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

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URL: https://www.frixlaw.com/law-library/documents/fr%3A2024-08038

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** April 26, 2024
- **Citation:** 89 FR 32842

## Text

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:

Final rule.

SUMMARY:

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 revisions include increasing the standard salary level, increasing the highly compensated employee total annual compensation threshold, and adding to the regulations a mechanism that will allow for the timely and efficient updating of the salary and compensation thresholds, including an initial update on July 1, 2024, to reflect earnings growth. The Department is not finalizing in this rule its proposal to apply the standard salary level to the U.S. territories subject to the Federal minimum wage and to update the special salary levels for American Samoa and the motion picture industry.

DATES:

The effective date for this final rule is July 1, 2024. Sections 541.600(a)(2) and 541.601(a)(2) are applicable beginning January 1, 2025.

FOR FURTHER INFORMATION CONTACT:

Daniel Navarrete, Acting 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 expressly gives the Secretary of Labor (Secretary) 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 Act, in this final rule the Department is setting compensation thresholds for the standard test and the highly compensated employee test that will work effectively with the respective duties tests to better identify who is employed in a bona fide EAP capacity for purposes of determining exemption status under the Act. Specifically, the Department is setting the standard salary level at the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region ($1,128 per week or $58,656 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 ($151,164). These 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 85 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 U.S. Bureau of Labor Statistics (BLS). As explained in section VII.B.5.i, 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 rule. The Department relied on CPS MORG data for calendar year 2022 to develop the NPRM, including to determine the proposed salary level. The Department is using the most recent full-year data available for this final rule, which is CPS MORG data for calendar year 2023. The new standard salary level of $1,128 per week is $12 to $30 less than the Department estimated in the NPRM. 88 FR 62152, 62152-53 n.3 (Sept. 8, 2023).

The 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 because they met the prior more detailed duties test, an approach that received unfavorable treatment in litigation.
7

Having grappled with these different approaches to setting the standard salary level, this final rule retains the simplified standard test, the benefits of

which were recognized in the Department's 2004, 2016, and 2019 rulemakings,
8

while, through a revised methodology, fully restoring the salary level's screening function and accounting for the switch from a two-test to a one-test system for defining the EAP exemption, and also separately updating the standard salary level to account for earnings growth since the 2019 rule.

4
69 FR 22122 (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 new 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 new standard salary level will 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 what the methodology used in 2016 would produce using current data, the new standard salary level will 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 result will be a more effective test for determining who is employed in a bona fide EAP capacity. The applicability date of the new standard salary level will be January 1, 2025. The Department is not finalizing its proposal to apply the standard salary level to the U.S. territories subject to the federal minimum wage and to update the special salary levels for American Samoa and the motion picture industry.
9

9
The Department proposed in sections IV.B.1 and B.2 of the NPRM to apply the 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 Commonwealth of the Northern Mariana Islands (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 will address these aspects of its proposal in a future final rule.

The Department is also increasing 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.
10

The Department is increasing the HCE total annual compensation threshold to the annualized weekly earnings amount of the 85th percentile of full-time salaried workers nationally ($151,164). The new HCE threshold is high enough to reserve the test for those employees who are “at the very top of [the] economic ladder”
11

and will guard against the unintended exemption of workers who are not bona fide EAP employees, including those in high-income regions and industries. The applicability date of the new HCE total annual compensation threshold will be January 1, 2025.

10

See
69 FR 22172-73.

11

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.
12

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.

12
84 FR 51250-51; 81 FR 32430;
see also
69 FR 22164.

To address this problem, in the 2004 and 2019 rules the Department expressed its commitment to regularly updating the salary levels.
13

In the 2016 rule, it included a regulatory provision to automatically update the salary levels.
14

Based on its long experience with updating the salary levels, the Department has determined that adopting a regulatory provision for updating the salary levels to reflect current earnings data, 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. This rule establishes a new updating mechanism. The initial update to the standard salary level and the HCE total annual compensation threshold will take place on July 1, 2024, and will use the methodologies in place at that time (
i.e.,
the 2019 rule methodologies), resulting in a $844 per week standard salary level and a $132,964 HCE total annual compensation threshold. Future updates to the standard salary level and HCE total annual compensation threshold with current earnings data will begin 3 years after the date of the initial update (July 1, 2027), and every 3 years thereafter, using the methodologies in place at the time of the updates. The Department anticipates that, by the time the first triennial update under the updating mechanism occurs, assuming the Department has not engaged in further rulemaking, the new methodologies for the standard salary level and HCE total annual compensation requirement established by this final rule will have become effective and the triennial update will employ these new methodologies. The new updating mechanism will allow for the timely, predictable, and efficient updating of the earnings thresholds.

13
69 FR 22171; 84 FR 51251-52.

14
81 FR 32430.

The Department estimates that in Year 1, approximately 1 million employees who earn at least $684 per week but less than $844 per week will be impacted by the initial update applying current wage data to the standard salary level methodology from the 2019 rule, and approximately 3 million employees who earn at least $844 per week but less than the new standard salary level of $1,128 per week will be impacted by the subsequent application of the new standard salary level.
See
Table 25. As explained in section V.B.4.ii, for 1.8 million of the affected employees (including the 1 million impacted by the initial update), this rule will restore overtime protections that they would have been entitled to under every rule prior to the 2019 rule. The Department also estimates that 292,900 employees who are currently exempt under the HCE test, but do not meet the standard test for exemption, will be affected by the proposed increase in the HCE total annual compensation level. Absent an employer increasing these employees' pay to at or above the new HCE level, the exemption status of these employees will 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 quantifies the direct costs resulting from this 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 will be $803 million with a 7 percent discount rate. This rule will also give employees higher earnings in the form of transfers of income from employers to employees. The

Department estimates annualized transfers will be $1.5 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 at least one and one-half times the employee's regular rate of pay for all hours worked over 40 in a workweek.
15

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 Procedure Act] . . .).” The FLSA does not define the terms “executive,” “administrative,” “professional,” or “outside salesman,” but rather directs the Secretary to define those terms through rulemaking. 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.
16

Because Congress explicitly gave the Secretary authority to define and delimit the specific terms of the exemption, the regulations so issued have the binding effect of law.
17

15

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

16

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.’”).

17

See Batterton
v.
Francis,
432 U.S. 416, 425 n.9 (1977).

The exemption for executive, administrative, or professional employees was included in the original FLSA legislation passed in 1938.
18

It was modeled after similar provisions contained in the earlier National Industrial Recovery Act of 1933 and state law precedents.
19

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.
20

Second, exempt 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.
21

18

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

19

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

20

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

21

See id.

Section 13(a)(1) exempts covered EAP employees from both the FLSA's minimum wage and overtime requirements. However, because of their long hours of work, its most significant impact is its exemption of these employees from the Act's overtime protections, as discussed in section VII.C.4. An employer may employ such exempt employees for any number of hours in the workweek without paying an overtime premium. Some state laws have stricter standards to be exempt from state minimum wage and overtime protections than those which exist under federal law, such as higher salary levels or more stringent duties tests. The FLSA does not preempt any such stricter state standards.
22

If a state establishes a higher standard than the provisions of the FLSA, the higher standard applies in that state.

22

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 the following three prongs to be satisfied 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's part 541 regulations have always included earnings criteria. From the first Part 541 regulations, 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[.]”
23

Because EAP employees “are denied the protection of the [A]ct[,]” they are “assumed [to] enjoy compensatory privileges” which distinguish them from nonexempt employees, including substantially higher pay.
24

Additionally, the Department has long recognized that the salary level test is a useful criterion for helping identify bona fide EAP employees and provides a practical guide for employers and employees, thus tending to reduce litigation and ensure that nonexempt employees receive the overtime protection to which they are entitled.
25

These benefits accrue to 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.
26

23
“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) at 19.

24

Id.; see
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.”).

25

See
84 FR 51237;
see also
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) at 8.

26
84 FR 51235;
see also
Stein Report at 5, 19; Weiss Report at 9.

The Department issued the first version of the part 541 regulations in October 1938.
27

The Department's initial regulations included a $30 per week compensation requirement for executive and administrative employees. It also included a duties test that prohibited employers from claiming the EAP exemption for employees who performed “[a] substantial amount of work of the same nature as that performed by nonexempt employees of the employer.”
28

27
3 FR 2518 (Oct. 20, 1938).

28

Id.

The Department issued the first update to its part 541 regulations in October 1940,
29

following extensive public hearings.
30

Among other changes, the 1940 update newly applied the salary level requirement to professional employees; added the salary basis requirement to the tests for executive, administrative, and professional employees; and introduced a 20 percent cap on the amount of nonexempt work that executive and professional employees could perform each workweek, replacing language which prohibited the performance of a “substantial amount” of nonexempt work.
31

29
5 FR 4077 (Oct. 15, 1940).

30

See
Stein Report.

31
5 FR 4077.

The Department conducted further hearings on the part 541 regulations in 1947
32

and issued revised regulations in December 1949.
33

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.
34

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 at a level designed 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.
35

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 these employees were employed in an 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.

