lower salaried employees would have received under the long test with an updated salary level based on contemporary data.

155

Id.

at 51244.

156

Id.

at 51243.

The Department's experience with a one-test system shows that it is less nuanced than the two-test system,

which allowed for finer calibration in defining and delimiting the EAP exemption. In a two-test system, there are four variables (two salary levels and two duties tests) that can be adjusted to define and delimit the exemption. In a one-test system, there are only two variables (one salary level and one duties test) that can be adjusted, necessarily yielding less nuanced results. The loss in precision does not impact the lowest-paid white-collar employees, who were screened from exemption by the long test salary level, because they maintain their right to overtime pay so long as the standard salary level is set at least equivalent to the lower long test salary level—a condition that was met by the 2004 rule's salary level but not by the 2019 rule's salary level. Instead, the Department's experience shows that the shift from a two-test system to a one-test system impacts employees earning between the long and short test salary levels and, in turn, employers' ability to use the exemption for these employees.

In the two-test system, employees who earned between the long and short test salary levels and performed large amounts of nonexempt work were protected by the long duties test, while bona fide EAP employees who performed only limited amounts of nonexempt work in that earnings range were exempt. Meanwhile, the short test provided a time-saving short-cut test for higher-earning employees who would almost invariably pass the more rigorous, and thus more time consuming, long duties test. But the more rigorous long duties test, with its limitation on the amount of nonexempt work that could be performed, was always core to the two-test system, with the higher short test salary level and less rigorous short duties test serving as a time-saving mechanism for employees who would likely have met the more rigorous long duties test.

Upon reflection and based on its rulemakings over the past 20 years, the Department has determined that a one-test system that uses the standard duties test, without its limitations on the amount of nonexempt work, must use a salary level above the long test salary level in order to ensure that it is effectively identifying bona fide EAP employees. A single test system cannot fully replicate both the two-test system's heightened protection for employees performing substantial amounts of nonexempt work and its increased efficiency for determining exemption status for employees who are highly likely to perform EAP duties. One way in a one-test system to protect lower-salaried employees earning between the long and short test salary levels who were historically entitled to overtime compensation under the long test would be to reinstate the long duties test with its limitation on nonexempt work. A one-test system with a more rigorous duties test would appropriately emphasize the important role of duties in determining exemption status. However, for the reasons discussed in this section, the Department is not proposing in this rulemaking to replace the standard duties test with the long duties test or to return to a two-test system with the long duties test. The Department has not had a one-test system with a limit on nonexempt work other than from 1940 to 1949,

157

when the Department replaced this approach with its two-test system, and returning to it would eliminate the benefits of the current duties test, including having a single test with which employers and employees are familiar.

157

See

5 FR 4077.

In light of these considerations, the Department's goal in this rulemaking is not only to update the single standard salary level to account for earnings growth since the 2019 rule, but also to build on the lessons learned in its most recent rulemakings to more effectively define and delimit employees working in a bona fide EAP capacity. Consistent with its broad authority under section 13(a)(1), the Department is proposing a single salary level test that will work effectively with the standard duties test to better define who is employed in a bona fide EAP capacity and will both perform the initial screening function that the salary level has always played and also adjust the salary level to account for the change to a single test system.

3. Salary Level Methodology

The Department's extensive regulatory history shows that the two-test system for defining the EAP exemption is an effective method of determining the exemption status of white-collar employees at both lower and higher salary levels. With this system, the salary and duties components of each test balance each other and the two tests work in combination to efficiently identify exempt employees while protecting employees who should receive overtime compensation. Although the two-test system's effectiveness diminished in its later years, this was a consequence of the Department's failure to update the salary level tests after 1975, not a flaw with the two-test structure itself. Not updating the salary levels in a two-test system is particularly problematic because the real value of the higher short test salary level will inevitably decrease, expanding the exemption to lower-paid white-collar employees who previously were not considered bona fide EAP employees because they did not meet the long duties test and earned below the short test salary level, and rendering the lower long test salary level, with its more rigorous duties requirements, less effective in differentiating between exempt and nonexempt employees.

The Department has considered returning to the two-test system as a way to define and delimit the EAP exemption without incurring the precision-related challenges inherent in a one-test system. However, the Department believes that a one-test system, with a single duties test, benefits both employers and employees in terms of the increased efficiency and simplicity in application. As the Department explained in 2004, a two-test system, with the more rigorous long duties test determining exemption status for many employees, would make exemption status determinations more complex and less efficient than retaining a single-test system with the existing duties test.

158

The Department also continues to be mindful of the post-1991 regulatory landscape, which remains highly relevant given that the two-test system effectively became a one-test system in 1991 when the Federal minimum wage equaled or surpassed the long test salary levels.

159

158

See

69 FR 22126-27;

see also

81 FR 32444-45 (discussing widespread employer and employee stakeholder opposition to reinstating a two-test system).

159

84 FR 51243.

The Department has also considered whether to propose changing the standard duties test in this rulemaking. A test requiring closer scrutiny of employee duties would be consistent with the statutory text, and a credible way to define the exemption.

160

Indeed, a more rigorous duties test, which limited the amount of nonexempt work—the long duties test—was traditionally the core of the EAP exemption in the two-test system. Experience under the two-test system shows that a more rigorous duties test helps to ensure that exempt employees are in fact performing EAP duties and

are therefore employed in a bona fide EAP capacity.

161

In this respect, the duties test allows for finer calibration than the salary level test when determining who is employed in a bona fide EAP capacity, with a rigorous duties test that limits the amount of nonexempt work that can be performed ensuring that employees are actually performing EAP work and not simply performing nonexempt work without receiving overtime compensation. Were the Department to lessen the salary level test's role by adopting a more rigorous duties test, the number of employees who are nonexempt based on their salary alone would decrease, helping alleviate concerns about the salary level “supplanting an analysis of an employee's job duties” in too many instances.

