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individuals with intellectual or DEPARTMENT OF LABOR The Department also adds a provision to developmental disabilities in residential the regulations that automatically homes and facilities with 15 or fewer and Hour Division updates the standard salary level and beds. This non-enforcement period will HCE compensation requirements every last from December 1, 2016 (the 29 CFR Part 541 three years by maintaining the earnings effective date of the Final RIN 1235–AA11 percentiles set in this Final Rule to Rule) until March 17, 2019. During this prevent these thresholds from becoming period of non-enforcement, the Defining and Delimiting the outdated. Finally, the Department has Department will not enforce the Exemptions for , not made any changes in this Final Rule updated salary threshold of $913 per Administrative, Professional, Outside to the duties tests for the EAP week for the subset of employers Sales and Computer Employees exemption. covered by this non-enforcement . AGENCY: Wage and Hour Division, DATES: This Final Rule is effective on However, the Department will continue Department of Labor. December 1, 2016. to enforce all other provisions of the ACTION: Final rule. FOR FURTHER CONTACT: Overtime Final Rule as to this subset of Director, Division of Regulations, employers, including in instances SUMMARY: The Fair Labor Standards Act and Interpretation, U.S. involving employees who meet the (FLSA or Act) guarantees a minimum Department of Labor, Wage and Hour salary basis and duties tests but who wage for all hours worked during the Division, Room S–3502, 200 earn less than the previous salary workweek and overtime premium pay of Avenue NW., Washington, not less than one and one-half times the threshold of $455 per week. The non- DC 20210; telephone: (202) 693–0406 employee’s regular rate of pay for hours enforcement policy does not apply to (this is not a toll-free number). Copies worked over 40 in a workweek. While of this Final Rule may be obtained in providers of Medicaid- funded services these protections extend to most for individuals with intellectual or alternative formats (Large Print, Braille, workers, the FLSA does provide a Audio Tape or Disc), upon request, by developmental disabilities in residential number of exemptions. In this Final care facilities with 16 or more beds. calling (202) 693–0675 (this is not a toll- Rule, the Department of Labor free number). TTY/TDD callers may dial Regulatory Requirements (Department) revises final regulations toll-free 1–877–889–5627 to obtain under the FLSA implementing the information or request materials in This document is non-binding exemption from minimum wage and alternative formats. guidance articulating considerations overtime pay for executive, Questions of interpretation and/or relevant to the Department’s exercise of administrative, professional, outside enforcement of the agency’s regulations its enforcement authority under the sales, and computer employees. These may be directed to the nearest Wage and FLSA. It is therefore exempt from the exemptions are frequently referred to as Hour Division (WHD) district office. notice-and-comment the ‘‘EAP’’ or ‘‘white collar’’ Locate the nearest office by calling the requirements under the Administrative exemptions. To be considered exempt WHD’s toll-free help line at (866) 4US– Procedure Act pursuant to 5 U.S.C. under part 541, employees must meet WAGE ((866) 487–9243) between 8 a.m. 553(b). certain minimum requirements related and 5 p.m. in your local time zone, or to their primary job duties and, in most Because no notice of proposed log onto WHD’s Web site at http:// instances, must be paid on a salary basis www.dol.gov/whd/america2.htm for a rulemaking is required, the Regulatory at not less than the minimum amounts Flexibility Act does not require an nationwide listing of WHD district and specified in the regulations. area offices. initial or final regulatory flexibility In this Final Rule the Department analysis. 5 U.S.C. 603(a), 604(a). The updates the standard salary level and SUPPLEMENTARY INFORMATION: Department has determined that this total annual compensation requirements Table of Contents guidance does not impose any new or to more effectively distinguish between I. Executive Summary revise any existing recordkeeping, overtime-eligible white collar II. Background reporting, or disclosure requirements on employees and those who may be A. What the FLSA Provides covered entities or members of the exempt, thereby making the exemption B. Legislative History public that would be collections of easier for employers and employees to C. Regulatory History information requiring OMB approval understand and ensuring that the D. Overview of Existing Regulatory under the Paperwork Reduction Act, 44 FLSA’s intended overtime protections Requirements U.S.C. 3501 et seq. are fully implemented. The Department E. Presidential Memorandum sets the standard salary level for exempt F. The Department’s Proposal Authority: 29 U.S.C. 216(c); Secretary’s EAP employees at the 40th percentile of G. Effective Date Order No. 01–2014. III. Need for Rulemaking weekly earnings of full-time salaried IV. Final Regulatory Revisions Mary Ziegler, workers in the lowest-wage Census A. Standard Salary Level Assistant Administrator for Policy, Wage and Region. The Department also permits B. Special Salary Tests Hour Division. employers to satisfy up to 10 percent of C. Inclusion of Nondiscretionary Bonuses, Incentive Payments, and Commissions in [FR Doc. 2016–11753 Filed 5–18–16; 8:45 am] the standard salary requirement with nondiscretionary bonuses, incentive the Salary Level Requirement BILLING CODE 4510–27–P payments, and commissions, provided D. Highly Compensated Employees these forms of compensation are paid at E. Automatic Updates least quarterly. The Department sets the F. Duties Requirements for Exemption V. Paperwork Reduction Act total annual compensation requirement VI. Analysis Conducted in Accordance With for an exempt Highly Compensated Executive Order 12866, Regulatory Employee (HCE) equal to the annualized Planning and Review, and Executive weekly earnings of the 90th percentile Order 13563, Improving Regulation and of full-time salaried workers nationally. Regulatory Review

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VII. Final Regulatory Flexibility Analysis regulations implementing the test salary level. This had the effect of VIII. Unfunded Mandates Reform Act exemption have generally required each making it easier for employers to both Analysis of three tests to be met for the pay employees a lower salary and not VIIIX. Executive Order 13132, Federalism exemption to apply: (1) The employee pay them overtime for time worked IX. Executive Order 13175, Indian Tribal beyond 40 hours. The 2004 Final Rule must be paid a predetermined and fixed XI. Effects on Families salary that is not subject to reduction also created an exemption for highly XII. Executive Order 13045, Protection of because of variations in the quality or compensated employees (HCE), which Children quantity of work performed (the ‘‘salary imposes a very minimal duties test but XIII. Environmental Impact Assessment basis test’’); (2) the amount of salary requires that an employee must earn at XIV. Executive Order 13211, Energy Supply paid must meet a minimum specified least $100,000 in total annual XV. Executive Order 12630, Constitutionally amount (the ‘‘salary level test’’); and (3) compensation. Protected Rights the employee’s job duties must On March 13, 2014, President Obama XVI. Executive Order 12988, Civil primarily involve executive, signed a Presidential Memorandum Reform AnalysisFinal Amendments to directing the Department to update the Regulatory Text administrative, or professional duties as defined by the regulations (the ‘‘duties regulations defining which white collar I. Executive Summary test’’). While payment of a salary does workers are protected by the FLSA’s minimum wage and overtime standards. The Fair Labor Standards Act (FLSA not make an employee ineligible for 79 FR 18737 (Apr. 3, 2014). The or Act) guarantees a minimum wage for overtime compensation, the Department memorandum instructed the all hours worked and limits to 40 hours has nonetheless long recognized the Department to look for ways to per week the number of hours an salary level test is the best single test of exempt for white collar modernize and simplify the regulations employee can work without additional while ensuring that the FLSA’s intended compensation. Section 13(a)(1) of the employees. The salary level test is an objective measure that helps distinguish overtime protections are fully FLSA, which was included in the implemented. The Department original Act in 1938, exempts from these white collar employees who are entitled to overtime from those who may be published a proposal to update the part minimum wage and overtime pay 541 regulations on July 6, 2015. protections ‘‘any employee employed in bona fide executive, administrative, or professional (EAP) employees. If left at One of the Department’s primary a bona fide executive, administrative, or goals in this rulemaking is updating the professional capacity.’’ The exemption the same amount over time, however, the effectiveness of the salary level test standard salary requirement, both in is premised on the belief that these light of the passage of time since 2004, kinds of workers typically earn salaries as a means of determining exempt status diminishes as the of employees and because the Department has well above the minimum wage and concluded that the effect of the 2004 increase and the real value of the salary enjoy other privileges, including above- Final Rule’s pairing of a standard duties threshold falls. average fringe benefits, greater job test based on the less rigorous short security, and better opportunities for The Department has updated the duties test with the kind of low salary advancement, setting them apart from salary level requirements seven times level previously associated with the workers entitled to overtime pay. The since 1938, most recently in 2004 when more rigorous long duties test was to delegates to the Secretary of the salary level an employee must be exempt from overtime many lower paid Labor the authority to define and paid to come within the standard test workers who performed little EAP work delimit the terms of the exemption. for EAP exemption was set at $455 per and whose work was otherwise The Department has undertaken this week ($23,660 per year for a full-year indistinguishable from their overtime- rulemaking in order to revise the worker), which nearly tripled the $155 eligible colleagues. This has resulted in regulations so that they effectively per week minimum salary level required the inappropriate classification of distinguish between overtime-eligible for exemption up to that point. The employees as EAP exempt—that is white collar employees who Congress Department also modified the duties overtime exempt—who pass the intended to be protected by the FLSA’s tests in 2004, eliminating the ‘‘long’’ standard duties test but would have minimum wage and overtime provisions and ‘‘short’’ tests that had been part of failed the long duties test. As the and bona fide EAP employees whom it the regulations since 1949 and replacing Department noted in our proposal, the intended to exempt. When the them with the ‘‘standard’’ test. The salary level’s function in helping to definition becomes outdated, employees historic long test paired a lower salary differentiate overtime-eligible who Congress intended to protect requirement with a stringent duties test employees from employees who may be receive neither the higher salaries and including a 20 percent cap on the exempt takes on greater importance above-average benefits expected for EAP amount of time most exempt employees when the duties test does not include a employees nor do they receive overtime could spend on nonexempt duties, specific limit on the amount of pay, and employers do not have an while the short test paired a higher nonexempt works that an exempt efficient means of identifying workers salary requirement with a less stringent employee may perform. who are, and are not, entitled to the duties test. In other words, prior to the In the Notice of Proposed Rulemaking FLSA’s protections. With this Final 2004 Final Rule, to exempt lower-paid (NPRM), the Department proposed Rule, the Department will ensure that employees from receiving overtime the setting the standard salary level at the white collar employees who should employer would have to meet more 40th percentile of weekly earnings of receive extra pay for overtime hours will rigorous requirements; but for higher- full-time salaried workers nationally do so and that the test for exemption paid employees, the requirements to and setting the HCE total annual remains up-to-date so future workers establish the applicability of the compensation requirement at the will not be denied the protections that exemption were less rigorous. The annualized value of the 90th percentile Congress intended to afford them. standard test established by the of weekly earnings of full-time salaried In 1938, the Department issued the Department in the 2004 Final Rule workers nationally. The Department first regulations at 29 CFR part 541 paired a duties test closely based on the further proposed to automatically defining the scope of the section 13(a)(1) less-stringent short duties test with a update these levels annually to ensure white collar exemption. Since 1940, the salary level derived from the lower long that they would continue to provide an