32

See
Weiss Report.

33

See
14 FR 7705 (Dec. 24, 1949).

34

Id.
at 7706.

35

See
Report and Recommendations on Proposed Revision of Regulations, Part 541, Under the Fair Labor Standards Act, by Harry S. Kantor, Assistant Administrator, Office of Regulations and Research, Wage and Hour and Public Contracts Divisions, U.S. Department of Labor (Mar. 3, 1958) (Kantor Report) at 6-7. Under the two-test system, 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.

Additional changes to the regulations, including salary level updates, were made in 1954,
36

1958,
37

1961,
38

1963,
39

1967,
40

1970,
41

1973,
42

and 1975.
43

The Department revised the part 541 regulations twice in 1992 but did not update the salary thresholds at that time.
44

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

36
19 FR 4405 (July 17, 1954).

37
23 FR 8962 (Nov. 18, 1958).

38
26 FR 8635 (Sept. 15, 1961).

39
28 FR 9505 (Aug. 30, 1963).

40
32 FR 7823 (May 30, 1967).

41
35 FR 883 (Jan. 22, 1970).

42
38 FR 11390 (May 7, 1973).

43
40 FR 7091 (Feb. 19, 1975).

44
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
Pub. L. 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.”
45

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,
46

which for a 40-hour workweek 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,
47

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

45
40 FR 7091.

46

See
Pub. L. 101-157, sec. 2, 103 Stat. 938 (Nov. 17, 1989).

47

See
Pub. L. 104-188, sec. 2104(b), 110 Stat 1755 (Aug. 20, 1996).

2. Part 541 Regulations From 2004 to 2019

The Department published a final rule in April 2004 (the 2004 rule)
48

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.
49

48
69 FR 22122.

49

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 to the single standard test for exemption was a significant change in the regulatory structure,
50

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[.]”
51

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[.]”
52

The Department acknowledged, however, that the new standard salary level was comparable to the lower 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).
53

Thus,

employees who would have been subject to the long duties test with its limit on the amount of time spent on nonexempt work 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 more than 20 percent of their 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 long test's more rigorous duties analysis due to their lower salary.

50

See id.
at 22126-28.

51

Id.
at 22167.

52

Id.
at 22126.

53

Id.
at 22171. The Department last set the long and short test salary levels in 1975. Throughout this preamble, when the Department refers to the relationship of salary levels set in this rule and the 2004, 2016, and 2019 rules to equivalent long or short test salary levels, it is referring to salary levels based on contemporaneous (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.
54

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.
55

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.
56

The Department also expressed its intent “in the future to update the salary levels on a more regular basis, as it did prior to 1975.”
57

54
69 FR 22172.

55

See id.
at 22169 (Table 3).

56

Id.
at 22172.

57

Id.
at 22171.

In May 2016, the Department issued a final rule (the 2016 rule) that retained the single-test system introduced in 2004 but increased the standard salary level and provided for regular updating. Specifically, 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);
58

(2) increased the HCE test total annual compensation amount from $100,000 to $134,004 per year;
59

(3) increased the special salary level for EAP workers in American Samoa;
60

(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;
61

and (5) added a mechanism to automatically update the part 541 earnings thresholds every 3 years.
62

The Department did not change any of the standard duties test criteria in the 2016 rule,
63

opting instead to adopt a standard salary level set at the low end of the historical range of short test salary levels used in the pre-2004 two-test system.
64

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

58
81 FR 32404-05.

59

Id.
at 32428.

60

Id.
at 32422.

61

See id.
at 32425-26.

62

See id.
at 32430.

63

Id.
at 32444.

64
In the 2016 rule, the Department estimated the historical range of short test salary levels as from $889 to $1,231 (based on contemporaneous earnings data).
Id.
at 32405.

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.
65

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.
66

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 undertook further rulemaking. Following an NPRM published on March 22, 2019,
67

the Department published a final rule on September 27, 2019 (the 2019 rule),
68

which formally rescinded and replaced the 2016 rule.

65

See Nevada
v.
U.S. Department of Labor,
218 F. Supp. 3d 520 (E.D. Tex. 2016).

66

See Nevada,
275 F.Supp.3d 795.

67

See
84 FR 10900 (March 22, 2019).

68

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 equivalent of the 20th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region (the South) and/or in the retail industry nationally; (2) increased the HCE total annual compensation threshold from $100,000 to $107,432, the equivalent of the 80th percentile of annual earnings of full-time salaried workers nationwide; (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.
69

The 2019 rule did not make changes to the standard duties test.
70

While using 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.
71

The Department acknowledged that the new standard salary level was, unlike the salary level set in the 2004 rule, below the long test salary level used in the pre-2004 two-test system.
72

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.”
73

The 2019 rule took effect on January 1, 2020.
74

69
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.
Id.
at 51246.

70

See id.
at 51241-43.

71

See id.
at 51242.

72

Id.
at 51244.

73

Id.
at 51251.

74
A lawsuit challenging the 2019 rule was filed in August 2022. The district court upheld the rule and an appeal of that decision was pending at the time the Department issued this final rule.
See Mayfield
v.
U.S. Department of Labor,
2023 WL 6168251 (W.D. Tex. Sept. 20, 2023),
appeal docketed,
No. 23-50724 (5th Cir. Oct. 11, 2023).

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.
75

Job titles and job descriptions do not determine

exemption status, nor does merely paying an employee a salary rather than an hourly rate.

75

See, e.g., Idaho Sheet Metal Works,
383 U.S. at 209;
Walling,
330 U.S. at 547-48.

As previously indicated, to satisfy the EAP exemption, employees must meet certain tests regarding their job duties
76

and generally must be paid on a salary basis at least the amount specified in the regulations.
77

Some employees, such as doctors, lawyers, teachers, and outside sales employees, are not subject to salary tests.
78

Others, such as academic administrative personnel and computer employees, are subject to special, contingent earning thresholds.
79

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.
80

A special salary level of $455 per week currently applies to employees in Puerto Rico, Guam, the U.S. Virgin Islands, and the CNMI;
81

a special salary level of $380 per week applies to employees in American Samoa;
82

and employers can pay a special weekly “base rate” of $1,043 per week to employees in the motion picture producing industry.
83

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.
84

76
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).

77
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.

78

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

79

See
§ 541.600(c)-(d).

80

See
§§ 541.600(a); 541.601(a)(1).

81

See
§§ 541.100; 541.200; 541.300.

82

See
§§ 541.100; 541.200; 541.300.

83

See
§ 541.709.

84
§ 541.602(a)(3).

Under the HCE test, employees who currently 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.
85

The HCE test applies only to employees whose primary duty includes performing office or non-manual work.
86

Employees considered exempt under the HCE test must currently 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.
87

85
§ 541.601.

86
§ 541.601(d).

87

See
§ 541.601(b)(1);
see also
84 FR 51249.

D. The Department's Proposal

On September 8, 2023, consistent with its statutory authority to define and delimit the EAP exemption, the Department published a Notice of Proposed Rulemaking (NPRM) to revise the part 541 regulations.
88

The Department proposed 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), equivalent to $1,059 per week based on earnings data used in the NPRM.
89

The Department also proposed 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.
90

The Department additionally proposed 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, equivalent to $143,988 per year based on earnings data used in the NPRM. Finally, the Department proposed a new mechanism to update the standard salary level and the HCE total annual compensation threshold every 3 years to ensure that they remain effective tests for exemption.

88

See
88 FR 62152.

89
The Department noted that the final rule would use the most recent earnings data available to set the standard salary level, which would change the dollar amount of the resulting threshold.
See
88 FR 62152-53 n. 3.

90
In this final rule the Department is not finalizing its proposal in section IV.B.1 and B.2 of the NPRM to apply the standard salary level to the U.S. territories subject to the federal minimum wage and to update the special salary levels for American Samoa and the motion picture industry. The Department will address these aspects of its proposal in a future final rule. While the Department is not finalizing its proposal, it is making nonsubstantive changes in provisions addressing the territories as a result of other changes in this final rule.

The public comment period for the NPRM concluded on November 7, 2023. The Department received approximately 33,300 comments in response to the NPRM during the 60-day comment period.
91

Comments came from a diverse array of stakeholders, including employees, employers, trade associations, small business owners, labor unions, advocacy groups, nonprofit organizations, law firms, academics, educational organizations and representatives, religious organizations, economists, members of Congress, state and local government officials, tribal representatives, and other interested members of the public. All timely received comments may be viewed on the
https://www.regulations.gov
website, docket ID WHD-2023-0001.

91
In
regulations.gov
, the number of comments received is listed as 33,310 and the number of posted comments is 26,280. This difference is because one commenter, WorkMoney, attached thousands of comments to their one submission.