162

The Department could, for instance, return to a duties test that explicitly limited the amount of nonexempt work that could be performed. As discussed above, a limitation on nonexempt work was an integral part of the long duties test that was, for a long time, a critical component of the test for EAP exemption.

160

See

81 FR 32446 (“The Department continues to believe that, at some point, a disproportionate amount of time spent on nonexempt duties may call into question whether an employee is, in fact, a bona fide EAP employee.”);

see also

Stein Report at 17 (noting that “it would be inconsistent with the purposes of the [FLSA]” to exempt employees like working foremen). In the 2004 rule, the Department explained that eliminating the salary level test entirely would require significant changes to the duties test.

See

69 FR 22172.

161

The importance of a rigorous duties test was illustrated by the Department's

Burger King

litigation in the early 1980s, when the short and long tests were still actively in use. The Department brought two actions arguing that Burger King assistant managers were entitled to overtime protection.

Sec'y of Labor

v.

Burger King Corp.,

675 F.2d 516 (2d Cir. 1982);

Sec'y of Labor

v.

Burger King Corp.,

672 F.2d 221 (1st Cir. 1982). One group of assistant managers satisfied the higher short test salary level and was therefore subject to the less rigorous short duties test; the other group was paid less and was therefore subject to the long duties test with its limit on nonexempt work. Both appellate courts found that the higher paid employees were not overtime protected—even though they performed substantial amounts of nonexempt work—because they satisfied the short duties test. The lower-paid employees, however, were not exempt and therefore entitled to overtime compensation because they did not meet the more rigorous long duties test.

162

275 F. Supp. 3d at 806.

The Department has ultimately decided, however, not to propose any changes to the duties test, consistent with its decisions in the 2016 and 2019 rules. This decision was also informed by the Department's experience when it established the single-test system in 2004. In that rulemaking, the Department initially considered substantive changes to the duties test,

163

but ultimately declined to go through with most of the proposed changes, stating that the final standard duties test was substantially the same as the short duties test.

164

The Department also considered changing the duties test in both the 2016 and 2019 rulemakings, but ultimately chose not to propose any such changes.

165

163

See

68 FR 15564-68.

164

69 FR 22126, 22192-94.

165

84 FR 10904; 82 FR 34618 (July 26, 2017); 80 FR 38543 (July 6, 2015).

At this time, the Department favors keeping the current duties test and concludes that, paired with an appropriate salary level requirement, the test can appropriately distinguish bona fide EAP employees from nonexempt workers. While comments received in previous rulemakings and during listening sessions show that the standard duties test is not universally popular, it is well known to employers, employees, and the courts, making it easier and more efficient for employers to implement and for workers to understand. Substantive changes to the duties test are a possible way to revise the regulatory test but they would take more time for employers and employees to adjust to than an increase in the salary level, requiring employers to reassess their current exemption determinations.

i. Fully Restoring the Salary Level's Screening Function

To determine the appropriate salary level, the Department first considers whether the present methodology adequately performs the historical screening function of the long test salary level and next, the extent to which the salary level must be increased above the long test salary level to account for the switch to a one-test system in 2004.

The Department first focused on the salary level's historic function of screening obviously nonexempt employees from the exemption, a “principle [that] has been at the heart of the Department's interpretation of the EAP exemption for over 75 years.”

166

Under the two-test system, the lower long test salary level provided “a ready method of screening out the obviously nonexempt employees, making an analysis of duties in such cases unnecessary.”

167

When the Department updated the long test in 1958, it reaffirmed the long test salary's function as a screening tool.

168

166

See

84 FR 51241.

167

Weiss Report at 8.

168

Kantor Report at 2-3.

When the Department moved to a one-test system, the standard salary test had to perform the initial screening function that the long test salary level performed in the two-test system. In the 2004 rule, the Department reaffirmed its historical statements emphasizing the salary level's critical screening function.

169

Most significantly, the Department used the long test methodology to validate its new salary level of $455 per week. Even though the 2004 rule made certain changes from that methodology (most significantly, setting the salary level equivalent to the “lowest 20% of

all

salaried employees” instead of the “lowest 10% of

exempt

salaried employees”), the Department stressed that both “approaches are capable of reaching exactly the same endpoint” and demonstrated that the new method and the long test method produced equivalent salary levels at the time.

170

By setting a salary level equivalent to the long test level, the Department ensured that employees earning at levels whereby they were entitled to overtime compensation under the two-test system because they earned below the long test salary level remained screened from the exemption by the new standard salary test, regardless of whether they met the less rigorous standard duties test. In the 2004 rule, the Department rejected requests from commenters who supported a salary level that was $30 to $95 lower than the level the Department ultimately adopted,

171

thus maintaining the historic screening function by declining to set a salary level lower than the long test level.

169

69 FR 22165.

170

See id.

at 22167-71 (showing that for all full-time salaried employees, $455 in weekly earnings corresponded to just over the 20th percentile in the South and the 20th percentile in retail, and that for employees performing EAP duties, $455 in weekly earnings corresponded to just over the 8th percentile in the South and the 10th percentile in retail).

171

See id.

at 22164.

In its 2019 rule, the Department reemphasized the salary level's screening function.

172

The Department distinguished the 2016 rule, which the Department explained was invalidated because it “ `untethered the salary level test from its historical justification' of `[s]etting a dividing line between nonexempt and potentially exempt employees' by screening out only those employees who, based on their compensation level, are unlikely to be bona fide executive, administrative, or professional employees.”

173

In contrast, the Department explained, reapplying the 2004 methodology to current data was likely to pass muster because the district court that invalidated the 2016 rule “endorsed the Department's historical approach to setting the salary level” and “explained that setting `the minimum salary level as a floor to screen[ ] out the obviously nonexempt

employees' is `consistent with Congress's intent.' ”

174

172

84 FR 51237 (internal quotation marks omitted).

173

Id.

at 51231 (quoting 84 FR 10901).