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effective test for exemption. In the In response to comments, however, the triennial automatic updating of the NPRM, the Department also asked for Final Rule provides for updates every salary and compensation levels, the the public’s comments on whether three years rather than for annual Department projects that 5.0 million nondiscretionary bonuses or incentive updates as proposed. The first update workers will be affected by the change payments should count toward some will take effect on January 1, 2020. The in the standard salary level test and portion of the required salary level. Department believes that regularly 221,000 workers will be affected by the Finally, the Department also discussed updating the salary and compensation change in the HCE total annual concerns with the standard duties tests levels is the best method to ensure that compensation test. and sought comments on a series of these tests continue to provide an Additionally, the Department questions regarding possible changes to effective means of distinguishing estimates that another 5.7 million white the tests. between overtime-eligible white collar collar workers who are currently After considering the comments, the employees and those who may be bona overtime eligible because they do not Department has made several changes fide EAP employees. Based on historical satisfy the EAP duties tests and who from the proposed rule to the Final wage growth in the South, at the time currently earn at least $455 per week Rule. In particular, the Department has of the first update on January 1, 2020, but less than $913 per week will have modified the standard salary level to the standard salary level is likely to be their overtime protection strengthened more fully account for the lower salaries approximately $984 per week ($51,168 in Year 1 because their status as paid in certain regions. In this Final annually for a full-year worker) and the overtime-eligible will be clear based on Rule, the Department sets the standard HCE total annual compensation the salary test alone without the need to salary level equal to the 40th percentile requirement is likely to be examine their duties. Reducing the of earnings of full-time salaried workers approximately $147,524. number of workers for whom employers in the lowest-wage Census Region The Department also revises the must apply the duties test to determine (currently the South). This results in a regulations to permit employers for the exempt status simplifies the application salary level of $913 per week, or first time to count nondiscretionary of the exemption and is consistent with $47,476 annually for a full-year worker, bonuses, incentives, and commissions the President’s directive. based on data from the fourth quarter of toward up to 10 percent of the required The Department quantified three 2015.1 The Department believes that a salary level for the standard exemption, direct costs to employers in this Final standard salary level set at the 40th so long as employers pay those amounts Rule: (1) Regulatory familiarization percentile of full-time salaried on a quarterly or more frequent basis. costs; (2) adjustment costs; and (3) employees in the lowest-wage Census Finally, the Department has not made managerial costs. Assuming a 7 percent Region will accomplish the goal of any changes to the duties tests in this discount rate, the Department estimates setting a salary threshold that Final Rule. The majority of the revisions that average annualized direct employer adequately distinguishes between occur in §§ 541.600, 541.601, 541.602 costs will total $295.1 million per year employees who may meet the duties and new § 541.607; conforming changes (Table ES1). In addition to the direct requirements of the EAP exemption and were also made in §§ 541.100, 541.200, costs, this Final Rule will also transfer those who likely do not, without 541.204, 541.300, 541.400, 541.604, income from employers to employees in necessitating the reintroduction of a 541.605, and 541.709. the form of higher earnings. We estimate limit on nonexempt work, as existed In FY2017,2 the Department estimates average annualized transfers to be under the long duties test. The there will be approximately 159.9 $1,189.1 million. The Department also Department sets the HCE total annual million wage and salary workers in the projects average annualized deadweight compensation level equal to the 90th United States, of whom we estimate that loss of $9.2 million, and notes that the percentile of earnings of full-time 22.5 million will be exempt EAP projected deadweight loss is small in salaried workers nationally ($134,004 workers potentially affected by this comparison to the amount of estimated annually based on the fourth quarter of Final Rule.3 In Year 1, FY2017, the costs. 2015), as we proposed. This increase Department estimates that 4.2 million The change to a standard salary level will bring the annual compensation currently exempt workers who earn at based on the lowest-wage Census requirement in line with the level least the current weekly salary level of Region has decreased the salary amount established in 2004. The Department $455 but less than the 40th earnings from the proposal, resulting in a smaller believes that this will avoid the percentile in the South ($913) would, number of affected workers and lower unintended exemption of large numbers without some intervening action by transfers than estimated in the NPRM. of employees in high-wage areas—such their employers, become entitled to Direct costs are higher than predicted in as secretaries in New York or Los minimum wage and overtime protection the NPRM, primarily because the Angeles—who are clearly not under the FLSA (Table ES1). Similarly, Department has increased its estimate of performing EAP duties. an estimated 65,000 currently exempt the number of affected workers who In order to prevent the salary and workers who earn at least $100,000 but work some overtime. Additionally, in compensation levels from becoming less than the annualized earnings of the response to comments, the Department outdated, the Department is including 90th percentile of full-time salaried has increased estimated regulatory in the regulations a mechanism to workers nationally ($134,004), and who familiarization and adjustment costs in automatically update the salary and meet the HCE duties test but not the the Final Rule. compensation thresholds by standard duties test, may also become Finally, the impacts of the Final Rule maintaining the fixed percentiles of eligible for minimum wage and extend beyond those we have estimated weekly earnings set in this Final Rule. overtime protection. In Year 10, with quantitatively. The Department

1 The Bureau of Labor Statistics (BLS) estimated non-hourly workers to be an appropriate proxy for levels will be in effect. FY2017 spans from October this value using Current Population Survey (CPS) compensation paid to salaried workers. 1, 2016 to September 30, 2017. data for earnings of full-time (defined as at least 35 2 Affected workers, costs, and transfers were 3 White collar workers not subject to the EAP hours per week) non-hourly paid employees. For estimated for the 2017 fiscal year (‘‘FY2017’’) salary level test include teachers, academic the purpose of this rulemaking, the Department because this will be the first year the updated salary administrative personnel, physicians, , considers data representing compensation paid to , and outside sales workers.

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discusses other transfers, costs, and benefits in the relevant sections.

TABLE ES1—SUMMARY OF REGULATORY COSTS AND TRANSFERS, STANDARD AND HCE SALARY LEVELS [Millions 2017$]

Future years [a] Average annualized value Impact Year 1 Year 2 Year 10 3% real rate 7% real rate

Affected Workers (1,000s)

Standard ...... 4,163 3,893 5,045 ...... HCE ...... 65 73 217 ......

Total ...... 4,228 3,965 5,261 ......

Costs and Transfers (Millions 2017$) [b]

Direct employer costs ...... 677.9 208.0 284.2 288.0 295.1 Transfers [c] ...... 1,285.2 936.5 1,607.2 1,201.6 1,189.1 DWL ...... 6.4 8.7 11.1 9.3 9.2 [a] Costs/transfers in years 3 through 9 are within the range bounded by the estimates for years 2 and 10. [b] Costs and transfers for affected workers passing the standard and HCE tests are combined. [c] This is the net transfer from employers to workers. There may also be transfers of hours and income from some workers to others.

II. Background See Batterton v. Francis, 432 U.S. 416, Specific references in the legislative 425 n.9 (1977). history to the exemptions contained in A. What the FLSA Provides The Department has consistently used section 13(a)(1) are scant. Although The FLSA generally requires covered our rulemaking authority to define and section 13(a)(1) exempts covered employers to pay their employees at clarify the section 13(a)(1) exemptions. employees from both the FLSA’s least the federal minimum wage Since 1940, the implementing minimum wage and overtime (currently $7.25 an hour) for all hours regulations have generally required each requirements, its most significant worked, and overtime premium pay of of three tests to be met for the impact is its removal of these employees one and one-half times the employee’s exemptions to apply: (1) The employee from the Act’s overtime protections. regular rate of pay for all hours worked must be paid a predetermined and fixed The requirement that employers pay a over 40 in a workweek.4 However, there salary that is not subject to reduction premium rate of pay for all hours are a number of exemptions from the because of variations in the quality or worked over 40 in a workweek is FLSA’s minimum wage and overtime quantity of work performed (the ‘‘salary grounded in two policy objectives. The requirements. Section 13(a)(1) of the basis test’’); (2) the amount of salary first is to spread (or, in FLSA, codified at 29 U.S.C. 213(a)(1), paid must meet a minimum specified other words, reduce involuntary exempts from both minimum wage and amount (the ‘‘salary level test’’); and (3) ) by incentivizing overtime protection ‘‘any employee the employee’s job duties must employers to hire more employees employed in a bona fide executive, primarily involve executive, rather than requiring existing employees administrative, or professional capacity administrative, or professional duties as to work longer hours. See, e.g., Davis v. . . . or in the capacity of outside defined by the regulations (the ‘‘duties J.P. Morgan Chase, 587 F.3d 529, 535 salesman (as such terms are defined and test’’). (2d Cir. 2009). The second policy Employees who meet the delimited from time to time by objective is to reduce overwork and its requirements of part 541 are exempted regulations of the Secretary, subject to detrimental effect on the health and from both the Act’s minimum wage and the provisions of [the Administrative well-being of workers. See, e.g., overtime pay protections. As a result, an Procedure Act] . . .).’’ The FLSA does Barrentine v. Arkansas-Best Freight employer may employ such employees not define the terms ‘‘executive,’’ System, Inc., 450 U.S. 728, 739 (1981). for any number of hours in the ‘‘administrative,’’ ‘‘professional,’’ or In contrast, the exemptions contained workweek without paying the minimum ‘‘outside salesman.’’ Pursuant to in section 13(a)(1) were premised on the hourly wage or an overtime premium. Congress’ grant of rulemaking authority, belief that the type of work exempt Some have stricter exemption the Department in 1938 issued the first employees performed was difficult to standards than those described above. regulations at part 541 defining the standardize to any time frame and could The FLSA does not preempt any such scope of the section 13(a)(1) not be easily spread to other workers stricter state standards. If a State exemptions. Because Congress explicitly after 40 hours in a week, making establishes a higher standard than the delegated to the Secretary of Labor the enforcement of the overtime provisions provisions of the FLSA, the higher power to define and delimit the specific difficult and generally precluding the standard applies in that State. See 29 terms of the exemptions through notice potential job expansion intended by the U.S.C. 218. and comment rulemaking, regulations FLSA’s time-and-a-half overtime so issued have the binding effect of . B. Legislative History premium. See Report of the Minimum Wage Study Commission, Volume IV, Section 13(a)(1) was included in the 5 4 pp. 236 and 240 (June 1981). Further, As discussed below, the Department estimates original Act in 1938 and was based on that 132.8 million workers are subject to the FLSA and the Department’s regulations. Most of these provisions contained in the earlier 5 Congress created the Minimum Wage Study workers are covered by the Act’s minimum wage National Industrial Recovery Act of Commission as part of the Fair Labor Standards and overtime pay protections. 1933 (NIRA) and state law . Amendments of 1977. See Sec. 2(e)(1),