Commenter views on the merits of the NPRM varied widely. Some of the comments the Department received were general statements of support or opposition, while many others addressed the Department's proposal in considerable detail. As with previous part 541 rulemakings, a majority of the total comments came from comment campaigns using similar or identical template language. Such campaign comments expressed support or opposition to the proposed salary level, and sometimes addressed other issues including applying the salary level to teachers,
92

and concerns from nonprofit agencies. However, the Department also received thousands of unique comments. Significant issues raised in the comments are discussed in this final rule. Comments germane to the need for this rulemaking are discussed in section III, comments about the NPRM's proposals are discussed in section V, and comments about the potential costs, benefits, and other impacts of this rulemaking are discussed in section VII. The Department has carefully considered the timely submitted comments about the Department's proposal.

92
As noted above, teachers are among the employees for whom there is no salary level requirement under the part 541 regulations.
See
§ 541.303(d).

The Department received a number of comments on topics that are beyond the scope of this rulemaking. A significant number of commenters (including a large comment campaign) urged the Department to newly apply the part 541 salary criteria to teachers. The Department did not solicit comment about the exemption criteria for teachers in the NPRM and, as many commenters on this issue recognized, addressing this issue would require a separate rulemaking. Other topics outside the

scope of this rulemaking include, for example, a request that the Department extend the right to overtime pay to medical residents, create exemptions from the salary level test, allow employers to credit the value of board and lodging towards the salary level, clarify issues related to the fluctuating workweek method of calculating overtime pay, or create a “safe harbor” provision for restaurant franchisors. The Department is not addressing these issues in its final rule.

Several stakeholders such as Catholic Charities USA and the National Council of Nonprofits expressed concern about funding and reimbursement rates to meet potential new overtime expenses. The Department appreciates the concerns conveyed in these comments and the challenges of adjusting public funding. As discussed in section V.B.4.iv, however, the Department's EAP regulations have never had special rules for nonprofit or charitable organizations and employees of these organizations are subject to the EAP exemption if they satisfy the same salary level, salary basis, and duties tests as other employees.

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 achieve this goal, the Department is not only updating 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. To this end, the Department is finalizing its proposed changes to the standard salary level and the HCE test's total annual compensation requirement methodologies. Additionally, to maintain the effectiveness of these tests, the Department is finalizing an updating mechanism that will update these earnings thresholds to reflect current wage data, initially on July 1, 2024 and every 3 years thereafter. The Department's response to commenter feedback on the specific proposals included in the NPRM is provided in section V. This section explains the need for the Department to update the part 541 earnings thresholds and addresses commenter feedback on whether the earnings thresholds established in the 2019 rule should be increased.

As the Department explained in the NPRM, there is a need for the Department to update the salary level to fully restore the salary level's screening function and to account for the shift to a one-test system in the 2004 rule, which broadened the exemption by placing the entire burden of this shift on employees who historically were entitled to the FLSA's overtime protection because they performed substantial amounts of nonexempt work and earned between the long and short test salary levels, but became exempt because they passed the more lenient standard 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 standard salary level. In 2004, the Department used a methodology that produced a salary level amount that was equivalent to the lower long test salary level under the two-test system.
93

This approach continued to perform the historical screening function of the long salary test—providing overtime protection to employees who earned less than the long test salary level. But it broadened the exemption to include employees earning between the long and short test salary levels who historically had not met the long duties test (and therefore were not considered bona fide EAP employees) and now became exempt if they met the less rigorous standard duties test.
94

The Department followed this same methodology to set the standard salary level in 2019, but applying the 2004 rule's methodology to contemporaneous data in 2019 resulted in a salary level that was lower than what would have been the equivalent of the long test salary level and thus did not fulfill the historical screening function for low-paid employees.
95

This broadened the EAP exemption even further by, for the first time, exempting a group of white-collar employees earning below the equivalent of the long test salary level.

93

See
69 FR 22168-69.

94

Id.
at 22214.

95

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, in 2016 the Department set the standard salary level using a methodology that produced a salary at the low end of the historical range of short test salary levels.
96

This approach restored overtime protection to lower-salaried white-collar employees who performed substantial amounts of nonexempt work, but it also made nonexempt some employees paid below the new salary level who performed only a limited amount of nonexempt work and would have been exempt under the long duties test.
97

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.
98

96
81 FR 32405.

97

See
84 FR 10908; 84 FR 51242.

98

See Nevada,
275 F.Supp.3d. at 806.

As explained in greater detail in section V.B, setting the standard salary level at the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region ($1,128 per week, $58,656 annually), which is below the midpoint between the long and short tests, will work effectively with the standard duties test to better define and delimit the EAP exemption, in part by more effectively accounting for the switch from a two-test to a one-test system, and will 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.
99

The new standard salary level will also account for earnings growth since the 2019 rule and fully restore the historical screening function of the salary level test. At the same time, the duties test will continue to determine exemption status for a large majority of all salaried white-collar employees subject to the part 541 regulations.

99

See
section V.A.3.

As the Department has explained,
100

earnings thresholds in the part 541 regulations gradually lose their effectiveness as the salaries paid to nonexempt employees rise over time. These impacts grow in the absence of increases to the salary threshold that keep pace with wage growth. Moreover, the longer it takes for the Department to implement such increases, the larger the increases must be to restore earning thresholds to maintain their effectiveness. More than 4 years have passed since the 2019 final rule established the current earnings thresholds. In the intervening years, salaried workers in the U.S. economy have experienced a rapid growth in their nominal wages, such that the current $684 per week salary level now corresponds to approximately the 12th percentile of earnings of full-time salaried workers in the lowest-wage Census Region and retail nationally. The longer the Department waits to update these earnings thresholds, the less effective they become in helping define

and delimit the EAP exemption. For example, applying the 2019 standard salary level methodology to current earnings data will result in a new threshold of $844 per week—a 23 percent ($160 per week) increase over the current $684 salary level. Earnings for full-time wage and salary workers nationally have increased even more rapidly, rising by 24 percent during this period.
101

100

See, e.g.,
84 FR 51250-51.

101
Estimate based on the change in median usual weekly earnings of full-time wage and salary workers from Q3 2019 to Q4 2023. BLS, Median usual weekly earnings of full-time wage and salary workers by sex, quarterly averages, seasonally adjusted.
https://www.bls.gov/news.release/wkyeng.t01.htm.

The Department is also increasing the HCE total annual compensation threshold to the annualized weekly earnings amount of the 85th percentile of full-time salaried workers nationally ($151,164). Similar to the standard salary level, nominal wage growth among higher-wage workers has eroded the effectiveness of the HCE threshold; data shows that the $107,432 threshold now corresponds to the 70th percentile of annual earnings of full-time salaried workers nationwide. Reapplying the 2019 methodology (annualized weekly earnings of the 80th percentile of full-time salaried workers nationally) to current earnings data would result in a threshold of $132,964 per year—a 24 percent increase over the current threshold of $107,432. Increasing the HCE test's total annual compensation threshold equivalent to the 85th percentile of salaried worker earnings nationwide will result in an HCE threshold reserved for employees at the top of today's economic ladder and, unlike a lower threshold, not risk the unintended exemption of large numbers of employees in high-wage regions.

Finally, the Department is adopting a mechanism to regularly update the thresholds for earnings growth, which will ensure that the thresholds continue to work effectively to help identify EAP employees. As noted above, 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 has generally 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. Routine updates of the earnings thresholds to reflect wage growth will bring certainty and stability to employers and employees alike.

The Department received many comments addressing the adequacy of the current salary and compensation thresholds set in the 2019 rule and the need for this rulemaking. Generally, employees and affiliated commenters, including labor unions, worker advocacy groups, plaintiff-side law firms, and others, supported the rulemaking as an overdue effort to restore FLSA protections that have eroded in recent decades, though a number of commenters urged the Department to adopt higher threshold increases than those proposed in the NPRM. By contrast, most employers and affiliated stakeholders opposed the main aspects of the proposal, with many urging the Department to withdraw the NPRM altogether. Some employers supported the proposal, or stated that they would support, or not oppose, some change to the current thresholds.

Many commenters agreed with the Department's assessment that the current salary level is too low.

102

See, e.g.,
Coalition of Gender Justice and Civil Rights Organizations; Coalition of State Attorneys General; Economic Policy Institute (EPI); Schuck Law LLC; Texas RioGrande Legal Aid; United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union (United Steelworkers). Several commenters asserted that the current standard salary level “fails to provide a true incentive for employers to balance the additional hours they ask of their workers with the costs of . . . overtime pay[,]” which they stated in turn undermines the FLSA's policy goals of providing “extra pay for extra work . . . [and] spreading employment.”
See, e.g.,
Center for Law and Social Policy (CLASP); Caring Across Generations; Family Values @Work; Jobs to Move America; North Carolina Justice Center; Workplace Justice Project. Opining that the standard salary level “has been increased too infrequently—and by too little[,]” Business for a Fair Minimum Wage asserted that the “current outdated overtime threshold is ripe for abuse and fosters unfair pay, worker burnout, poorer health and safety, and increased employee turnover.” American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) asserted that the $684 per week salary level is “so low that it risks becoming irrelevant[.]”