174

Id.

at 51241 (quoting 275 F. Supp.3d at 806).

The Department's position remains that a core function of the salary level test is to screen from the EAP exemption employees who, based on their low pay, should receive the FLSA's overtime protections. For decades under the Department's two-test system, the long test salary level performed this screening function. In the 2004 rule, the Department used a different approach—setting a single salary level test that was equivalent to, and thus set the same line of demarcation as, the long test salary level (although it combined that salary level with a duties test that was equivalent to the less rigorous short duties test). The Department deviated from this approach in 2019, setting a salary level that was $40 per week below the level produced using the long test methodology.

175

In doing so, the Department for the first time expanded the exemption to include employees who were paid below the long test salary level. As an initial step, the proposed salary level methodology must fully restore the salary level's screening function by ensuring that employees who were nonexempt because they earned less than the long test salary are also nonexempt under the standard test. Simply restoring the historic screening function would require a standard salary level amount that is at least equal to the long test level (which is $925 per week using current data). Such a salary level would not, however, account for the shift to a one-test system in 2004.

175

Id.

at 51244.

Increasing the standard salary level to at least the long test level would ensure that the salary level, at a minimum, performs the historical screening function it would have performed in a two-test system. From 1938 to 2019, all salaried white-collar employees paid below the long test salary level were entitled to the FLSA's protections, regardless of the duties they performed. This was true from 1938 to 1949 under the salary level test that became the long test,

176

from 1949 to 2004 under the long test, and from 2004 to 2019 under the standard salary level test that was set equivalent to the long test level. Setting the salary level below the long test level as was done in the 2019 rule—because the 2004 methodology no longer matched the long test salary level based on contemporaneous data—departed from this history by enlarging the exemption to newly include employees who earned less than the long test salary level.

176

During this period the Department used a one-test system that paired a lower salary level with a more rigorous duties test.

See, e.g.,

5 FR 4077.

In the 2019 rule, the Department expressly declined to use the long test methodology to set the salary level test.

177

Because the Department is not using the long test methodology to set the salary level in this proposal, but is instead using it to inform its selection of a new salary level methodology, the concerns expressed by the Department in 2019 do not apply. The Department was in part worried that the long test method is “complex to model and thus is less accessible and transparent.”

178

This concern does not arise here because the Department's proposed methodology uses a publicly available data set of all full-time nonhourly workers in the South to set the salary level, as opposed to the long test methodology data set (which only included exempt workers).

179

In 2019, the Department also expressed concern that the long test methodology presents a “circularity problem” because this approach “would determine the population of exempt salaried employees, while being determined by the make-up of that population.”

180

This concern is similarly not implicated here because, consistent with its practice since 2004, the Department is setting the salary level using a data set of all full-time nonhourly workers, not just exempt workers.

177

84 FR 51244, 51260.

178

Id.

at 51244.

179

For the same reason, the Department's approach does not implicate concerns that applying the long test method “requires `uncertain assumptions' ” to compile a dataset set that represents exempt EAP employees.

Id.

(quoting 69 FR 22167). Moreover, while it is true that the Department must apply its probability codes to determine the group of salaried employees who pass the duties test, the Department has consistently applied these codes since the 2004 rule.

See generally

section VII.B.5 (discussing probability codes).

180

84 FR 51244 (quoting 69 FR 22167).

ii. Selecting the Proposed Salary Level Methodology

Section 13(a)(1)'s broad grant of statutory authority for the Department to define and delimit the EAP exemption provides the Department a degree of latitude in determining an appropriate salary level for identifying individuals who are employed in a bona fide EAP capacity. The Department believes that the long and short test salary levels provide useful parameters informed by its historical rulemaking for determining how to update the salary level test in this rulemaking. As previously discussed, the long and short test salary levels have served as the foundation for nearly all of the Department's prior rulemakings, either directly under the two-test system, or indirectly as a means of evaluating the Department's salary level methodology under a one-test system. Based on 2022 data, applying the long test methodology produces a salary level of $925 per week ($48,100 per year) and the short test methodology produces a salary level of $1,378 per week ($71,656 per year).

The long and short test salary levels reflected longstanding understandings of how an individual's salary level informs the question of whether an individual is employed in a bona fide EAP capacity. As noted above, the long test salary level helped distinguish employees who were not employed in a bona fide EAP capacity and the Department found that employees who were screened from exemption by the long test salary level generally did not meet the other requirements for exemption.

181

The justification for the short test, on the other hand, was that employees who met the higher salary level were more likely to meet all the requirements of the exemption (including the long test's 20 percent limit on nonexempt work).

182

Moreover, because the Department's rulemakings since 2004 have, to varying extents, used the long and short tests as guideposts for setting the salary level in a one-test system, maintaining the same orientation in this rulemaking would enable the Department to calibrate its methodology to better define and delimit bona fide EAP employees, and evaluate how it impacts employees who historically have been entitled to overtime compensation and the ability of employers to use the exemption to exclude from overtime protection employees who have historically been exempt.

181

See

Kantor Report at 2-3.

182

Weiss Report at 22-23.

In its almost 20 years of experience with the one-test system, the Department has never set a standard salary level that falls between the long test salary level and the short test range. As explained more fully above, the Department set the standard salary at (or below) the long test salary level in the 2004 and 2019 rules and set it at the low end of the historic range of short test salary levels in the 2016 rule. Setting the salary level at either the long test salary level or equivalent to a short test salary level in a one-test system with the standard duties test, however, results in either denying overtime protection to lower-paid employees who are performing large amounts of nonexempt work, and thus, were exempt under the Department's historical view of the EAP

exemption, or in raising concerns that the salary level is determining the status of too many employees. An appropriately calibrated salary level between the long and short test salary levels would better define and delimit which employees are employed in a bona fide EAP capacity, and thus better fulfill the Department's duty to define and delimit the EAP exemption.