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the exempted workers typically earned discussed in a report issued by WHD,6 basis test required for exemption. 57 FR salaries well above the minimum wage the Department published revised 37677 (Aug. 19, 1992). The Department and were presumed to enjoy other regulations in 1940, which, among other also implemented the 1990 law privileges to compensate them for their things, added the salary basis test. 5 FR requiring it to promulgate regulations long hours of work, setting them apart 4077 (Oct. 15, 1940). Further hearings permitting employees in certain from the nonexempt workers entitled to were convened in 1947, as discussed in computer-related occupations to qualify overtime pay. See id. a WHD-issued report,7 and the as exempt under section 13(a)(1) of the The universe of employees eligible for Department issued revised regulations FLSA. 57 FR 46744 (Oct. 9, 1992); see the section 13(a)(1) exemptions has in 1949, which updated the salary levels Sec. 2, Public Law 101–583, 104 Stat. fluctuated with amendments to the required to meet the salary level test for 2871 (Nov. 15, 1990). FLSA. Initially, persons employed in a the various exemptions. 14 FR 7705 On March 31, 2003, the Department ‘‘local retailing capacity’’ were exempt, (Dec. 24, 1949). An explanatory bulletin published a Notice of Proposed but Congress eliminated that language interpreting some of the terms used in Rulemaking proposing significant from section 13(a)(1) in 1961 when the the regulations was published as changes to the part 541 regulations. 68 FLSA was expanded to cover and subpart B of part 541 in 1949. 14 FR FR 15560 (Mar. 31, 2003). On April 23, service enterprises. See Public Law 87– 7730 (Dec. 28, 1949). In 1954, the 2004, the Department issued a Final 30, 75 Stat. 65 (May 5, 1961). Teachers Department issued revisions to the Rule (2004 Final Rule), which raised the and academic administrative personnel regulatory interpretations of the salary salary level for the first time since 1975, were added to the exemption when basis test. 19 FR 4405 (July 17, 1954). In and made other changes, some of which elementary and secondary schools were 1958, based on another WHD-issued are discussed below. 69 FR 22122 (Apr. made subject to the FLSA in 1966. See report,8 the regulations were revised to 23, 2004). Current regulations retain the Sec. 214, Public Law 89–601, 80 Stat. update the required salary levels. 23 FR three tests for exempt status that have 830 (Sept. 23, 1966). The Education 8962 (Nov. 18, 1958). Additional been in effect since 1940: a salary basis Amendments of 1972 made the Equal changes, including salary level updates, test, a salary level test, and a job duties Pay provisions, section 6(d) of the were made to the regulations in 1961 test. FLSA, expressly applicable to (26 FR 8635, Sept. 15, 1961), 1963 (28 FR 9505, Aug. 30, 1963), 1967 (32 FR D. Overview of Existing Regulatory employees who were otherwise exempt Requirements from the FLSA under section 13(a)(1). 7823, May 30, 1967), 1970 (35 FR 883, See Sec. 906(b)(1), Public Law 92–318, Jan. 22, 1970), 1973 (38 FR 11390, May The regulations in part 541 contain 86 Stat. 235 (June 23, 1972). 7, 1973), and 1975 (40 FR 7091, Feb. 19, specific criteria that define each A 1990 enactment expanded the EAP 1975). Revisions to increase the salary category of exemption provided by exemptions to include computer levels in 1981 were stayed indefinitely section 13(a)(1) for bona fide executive, by the Department. 46 FR 11972 (Feb. systems analysts, computer administrative, and professional 12, 1981). In 1985, the Department programmers, software engineers, and employees (including teachers and published an Advance Notice of similarly skilled professional workers, academic administrative personnel), Proposed Rulemaking that reopened the including those paid on an hourly basis and outside sales employees. The comment period on the 1981 proposal if paid at least 61⁄2 times the minimum regulations also define those computer and broadened the review to all aspects wage. See Sec. 2, Public Law 101–583, employees who are exempt under of the regulations, including whether to 104 Stat. 2871 (Nov. 15, 1990). The section 13(a)(1) and section 13(a)(17). increase the salary levels, but this compensation test for computer-related See §§ 541.400–.402. The employer rulemaking was never finalized. 50 FR occupations was subsequently capped at bears the burden of establishing the 47696 (Nov. 19, 1985). $27.63 an hour (61⁄2 times the minimum applicability of any exemption from the The Department revised the part 541 FLSA’s pay requirements. Job titles and wage in effect at the time) as part of the regulations twice in 1992. First, the 1996 FLSA Amendments, when job descriptions do not determine Department created a limited exception exempt status, nor does paying a salary Congress enacted the new section from the salary basis test for public 13(a)(17) exemption for such computer rather than an hourly rate. To qualify for employees, permitting public employers the EAP exemption, employees must employees. Section 13(a)(17) also to follow public sector pay and leave incorporated much of the regulatory meet certain tests regarding their job systems requiring partial-day duties and generally must be paid on a language that resulted from the 1990 deductions from pay for absences for salary basis of not less than $455 per enactment. See 29 U.S.C. 213(a)(17), as personal reasons or due to illness or week.9 In order for the exemption to added by the 1996 FLSA Amendments injury not covered by accrued paid (Sec. 2105(a), Public Law 104–188, 110 leave, or due to budget-driven Stat. 1755 (Aug. 20, 1996)). 9 Alternatively, administrative and professional furloughs, without defeating the salary employees may be paid on a ‘‘fee basis.’’ This C. Regulatory History occurs where an employee is paid an agreed sum 6 Executive, Administrative, Professional . . . for a single job regardless of the time required for The FLSA became law on June 25, Outside Salesman Redefined, Wage and Hour its completion. See § 541.605(a). Salary level test 1938, and the Department issued the Division, U.S. Department of Labor, Report and compliance for fee basis employees is assessed by first version of the part 541 regulations, Recommendations of the Presiding Officer (Harold determining whether the hourly rate for work Stein) at Hearings Preliminary to Redefinition (Oct. performed (i.e., the fee payment divided by the setting forth criteria for exempt status 10, 1940) (‘‘Stein Report’’). number of hours worked) would total at least $455 under section 13(a)(1), that October. 3 7 Report and Recommendations on Proposed per week if the employee worked 40 hours. See FR 2518 (Oct. 20, 1938). Following a Revisions of Regulations, Part 541, by Harry Weiss, § 541.605(b). Some employees, such as doctors and series of public hearings, which were Presiding Officer, Wage and Hour and Public lawyers (§ 541.600(e)), teachers (§§ 541.303(d); Divisions, U.S. Department of Labor (June 541.600(e)), and outside sales employees 30, 1949) (‘‘Weiss Report’’). (§ 541.500(c)), are not subject to a salary or fee basis 95–151, 91 Stat. 1246 (Nov. 1, 1977). This 8 Report and Recommendations on Proposed test. Some, such as academic administrative independent commission was tasked with Revision of Regulations, Part 541, Under the Fair personnel, are subject to a special, contingent salary examining many FLSA issues, including the Act’s Labor Standards Act, by Harry S. Kantor, Presiding level. See § 541.600(c). There is also a separate minimum wage and overtime exemptions, and Officer, Wage and Hour and Public Contracts salary level in effect for workers in American issuing a report to the President and to Congress Divisions, U.S. Department of Labor (Mar. 3, 1958) Samoa (§ 541.600(a)), and a special salary test for with the results of its study. (‘‘Kantor Report’’). picture industry employees (§ 541.709).

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apply, an employee’s specific job duties software engineer, or other similarly- implemented. As the President noted at and salary must meet all the skilled worker in the computer field. the time, the FLSA’s overtime requirements of the Department’s See §§ 541.300; 541.303; 541.400. An protections are a linchpin of the middle regulations. The duties tests differ for exempt professional employee must class, and the failure to keep the salary each category of exemption. perform work requiring the consistent level requirement for the white collar The Department last updated the part exercise of discretion and , or exemption up to date has left millions 541 regulations in the 2004 Final Rule. requiring , imagination, or of low-paid salaried workers without Prior to 2004, employers could assert talent in a recognized field of artistic this basic protection.11 The current the EAP exemption for employees who endeavor. See § 541.300(a)(2). The salary level threshold for exemption of satisfied either a ‘‘long’’ test—which salary requirements do not apply to $455 per week, or $23,660 annually, is paired a more restrictive duties test with certain licensed or certified doctors, below the 2015 poverty threshold for a a lower salary level—or a ‘‘short’’ test— lawyers, and teachers. See family of four.12 which paired less stringent duties §§ 541.303(d); 541.304(d). Following issuance of the requirements with a higher salary An exempt outside salesperson must memorandum, the Department level.10 In the 2004 Final Rule the be customarily and regularly engaged embarked on an extensive outreach Department abandoned the concept of away from the employer’s place of program, meeting with over 200 separate long and short tests, opting business and have a primary duty of organizations in Washington, DC and instead for one ‘‘standard’’ test, and set making sales, or obtaining orders or several other locations, as well as by the salary level under the new standard contracts for services or for the use of conference call. A wide range of duties test at $455 per week for facilities. See § 541.500. There are no stakeholders attended the listening executive, administrative, and salary or fee requirements for exempt sessions: employees, employers, professional employees. outside sales employees. See id. business associations, non- Under the current part 541 The 2004 Final Rule also created a organizations, employee advocates, regulations, an exempt executive test for exemption of highly unions, state and local employee must be compensated on a compensated executive, administrative, representatives, tribal representatives, salary basis at a rate of not less than and professional employees. Under the and small businesses. In these sessions $455 per week and have a primary duty HCE exemption, employees who are the Department asked stakeholders to of managing the enterprise or a paid total annual compensation of at address, among other issues: (1) What is department or subdivision of the least $100,000 (which must include at the appropriate salary level for enterprise. See § 541.100(a)(1)–(2). An least $455 per week paid on a salary or exemption; (2) what, if any, changes exempt executive must also customarily fee basis) are exempt from the FLSA’s should be made to the duties tests; and and regularly direct the work of at least overtime requirements if they (3) how can the regulations be two employees and have the authority customarily and regularly perform at simplified. to hire or fire, or the employee’s least one of the exempt duties or The stakeholders shared their suggestions and recommendations as to responsibilities of an executive, concerns with various aspects of the the hiring, firing, or other change of administrative, or professional current regulations, suggestions for status of employees must be given employee identified in the standard changes, and general concerns about the particular weight. See § 541.100(a)(3)– tests for exemption. See § 541.601. The scope of the exemption. The Department (4). HCE exemption applies only to greatly appreciated the wide range of An exempt administrative employee employees whose primary duty includes views that were shared during the must be compensated on a salary or fee performing office or non-manual work; outreach sessions. The information basis at a rate of not less than $455 per non-management production line shared during those sessions informed week and have a primary duty of the workers and employees who perform the Department’s NPRM. performance of office or non-manual work involving repetitive operations The Department’s outreach also made work directly related to the management with their hands, physical skill, and clear, however, that there are some or general business operations of the energy are not exempt under this widespread misconceptions about employer or the employer’s customers. section no matter how highly paid. See overtime eligibility under the FLSA, See § 541.200. An exempt id. Finally, in the 2004 Final Rule, the some of which were echoed in the administrative employee’s primary duty Department, mindful that nearly 30 comments received on the NPRM. For must include the exercise of discretion years had elapsed between salary level example, many employers and and independent judgment with respect increases, and in response to commenter employees mistakenly believe that to matters of significance. See id. concerns that similar lapses would payment of a salary automatically An exempt professional employee occur in the future, expressed an intent disqualifies an employee from must be compensated on a salary or fee to ‘‘update the salary levels on a more entitlement to overtime compensation basis at a rate of not less than $455 per regular basis.’’ 69 FR 22171. irrespective of the duties performed. week and have a primary duty of (1) E. Presidential Memorandum Many employees are also unaware of the work requiring knowledge of an On March 13, 2014, President Obama duties required to be performed in order advanced type in a field of science or for the exemption to apply. learning customarily acquired by signed a Presidential Memorandum directing the Department to update the Additionally, many employers seem to prolonged, specialized, intellectual mistakenly believe that newly overtime- instruction and study, or (2) work that regulations defining which ‘‘white collar’’ workers are protected by the is original and creative in a recognized 11 See http://www.whitehouse.gov/the-press- field of artistic endeavor, or (3) teaching FLSA’s minimum wage and overtime office/2014/03/13/fact-sheet-opportunity-all- in a school system or educational standards. See 79 FR 18737 (Apr. 3, rewarding-hard-work-strengthening-overtime-pr. institution, or (4) work as a computer 2014). The memorandum instructed the 12 See http://www.census.gov/hhes/www/poverty/ Department to look for ways to data/threshld/index.html (the 2015 poverty systems analyst, computer programmer, threshold for a family of four with two related modernize and simplify the regulations children). The 2015 poverty threshold for a family 10 From 1949 until 2004 the regulations contained while ensuring that the FLSA’s intended of four with two related people under 18 in the both long and short tests for exemption. overtime protections are fully household is $24,036.