102
Commenter views on the adequacy of the current HCE threshold are addressed in section V.C.

Finally, some supportive commenters provided reasons why, in their opinion, this rulemaking is timely. A joint comment submitted by 10 Democratic members of the House of Representatives asserted that “[o]vertime standards are long overdue for a meaningful update.”
See also
AFL-CIO (asserting that setting the salary level below the long test level in the 2019 rule “led to the faster irrelevance of the current level”). The Coalition of State AGs commented that “[r]egardless of whether [the $684 per week standard salary] level was appropriate in 2019, economic trends in the intervening years have rendered that level obsolete . . . [as] $684 in January 2020 has the same buying power as $816.90 in September 2023.” Sanford Heisler Sharp LLP (Sanford Heisler Sharp) invoked “the explosion of remote work since 2020” as support for the rulemaking, asserting that the significant increase in telework since 2020 has meant that employers are “no longer constrained by the practical limitation of the worker leaving the workplace.”

Many employer trade associations that were neutral or opposed to the NPRM's specific proposals for increasing the compensation levels expressed openness or support for a rulemaking to change the existing part 541 earnings thresholds.
See, e.g.,
Alliance for Chemical Distribution; Growmark Comment Campaign (GROWMARK); National Cotton Ginners Association; National Golf Course Owners Association. Reporting on the results of a survey taken of its members, Society for Human Resource Management (SHRM) stated that its members “support a reasonable increase to the rule's minimum salary threshold . . . as only 4% of the total number of respondents indicated that they would not support any increase.” Independent Sector remarked that “a healthy and equitable nonprofit workforce requires an increase in the salary threshold beyond $35,568.”
See also
North Carolina Center for Nonprofits (“The Center recognizes that a higher salary level threshold would benefit people served by nonprofits and many nonprofit employees, and we encourage the Department to move forward with a final rule that increases the [current] salary level threshold[.]”). National Association of Convenience Stores commented that it “acknowledges that the minimum salary level should be revisited occasionally, and it support[s] USDOL's approach in 2019 of doing so approximately every four years[.]”
See also
Retail Industry Leaders Association

(RILA) (“We recognize that the DOL committed itself in 2019 to engage in more regular reviews of the salary threshold level for the [EAP] exemptions and that the DOL now is following up on that commitment.”).

Other employer stakeholders disputed the need for this rulemaking. Many of these commenters, including the American Bus Association, Americans for Prosperity Foundation, Construction Industry Round Table, and National Restaurant Association, asserted that increases to the part 541 earnings thresholds were unnecessary at this time because the last update took effect on January 1, 2020. A number of commenters stated that prior salary level updates have occurred less frequently.
See, e.g.,
National Association of Manufacturers (NAM) (never less than 5 years); National Demolition Association (on average every 9 to 10 years); National Association of Wholesale Distributors (NAW) (historically 7 to 9 years). National Retail Federation (NRF) commented that “[t]here has been no increase of the federal minimum wage since 2019, and therefore, there is no need to adjust the minimum salary threshold.” NRF further asserted that there was no need to increase the part 541 earnings thresholds because “market forces have already increased the compensation of lower-level exempt employees” since 2019, echoing the sentiment from several individual employers that markets should determine employee wages rather than government regulation.
See also, e.g.,
Casa Del Mar Beachfront Suites (opposing changes to the regulations and stating that the wages it pays “are based on free enterprise and competitive business plans”); Individual Small Business Commenter (asking the Department to “let the market take care of the situation”). Numerous commenters also asserted that the Department should refrain from amending the part 541 regulations at this time due to current conditions in specific industries or the broader economy.
See, e.g.,
Asian American Hotel Owners Association, Inc.; American Hotel and Lodging Association (AHLA); College and University Professional Association for Human Resources (CUPA-HR); Food Marketing Institute (FMI); Indiana Chamber of Commerce; National Association of Home Builders (NAHB).

Finally, a small number of commenters opposed this rulemaking on the grounds that the Department lacks the legal authority to use any salary criteria to define and delimit the EAP exemption.
See, e.g.,
America First Policy Institute (AFPI); National Federation of Independent Business (NFIB); Pacific Legal Foundation.
103

However, the overwhelming majority of commenters did not oppose the use of salary criteria in the part 541 regulations or address the Department's authority, and a number of employer representatives expressed general support for the use of earnings thresholds.
See, e.g.,
AHLA (“[M]oving to a duties-only test would undoubtedly result in a more rigid duties test . . . [and] likely result in excessive burdens on the hospitality industry, including new and onerous recordkeeping requirements and increased litigation costs.”); National Restaurant Association (“[S]alary levels save investigators and employers time by giving them a quick, short-hand test[.]”); Transportation Intermediaries Association (“Implementing a duties-only test without considering salary would be overly complex[.]”). This sentiment is consistent with stakeholder feedback provided in earlier part 541 rulemakings.
104

103

See
discussion in section V.A.

104

See supra
note 23.

Having reviewed the comments received, the Department remains of the view that the earnings criteria in the part 541 regulations must be increased and disagrees with commenters that urged the Department to withdraw its proposal. In addition to updating the salary level to account for wage growth since 2019, an update is needed in part because the current standard salary level is too low to fully perform its screening role, as it is now significantly below the contemporary equivalent of the historical long test salary level ($942 per week).
105

Moreover, as the Department explained in the NPRM, there is a need for the Department to update the salary level to account for the shift to a one-test system in the 2004 rule, which broadened the exemption by placing the entire burden of this shift on employees who historically were entitled to the FLSA's overtime protection because they performed substantial amounts of nonexempt work and earned between the long and short test salary levels, but are now exempt because they pass the more lenient standard duties test. This effect would continue to grow over time in the absence of an increase to the current $684 per week standard salary level.

105

See
sections V.B. and VII.C.8.

The Department disagrees with the criticism from some commenters that this rulemaking is premature due to the relative recency of the 2019 rule. In that rule, the Department “reaffirm[ed] its intent to update the standard salary level and HCE total annual compensation threshold more regularly in the future” than it has in the past, noting that “long periods without updates . . . diminish the usefulness of the salary level test and cause future increases to be larger and more challenging for businesses to absorb.”
106

Notably, the Department initially proposed in the 2019 NPRM to codify a commitment to update the part 541 earnings thresholds on a quadrennial basis (
i.e.,
once every 4 years) through notice and comment rulemaking.
107

While that proposed commitment was not adopted in the 2019 final rule, the Department reaffirmed the importance of, and its commitment to, regular updates in its 2019 final rule. The Department's 2019 final rule in no way suggested that increases to the part 541 earnings thresholds should occur only after some longer period of time.

106
84 FR 51251-52.

107
84 FR 10914-15.

Relatedly, the fact that employee salaries have grown substantially since 2019 underscores the need for this rulemaking. Commenter assertions to the contrary, including that the federal minimum wage has not increased since the salary level was last updated, misunderstand the purpose of the part 541 earnings thresholds, which are intended to assist in the identification of EAP employees based on the wages employees presently receive.
108

To the extent that employers have already been providing raises to exempt EAP workers since January 1, 2020 (the effective date of the 2019 final rule), as some commenters contended, those increases should be appropriately reflected in the earnings thresholds to ensure their effectiveness.

108
The Department “is not authorized to set wages or salaries for executive, administrative, and professional employees . . . [and] improving the conditions of such employees is not the objective of the [part 541] regulations.” Weiss Report at 11.

The Department is sensitive to commenter concerns about the potential impact of this rulemaking on affected employers. However, as discussed in greater detail in the regulatory impact analysis in section VII, the costs of this rule, while significant, are a necessary byproduct of ensuring a salary level that works effectively with the duties tests both now and in the future.

IV. Effective Date

The Department proposed that all aspects of the proposed rule would become effective 60 days after publication of the final rule. This proposed effective date was consistent

with the 60 days mandated for a “major rule” under the Congressional Review Act and exceeded the 30-day minimum required under the Administrative Procedure Act (APA).
109

The Department recognized that the 60-day proposed effective date was shorter than the effective dates for the 2004, 2016, and 2019 rules, which were between approximately 90 and 180 days. The Department stated that a 60-day effective date was appropriate, however, in part because employers and employees are familiar with the procedures in the current regulations from the 2019 rulemaking and changed economic circumstances have caused a strong need to update the standard salary level. The Department also sought comments on whether to apply different effective dates to different provisions of the proposed rule. The Department is finalizing an effective date of July 1, 2024. The change to the standard salary level methodology and the change to the HCE total annual compensation methodology will have a delayed applicability date of January 1, 2025.
110

Accordingly, the standard salary level and HCE total annual compensation requirement will increase at the initial update on the effective date July 1, 2024 (to $844 and $132,964, respectively), again on the applicability date for the new methodologies on January 1, 2025 (to $1,128 and $151,164, respectively), and then every 3 years after the initial update on July 1 (using the methodology in effect at the time of each update).

109

See
5 U.S.C. 801(a)(3)(A); 5 U.S.C. 553(d).