Traditionally, the Department considered employees earning between the long and short test salary levels to be employed in a bona fide EAP capacity only if they were not performing substantial amounts of nonexempt work. With the adoption of a duties test based on the less rigorous short duties test, the shift to a single-test system eliminated the inquiry into the amount of nonexempt work employees performed. Following this shift, the Department has taken two approaches to setting the salary level to pair with the standard duties test. The approach taken in the 2004 rule permitted the exemption of all employees earning above the long test salary level who met the standard duties test—including many employees who performed substantial amounts of nonexempt work and were protected by the long duties test. The approach taken in the 2016 rule was challenged and criticized as making nonexempt employees earning between the long test salary level and the low end of the short test salary range—including some employees who may have performed very little nonexempt work and would have been exempt under the long test. Inevitably, any attempt to pair a single salary level with the current duties test will result in some employees who perform substantial amounts of nonexempt work being exempt, and some employees who perform almost exclusively exempt work being nonexempt.

183

But such a result is inherent in setting any salary level in a one test system—some employees will have EAP status turn on salary level. The proposed salary level would better identify which employees are employed in a bona fide EAP capacity—particularly by restoring overtime eligibility for individuals who perform substantial amounts of nonexempt work and historically would have been protected by the long duties test—while at the same time addressing potential concerns that the salary level test should not be determinative of exemption status for too many individuals.

184

183

See

Stein Report at 6 (“In some instances the rate selected will inevitably deny exemption to a few employees who might not unreasonably be exempted, but, conversely, in other instances it will undoubtedly permit the exemption of some persons who should properly be entitled to benefits of the act.”).

184

The Department has repeatedly recognized that increasing salary level tends to correlate with the performance of bona fide EAP duties.

See

section IV.A.2 (discussing role of long test and short test salary levels); section IV.C (discussing the role of the HCE total annual compensation threshold). Thus, increasing overtime protection specifically for workers earning at the lower end of the range between the long test salary level and short test salary level—but not those earning at the higher end of that range—is an especially appropriate approach to balancing these concerns.

In setting the salary level, the Department continues to believe that it is important to use a methodology that is transparent and easily understood. As in its prior rulemakings, the Department proposes to set the salary level using a lower-salary regional data set (as opposed to nationwide data) to accommodate businesses for which salaries generally are lower due to geographic or industry-specific reasons.

185

Specifically, the Department proposes to set the salary level using the data set of full-time nonhourly

186

workers in the lowest-wage Census Region (the South). Like the Department's 2004, 2016, and 2019 rules, this approach would promote transparency because BLS routinely compiles this data. It would also promote regulatory simplification because the data set is not limited to exempt EAP employees and thus does not require the Department to model which employees pass the duties test.

187

185

See

84 FR 51238; 81 FR 32404.

186

Consistent with recent rulemakings, in determining earnings percentiles the Department looked at nonhourly earnings for full-time workers from the CPS MORG data collected by BLS.

187

As discussed in the economic analysis,

see

section VII.B.5, this modeling is done using the Department's probability codes.

See

84 FR 51244; 69 FR 22167.

For similar reasons, the Department is not proposing to add nationwide earnings data from specific industries (such as retail) to the CPS earnings data from the lowest-wage Census Region. The Department's 2019 rule included such data to faithfully replicate the 2004 methodology which considered earnings of full-time nonhourly workers in the lowest-wage Census Region and the retail industry nationally.

188

The Department's approach nonetheless would yield a salary level that would be appropriate in low-wage industries because using earnings data from the lowest-wage Census Region would capture differences across regional labor markets without attempting to adjust to specific industry conditions.

189

188

See

84 FR 51244 (citing 69 FR 22167).

189

See

81 FR 32410.

Based on 2022 data, applying the long test methodology produces a salary level of $925 per week ($48,100 per year), which equates to between the 26th and 27th percentiles of weekly earnings of full-time, nonhourly workers in the lowest-wage Census Region (the South).

190

This figure provides what the Department believes should be the lowest boundary of a salary level methodology because it would at least restore the historical screening function that had operated under a two-test system.

190

The 26th percentile in this data set corresponds to a salary level of $918 per week and the 27th percentile corresponds to a salary level of $933 per week.

The Department is not proposing to set the salary level equivalent to the long test level in part because doing so would perpetuate the problem that has become evident under the 2004 and 2019 rules: that setting the single salary level no higher than the long test level enables employers to exempt employees who were traditionally not considered bona fide EAP employees because they performed substantial amounts of nonexempt work and did not meet the long duties test under the two-test system. Like these earlier rules, this approach would impact white-collar employees earning between the long and short test salary levels who perform substantial amounts of nonexempt work—and thus were entitled to overtime protection under the two-test system—but meet the less rigorous standard duties test.

As discussed above, the Department could address this issue by changing the duties test to reinstate the long test's limit on nonexempt work. Doing so would restore the relationship between the salary level and duties tests that existed under the two-test system whereby the Department paired a lower salary level with a more rigorous duties test. Paired with a long test-equivalent salary level, a stronger duties test would ensure that lower-paid employees who perform large amounts of nonexempt work receive overtime protection, while permitting employers to continue using the exemption for lower-paid employees performing EAP duties. However, for the reasons previously discussed, the Department proposes to restore the relationship between the salary level and duties test by keeping the duties test unchanged at this time and instead increasing the salary level moderately above the long test level. This increase in the salary level is necessary for the Department to effectively fulfill its role of defining and delimiting the EAP exemption because, without it, the employees who were not considered bona fide EAPs historically—those earnings between the long and short test

salary levels who did not meet the historical long duties test—would remain exempt from overtime. In other words, the Department's proposed salary level methodology will better help limit the exemption of lower-paid employees who historically were not considered bona fide EAP employees because they perform substantial amounts of nonexempt work, but who are not receiving overtime protection under the one-test system.