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eligible employees (i.e., those earning these proposed changes, the Department general statements of support or between the current and new salary also discussed whether to include opposition; (2) personal anecdotes that levels) must be converted to hourly nondiscretionary bonuses in did not address a specific aspect of the compensation.13 Similarly, some determining whether the standard salary proposed changes; or (3) identical or employers erroneously believe that they level is met and whether changes to the nearly identical ‘‘campaign’’ comments are prohibited from paying duties tests are warranted, but did not sent in response to comment initiatives nondiscretionary bonuses to EAP propose specific regulatory revisions on sponsored by various groups. A large employees, given that they cannot be these issues. number of commenters favored some used to satisfy the salary requirement. More than 270,000 individuals and change to the existing regulations, and Some employers also mistakenly believe organizations timely commented on the commenters expressed a wide variety of that the EAP regulations limit their NPRM during the sixty-day comment views on the merits of particular aspects ability to permit white collar employees period that ended on September 4, 2015. of the Department’s proposal. Some to work part-time or job share.14 The Department received comments commenters requested that the from a broad array of constituencies, Department withdraw the proposal. F. The Department’s Proposal including small business owners, Acknowledging that there are strong On July 6, 2015, in accordance with Fortune 500 corporations, employer and views on the issues presented in this the Presidential Memorandum, the industry associations, individual rulemaking, the Department has Department published a Notice of workers, worker advocacy groups, carefully considered the timely Proposed Rulemaking to propose unions, non-profit organizations, law submitted comments addressing the revisions to the part 541 regulations. See firms (representing both employers and proposed changes. 80 FR 38516 (July 6, 2015). The employees), educational organizations Significant issues raised in the timely Department’s proposal focused and representatives, religious received comments are discussed below, primarily on updating the salary and organizations, economists, Members of together with the Department’s response HCE compensation levels by proposing Congress, federal government agencies, to those comments and a topical that the standard salary level be set at state and local governments and discussion of the changes that have been the 40th percentile of weekly earnings representatives, tribal governments and made in the Final Rule and its of full-time salaried workers, proposing representatives, professional regulatory text. The Department also to increase the HCE annual associations, and other interested received a number of submissions after compensation requirement to the members of the public. All timely the close of the comment period, annualized value of the 90th percentile received comments may be viewed on including some campaign comments, of weekly earnings of full-time salaried the www.regulations.gov Web site, from a range of commenters workers, and proposing a mechanism docket ID WHD–2015–0001. representing both employers and for automatically updating the salary Several organizations’ submissions employees. Late comments were not and compensation levels going forward included attachments from their considered in the development of this to ensure that they will continue to individual members generally using Final Rule, and are not discussed in this provide a useful and effective test for substantively identical form comments: Final Rule. In instances where an exemption. While the primary For example, AFSCME (24,122 organization submitted both timely and regulatory changes proposed were in comments), Center for American untimely comments, only the timely §§ 541.600 and 541.601, the Department Progress (6,697 comments from two comments were considered. proposed additional conforming submissions), CREDO Action (58,927 The Department received a number of changes to update references to the comments), Democracy for America comments that are beyond the scope of salary level throughout part 541 as well (34,932 comments), this rulemaking. These include, for as to update the special salary Institute (72,131 comments from five example, comments asking the provisions for American Samoa and the submissions), Faculty Forward and Department to issue a rule requiring motion picture industry. In addition to SEIU (515 comments), Jobs with Justice employers to provide employees with (5,136 comments), Mom’s Rising (16,114 ‘‘clear pay stubs,’’ and requesting that 13 Such misconceptions are not new. In 1949 the comments from three submissions), the Department clarify the definition of Department noted ‘‘the failure of some employers National Partnership for Women and ‘‘establishment’’ under the exemption to realize that salary is not the sole test of Families (21,192 comments from two for seasonal amusement or recreational exemption.’’ Weiss Report at 8 n. 27. In 1940 the Department responded to the assertion that submissions), National Restaurant establishments. The Department does employers would convert overtime-eligible white Association (2,648 comments), National not address such issues in this Final collar employees to hourly pay instead of more Women’s Law Center (6,753 comments Rule. secure salaries, stating: ‘‘Without underestimating from two submissions), Partnership to A number of commenters asked the the general desirability of weekly or monthly Department to provide guidance on how salaries which enable employees to adjust their Protect Workplace Opportunity (1,770 expenditures on the basis of an assured income (so comments from five submissions), the FLSA applies to non-profit long as they remain employed), there is little Social Security Works (15,575 organizations. See, e.g., Alliance for advantage in salaried employment if it serves comments), for Human Resource Strong Families and Communities merely as a cloak for long hours of work. Further, Management (827 comments from two (describing ‘‘a tremendous amount of such salaried employment may well conceal excessively low hourly rates of pay.’’ Stein Report submissions), and others. Other confusion in the non-profit sector at 7. organizations attached membership concerning who is currently covered by 14 As the Department has previously explained, signatures to their comments. These FLSA’’); Independent Sector (stating there is no special salary level for EAP employees included Care2 (37,459 signatures), the that this rulemaking process has working less than full-time. See 69 FR 22171. Employers, however, can pay white collar International Franchise Association (17 ‘‘highlighted a lack of clarity regarding employees working part-time or job sharing a salary signatures), Organizing for Action when and how the Fair Labor Standards of less than the required EAP salary threshold and (76,625 signatures), and 15 different Act applies to the nonprofit sector will not violate the Act so long as the salary equals post-doctoral associations (560 workforce’’); Alliance of Arizona at least the minimum wage for all hours worked and the employee does not work more than 40 hours a signatures). Nonprofits. Some commenters, such as week. See FLSA2008–1NA (Feb. 14, 2008). See also Many of the comments the CASA, asserted that most charitable section IV.A.iv. Department received were: (1) Very organizations are not covered

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enterprises under the FLSA and, as a spends an insubstantial amount of time are exempt if their primary duty is result, this rulemaking ‘‘will not reach performing such work is individually teaching, tutoring, instructing or a very sizable number of employees of covered by the FLSA. lecturing in the activity of imparting not-for-profit organizations.’’ Other The Department also refers interested knowledge, and if they are employed commenters stated that non-profit stakeholders to guidance on the and engaged in this activity as a teacher employees may be individually covered application of the FLSA to non-profit in an educational establishment. because they engage in interstate organizations available in WHD Fact § 541.303(a). An educational commerce. A comment submitted on Sheet #14A: Non-Profit Organizations establishment is ‘‘an elementary or behalf of 57 professors specializing in and the Fair Labor Standards Act; 15 see secondary school system, an institution employment and labor law, however, also Fact Sheet #14: Coverage Under the of higher education or other educational asserted that the ‘‘overwhelming Fair Labor Standards Act (FLSA).16 institution.’’ 19 § 541.204(b). Teachers majority of the millions of employees Additional information regarding the may include professors, adjunct excluded from FLSA coverage because applicability of the FLSA to non-profits instructors, primary and secondary their not-for-profit employers are not can be found in the WHD school teachers, and teachers of skilled subject to enterprise coverage also are Administrator’s blog post.17 Moreover, a and semi-skilled trades and not subject to individual FLSA number of WHD Opinion Letters occupations. Preschool and coverage,’’ and Economic Policy address the applicability of the FLSA to kindergarten teachers may also qualify Institute (EPI) asserted that non-profit non-profits. See, e.g., FLSA2009–20 for exemption under the same employers can limit the number of (Jan. 16, 2009); FLSA2008–8 (Sept. 29, conditions as teachers in elementary employees covered on an individual 2008); FLSA2005–52 (Nov. 14, 2005); and secondary schools. See Fact Sheet basis by managing interstate commerce FLSA2005–8NA (Sept. 2, 2005); #46: Daycare Centers and Preschools activity. FLSA2005–12NA (Sept. 23, 2005); Under the Fair Labor Standards Act. In 18 The Department notes that the FLSA FLSA2004–29NA (Nov. 30, 2004). addition, coaches may qualify for the does not provide special rules for non- Finally, the Department is issuing exemption if their primary duty is profit organizations or their employees, additional guidance for the non-profit teaching as opposed to recruiting nor does this Final Rule. Nevertheless, sector in connection with the students to play sports or performing we agree that it is important for such publication of this Final Rule. manual labor. Some commenters Commenters also asked for guidance organizations to understand their addressed other non-teaching staff. For on the application of the EAP obligations under the Act. As a general example, CUPA–HR commented about exemption to educational institutions. matter, non-profit charitable workers including academic affairs See, e.g., College and Universities organizations are not covered counselors and advisors, textbook Human Resources Executives; Michigan enterprises under the FLSA unless they managers, and managers in service, Head Start; Savannah-Chatham County engage in ordinary commercial activities security, and building and grounds, Public School System. Preschools, (for example, operating a gift shop). See among other employees working at elementary and secondary schools, and 29 U.S.C. 203(r)–(s), 206(a), 207(a). For colleges and universities. Academic institutions of higher education are a non-profit organization, enterprise administrative personnel subject to the covered by the FLSA, and nothing in coverage applies only to the activities exemption include: Superintendents; this Final Rule changes that coverage. performed for a business purpose; it principals and vice-principals; 29 U.S.C. 203(r)(2)(A). Employees of does not extend to the organization’s department heads in institutions of such institutions therefore are generally charitable activities. An organization higher education; academic counselors protected by the FLSA’s minimum wage that performs only charitable services, and advisors; and other employees with and overtime provisions; however, such as providing free food to the similar responsibilities. Academic special provisions apply to many hungry, is not a covered enterprise; administrative employees are subject to personnel at these institutions that make however, an employee of such a non- the salary basis requirement, but the them overtime exempt. Department notes that a special profit employer may nevertheless be Although the EAP exemption covered on an individual basis. See 29 provision allows this requirement to be expressly applies to an ‘‘employee met if such employees are paid ‘‘on a U.S.C. 206(a), 207(a). The FLSA covers employed in the capacity of academic an employee on an individual basis— salary basis which is at least equal to the administrative personnel or teacher’’ 29 entrance salary for teachers in the that is, an individual is protected by the U.S.C. 213(a)(1); see §§ 541.204, .303, FLSA regardless of whether the educational establishment by which the salary level and salary basis [they are] employed.’’ § 541.204(a)(1). individual works for a covered requirements do not apply to bona fide enterprise—if he or she engages in To the extent that this entrance salary is teachers. § 541.303(d), .600(e). below the salary level established in this interstate commerce through activities Accordingly, the increase in the such as making out-of-state phone calls, rule, academic administrative personnel standard salary level in this Final Rule will be exempt if their salary equals or sending mail, or handling credit card will not affect the overtime eligibility of transactions. This individual coverage exceeds the entrance salary. Employees bona fide teachers. whose work relates to general business applies even if the employee is not Commenters such as the NEA asked engaging in such activities for a operations, building management and the Department to clarify which workers maintenance, or the health of students business purpose. For example, if an qualify as bona fide teachers. Teachers employee regularly calls an out-of-state and staff (such as lunch room managers), do not perform academic store and uses a credit card to purchase 15 Available at: http://www.dol.gov/whd/regs/ food for a non-profit that provides free compliance/whdfs14a.pdf. administrative functions. § 541.204(c). meals for the homeless, that employee is 16 Available at: http://www.dol.gov/whd/regs/ The Department also received several protected by the FLSA on an individual compliance/whdfs14.pdf. comments about postdoctoral scholars. basis, even though the non-profit may 17 Available at: http://blog.dol.gov/2015/08/26/ non-profits-and-the-proposed-overtime-rule/. 19 For purposes of the exemption, no distinction not be covered as an enterprise. WHD, 18 Available at: http://www.dol.gov/whd/opinion/ is drawn between public and private schools, or however, will not assert that an flsa.htm; http://www.dol.gov/whd/opinion/ between those operated for profit and those that are employee who on isolated occasions flsana.htm. not for profit. § 541.204(b).