110
The January 1, 2025 applicability date is six months after the effective date of the rule.

The Department specifically asked for comments on whether the effective date for the increase of the standard salary level should be 60 days after publication as proposed or instead if the increase should be made effective at a later date, such as 6 months or 1 year after publication of the final rule. If the effective date were longer than 60 days, the Department sought comments on “whether it should initially adjust the salary level to reflect recent wage growth (for example, making an initial adjustment for wage growth 60 days after publication of a final rule and having the final rule standard salary level be effective 6 months or a year after publication).”
111

Were it to follow such an approach, the Department sought comments on the methodology it should use for an initial update, specifically “whether to implement an initial update to the standard salary level, effective 60 days after publication of a final rule, that uses the current salary level methodology (the 20th percentile of weekly earnings of full-time nonhourly workers in the lowest-wage Census Region and retail nationally) and applies it to the most recent data available[.]”
112

111
88 FR 62180.

112

Id.
Commenters generally did not address the Department's suggestion that a delay in the effective date for the proposed standard salary level increase be combined with an initial update to the existing salary level to reflect wage growth. An individual commenter acknowledged the Department's suggestion but “defer[ed] to the economists and statisticians to comment as to whether, if the effective date is later than 60 days, the Department should initially adjust the salary level to reflect recent wage growth, and if so, the methodology for doing so.”
See also
Ho-Chunk, Inc., a subsidiary of the Winnebago Tribe of Nebraska.

The Department did not specifically request comment on delaying the effective date of the proposed HCE compensation threshold beyond 60 days or on making an initial update using current data and the existing HCE compensation methodology if it were to delay the effective date of the new total annual compensation threshold. The Department stated that it believed a 60-day effective date was appropriate for the proposed increase to the HCE compensation threshold because only a relatively small number of employees earning between the current and proposed HCE compensation thresholds would not meet the standard duties test and be affected by the proposed change. The Department sought comment on the proposed effective date for the HCE compensation threshold.

Lastly, the Department proposed that the first automatic update to the new compensation levels be effective 3 years after the proposed 60-day effective date. The Department sought comments on whether the date for the first automatic update should be adjusted if it were to make an initial adjustment to any of the compensation levels.

Many commenters that objected to the proposed rule also objected to the proposed 60-day effective date should the Department go forward with a final rule. Commenters addressed their comments to the single 60-day effective date and generally did not suggest different effective dates for different provisions. Several commenters suggested effective dates between 90 and 180 days, which the NPRM noted was the range for recent rules.
See, e.g.,
HR Policy Association (minimum of 90 days); International Foodservice Distributors Association (IFDA) (minimum of 90 days); American Society of Travel Advisors (ASTA) (90 to 180 days); RILA (at least 120 days); NAIS/NBOA (at least 120 days). Several commenters suggested a 180-day effective date.
See, e.g.,
AASA/AESA/ASBO; CUPA-HR; LeadingAge; NRF. The National Council of Young Men's Christian Associations of the United States of America (YMCA) suggested an effective date of at least 6 to 9 months. The United States Chamber of Commerce (Chamber), National Association of Convenience Stores, and NAFCU suggested an effective date of 12 months. Commenters including the U.S. Small Business Administration Office of Advocacy (SBA Advocacy), National Automobile Dealers Association, and Partnership to Protect Workplace Opportunity (PPWO) suggested an effective date of 12 to 18 months. Commenters including Seyfarth Shaw LLP (Seyfarth Shaw) and Credit Union National Association (CUNA) suggested an effective date of 150 days to align with the proposed notice period for future update amounts. A number of commenters suggested tying the effective date to the beginning of the next calendar year (January 1, 2025).
See, e.g.,
Seyfarth Shaw; SHRM; RILA; YMCA. Some commenters suggested a longer time period between the publication and effective date of the final rule for specific industries or types of employers.
See, e.g.,
Boy Scouts of America (requesting at least 12 months of lead time for nonprofit employers); Small Business Majority (180 days for small businesses with fewer than 50 employees). A few commenters linked the need for a longer effective date with what they asserted was uncertainty as to the final salary amount caused by the Department's projections in footnote 3 of the NPRM, with NRF asserting that “[t]he brevity of the implementation period is particularly problematic given the Department's . . . lack of clarity about the dollar value of the proposed threshold.”
See also
HR Policy Association; RILA.

Several commenters suggested phasing in any increase in the salary level, often in addition to an initial extension of the proposed effective date. Commenters advocating for a phase-in suggested a range of steps or timeframes.
See, e.g.,
ASTA (not less than 3 years); Chamber (3 years in even or incrementally larger steps); North Carolina Center for Nonprofits (“multiple years”); National Council of Nonprofits (two or more steps); PPWO (a period of years), Safe Journeys (6 years); Washington Farm Labor Association (“multi-year”); YMCA (proportional increases over 5 years).

Most commenters supporting the Department's proposal did not specifically address the effective date for the Department's proposed changes. Commenters including American Federation of Teachers (AFT), National

Partnership for Women & Families (National Partnership), and National Women's Law Center (NWLC) urged the Department to finalize the rule “without delay.” American Federation of State, County, and Municipal Employees (AFSCME) specifically supported the 60-day effective date as proposed. A number of commenters in the home and community-based health services sector, that were generally supportive of the Department's intent but expressed concerns with its proposal, advocated for a longer effective date. ANCOR suggested a 2-year delayed effective date followed by a 3-to-5-year phase-in of the new salary level.
See also
Advancing States (18-month to 2-year effective date); National Association of State Directors of Developmental Disabilities Services (NASDDDS) (18- to 24-month effective date for providers of services to individuals with intellectual and developmental disabilities); United Cerebral Palsy (phase-in or transition period for the Department to work with the Centers for Medicare and Medicaid Services and the Administration for Community Living to minimize impact on access to services). BrightSpring Health Services urged the Department to delay the effective date for 2 years and to consider an enforcement delay for the sector as it did in 2016.

As discussed below, the Department believes it is important to update the standard salary level in part to account for substantial earnings growth since the Department last updated the salary level in the 2019 rule. It has been more than 4 years since the Department updated the salary level, and economic conditions have changed significantly since then as evidenced by the salary increase that would result by applying current data to the 2019 salary level methodology ($844 per week, an increase of $160 per week over the existing salary level). These economic conditions have also impacted employees subject to the HCE exemption. Applying current data to the 2019 HCE compensation methodology would result in an annual compensation threshold of $132,964 (an increase of $25,551 over the existing compensation threshold).

At the same time, the Department is also mindful of the desire expressed by multiple commenters to extend the effective date of the new standard salary and annual compensation methodologies from the proposed 60-day period to 6-to-12 months (or more). A longer effective date for the new standard salary level and HCE compensation methodologies would provide employers with more time to make adjustments after they are informed of the exact levels of the thresholds set in this final rule.

After considering the comments, the Department has determined that the final rule will be effective on July 1, 2024, but the new standard salary level methodology and the new HCE total annual compensation methodology will not be applicable until January 1, 2025. The Department is setting the effective date on July 1, 2024 rather than a set number of days after publication in the
Federal Register
because it will further administrability for employers to have the effective date coincide with the first of a month and some employers' budget years also begin on that date.
113

While the rule will be effective on July 1, 2024, the Department is extending by an additional 6 months the time for employers to comply with the new standard salary level methodology and the HCE total annual compensation methodology. Accordingly, the applicability date for § 541.600(a)(2), which sets out the new standard salary level of the 35th percentile of weekly earnings of full-time nonhourly workers in the lowest-wage Census Region, and § 541.601(a)(2), which sets out the new HCE total annual compensation level of the annualized earnings amount of the 85th percentile of full-time nonhourly workers nationally, will be January 1, 2025. The Department decided to delay application of the new HCE total annual compensation methodology so that the new methodologies for both the standard salary level and the HCE compensation level take effect at the same time. The delayed applicability date will allow employers 6 additional months beyond the proposed 60-day effective date in which to evaluate employees who will be affected by the new standard salary level methodology and the new HCE compensation level methodology and make any adjustments.

113
Future updates will occur every three years on July 1.

New § 541.607, Regular updates to amounts of salary and compensation required, will be applicable on the effective date July 1, 2024. Because the current standard salary and HCE annual compensation levels have not been updated in more than 4 years, and economic conditions have changed markedly during that time, the first update will occur on that same date (§ 541.607(a)). Subsequent updates will occur every 3 years after this date starting on July 1, 2027 (§ 541.607(b)). As discussed in section V.A, regular updating of the standard salary and HCE annual compensation levels to reflect current wage data is imperative to ensure that they continue to work effectively in combination with the duties tests in defining bona fide EAP employees. In light of the approximately 8-month delay in applicability of the new standard salary and HCE total compensation methodologies, the initial update will use the current methodologies from the 2019 rule, which result in a salary level of $844 per week and an HCE total annual compensation threshold of $132,964. Accordingly, the requirement that an exempt employee be compensated on a salary basis at a salary level of at least $844 per week, set forth in § 541.600(a)(1), and that an employee receive total annual compensation of at least $132,964 per year to qualify for the HCE exemption, set forth in § 541.601(a)(1), will apply on July 1, 2024. The Department believes that this date for the initial update is appropriate because it will use methodologies that employers are familiar with. Subsequent triennial updates will apply the most recent four quarters of data to the standard salary and HCE total annual compensation levels in effect at the time of the updates. The Department anticipates that at the time of the first triennial update, the salary and compensation methodologies that are in effect will be the methodologies described in §§ 541.600(a)(2) and 541.601(a)(2) of this final rule. The Department notes that the standard salary and HCE compensation levels need to be updated regularly based on up-to-date earnings data to ensure that they continue to function effectively regardless of the methodology used to set the levels.