Although the “regulations cannot have the precision of a mathematical formula[,]”

191

with only two variables to adjust in a one-test system, and with the Department deciding to leave one of those variables (the duties test) unchanged in this rulemaking, the Department wanted to look more precisely at methods for updating the salary level test. The Department has therefore looked to employee earnings ventiles rather than only deciles as it has historically done.

192

The earnings ventiles between the long test salary level (approximately the 26th or 27th percentile) and short test salary level (approximately the 53rd percentile) are the 30th, 35th, 40th, 45th, and 50th percentiles of weekly earnings of full-time salaried workers in the lowest-wage Census Region. The Department examined these earnings ventiles with the goal of more effectively defining and delimiting the exemption while maintaining the one-test system.

191

Weiss Report at 9.

192

Historically, the Department set the long test salary level to exclude from exemption approximately the lowest-paid 10 percent of exempt salaried employees in the lowest-wage regions and industries. In 2004 and 2019, the Department set the standard salary level test equivalent to the 20th percentile of weekly earnings of full-time salaried workers in the South Census Region and in the retail industry nationally. In the 2016 rule, the Department set the salary level equal to the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region (the South).

See

84 FR 51236-37 (describing prior methodologies).

Setting the salary level at the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region would reduce the impact of a one-test system on lower-paid white-collar employees who perform significant amounts of nonexempt work. This percentile is midway between the 30th and 50th percentiles and would produce a salary level ($1,145 per week) that is roughly the midpoint between the long and short test salary levels. Of the approximately 10.3 million salaried white-collar employees who earn between the long and short test salary levels, approximately 47 percent earn between the long test salary level and $1,145 and would receive overtime protection by virtue of their salary, while approximately 53 percent earn between $1,145 and the short test salary level and would have their exemption status turn on whether they meet the duties test.

The Department remains concerned, however, that courts could find this approach makes the salary level test determinative of overtime eligibility for too many employees (

i.e.,

47 percent of those earning between the long and short test levels). Setting the salary level equal to the 45th or 50th percentile of weekly earnings would further amplify this concern. In contrast, setting the salary level based on a lower percentile of earnings will (compared to such higher levels) increase the number of employees for whom duties is determinative of exemption status, and in turn the ability of employers to use the exemption for more lower-paid employees who meet the EAP duties requirements. This outcome is consistent with the important role of the duties test in identifying bona fide EAP employees and recognizes that the 2016 rule (which set the salary level equal to the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region) was held invalid by the U.S. District Court for the Eastern District of Texas for making too many employees eligible for overtime based on salary alone.

193

193

See Nevada,

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

The Department is also responding to concerns that setting the salary level equal to the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region would foreclose employers from exempting any white-collar employees who earn less than $1,145 per week and perform EAP duties, including those who were exempt under the long test and remained exempt when the Department established the one-test system in 2004 and set the salary level equivalent to the long test level.

194

Litigants challenging the 2016 rule also emphasized this consequence of setting a salary level above the long test in a one-test system, and those arguments have contributed to the Department more fully attempting to account for the impact of the shift from a two-test to a one-test system on the scope of the exemption. Although some stakeholders have urged the Department to follow the methodology from the 2016 rule or set an even higher threshold, the Department has chosen a salary level that is appreciably lower than the midpoint between the short and long test salary levels—an approach that it believes is an appropriate method for identifying bona fide EAP employees. This approach would also reasonably balance the goal of ensuring that employees earning above the long test salary level but performing substantial amounts of nonexempt work are not exempt with the goal of enabling employers to use the exemption for employees who do not perform substantial amounts of nonexempt work.

194

See

84 FR 51242.

The Department also examined the 30th and 35th percentiles of weekly earnings of full-time salaried workers in the lowest-wage Census Region. The Department did not consider setting the salary level at the 25th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region ($901 per week or $46,852 per year) because it is lower than the long test salary level ($925 per week or $48,100 per year, which is approximately the 26th or 27th percentile). Setting the standard salary level at the 30th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region would result in a salary level of $975 per week ($50,700 per year). This salary level is roughly the midpoint between the 2004 methodology (the 20th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census region and in retail nationally, currently $822 per week or $42,744 per year), and the 2016 methodology (the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region, currently $1,145 per week or $59,540 per year). While setting the salary level equal to the 30th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region would produce a salary level that is above the long test salary level, it is very close to the long test salary level, and the Department is concerned it would not sufficiently address the problem inherent in the 2004 methodology of including in the exemption employees who perform significant amounts of nonexempt work, including those earning salaries closer to the long test salary level, and historically were not considered bona fide EAP employees under the two-test system. Additionally, only 11 percent of white-collar employees who earn between the long and short test salary levels earn below the 30th percentile. As noted above, the Department believes that the standard salary must fulfill the historical screening function of the long test salary level and account for the shift to a one-test system, and the

Department is concerned that this salary level would not fulfill both objectives.

After careful consideration, the Department concludes that setting the salary level equal to the 35th percentile—which produces a salary level of $1,059 per week—will effectively define and delimit the scope of the EAP exemption. Consistent with the Department's responsibility to “not only . . . determin[e] which employees are entitled to the exemption, but also [to] draw[ ] the line beyond which the exemption is not applicable[,]”

195

the Department's proposed standard salary level will, in combination with the standard duties test, effectively calibrate the scope of the exemption to ensure the exemption of bona fide EAP employees, and do so in a way that distributes across the population of white-collar employees earning between the long and short test salary levels the impact of the shift to a one-test system.

195

Stein Report at 2.

The Department stated in the 2019 rule that the primary and modest purpose of the salary level is to identify potentially exempt employees by screening out obviously nonexempt employees.