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See, e.g., Association of American done in the Department’s 2004 801(a)(3)(A), we concluded at that time Medical Colleges; National Postdoctoral rulemaking. that ‘‘a period of 120 days after the date Association; UAW Local 5810. Other commenters requested a longer of publication will provide employers Postdoctoral scholars who do not have period. The American Car Rental ample time to ensure compliance with a primary duty of teaching are not Association (ACRA), Dollar Tree, and the final regulations.’’ Id. The changes considered bona fide teachers; these the Retail Industry Leaders Association provided in the 2004 Final Rule were employees would generally meet the (RILA) each requested a delayed more extensive and more complicated duties test for the learned professional effective date of at least six months for employers to implement—the 2004 exemption and would be subject to the following publication of the Final Rule. Final Rule included several significant salary basis and salary level tests. The United States Chamber of changes: (1) A significant percentage Finally, the Council on Government Commerce (Chamber), the Food increase in the salary threshold; (2) a Relations commented that ‘‘it is our Marketing Institute (FMI), H–E–B, significant reorganization of the part 541 understanding that the Wage and Hour Island Hospitality Management, the regulations; (3) the elimination of the Division does not assert an employee- National Association of Landscape short and long test structure that had employer relationship for graduate Professionals (NALP), the National been in place for more than 50 years and students who are simultaneously Council of Chain Restaurants (NCCR), the creation of a single standard test; performing research under faculty the National Retail Federation (NRF), and (4) the creation of a new test for supervision.’’ The Department views and the Securities Industry and highly compensated employees. In light graduate students in a graduate school Financial Markets Association (SIFMA) of the Department’s decision not to each requested a one-year delayed engaged in research under the make changes to the standard duties test effective date. Finally, Laff and supervision of a member of the faculty at this time, the primary change in this Associates, the National Association for and in the course of obtaining advanced Final Rule is the revision to the salary Home Care and Hospice, and American degrees as being in an educational level test and, therefore, this rule will be Network of Community Options and relationship and not in an employment much less complicated for employers to Resources (ANCOR), which coordinated relationship with either the school or of implement. Accordingly, the with more than three dozen home any grantor funding the research, even Department believes that the December organizations, submitted 1, 2016 effective date for this Final Rule though the student may receive a comments requesting an effective date at (more than 180 days after publication) stipend for performing the research. least two years following publication of will provide ample time for employers 1994 WL 1004845 (June 28, 1994). In an the Final Rule, to afford states sufficient to ensure compliance. effort to assist the educational sector time to allocate and appropriate Multiple commenters also requested a with the issues addressed above, the funding. delayed enforcement period or some Department is issuing additional More than 55,000 individuals form of safe harbor following the guidance for this sector in connection submitted comments coordinated by the effective date of the Final Rule ranging with the publication of this Final Rule. Center for American Progress, EPI, and from six months to two years. See, e.g., Lastly, in an attempt to address MomsRising, requesting that the salary ACRA; American Insurance Association concerns that the terms exempt and level be raised without delay. Many and the Property Casualty Insurers nonexempt were not sufficiently labor organizations and Association of America (AIA–PCI); descriptive or intuitive, in the NPRM and women’s advocacy organizations, AT&T; Chamber; Dollar Tree; the Department used the terms including the Center for Law and Social International Franchise Association ‘‘overtime-protected’’ and ‘‘overtime- Policy, the Center for Popular (IFA); the Littler Mendelson law firm; eligible’’ as synonyms for nonexempt, Democracy, the First Shift Justice RILA; the Wessels Sherman law firm; and ‘‘not overtime-protected’’ and Project, the Institute for Women’s Policy World Travel. Several commenters also ‘‘overtime-ineligible’’ as synonyms for Research (IWPR), the Leadership asked the Department to provide exempt.20 The Department received Conference on Civil and , compliance assistance, whether related very few comments on this new the National Education Association specifically to the changes implemented terminology. The Department believes (NEA), the National Coalition of by the Final Rule or more broadly to the that these new terms are less confusing Classified Education Support FLSA’s white collar regulations in to the public and continues to use them Employees Union, the National Urban general. See, e.g., Chamber; Dollar Tree; in this Final Rule. League, the Public Justice Center, the IFA; Littler Mendelson; RILA. United Automobile, Aerospace and The Department appreciates employer G. Effective Date Agricultural Implement Workers of concerns regarding compliance and The Department received a number of America (UAW), Women Employed, enforcement in light of this rulemaking. comments concerning the effective date and others, similarly urged the As explained above, the Department of the Final Rule. Citing the need to Department to implement the Final Rule believes that the December 1, 2016 reduce the burden of implementation, as soon as possible. effective date will provide employers many commenters representing The Department has set an effective ample time to make any changes that are employers requested a delayed effective date of December 1, 2016 for the Final necessary to comply with the final date following publication of the Final Rule. As several commenters noted, the regulations. The Department will also Rule. Commenters including the Fisher Department’s 2004 Final Rule set an provide significant outreach and & Phillips law firm, the National effective date 120 days following compliance assistance, and will issue a Association of Independent Schools and publication of the final rule. See 79 FR number of guidance documents in the National Association of Business 22126 (April 23, 2004). Explaining that connection with the publication of this Officers, requested an effective date at a 120-day effective date exceeds the 30- Final Rule. least 120 days after publication as was day minimum required under the Administrative Procedure Act (APA), 5 III. Need for Rulemaking 20 The Department is using the more precise term U.S.C. 553(d), and the 60 days One of the Department’s primary ‘‘overtime exempt’’ rather than ‘‘overtime- mandated for a ‘‘major rule’’ under the goals in this rulemaking is updating the ineligible’’ in this Final Rule. Congressional Review Act, 5 U.S.C. section 13(a)(1) exemption’s standard