Except for the specific provisions discussed in this section that will become applicable on January 1, 2025, all other provisions of this final rule will be applicable on the effective date on July 1, 2024.

V. Discussion of Final Regulatory Revisions

Consistent with its statutory duty to define and delimit the EAP exemption, the Department is making several changes to the earnings thresholds provided in the part 541 regulations. As explained in greater detail below, the Department is setting the standard salary level at the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region (currently the South). The Department additionally is raising the HCE test's total annual compensation requirement to the annualized equivalent of the 85th percentile of weekly earnings of full-time salaried workers nationally. Finally, the

Department is adopting a new mechanism to update the standard salary level and the HCE total annual compensation threshold, initially on July 1, 2024 and every 3 years thereafter to ensure that they remain effective tests for exemption. The Department is not making substantive changes to any provisions related to the salary basis or job duties tests.

The primary changes to the existing regulations are in §§ 541.5, 541.600, 541.601, and newly added § 541.607. In addition, the Department is making conforming changes throughout part 541 to update references to the applicable salary level requirements.
114

The discussion below begins with the new updating provision (§ 541.607), which will make an initial update to the salary and compensation thresholds on July 1, 2024, followed by discussion of changes to the standard salary level methodology (§ 541.600(a)(2)) and HCE total annual compensation threshold methodology (§ 541.601(a)(2)), which will become applicable on January 1, 2025. As noted in these sections, the Department intends for the changes in this final rule to be severable. Severability is addressed more fully at the end of the discussion of final revisions with a discussion of the new severability provision (§ 541.5).

114
The Department is also revising §§ 541.100, 541.200, and 541.300 to reflect that an executive, administrative, or professional employee must be compensated on a salary or fee basis at not less than the level set forth in § 541.600 (rather than referencing a specific salary level amount). Similarly, it is revising § 541.204 and § 541.400 to reflect that an employee employed in a bona fide administrative capacity and a computer employee may qualify for the section 13(a)(1) exemption if they are compensated on a salary or fee basis at not less than the level set forth in § 541.600 (rather than referencing a specific salary level amount). The Department is also updating cross-references to § 541.600(a) in §§ 541.602 and 541.605 to reference § 541.600(a)-(c). Finally, the Department is revising § 541.604, which explains the circumstances under which an employer may provide an exempt employee with additional compensation without violating the salary basis requirement, and § 541.605, which sets forth the conditions under which an administrative or professional employee may be compensated on a fee basis, with examples that reflect the new standard salary level amount of $1,128 per week.

A. Updating the Standard Salary Level and Total Annual Compensation Threshold

As the Department stated in the NPRM, it has long recognized the need to regularly update the earnings thresholds to ensure that they remain useful in helping differentiate between exempt and nonexempt white-collar employees. In each of its part 541 rulemakings since 2004, the Department has observed that a salary level that is not kept up to date becomes obsolete as wages for nonexempt workers increase over time.
115

Long intervals between rulemakings have resulted in eroded earnings thresholds based on outdated earnings data that were ill-equipped to help identify bona fide executive, administrative, and professional employees. This problem was most clearly illustrated by the stagnant salary levels in the regulations from 1975 to 2004, during which period increases in the federal minimum wage meant that by 1991, earnings of a worker paid the federal minimum wage exceeded the long test salary level for a 40-hour workweek and came close to equaling the short test salary level.
116

115
84 FR 51250-51; 81 FR 32430; 69 FR 22164.
See also,
88 FR 62176.

116

See
section II.B.1.

The Department proposed in the NPRM a mechanism to regularly update the earnings thresholds to maintain their effectiveness. In a new §  541.607(a)(1) and (b)(1), the Department proposed to update the standard salary level and the HCE total annual compensation requirement every 3 years to reflect current earnings data. The Department proposed in § 541.607(a)(2) and (b)(2) to make the triennial updates using the methodologies proposed to set the thresholds in the NPRM—
i.e.,
the 35th percentile of weekly earnings of full-time nonhourly workers in the lowest-wage Census Region (currently the South) for the standard salary level and the annualized weekly earnings of the 85th percentile of full-time nonhourly workers nationally for the HCE total annual compensation requirement.
117

The NPRM also outlined in proposed § 541.607(c) the manner in which the Department would publish advance notice of the updated thresholds and included a pause mechanism in proposed § 541.607(d) that could be triggered to delay a scheduled update under certain circumstances.

117
Observing that the proposed special salary level for American Samoa and the base rate for the motion picture industry are set in relation to the standard salary level, the Department also proposed that those earnings thresholds reset at the time the standard salary level was updated. The Department is not finalizing its proposal to apply the standard salary level to the U.S. territories subject to the federal minimum wage and to update the special salary levels for American Samoa and the motion picture industry.
See supra
note 9. Therefore, the updating mechanism finalized in this rule will not apply to the special salary levels at this time.

The Department proposed to make the first update under its proposed updating mechanism 3 years after the effective date of the final rule. The effective date of the final rule was in turn proposed to be 60 days after publication and to apply to all aspects of the proposed rule, including the proposed methodologies for the standard salary level and the HCE total annual compensation threshold. As discussed in section IV, the Department specifically sought comments on whether the effective date for the proposed change to the standard salary level methodology (to the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region) should be 60 days after publication as proposed or if the change should be made effective at some later date, such as 6 months or 1 year after publication of the final rule.
118

If the effective date were longer than 60 days, the Department sought comments on “whether it should initially adjust the salary level to reflect recent wage growth (for example, making an initial adjustment for wage growth 60 days after publication of a final rule and having the final rule standard salary level be effective 6 months or a year after publication).”
119

The Department also sought comments on what methodology to use for the initial update, were it to follow such an approach. In particular, the Department invited comments on “whether to implement an initial update to the standard salary level, effective 60 days after publication of a final rule, that uses the current salary level methodology (the 20th percentile of weekly earnings of full-time nonhourly workers in the lowest-wage Census Region and retail nationally) and applies it to the most recent data available ($822 per week based on current data).”
120

118
88 FR 62180

119

Id.

120

Id.

The Department received numerous comments on its proposed updating mechanism. Many organizations representing employee interests as well as some employers generally supported the updating mechanism, while most organizations representing employer interests opposed it. Many of the commenters opposing the proposed updating mechanism asserted that the Department lacked the authority to institute such a mechanism. After considering the comments received, the Department is finalizing the updating mechanism, with some modifications as discussed below, to keep the salary and compensation thresholds up to date with current data and maintain their effectiveness.

The first update under new § 541.607 will occur on July 1, 2024. As discussed in section IV, the new standard salary level and HCE total annual compensation threshold methodologies will not be applicable until January 1, 2025 (a total of approximately 8 months

after publication of this final rule). Accordingly, § 541.607(a) establishes an initial update on July 1, 2024 to the standard salary level and the HCE total annual compensation threshold using the methodologies in place at that time (
i.e.,
the 2019 rule methodologies), which results in a $844 per week standard salary level and a $132,964 HCE total annual compensation threshold. Section 541.607(b) further establishes future updates to the standard salary level and HCE total annual compensation threshold with current earnings data beginning 3 years after the date of the initial update, and every 3 years thereafter, using the methodologies in place at the time of the updates. The Department anticipates that by the time the first triennial update under the updating mechanism occurs on July 1, 2027, assuming the Department has not engaged in further rulemaking, the new methodologies for the standard salary level and HCE total annual compensation requirement established by this final rule will be effective and the triennial update would employ these new methodologies. In response to commenter concerns, the Department is also adding clarifying language from the NPRM preamble to the final regulatory text of the delay provision.

1. The Department's Authority To Adopt a Salary Level Test

The updating mechanism in new § 541.607 will maintain the effectiveness of the salary and compensation thresholds set in §§ 541.600 and 541.601 by adjusting them regularly to reflect current economic data. At the outset, a small number of commenters contended the Department lacked authority under section 13(a)(1) to even include a salary level test in the regulations, advocating for the Department to withdraw this rulemaking.
See, e.g.,
AFPI; Job Creators Network Foundation; NFIB; Pacific Legal Foundation. These commenters asserted that the express terms of section 13(a)(1) do not permit the Department to include any compensation-based requirements.

The Department maintains its longstanding position that the Secretary's express 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,
121

and the Department's authority to use a salary test has been repeatedly upheld,
122

including recently in
Mayfield
v.
U.S. Dept. of Labor.
123

Despite numerous amendments to the FLSA over the past 85 years, Congress has not restricted the Department's use of the salary level tests in the regulations. 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 compensation requirements.