196

While this initial screening function is the primary effect of the salary level, as noted above, each update to the salary level has also had a secondary effect: it defines the group of white-collar employees for whom the duties test is determinative of their exemption status. Setting the salary level equal to the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region produces a salary level high enough above the long test level to ensure overtime protection for some lower-paid employees who were traditionally entitled to overtime compensation under the two-test system by virtue of their performing large amounts of nonexempt work. The salary level is also low enough, as compared with higher salary levels, to significantly shrink the group of employees performing EAP duties who are excluded from the exemption by virtue of their salary alone. Of the 10.3 million salaried white-collar employees earning between the equivalent of the long and short test salary levels, approximately 31 percent earn between $925 (the equivalent of the long test salary level) and $1,059 (the proposed salary level) and would receive overtime protection by virtue of their salary, while approximately 69 percent earn between $1,059 and $1,378 (the equivalent of the short test salary level) and would have their exemption status turn on whether they meet the duties test.

196

84 FR 51238.

Comparing the impact of the new salary level on white-collar employees earning between the long and short test salary levels and their employers reinforces the reasonableness of the Department's proposed salary level. Whereas the 2004 and 2019 rules permitted the exemption of such employees even if they performed significant amounts of nonexempt work, and the 2016 rule prevented employers from using the exemption for such employees earnings below the short test salary range even if they performed EAP duties, the proposed methodology falls between these two methodologies and therefore reasonably balances the effect of the switch to a one-test system in a way that better differentiates between those who are and are not employed in a bona fide EAP capacity. Even though the Department's decision to select a salary level below the midpoint between the long and short tests means that the effect of the salary level on these employees and employers is not equal, a higher salary level could disrupt reliance interests of employers who (due in part to the Department's failure to update the salary level tests between 1975 and 2004), have been able to use a lower salary level and more lenient duties test to determine exemption status since 1991. However, a significantly lower salary level akin to the long test salary level would avoid disrupting such reliance interests only by continuing to place the burden of the move to a one-test system entirely on employees who historically were entitled to the FLSA's overtime protections because they perform substantial amounts of nonexempt work. The Department believes that employer reliance interests should inform where the salary level is set between the long and short test levels, and that its approach strikes a workable equilibrium that reasonably balances, between employees' right to receive overtime compensation and employers' ability to use the exemption, the impact of a one-test system.

Such reasonable balancing is fully in line with the Department's authority under the FLSA to “mak[e] certain by specific definition and delimitation” the “general phrases” “bona fide executive, administrative, and professional employee.”

197

This grant of authority confers discretion upon the Department to reasonably determine the boundaries of these general categories; any such line-drawing, as courts have recognized, will “necessarily” leave out some employees “who might fall within” these categories.

198

197

Walling,

140 F.2d at 831.

198

Id.

The Department recognizes that it stated in its 2016 rule that the current duties test could not be effectively paired with a salary level below the short test salary range, and for this reason expressly rejected setting the salary level at the 35th percentile of weekly earnings of full-time salaried workers in the South.

199

But that rule, which would have prevented employers from using the EAP exemption for some employees who were considered exempt under the prior two-test system, was challenged in court, and a return to it would result in significant legal uncertainty for both workers and the regulated community. In the 2019 rule, the Department expressly rejected setting the salary level equal to the long test or higher.

200

However, as noted above, the Department did not fully address in that rule the implications of the switch from a two-test to a single-test system. Having now grappled with those implications, particularly in light of the Department's experience in the litigation challenging its 2016 rule, the Department has concluded that not only can it pair the current duties test with a salary between the long and short test salary levels, but that doing so appropriately recalibrates the salary level in a one-test system to ensure that it effectively identifies bona fide EAP employees.

199

81 FR 32410.

200

See

84 FR 51244.

The Department is not proposing any changes to how bonuses are counted toward the salary level requirement. Consistent with the current regulations, if the salary level is finalized as proposed, employers could satisfy up to 10 percent of the salary level ($105.90 per week under this proposed rule) through the payment of nondiscretionary bonuses and incentive pay (including commissions) paid annually or more frequently.

201

201

§ 541.602(a)(3).

4. Assessing the Impact of the Proposed Salary Level

As stated above, the Department believes that the salary level test should fulfill a “useful, but limited, role” in defining and delimiting the EAP exemption.

202

In proposing to update the standard salary level, the Department seeks to: preserve the primary role of an analysis of employee duties in determining EAP exemption status, fully restore the initial screening function of the salary level, and more

effectively identify in a one-test system who is employed in a bona fide EAP capacity in a manner that reasonably distributes among employees earning between the long and short test salary levels and their employers the impact of the Department's move from a two-test to a one-test system. A closer look at the expected impact of the proposed salary level shows that it meets these objectives.

202

84 FR 51238.

The Department intentionally chose a salary level methodology that, if finalized, would ensure that the EAP exemption status of the great majority of white-collar employees would continue to depend on their duties. To evaluate whether the proposed methodology meets this objective, the Department first considered its effect on the population of all salaried white-collar employees—the universe of employees who could potentially be impacted by a change in the standard salary level. This analysis confirmed that the number of white-collar employees who would be excluded from the EAP exemption as a result of the Department's proposed standard salary level is greatly exceeded by the far-larger population of white-collar employees for whom duties would continue to determine their exemption status.

As illustrated in Figure A below, of the approximately 43.8 million salaried white-collar employees in the United States subject to the FLSA,

203

about 11.7 million earn below the Department's proposed standard salary level of $1,059 per week and about 32.1 million earn above the Department's proposed salary level.

204

Thus, approximately 27 percent of salaried white-collar employees (most of whom, as discussed below, do not perform EAP duties) earn below the proposed salary level, whereas approximately 73 percent of salaried white-collar employees earn above the salary level and would have their exemption status turn on their job duties.

205

203

Excluded from this number are workers in named occupations and those exempt under another non-EAP overtime exemption. The exemption status of these groups will not be impacted by a change in the standard salary level.

204

As discussed further below,

see, e.g.,

section VII.B.5, the Department used data representing compensation paid to nonhourly white-collar workers to estimate compensation paid to salaried white-collar employees.