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salary level requirement. A salary level Additionally, the salary level required the salary level using a consistent test has been part of the regulations for exemption under section 13(a)(1) is methodology that has been subject to since 1938 and has been long currently $455 a week and has not been notice and comment rulemaking will recognized as ‘‘the best single test’’ of updated in more than 10 years. The maintain the utility of the dividing line exempt status. Stein Report at 19, 42; annual value of the salary level set by the salary level without the need see Weiss Report at 8–9; Kantor Report ($23,660) is now lower than the poverty for frequent rulemaking. This at 2–3. The salary an employer pays an threshold for a family of four. As the modernization of the regulations will employee provides ‘‘a valuable and relationship between the current provide predictability for employers and easily applied index to the ‘bona fide’ standard salary level and the poverty employees by replacing infrequent, and character of the employment for which threshold shows, the effectiveness of the thus more drastic, salary level increases exemption is claimed’’ and ensures that salary level test as a means of helping with gradual changes occurring at set section 13(a)(1) of the FLSA ‘‘will not determine exempt status diminishes as intervals. invite evasion of section 6 [minimum the wages of employees entitled to Finally, the Department has always wage] and section 7 [overtime] for large overtime pay increase and the real value recognized that the salary level test numbers of workers to whom the wage- of the salary threshold falls. works in tandem with the duties tests to and-hour provisions should apply.’’ By way of this rulemaking, the identify bona fide EAP employees. The Stein Report at 19. Department seeks to update the Department discussed concerns with the The salary level’s function in standard salary level to ensure that it duties test for executive employees in differentiating exempt from overtime- works effectively with the standard the NPRM. The proposal also included eligible employees takes on greater duties test to distinguish exempt EAP questions about the duties tests importance when there is only one employees from overtime-protected including requiring exempt employees duties test that has no limitation on the white collar workers. This will make the to spend a specified amount of time amount of nonexempt work that an exemptions easier for employers and performing their primary duty (e.g., a 50 exempt employee may perform, as has workers to understand and ensure that percent primary duty requirement as been the case since 2004. Historically, the FLSA’s intended overtime required under California state law) or the Department set two different salary protections are fully implemented. The otherwise limiting the amount of tests that were paired with different Department also proposed to update the nonexempt work an exempt employee duties tests. The long test salary level total annual compensation required for may perform, and adding to the set at the low end of salaries paid to the HCE exemption, because it too has regulations additional examples exempt employees imposed a cap on the been unchanged since 2004 and must be illustrating how the exemption may amount of nonexempt work that an updated to avoid the unintended apply to particular occupations. The exempt employee could perform. This exemption of employees in high-wage Department’s proposal sought feedback aspect of the long duties test made it areas who are clearly not performing on whether such revisions to the duties effective in distinguishing lower-paid EAP duties. tests are needed to ensure that these exempt EAP employees from overtime- In a further effort to respond to tests fully reflect the purpose of the eligible employees. In effect, the long changing conditions in the workplace, exemption. duties test ensured that employers could the Department’s proposal also IV. Final Regulatory Revisions not avoid paying overtime by assigning requested comment on whether to allow lower-paid employees a minimal nondiscretionary bonuses and incentive A. Standard Salary Level amount of exempt work. The short test payments to satisfy some portion of the i. History of the Standard Salary Level salary level, which was historically set standard test salary requirement. at a level between 130 and 180 percent Currently, such bonuses are only The FLSA became law on June 25, of the long test salary level, did not included in calculating total annual 1938, and the first version of part 541, impose any specific limit on the amount compensation under the HCE test, but issued later that year, set a minimum of nonexempt work since that some stakeholders have urged broader salary level of $30 per week for exempt distinction was not considered inclusion, pointing out that in some executive and administrative necessary to aid in classifying higher- industries significant portions of employees. See 3 FR 2518. Since 1938, paid exempt EAP employees. In salaried EAP employees’ earnings may the Department has increased the salary eliminating the two salary tests in 2004, be in the form of such bonuses. levels seven times: in 1940, 1949, 1958, the Department instead set the single The Department also proposed 1963, 1970, 1975, and 2004. See Table standard salary level equivalent to the automatically updating the salary and A. While the Department has refined the historic levels of the former long test compensation levels to prevent the method for calculating the salary level salary, but paired it with a standard levels from becoming outdated. The to fulfill its mandate, the purpose of the duties test based on the short duties test, Department proposed to automatically salary level requirement has remained which did not include a limit on update the standard salary test, the total consistent—to define and delimit the nonexempt work. The effect of this annual compensation requirement for scope of the executive, administrative, mismatch was to exempt from overtime highly compensated employees, and the and professional exemptions. See 29 many lower-wage workers who special salary levels for American U.S.C. 213(a)(1). The Department has performed little EAP work and whose Samoa and for motion picture industry long recognized that the salary paid to work was otherwise indistinguishable employees, in order to ensure the an employee is the ‘‘best single test’’ of from their overtime-eligible colleagues. continued utility of these tests over exempt status, Stein Report at 19, and The Department has now concluded time. As the Department explained in that the salary level test furnishes a that the standard salary level we set in 1949, the salary test is only a strong ‘‘completely objective and precise 2004 did not account for the absence of measure of exempt status if it is up to measure which is not subject to the more rigorous long duties test and date, and a weakness of the salary test differences of opinion or variations in thus has been less effective in is that increases in wage rates and salary judgment.’’ Weiss Report at 8–9. The distinguishing between EAP employees levels over time gradually diminish its Department reaffirmed this position in who are exempt from overtime and effectiveness. See Weiss Report at 8. A the 2004 Final Rule, explaining that the overtime-eligible employees. rule providing for automatic updates to ‘‘salary level test is intended to help

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distinguish bona fide executive, these exempt categories,’’ and separating exempt from nonexempt administrative, and professional reiterating that any increase in the employees.’’ 69 FR 22165. employees from those who were not salary level must ‘‘have as its primary intended by Congress to come within objective the drawing of a line

TABLE A—WEEKLY SALARY LEVELS FOR EXEMPTION

Long test Date enacted Short test Executive Administrative Professional (all)

1938 ...... $30 $30 ...... 1940 ...... 30 50 $50 ...... 1949 ...... 55 75 75 $100 1958 ...... 80 95 95 125 1963 ...... 100 100 115 150 1970 ...... 125 125 140 200 1975 ...... 155 155 170 250

Standard Test

2004 ...... $455

In 1940, the Department maintained the exempt employees, starting salaries for long test was the long test’s limit on the $30 per week salary level set in 1938 for college graduates, and salary ranges for amount of time an exempt employee executive employees, increased the different occupations such as could spend on nonexempt duties while salary level for administrative bookkeepers, accountants, chemists, and allowing the employer to claim the employees, and established a salary mining engineers. See Weiss Report at exemption. A bright-line, 20 percent cap level for professional employees. The 10, 14–17, 19–20. The Department noted on nonexempt work was instituted as Department used salary surveys from that the ‘‘salary level adopted must part of the long duties test in 1940 for federal and state government agencies, exclude the great bulk of nonexempt executive and professional employees, experience gained under the National persons if it is to be effective.’’ Id. at 18. and in 1949 for administrative Industrial Recovery Act, and federal Recognizing that the ‘‘increase in wage employees.22 The short duties tests did government salaries to determine the rates and salary levels’’ since 1940 had not include a specific limit on salary level that was the ‘‘dividing line’’ ‘‘gradually weakened the effectiveness nonexempt work.23 The rationale for the between employees performing exempt of the present salary tests as a dividing less rigorous short duties test was that and nonexempt work. See Stein Report line between exempt and nonexempt employees who met the higher salary at 9, 20–21, 31–32. The Department employees,’’ the Department calculated level were more likely to meet ‘‘all the recognized that the salary level falls the percentage increase in weekly requirements for exemption . . . within a continuum of salaries that earnings from 1940 to 1949, and then including the requirement with respect overlaps the outer boundaries of exempt adopted new salary levels ‘‘at a figure and nonexempt employees. Specifically, slightly lower than might be indicated 22 By statute, beginning in 1961, retail employees the Department stated: could spend up to 40 percent of their hours worked by the data’’ in order to protect small performing nonexempt work and still be found to To make enforcement possible and to businesses. Id. at 8, 14. The Department meet the duties tests for the EAP exemption. See 29 provide for in , a rate also cautioned that ‘‘a dividing line U.S.C. 213(a)(1). should be selected in each of the three cannot be drawn with great precision 23 For example, the long duties test in effect from definitions which will be reasonable in the but can at best be only approximate.’’ Id. 1949 to 2004 for administrative employees required that an exempt employee: (1) Have a primary duty light of average conditions for industry as a at 11. whole. In some instances the rate selected consisting of the performance of office or non- will inevitably deny exemption to a few Also in 1949, the Department manual work directly related to management established a second, less-stringent or general business operations of the employees who might not unreasonably be employer or the employer’s customers; (2) exempted, but, conversely, in other instances duties test for each exemption, but only customarily and regularly exercise discretion and it will undoubtedly permit the exemption of for those employees paid at or above a independent judgment; (3) regularly and directly some persons who should properly be higher ‘‘short test’’ salary level. Those assist a proprietor or a bona fide executive or entitled to the benefits of the act. paid above the higher salary level were administrative employee, or perform under only general supervision work along specialized or Id. at 6. Taking into account the average exempt if they also met a ‘‘short’’ duties technical lines requiring special training, salary levels for employees in numerous test, which lessened the duties experience, or knowledge, or execute under only industries, and the percentage of requirements for exemption.21 The general supervision special assignments and tasks; employees earning below these original, more thorough duties test and (4) not devote more than 20 percent (or 40 percent in a retail or service establishment) of hours amounts, the Department set the salary became known as the ‘‘long’’ test, and worked in the workweek to activities that are not level for each exemption slightly below remained for more than 50 years the test directly and closely related to the performance of the ‘‘dividing line’’ suggested by these employers were required to satisfy for the work described above. See § 541.2 (2003). By averages. those employees whose salary was contrast, the short duties test in effect during the 1949 to 2004 period provided that an administrative In 1949, the Department again looked insufficient to meet the higher short test employee paid at or above the short test salary level at salary data from state and federal salary level. Apart from the differing qualified for exemption if the employee’s primary agencies, including the Bureau of Labor salary requirements, the most significant duty consisted of the performance of office or non- Statistics (BLS). The data reviewed difference between the short test and the manual work directly related to management policies or general business operations of the included wages in small towns and low- employer or the employer’s customers which wage industries, earnings of federal 21 These higher salary levels are presented under includes work requiring the exercise of discretion employees, average weekly earnings for the ‘‘Short Test’’ heading in Table A. and independent judgment. See id.

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to nonexempt work.’’ Id. at 22–23. Thus, investigations. Kantor Report at 6. The adopted for executive employees and 15 a ‘‘short-cut test for exemption . . . Department then set the long test salary percent of the establishments employing would facilitate the administration of levels for exempt employees ‘‘at about administrative or professional employees the regulations without defeating the paid one or more employees employed in the levels at which no more than about such capacities less than the minimum salary purposes of section 13(a)(1).’’ Id. 10 percent of those in the lowest-wage adopted for administrative and professional In contrast to the Department’s region, or in the smallest size employees. extensive discussion of the methodology establishment group, or in the smallest- Id. for setting the long test salary level, the sized city group, or in the lowest-wage Department’s have The Department continued to use a industry of each of the categories would similar methodology when updating the included comparatively little discussion fail to meet the tests.’’ Id. at 6–7. In of the methodology for setting the short long test salary levels in 1970. After other words, the Department set the examining data from 1968 WHD test levels. While the Department set the long test salary level so that only a long test salary level based on an investigations, 1969 BLS wage data, and limited number of workers performing information provided in a report issued analysis of the defined sample, we set EAP duties (about 10 percent) in the the short test salary level in relation to by the Department in 1969 that included lowest-wage regions and industries salary data for executive, administrative, the long test salary, and the initial short would fail to meet the salary level test 25 test salary set in 1949 was 133 percent and professional employees, the and therefore be overtime protected. In Department increased the long test of the highest long test salary laying out this methodology, the (administrative and professional). In salary level for executive employees to Department echoed comments from the $125 per week when the salary data 1958, the Department rejected the Weiss Report that the salary tests suggestion that the short test salary level showed that 20 percent of executive ‘‘simplify enforcement by providing a employees from all regions and 12 should be increased by the same dollar ready method of screening out the amount that the highest long test salary percent of executive employees in the obviously nonexempt employees,’’ and West earned less than $130 a week. See levels were increased and instead that ‘‘[e]mployees that do not meet the increased the short test salary to 35 FR 884–85. The Department also salary test are generally also found not increased the long test salary levels for maintain the ‘‘percentage differential in to meet the other requirements of the relation to the highest [long test] salary administrative and professional regulations.’’ Id. at 2–3. The Department employees to $125 and $140, requirement.’’ See Kantor Report at 10. also noted that in our experience In 1970, the Department adopted a respectively. misclassification of overtime-protected In 1975, instead of following these ‘‘slightly higher percentage differential’’ employees occurs more frequently when prior approaches, the Department set between the ‘‘basic and [short test] the salary levels have ‘‘become outdated the long test salary levels based on salary figures,’’ than previously existed, by a marked upward movement of increases in the Consumer Index resulting in an approximately 143 wages and salaries.’’ Id. at 5. (CPI), although the Department adjusted percent ratio between the highest long The Department followed a similar the salary level downward ‘‘in order to test salary level (professional) and the methodology when determining the eliminate any inflationary impact.’’ 40 short test. 35 FR 885. From 1949 to 1975 appropriate long test salary level FR 7091. As a result of this recalibration the Department set a single short test increase in 1963, using data regarding of the 1970 levels, the long test salary salary level that applied to all categories salaries paid to exempt workers level for the executive and of EAP employees while maintaining collected in a 1961 WHD survey. See 28 administrative exemptions was set at multiple long test salary levels that FR 7002. The salary level for executive $155, while the professional level was applied to the different categories. The and administrative employees was set at $170. The salary levels adopted ratio of the short test salary level to the increased to $100 per week, for were intended as interim levels long test salary levels ranged from example, when the 1961 survey data ‘‘pending the completion and analysis approximately 130 percent to 180 showed that 13 percent of of a study by [BLS] covering a six month percent over this period.24 The establishments paid one or more exempt period in 1975,’’ and were not meant to existence of separate short and long executives less than $100 per week, and set a for future salary level tests remained part of the Department’s 4 percent of establishments paid one or increases. Id. at 7091–92. Although the regulations until 2004. See Table A. more exempt administrative employees Department intended to revise the salary In setting the long test salary level in less than $100 a week. See 28 FR 7004. levels after completion of the BLS study 1958, the Department considered data The professional exemption salary level of actual salaries paid to employees, the collected during 1955 WHD was increased to $115 per week, when envisioned process was never investigations on the ‘‘actual salaries the 1961 survey data showed that 12 completed, and the ‘‘interim’’ salary paid’’ to employees who ‘‘qualified for percent of establishments surveyed paid levels remained unchanged for the next exemption’’ (i.e., met the applicable one or more professional employees less 29 years. salary and duties tests), grouped by than $115 per week. See id. The As reflected in Table A, the short test geographic region, broad industry Department noted that these salary salary level increased in tandem with groups, number of employees, and city levels approximated the same the long test level throughout the size, and supplemented with BLS and percentages used in 1958: various rulemakings since 1949. Census data to reflect income increases Because the short test was designed to of white collar and manufacturing Salary tests set at this level would bear approximately the same relationship to the capture only those white collar employees during the period not employees whose salary was sufficiently covered by the Department’s minimum salaries reflected in the 1961 survey data as the tests adopted in 1958, on high to indicate a stronger likelihood of the occasion of the last previous adjustment, exempt status and thus warrant a less 24 The smallest ratio occurred in 1963 and was bore to the minimum salaries reflected in a stringent duties requirement, the short between the long test salary requirement for comparable survey, adjusted by trend data to professionals ($115) and the short test salary level ($150). The largest ratio occurred in 1949 and was early 1958. At that time, 10 percent of the 25 Earnings Data Pertinent to a Review of the between the long test salary requirement for establishments employing executive Salary Tests for Executive, Administrative and executives ($55) and the short test salary level employees paid one or more executive Professional Employees As Defined in Regulations ($100). employees less than the minimum salary Part 541, (1969), cited in 34 FR 9935.