121

See
Stein Report at 5, 19. As discussed in section V.B.4.i, the vast majority of employer commenters in this rulemaking, whether favoring no increase or a smaller increase, presumed the salary level test's continued existence and utility, with some, such as the National Restaurant Association, expressly referencing their support for the 2019 rule's salary level increase. Many commenters acknowledged the salary level's longstanding function of screening obviously nonexempt employees from the exemption.
See
section V.B.4.ii. Other commenters that opposed the proposal nonetheless cited benefits of having a salary level test, including helping to ensure that the EAP exemption is not abused,
see, e.g.,
AASA/AESA/ASBO, Bellevue University, and “sav[ing] investigators and employers time by giving them a quick, short-hand test[.]”
See
National Restaurant Association.

122

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).

123
2023 WL 6168251 (W.D. Tex. Sept. 20, 2023),
appeal docketed,
No. 23-50724 (5th Cir. Oct. 11, 2023).

The FLSA gives the Secretary 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.”
124

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.”
125

124

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.”).

125
Stein Report at 2.

2. Initial Update to the Standard Salary Level and Total Annual Compensation Threshold To Reflect the Change in Earnings Since the 2019 Rule

The Department received many comments regarding its proposed regulatory mechanism for updating the standard salary level and the HCE total annual compensation requirement to maintain their effectiveness. While commenters disagreed on how and when the salary and total annual compensation thresholds should be updated, commenters generally did not dispute that the earnings thresholds need to be periodically updated to reflect current economic conditions. Many commenters that opposed the proposed updating mechanism nonetheless agreed that the thresholds in the regulations need to be periodically updated.
See, e.g.,
ASTA; FMI; SBA Advocacy; SHRM; TechServe Alliance; World Floor Covering Association (WFCA).

In the context of addressing the Department's proposed standard salary level methodology, several commenters generally expressed support for—or in opposing the salary level suggested in the alternative—an increase to the salary level using the 2019 methodology.
See, e.g.,
Bellevue University; Center for Workplace Compliance (CWC); RILA; YMCA. CWC noted that the 2019 methodology is well-established and already familiar to employees and employers, and Bellevue University similarly stated that this methodology “has been previously field-tested on the U.S. economy[.]” As noted in section IV, commenters generally did not address applying the 2019 methodology through the updating mechanism.

The Department remains convinced that effective salary and compensation thresholds must use up-to-date earnings data. This position is long-standing. When the Department updated its salary level tests in 1949, for example, it explained that the “relative ineffectiveness of these tests in recent years is the result of changed economic conditions rather than any inherent weakness in the tests[,]” and that the “increase in wage rates and salary levels gradually weakened the effectiveness of the present salary tests as a dividing line between exempt and nonexempt employees.”
126

The principle that effective tests for exemption must use

up-to-date earnings data remains as true today as it was 75 years ago.

126
Weiss Report at 8.

The Department's need to update the standard salary level and HCE total annual compensation requirement for current data in this rulemaking is distinct from its decision to establish new methodologies for setting those thresholds. The current salary and compensation levels have been in place for more than 4 years and need to be updated to reflect current wage data to maintain their effectiveness.
127

Since the Department's last rulemaking in 2019, there has been significant change in salaried worker earnings.
128

The $684 standard salary level is far below what constitutes the 20th percentile of weekly earnings of full-time salaried workers in the South and/or in the retail industry nationally using current data, which greatly undermines the utility of the threshold as a means of helping distinguish exempt from nonexempt employees. The same is true for the HCE total annual compensation threshold. Updating the existing thresholds to reflect current earnings data is consistent with the intent the Department has expressed repeatedly in its past part 541 rulemakings, including in the 2019 rule, to periodically update the thresholds.

127
The standard salary level and HCE total annual compensation threshold in the 2019 rule were set using pooled data for July 2016 to June 2019, adjusted to reflect 2018/2019. 84 FR 51250.

128

See
section VII.

For these reasons, the Department is revising final § 541.607(a) to provide for an initial update to the standard salary level and HCE total annual compensation requirement with current earnings data on July 1, 2024. Specifically, the standard salary level will be updated to the 20th percentile of weekly earnings of full-time salaried workers in the South and/or in the retail industry nationally using the most recent data, resulting in a standard salary level of $844 per week. The HCE total annual compensation threshold will be updated to the 80th percentile of full-time salaried worker earnings nationwide using the most recent data, resulting in an annual compensation threshold of $132,964. The Department believes that the July 1, 2024 effective date provides sufficient time for employers to adjust to this initial update because the methodology used for the initial update to the standard salary level has been used since 2004 and is familiar to the regulated community. The size of the initial increase to the standard salary level, which is $160 per week, is also less (in nominal terms) than the $229 per week change that resulted from the 2019 rule.
129

129
Consistent with the 2019 rule, the Department used pooled data for the most recent 3 years (2021, 2022, 2023), adjusting them to reflect 2023, for the initial updates to both the standard salary level and HCE total annual compensation threshold.
See
84 FR 51250.

The initial update on July 1, 2024 and the change in the standard salary level and HCE total annual compensation methodologies on January 1, 2025 will result in two increases in the compensation thresholds within a 12-month period. The Department recognizes that for some employers both changes to the compensation thresholds may occur in the same budget year. Because both the amount of the initial update and the subsequent increase to the thresholds are set forth in this final rule, some employers may choose to make a single adjustment at the first date that encompasses both the initial update and the impending change to the standard salary level and the HCE total annual compensation threshold.
130

130
Although the Department's approach is not a phase-in, the effect of increasing the salary level twice in 8 months is, from a timing perspective, not altogether different from the request from some commenters to phase in the salary level in more than one step.
See, e.g.,
Argentum & ASHA; Associated General Contractors; SBA Advocacy.

The Department intends for the initial update of the standard salary level and the HCE total annual compensation requirement, using current earnings data applied to the 2019 rule methodologies, to be severable from future triennial updates to the thresholds under § 541.607(b), as well as from the revision to the methodologies for the standard salary level and the HCE total annual compensation threshold discussed in section V.B and section V.C. In implementing the initial update, the Department intends to account for changes in earnings since the 2019 rule. In changing the methodology for the standard salary level, the Department further intends to fully restore the salary level's historic screening function and account for the shift in the 2004 rule from a two-test to a one-test system for defining and delimiting the EAP exemption.
131

Lastly, in changing the methodology for the HCE total annual compensation threshold, the Department intends to ensure the HCE threshold's role as a streamlined alternative for those employees most likely to meet the standard duties test by excluding all but those employees “at the very top of [the] economic ladder[.]”
132

These are independent objectives of this rulemaking and the provisions implementing them can each stand alone. Therefore, the Department intends for the initial update to remain in force even if the methodologies for the standard salary level and/or the HCE total annual compensation threshold established by this final rule are stayed or do not take effect. Similarly, the Department intends for the initial update to remain in effect even if future triennial updates under § 541.607(b) are stayed or do not take effect.

131

See
section V.B.

132

See
section V.C.

The initial update will take effect approximately 60 days after the publication of the final rule, immediately coming out of this notice and comment rulemaking. As such, the notice procedures set forth in § 541.607(b)(3) will not apply. As discussed below, future triennial updates will be preceded by advance publication of a notice of the updated salary level and HCE total annual compensation threshold in the
Federal Register
. For the initial update, this final rule provides notice of the updated salary and compensation levels.
133

133
The NPRM included updating the 2019 rule standard salary level and HCE annual compensation threshold using 2022 data as a regulatory alternative, stating that applying the methodologies would result in a standard salary level of $822 per week and a HCE annual compensation threshold of $125,268.
See
88 FR 62218.

3. Future Triennial Updates To Keep the Standard Salary Level and Total Annual Compensation Threshold Up to Date

As the Department previously explained, the earnings thresholds are only an effective indicator of exempt status if they are kept up to date. Left unchanged, the thresholds become substantially less effective in helping identify exempt EAP employees as wages for workers increase over time. To that end, the Department proposed to triennially update the standard salary level and HCE total annual compensation threshold by applying the most recent earnings data to the methodologies set forth in proposed § 541.600(a)(1) and § 541.601(a)(1), while any change to the methodologies used to set the standard salary level and HCE annual compensation threshold would be effectuated through future rulemaking.

The Department received many comments on its proposed triennial updating mechanism for keeping the thresholds up to date in the future, which are addressed below. The comments were sharply divided on this aspect of the NPRM. After considering the comments received, the Department concludes that establishing a mechanism for resetting the standard salary level and HCE total annual compensation requirement based on

current earnings data, and on a regular 3-year schedule, will ensure that the thresholds remain effective into the future and thus better serve to help define and delimit the EAP exemption.

i. The Department's Authority To Update the Standard Salary Level and Total Annual Compensation Threshold With Current Data in the Future

The Department received many comments regarding its authority to update the earnings thresholds through the proposed triennial updating mechanism. A majority of the commenters opposing the updating mechanism challenged the Department's authority to adopt such a provision. Most commenters that supported the updating mechanism did not specifically discuss the Department's authority to institute such a mechanism. As to commenters supporting the proposed triennial updating mechanism that addressed the issue, they supported the Department's authority.