205

Even this estimate is conservative, as it excludes 8.1 million white-collar employees employed as teachers, attorneys, and physicians, for whom there is no salary level requirement under the part 541 regulations and whose exemption status is therefore always determined by their duties. If these employees in “named occupations” are included, the percentage of white-collar employees for whom exemption status would depend on duties, rather than salary, increases to 77 percent.

See

§§ 541.303-304.

Scrutinizing these figures more closely reinforces the continued importance of the duties test under the Department's proposal. Of the approximately 11.7 million salaried white-collar employees who earn below the Department's proposed standard salary level of $1,059 per week, about 8.5 million earn below the long test salary level of $925 per week. As explained above, with the exception of the 2019 rule, when the Department set the salary level slightly lower, the Department has always set salary levels that screened from exemption employees earning below the long test salary level. The number of salaried white-collar employees for whom salary would be determinative of their nonexempt status and who earn at least the long test salary level—3.2 million—is nearly ten times smaller than the number of salaried white-collar employees for whom job duties would continue to be determinative of their exemption status because they earn at least the proposed standard salary level—32.1 million.

206

206

As noted above,

see supra

note 205, these figures do not include the additional 8.1 million white-collar employees in occupations for which there is no salary level requirement and so duties is always determinative of exemption status.

EP08SE23.000

In analyzing how the Department's proposed salary level would impact all salaried white-collar employees, the Department also considered the extent to which salaried white-collar employees across the income distribution perform EAP duties. As noted above, the salary level has historically served as “a helpful indicator of the capacity in which an employee is employed, especially among lower-paid employees;”

207

however, it should not eclipse the duties test.

208

The Department's proposed standard salary level meets this standard because, according to probability codes the Department has used in all of its recent part 541 rules,

209

most salaried white-collar employees paid less than the proposed standard salary level do not meet the duties test, whereas a substantial majority of salaried white-collar employees earning above the proposed standard salary level meet the duties test.

207

84 FR 51239 (quoting 84 FR 10907).

208

See id.

at 51245.

209

See

section VII.B.5.

As illustrated in Figure B, of the 11.7 million salaried white-collar employees who earn less than the proposed standard salary level of $1,059 per week, the Department estimates that only 36 percent—about 4.2 million employees—meet the standard duties test. In contrast, of the 32.1 million salaried white-collar employees who earn at least $1,059 per week, 76 percent—about 24.5 million employees—meet the standard duties test.

210

The number of salaried white-collar workers who meet the standard duties test and earn below the proposed standard salary level is thus nearly six times smaller than the number of salaried white-collar workers who meet the standard duties test and earn at least the proposed standard salary amount. And 85 percent of all salaried white-collar workers who meet the standard duties test—24.5 million out of a total of approximately 28.7 million—earn at least the Department's proposed standard salary level.

211

210

As noted above,

see supra

note 205, these figures exclude salaried white-collar workers who are not subject to the part 541 salary criteria.

211

Note that these numbers refer only to salaried white-collar employees at all salary levels who meet the standard duties test, including employees who are nonexempt because they earn below the current standard salary level.

BILLING CODE 4510-27-P

EP08SE23.001

The Department next evaluated its proposed salary level methodology by looking at salaried white-collar employees who earn between the long and short test salary levels. As discussed in section IV.A.3.ii, the long

and short test salary levels provide appropriate parameters for determining how to update the salary level test. Under the Department's proposal, duties would continue to be determinative of exemption status for a significant majority of white-collar employees earning between these thresholds.

As illustrated in Figure C, of the approximately 10.3 million salaried white-collar employees who earn between the long test salary level of $925 per week and the short test salary level of $1,378 per week, about 31 percent (3.2 million) earn below the Department's proposed standard salary level, and about 69 percent (7.1 million) earn at or above the Department's proposed standard salary level. Moreover, of the 3.2 million employees earning between the long test and the proposed standard salary level, approximately half do not meet the standard duties test.

212

212

As discussed further below, about 1.6 million of the approximately 3.2 million salaried white-collar employees who earn between the long test salary threshold and the Department's proposed salary level (about 49 percent of these employees) do not meet the standard duties test. Thus, in effect, only 16 percent of salaried white-collar employees who earn between the long and short test salary levels—1.6 million out of a total of 10.3 million—have their exemption status determined solely by the proposed standard salary level.

EP08SE23.002

BILLING CODE 4510-27-C

Finally, the Department also looked at the impact of the proposed salary level on currently exempt EAP employees—those salaried white-collar employees who meet the standard duties test and earn at least $684 per week. As with every prior rulemaking to increase the part 541 salary levels, a relatively small percentage of currently exempt employees would become nonexempt if this proposal were finalized. Of the approximately 43.8 million salaried white-collar employees in the United States, approximately 27.9 million currently qualify for the EAP exemption.

213

Of these 27.9 million presently-exempt employees, just 3.4 million earn at or above the current $684 per week standard salary level but less than $1,059 per week and would, without some intervening action by their employers, become entitled to overtime protection as a result of the Department increasing the standard salary level to $1,059 per week. A test for exemption that includes a salary level component will necessarily result in a number of employees who earned at or above the prior salary level and pass the duties test becoming nonexempt when the salary level is updated. This is a feature, and not a flaw, of a salary level test, and as the

Department has consistently found since 1938, salary is an important indicator of whether an individual is employed in a bona fide EAP capacity and therefore a key element in defining the exemption.

213

Note that the 27.9 million employee figure only refers to employees who meet the standard EAP exemption and thus differs from the population of currently exempt EAP workers identified in the economic analysis (28.4 million), which includes workers who qualify only for the HCE exemption. As noted above, this is a conservative estimate because there are also 8.1 million employees in the “named occupations” who, under the Department's regulations, are exempt based on their duties alone.