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test salary level was always set rulemakings, the Department relied on downward to eliminate any potential significantly higher than the long test actual earnings data. However, instead inflationary impact. See 40 FR 7091 salary levels. Thus, in 1975 while the of using salary data gathered from WHD (‘‘However, in order to eliminate any long test salary levels ranged from $155 investigations, as was done under the inflationary impact, the interim rates to $170, the short test level was $250. Kantor method, the Department used hereinafter specified are set at a level The salary level test was most Current Population Survey (CPS) data slightly below the rates based on the recently updated in 2004, when the that encompassed most salaried CPI.’’). In each of these rulemakings, the Department abandoned the concept of employees. The Department also set the Department set the short test salary level separate long and short tests, opting salary level to exclude roughly the in relation to, and significantly higher instead for one ‘‘standard’’ test, and set bottom 20 percent of these salaried than, the long test salary levels (ranging the salary level associated with the new employees in each of the from approximately 130 to 180 percent standard duties test at $455 for subpopulations: (1) The South and (2) of the long test salary levels). executive, administrative, and the retail industry. Thus in setting the In 2004, the Department eliminated professional employees. Due to the standard salary level, the Department the short and long duties tests in favor lapse in time between the 1975 and was consistent with our previous of a standard duties test (that was 2004 rulemakings, the salary threshold practice of setting the long test salary similar to the prior less rigorous short for the long duties tests (i.e., the lower level near the lower end of the current test) for each exemption and a single salary level) did not reflect salaries range of salaries. Although prior long salary level for executive, being paid in the economy and had test salary levels were based on salaries administrative, and professional become ineffective at distinguishing of approximately the lowest 10 percent employees. This most recent revision between overtime-eligible and overtime of exempt salaried employees in low- established a standard salary level of exempt white collar employees. For wage regions and industries (the Kantor $455 per week using earnings data of example, at the time of the 2004 Final long test method), the Department stated full-time salaried employees (both Rule, the salary levels for the long that the change in methodology was exempt and nonexempt) in the South duties tests were $155 for executive and warranted in part to account for the and in the retail sector. As in the past, administrative employees and $170 for elimination of the short and long duties the Department used lower-salary data professional employees, while a full- tests, and because the utilized data sets to accommodate those businesses time employee working 40 hours per sample included nonexempt salaried for which salaries were generally lower week at the federal minimum wage employees, as opposed to only exempt due to geographic or industry-specific ($5.15 per hour) earned $206 per week. salaried employees. However, as the reasons. See 69 FR 22164. Even the short test Department acknowledged, the salary ii. Standard Salary Level Proposal salary level at $250 per week was not far arrived at by this method was, in fact, To restore the effectiveness of the above the minimum wage. equivalent to the salary derived from the The Department in the 2004 Final salary test, in the NPRM the Department Kantor long test method. See 69 FR Rule based the new ‘‘standard’’ duties proposed to set the standard salary level 22168. Based on the adopted tests on the short duties tests (which did equal to the 40th percentile of weekly methodology, the Department ultimately not limit the amount of nonexempt earnings of full-time salaried workers set the salary level for the new standard work that could be performed), and tied nationally. Using salary data from 2013, test at $455 per week. them to a single salary test level that the proposed methodology resulted in a was updated from the long test salary In summary, the regulatory history standard salary level of $921 per week, (which historically had been paired reveals a common methodology used, or $47,892 annually. The Department with a cap on nonexempt work). See 69 with some variations, to determine estimated that, by the time of FR 22164, 22168–69; see also 68 FR appropriate salary levels. In almost publication of a Final Rule, the 15570 (‘‘Under the proposal, the every case, the Department examined a proposed methodology would result in minimum salary level to qualify for broad set of data on actual wages paid a standard salary level of approximately exemption from the FLSA minimum to salaried employees and then set the $970 per week, or $50,440 annually. wage and overtime requirements as an long test salary level at an amount In proposing to update the salary executive, administrative, or slightly lower than might be indicated threshold, the Department sought to professional employee would be by the data. In 1940 and 1949, the reflect increases in actual salary levels increased from $155 per week to $425 Department set the long test salary nationwide since 2004. As the per week. This salary level would be levels by looking to the average salary Department explained in the NPRM, referred to as the ‘standard test,’ thus paid to the lowest level of exempt when left at the same amount over time, eliminating the ‘short test’ and ‘long employees. Beginning in 1958, the the effectiveness of the salary level test test’ terminology.’’). The Department Department set the long test salary as a means of determining exempt status concluded that it would be burdensome levels to exclude approximately the diminishes as the wages of employees to require employers to comply with a lowest-paid 10 percent of exempt entitled to overtime increase and the more complicated long duties test given salaried employees in low-wage regions, real value of the salary threshold falls. that the passage of time had rendered employment size groups, city sizes, and See 80 FR 38517. the long test salary level largely industry sectors, and we followed a The Department also sought to adjust obsolete. See 69 FR 22164; 68 FR similar methodology in 1963 and 1970. the salary level to address our 15564–65. The Department stated at the The levels were based on salaries in conclusion that the salary level we set time that the new standard test salary low-wage categories in order to protect in 2004 was too low given the level accounted for the elimination of the ability of employers in those areas Department’s elimination of the more the long duties test. See 69 FR 22167. and industries to utilize the exemptions rigorous long duties test. As discussed In determining the new salary level in and in order to mitigate the impact of above, for many decades the long duties 2004, the Department reaffirmed our oft- salaries in higher-paid regions and test—which limited the amount of time repeated position that the salary level is sectors. In 1975, the Department an exempt employee could spend on the ‘‘best single test’’ of exempt status. increased the long test salary levels nonexempt duties and was paired with See 69 FR 22165. Consistent with prior based on changes in the CPI, adjusting a lower salary level—existed in tandem