Commenters favoring automatic updating, such as AFL-CIO and EPI, agreed with the Department that just as the Department has authority to set salary thresholds for the EAP exemption, it also has authority to provide for regular updates to ensure the thresholds do not erode over time. Some supportive commenters further emphasized that future updates would make no change to the standard (
i.e.,
methodology) by which the Department implements the FLSA, but rather merely ensure that the standard accounts for current economic conditions.
See, e.g.,
Administrative Law Professors; Democracy Forward Foundation; EPI. The Administrative Law Professors similarly asserted that automatic adjustments to the earnings thresholds fall within the Secretary's authority to define and delimit “what it means to function in a `bona fide executive, administrative, or professional capacity[.]' ” Observing that even a so-called “static” salary threshold expressed in “non-indexed dollar terms” is constantly changing as a matter of economic value, the Administrative Law Professors asserted that “if a non-indexed salary threshold is lawful, as nobody seriously questions, so too is a standard pegged to income percentile.” The Administrative Law Professors observed “it is arguably more rational” for the Department to “proffer a regulation that expressly accounts for the inevitably dynamic nature of every salary threshold . . . rather than to permit arbitrarily fluid macroeconomic conditions to dictate the threshold's true economic worth.”

On the other hand, many commenters opposing the proposed updating mechanism asserted that the Department lacks statutory authority to update the thresholds in this manner. Some of these commenters contended that since the FLSA does not expressly authorize the Department to index the earnings thresholds unlike, for example, the Social Security Act or the Patient Protection and Affordable Care Act, it follows that the FLSA does not authorize the Department to automatically update the thresholds.

134

See, e.g.,
CUPA-HR; International Dairy Foods Association (IDFA); PPWO; RILA; Seyfarth Shaw. Several commenters pointed out that Congress did not provide for automatic updating of any of the earnings requirements under the FLSA, such as the minimum wage under section 6, the tip credit wage under section 3(m), or the hourly wage for exempt computer employees under section 13(a)(17).
See, e.g.,
AFPI; FMI. Commenters including National Restaurant Association and PPWO further asserted that Congress never amended the FLSA to grant the Department explicit authority to index the salary level despite knowing that the Department has updated the salary level on an irregular schedule.

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In contrast, the Administrative Law Professors highlighted that “[a]utomatic updating is a common feature of regulations pegged to monetary values, even when the relevant authorizing statutes make no specific reference to indexing or automatic adjustment.” Some of the examples cited by the Administrative Law Professors to illustrate this point include: 79 FR 63317 (2014) (establishing automatic inflationary adjustments to the minimum amount set by the regulation to define “adverse credit history”); 76 FR 23110 (2011) (establishing automatic adjustments to the amount of “Denied Boarding Compensation” airlines must pay affected passengers); 88 FR 35150 (2023) (adopting once-every-five year inflation adjustments to the revenue threshold for defining a “small business”); and
Amusement & Music Operators Ass'n
v.
Copyright Royalty Tribunal,
676 F.2d 1144 (7th Cir. 1982), cert. denied, 103 S. Ct. 210 (1982) (upholding a rule promulgated by the Copyright Royalty Tribunal establishing a $50 compulsory royalty fee to be paid by jukebox operators, and which would be subject to future inflationary adjustments).

As the Department stated in the NPRM, the Department's authority to update the salary level tests for the EAP exemption by regularly resetting them based on existing methodologies is grounded in section 13(a)(1), which expressly gives the Secretary broad authority to define and delimit the scope of the exemption. Using this broad authority, the Department established the first salary level tests by regulation in 1938. Despite numerous amendments to the FLSA over the past 85 years, Congress has not restricted the Department's use of the salary level tests. As just discussed, significant changes involving the salary requirements made through regulations issued pursuant to the Secretary's authority to define and delimit the exemption include adding a separate salary level for professional employees in 1940, adopting the two-test system in 1949, and switching to the single standard test and adding the new HCE test in 2004. Despite having amended the FLSA numerous times over the years, Congress has not amended section 13(a)(1) to alter these regulatory salary requirements.

Unlike the statutes some of the commenters referenced explicitly providing for indexing, or the statutory FLSA wage rates—
i.e.,
the minimum wage under section 6, the tip credit wage under section 3(m), or the hourly wage for exempt computer employees under section 13(a)(17)—the part 541 earnings thresholds are established in the regulations. Therefore, it is not surprising that the FLSA contains no specific reference to the indexing or automatic adjustments of these thresholds. The Department agrees with the Administrative Law Professors and other commenters that stated that the Department has the authority to establish a mechanism to automatically adjust the earnings thresholds to ensure their continued effectiveness, using a process established through notice and comment rulemaking, just as it has the authority to initially set them. The Department believes the updating mechanism in this final rule fulfills its statutory obligation to define and delimit the EAP exemptions by preventing the thresholds from becoming obsolete and providing predictability and clarity for the regulated community.

Many of the commenters opposed to the updating mechanism also asserted that automatically updating the earnings thresholds would violate the APA's rulemaking requirements expressly incorporated by reference in section 13(a)(1).
See, e.g.,
AFPI; FMI; National Club Association; and Wage and Hour Defense Institute. These and other commenters claimed that the Department cannot lawfully update the salary level without engaging in notice and comment rulemaking for each update.
See, e.g.,
AASA/AESA/ASBO; Competitive Enterprise Institute; CWC; RILA. IFDA, for example, asserted that notice and comment rulemaking needs to precede each future update so that stakeholders have the opportunity to comment on and adequately prepare for any changes that will affect them. AHLA commented that the proposal to update the thresholds triennially without a preceding opportunity for comment is

“drastic and troublesome” and that “notice and comment will help ensure that the knowledge, expertise, and vital input of interested stakeholders will be considered before moving forward with increases.”

Relatedly, AFPI, NRF, and SBA Advocacy asserted that automatic updating would violate the directive under section 13(a)(1) that the Department define and delimit the EAP exemption “from time to time” by regulations. NRF, for example, noted that Congress asked the Department to revisit the EAP exemptions from time to time “expecting the Department to use its deep knowledge of the U.S. economy in general, and labor market in particular, to establish appropriate parameters for the exemptions” and contended that by implementing automatic updates the Department evades that decision-making process. AFPI similarly asserted that the “directive, `from time to time,' does not allow the Department to set it and forget it.”

The Department disagrees with the assertion that triennial updates using the compensation methodologies adopted in the regulations improperly bypass the APA's—and section 13(a)(1) by reference—requirements for notice and comment rulemaking. The Department is adopting an updating mechanism in this rulemaking after publishing a notice of the proposed rule and providing opportunity for stakeholders to comment in accordance with the APA's notice and comment requirements. The Department has received and considered numerous comments on the proposed updating mechanism. Future updates under the triennial updating mechanism would simply reset the thresholds by applying current data to a standard already established by notice and comment regulation, providing clarity for the regulated community as to future changes in the thresholds. Therefore, the Department disagrees with commenters that claimed that notice and comment rulemaking must precede each future update made through the updating mechanism even where the methodology for setting the compensation levels and the mechanism for updating those levels would remain unchanged.
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The updating mechanism will not alter the Department's ability to engage in future rulemaking to change the updating mechanism or any other aspect of the part 541 regulations at any point.

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Some commenters, such as Independent Electrical Contractors, RILA, and U-Haul, further asserted that automatic updates improperly bypass the requirements of the Regulatory Flexibility Act (“RFA”) and executive orders requiring the Department to undertake a detailed economic and cost analysis. The Department disagrees. Pursuant to the RFA, the Department has included in this final rule as well as in the NPRM detailed estimates for the future costs of updates under the updating mechanism.
See
section VII and VIII; 88 FR 62224. Similarly, as relevant here, Executive Order 13563 directs agencies to take certain steps when promulgating regulations, including using the “best available techniques to quantify anticipated present and future benefits and costs as accurately as possible” and adopting regulations “through a process that involves public participation.” 76 FR 3821 (Jan. 18, 2011). The current rulemaking fully satisfies all aspects of Executive Order 13563.
See
section VII; 88 FR 62182. The RFA and Executive Order 13563 do not require notice and comment rulemaking to precede future triennial updates made through the updating mechanism established in this rulemaking.

The Department also disagrees with commenters that claimed section 13(a)(1)'s “time to time” language precludes the Department from adopting an updating mechanism. The updating mechanism would only ensure the standard salary level and total annual compensation threshold remain at the percentiles established through rulemaking. This does not preclude the Department from engaging in future rulemaking “from time to time” if it determines that there is a need to change the underlying methodologies for setting the standard salary level or HCE total annual compensation threshold, the updating mechanism, or any other substantive change to part 541, as the Department did, for instance, in 1940, 1949, 1958 1975, 2004, 2016, and 2019.

Many commenters opposing the updating mechanism referenced the Department's prior statements to further support their assertion that the Department lacks authority to implement automatic updating. In particular, commenters pointed to the Department's decision not to institute an automatic updating mechanism in the 2004 rule and its statement that “the Department finds nothing in the legislative or regulatory hist

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2024-08038. Public record. Not legal advice.