The Department's proposed standard salary level would impact the exemption status of two distinct and important, but relatively small, groups of lower-paid EAP employees. First, the Department's proposal would restore overtime protections to 1.8 million currently exempt employees who meet the standard duties test but earn less than the equivalent of the long test salary level ($925). As previously explained, such employees were always excluded from the EAP exemption prior to 2019, either by the long test salary level itself, or under the 2004 rule salary level, which was equivalent to the long test salary level. Fully restoring the salary level's initial screening function requires a salary level that would ensure all employees who earn below the long test level would be excluded from the exemption.

Second, the proposed standard salary level would result in overtime protections for an additional 1.6 million currently exempt employees who meet the standard duties test and earn between the long test salary level ($925 per week) and the Department's proposed standard salary level. As explained earlier, the Department believes it is necessary to set the standard salary level above the long test level to reasonably distribute the impact of the switch from a two-test system to a one-test system. The Department's proposal would limit the number of affected employees by setting a standard salary level towards the lower end of the range between the long and short test salary levels and by using earnings data from the lowest-wage Census region (the South).

Even among the 3.4 million affected employees, the fact that a majority of these employees earn below the long test level underscores the modest role of the Department's proposed standard salary level. Beyond these 1.8 million employees earning less than the long test salary level—to whom this proposal would simply restore overtime protections that they had under every rule prior to 2019—the Department's proposed increase in the standard salary level would only affect the exemption status of 1.6 million employees. This group makes up less than six percent of all currently exempt, salaried white-collar employees and less than four percent of all salaried white-collar employees.

214

That this group is so small reinforces the conclusion that the Department's proposed salary level methodology would maintain the “useful, but limited, role” of the salary level in defining and delimiting the EAP exemption.

215

214

The 3.4 million employees affected by the Department's proposed standard salary level represent only 12 percent of the 27.9 million salaried white-collar employees who currently qualify for the standard EAP exemption.

215

84 FR 51238.

5. Salary Level Alternatives

In determining which methodology to use to update standard salary level, the Department considered several alternatives to its proposed methodology of the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region. As discussed, the Department believes that the long and short test salary levels provide appropriate boundaries for assessing potential salary levels,

216

though it also considered the methodology used in the 2019 rule, which set the standard salary level below the long test level.

217

The Department also looked at earnings ventiles for full-time salaried workers falling between the long and short test salary levels. The Department analyzed four alternative salary levels—two methodologies that would produce a higher salary level than the proposed methodology, and two that would produce a lower salary level.

218

216

See

section IV.A.3.ii.

217

See

84 FR 51260.

218

The potential impact of these four alternatives is discussed in greater detail below.

See

section VII.C.8.

The Department first considered setting the standard salary level at the historical average short test salary level ($1,378 per week or $71,656 per year).

219

This would ensure that all employees who earn between the long and short test salary levels and perform substantial amounts of nonexempt work would be entitled to overtime compensation. However, by making exemption status for all employees who earn between the long and short test levels depend entirely on the salary paid by the employer, this approach would also prevent employers from being able to use the EAP exemption for employees earning between these salary levels who do not perform substantial amounts of nonexempt work and thus were historically exempt under the long test. For this reason, among others, the Department has chosen not to propose the salary level generated by this methodology.

219

See

section IV.A.3.ii.

The Department also considered setting the standard salary level at the 40th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region ($1,145 per week or $59,540 per year). This salary level is roughly the midpoint between the long and short test salary level alternatives ($925 per week and $1,378 per week, respectively). However, as discussed above, the Department is concerned that this approach could be seen by courts as making salary determinative of exemption status for too large a portion of employees, as this salary level would make the salary paid by the employer determinative of exemption status for roughly half (47 percent) of white-collar employees who earn between the long and short test salary levels.

220

The Department is also concerned that this approach would generate the same concerns that led to the district court decision invalidating the 2016 rule (which adopted the same methodology).

221

220

See id.

221

See id.

The Department also considered using the 2004 methodology (the 20th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census region and in retail nationally), which is currently $822 per week ($42,744 per year). This is also the methodology that the Department used in the 2019 rule.

222

However, the salary level produced by the 2004 methodology is below the equivalent of the long test salary level ($925 per week). As discussed, the Department considers the long test to be the lower boundary for an appropriate salary level since, except for the 2019 rule, employees who earn below the long test salary level have consistently been excluded from the EAP exemption by the initial screening function of the salary level.

223

Accordingly, the Department believes that a standard salary level produced using the 2004 methodology would be too low to fully effectuate the salary level's role in defining the EAP exemption.

222

84 FR 51260.

223

See

section IV.A.2; section IV.A.4.

The Department also considered setting the standard salary level at the long test level ($925 per week or $48,100 per year). Doing so would ensure the initial screening function of the salary level by restoring overtime protections to those employees who were consistently excluded from the EAP exemption prior to 2019, either by the long test salary level itself, or under the 2004 rule salary level, which was set equivalent to the long test salary

level.

224

However, as explained above, setting the standard salary level at the long test level would perpetuate the problem that has become evident under the 2004 and 2019 rules. Specifically, this approach would unduly deny overtime protections to all employees whose entitlement to overtime compensation was protected by the more rigorous long duties test.

225

As noted above, however, the Department believes that in a one-test system with the current duties test it must set the salary level above the long test salary level in order to better define and delimit which employees are employed in a bona fide EAP capacity.

224

See

section IV.A.1.

225

See

section IV.A.2.

While, for the reasons discussed herein, none of these alternatives were used as a method to establish the proposed salary test level, they confirm that the proposed salary level of the 35th percentile of weekly earnings of all full-time salaried employees in the lowest-wage Census Region (the South) is an appropriate salary level. The Department's proposed salary level appropriately would account for the shift from a two-test to a one-test system for determining exemption status, protecting lower-paid white-collar employees who traditionally have been entitled to overtime protection, while allowing employers to use the exemption for EAP employees earning less than the short test salary level.

The Department welcomes comments on its proposed increase to the standard salary level. The Department also invites comments on alternate salary methodolog

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