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with a short duties test—which did not significant amounts of time performing collar workers. Based on the historical contain a specific limit on the amount the same routine, nonexempt work as relationship of the short test salary level of nonexempt work and was paired with their subordinates. Both appellate to the long test salary level, the a salary level that was approximately found that the higher paid employees Department determined that a salary 130 to 180 percent of the long test salary were not overtime protected—even between approximately the 35th and level. In 2004, the Department though they performed substantial 55th percentiles of weekly earnings of eliminated the long and short duties amounts of nonexempt work—because full-time salaried workers nationwide tests and created the new standard they satisfied the short duties test. The would work appropriately with the duties test, based on the short duties lower paid employees, however, were standard duties test. The Department test. The creation of a single standard overtime-protected by application of the proposed to set the salary level at the test that did not limit nonexempt work more rigorous long duties test. If the low end of this range—the 40th caused new uncertainty as to what long test’s lower salary threshold had percentile of weekly earnings of full- salary level is sufficient to ensure that been paired with a duties test that did time salaried workers nationally—to employees intended to be overtime- not limit nonexempt work—as the account for low-wage regions and protected are not subject to Department did in 2004—the lower paid industries and for the fact that inappropriate classification as not assistant managers would have also lost employers no longer have a long duties overtime-protected, while minimizing overtime protection. test to fall back on for purposes of the number of employees disqualified In this rulemaking, the Department exempting lower-salaried workers from the exemption even though their sought to correct the mismatch between performing bona fide EAP duties. The primary duty is EAP exempt work. As the standard salary level (based on the Department explained, however, that a the Department had observed in 1975, if old long test) and the standard duties standard salary threshold significantly the salary level associated with such a test (based on the old short test). As we below the 40th percentile would require test is too low, employers may use it to noted in the NPRM, we are concerned a more rigorous duties test than the inappropriately classify as exempt that at the current low salary level current standard duties test in order to employees who would not meet the employees in lower-level management effectively distinguish between white more rigorous long duties test. 40 FR positions who would have failed the collar employees who are overtime 7092 (‘‘[T]here are indications that long duties test may be inappropriately protected and those who may be bona certain employers are utilizing the high classified as ineligible for overtime. At fide EAP employees. See 80 FR 38519, salary test to employ otherwise the same time, the Department proposed 38532, 38543. nonexempt employees (i.e., those who a lower salary level than the average salary traditionally used for the short iii. Final Revisions to the Standard perform work in excess of the 20 Salary Level percent tolerance for nonexempt work duties test in order to minimize the The Final Rule adopts the proposed or the 40 percent tolerance allowed in potential that bona fide EAP employees, methodology for setting the standard the case of executive and administrative especially in low-wage regions and salary level as a percentile of actual employees in retail and service industries, might become overtime- salaries currently being paid to full-time establishments) for excessively long protected because they fall below the nonhourly employees, as reported by workweeks.’’). Rather than pair the proposed salary level. As the BLS based on data obtained from the standard duties test with a salary level Department explained, an up-to-date and effective salary level protects CPS. However, we have adjusted the based on the higher short test salary against the misclassification of data set used in response to a level, however, we tied the new overtime-eligible workers as exempt and substantial number of comments standard duties test to a salary level simplifies application of the exemption asserting that the salary level proposed based on the long duties test. This for employers and employees alike. would render overtime-eligible too resulted in a standard salary level that, Consistent with prior rulemakings, many bona fide EAP employees in low- even in 2004, was too low to effectively the Department reached the proposed wage areas. Rather than set the salary screen out from the exemption salary level after considering available level at the 40th percentile of weekly overtime-eligible white collar data on actual salary levels currently earnings of full-time salaried workers employees. being paid in the economy. Specifically, nationally, this Final Rule sets the The importance of ensuring that the as we did in 2004, the Department used salary level at the 40th percentile of standard duties test is not paired with CPS data comprising full-time weekly earnings of full-time salaried too low of a salary level is illustrated by nonhourly employees to determine the workers in the lowest-wage Census the Department’s Burger King litigation proposed salary level. Unlike in the Region. Census Regions are groupings of in the early 1980’s, when the short and 2004 rulemaking, however, the states and the District of Columbia that long tests were still actively in use. The Department did not further restrict the subdivide the United States for the Department brought two actions arguing data by filtering out various employees presentation of data by the United States that Burger King assistant managers based on statutory and regulatory Census Bureau. The current Census were entitled to overtime protection. exclusions from FLSA coverage or the Regions are: The Northeast, the Sec’y of Labor v. Burger King Corp., 675 salary requirement (such as federal Midwest, the South, and the West.26 F.2d 516 (2d Cir. 1982); Sec’y of Labor employees, doctors, lawyers, and The Department determined the v. Burger King Corp., 672 F.2d 221 (1st teachers). ‘‘lowest-wage Census Region’’ by Cir. 1982). One group of assistant The Department proposed to set the examining the 40th percentile of weekly managers satisfied the higher short test salary level as a percentile rooted in the earnings of full-time salaried workers salary level and was therefore subject to distribution of earnings rather than a based on CPS data in each region. For the less rigorous short duties test; the specific dollar amount. Because the purposes of this rulemaking, we other group was paid less and was earnings are linked to the type of work define the ‘‘lowest-wage Census Region’’ therefore subject to the long duties test salaried workers perform, a percentile as the Census Region having the lowest with its limit on nonexempt work. All serves as an appropriate proxy for of the assistant managers performed the distinguishing between overtime- 26 See https://www.census.gov/geo/reference/gtc/ same duties, which included spending eligible and overtime exempt white gtc_census_divreg.html.

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40th percentile of weekly earnings of Resources (CUPA–HR), CVS Health, the week, or $50,440 per year, in 2016). full-time salaried workers, which National Restaurant Association (NRA), Many commenters endorsed the currently is the South.27 and the Northeastern Retail Lumber proposed salary level as an appropriate In keeping with our practice, the Association. Multiple commenters dividing line between employees Department relies on the most up-to- echoed the Department’s observation in performing exempt and overtime- date data available to derive the final the NPRM that the current standard protected work, but others objected that salary level from this methodology. See salary level of $455 per week, or it was either too low or too high. The 69 FR 22168. In the NPRM, the $23,660 annually, is below the 2014 majority of employees and commenters Department utilized 2013 salary data for poverty threshold for a family of four.29 representing employees believed the estimating the salary level resulting The American Federation of Labor and proposed salary level amount was from the proposed methodology, which Congress of Industrial Organizations appropriate or should be increased, was current at the time the Department (AFL–CIO) pointed out that the current while the majority of employers and developed the proposal. In this Final salary level is only slightly higher than commenters representing them believed Rule, we rely on salary data from the the state minimum wage for forty hours the salary level amount should be lower fourth quarter of 2015, as published by of work in several states, and noted that than the threshold the Department BLS, to set the salary level.28 Using this it has long been widely recognized that proposed. data, the Department has determined workers whose pay is ‘‘close to the A large number of commenters that the required standard salary level minimum wage’’ are ‘‘not the kind of supported the proposed salary level will be $913 per week, or $47,476 employees Congress intended to deny either by explicitly endorsing the annually, based on the 40th percentile overtime protection’’ (citing Stein proposed increase or supporting the of weekly earnings of full-time salaried Report at 5). Some salaried employees Department’s proposed rule generally. workers in the South. The $913 salary currently classified as exempt managers Commenters who supported the salary level that results from the methodology commented that they earn less per hour level included thousands of individual is at the low end of the historical range than the employees they supervise. employees, writing independently or as of short test salary levels, based on the The Department also received part of comment campaigns, and historical ratios between the short and multiple comments, including organizations representing employees long test salary levels ($889–$1231). See comments from the American (such as the American Association of section VI.C.iii. Sustainable Business Council and the Retired Persons (AARP), the Coalition of White collar employees subject to the Heartland Alliance for Human Needs Labor Union Women, National Council salary level test earning less than $913 and Human Rights, expressing concern of La Raza, the National Domestic per week will not qualify for the EAP that the current salary level facilitates Workers Alliance (NDWA), the National exemption, and therefore will be eligible the misclassification of overtime-eligible Partnership for Women & Families for overtime, irrespective of their job employees as overtime exempt. The (Partnership), Service Employees duties and responsibilities. Employees RAND Corporation submitted a study International Union (SEIU), the United earning this amount or more on a salary estimating that 11.5 percent of salaried Steel, Paper and Forestry, Rubber, or fee basis will qualify for exemption workers are misclassified as exempt— Manufacturing, Energy, Allied only if they meet the standard duties and therefore do not receive overtime Industrial and Service Workers test, which is unchanged by this Final compensation—even though their International Union (USW), and many Rule. As a result of this increase, 4.2 primary duty is not exempt work or they others). Some employers and human million employees who meet the earn less than the current salary level, resource professionals also supported standard duties test will no longer fall while a human resource professional the proposed increase. For example, the within the EAP exemption and therefore from Florida ‘‘estimate[d] that 40 owner of a hardware store in will be overtime-protected. percent of those employees my clients Minneapolis explained that he had observed ‘‘large businesses abuse their Additionally, 8.9 million employees class[ify] as . . . exempt are really non- employees for many years by paid between $455 and $913 per week exempt.’’ who do not meet the standard duties A few commenters, however, such as misclassifying them as exempt from test—5.7 million salaried white collar the National Grocers Association (NGA), overtime,’’ and stated that the employees and 3.2 million salaried blue urged the Department to maintain the Department’s proposal would ‘‘help bring things back in line.’’ H–E–B stated collar employees—will now face a lower current salary level of $455 per week. that it pays ‘‘competitive wages,’’ and is risk of misclassification. For example, the National Lumber and ‘‘supportive of doubling the minimum Building Material Dealers Association iv. Discussion of Comments salary threshold to the proposed amount stated that the current salary level is of $50,400,’’ although it urged the 1. Proposed Increase in the Standard appropriate for managers in many Department to consider making regional Salary Level sectors and regions. Mutual of Omaha adjustments because other retailers pay requested that the Department create a The overwhelming majority of lower wages based on geographic ‘‘grandfathered exemption,’’ by applying commenters agreed that the standard differences. Some Members of Congress the current salary level to currently salary level needs to be increased, expressed support for the Department’s exempt employees. including many commenters writing on proposal, although other Members of The Department received a significant behalf of employers, such as the Congress opposed it. Business Roundtable, Catholic Charities number of comments in response to our The Department received many USA, College and University proposal to set the standard salary level comments from those who endorsed the Professional Association for Human equal to the 40th percentile of weekly proposal (as well as those seeking a earnings of full-time salaried employees higher salary level) asserting that a 27 For simplicity, in this rulemaking we refer to nationally (estimated to be $970 per significant increase to the current salary the lowest-wage Census Region and the South level is necessary to effectuate Congress’ interchangeably. 29 The 2015 poverty threshold for a family of four 28 BLS currently publishes this data at: http:// with two related people under 18 in the household intent to extend the FLSA’s wage and www.bls.gov/cps/ is $24,036. Available at: http://www.census.gov/ hour protections broadly to most research_series_earnings_nonhourly_workers.htm. hhes/www/poverty/data/threshld/index.html. workers in the United States. See, e.g.,

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Comment from 57 labor law professors; nonexempt work, ‘‘for excessively long Commenters, such as the UFCW, AFL–CIO; Equal Justice Center; National workweeks.’’ 40 FR 7092. The pointed out that the Department’s Employment Lawyers Association Department believes that the effect of proposed salary is lower than the (NELA); Nichols Kaster law firm; SEIU. the 2004 Final Rule’s pairing of a average historical salary ratio associated AFL–CIO stated that Congress intended standard duties test based on the short with the short duties test, which is the the EAP exemptions to apply only to duties test (for higher paid employees) basis for the standard duties test. employees who have sufficient with a salary test based on the long test Multiple commenters noted that the bargaining power such that they do not (for lower paid employees) was to proposed salary level covers a smaller need the Act’s protections against exempt from overtime many lower paid share of all salaried workers (40 percent) overwork and who perform work that workers who performed little EAP work than the 1975 short test salary level, cannot be easily spread to other and whose work was otherwise which covered 62 percent of full-time workers. AFL–CIO and the EPI further indistinguishable from their overtime- salaried employees. See, e.g., AFL–CIO; stated that Congress knew from eligible colleagues.30 This has resulted NELA; Rudy, Exelrod, Zieff & Lowe. experience with Depression-era worker in the inappropriate classification of NELA stated that the 1975 short test protection legislation that employers employees as EAP exempt who pass the salary level was 1.57 times the median sometimes misclassified ordinary standard duties test but would have wage of all full-time wage and salary workers as managers to evade paying failed the long duties test. A significant workers, a ratio which they asserted overtime premiums, and as a result, increase from the 2004 threshold is would result in a current salary exempted only ‘‘bona fide’’ executive, therefore necessary, not only to account threshold of over $65,000 per year based administrative, and professional for the declining real value of the salary on first quarter 2015 data. EPI employees. The National Employment threshold, but also to correct for the fact commented that the proposed salary Law Project (NELP) commented that the that the Department set the standard level is lower than the short test salary Department set the salary level too low salary level in 2004 without adjusting levels adopted by the Department in the in 2004, especially when paired with a for the elimination of the more rigorous 1960s and 1970s, when adjusted for more lenient duties test than the prior long duties test. inflation to 2013 dollars. EPI also long duties test. A comment submitted Many commenters (including some asserted that the salary threshold should on behalf of 57 labor law professors that believe that the proposed salary be higher than the inflation-adjusted noted that, even if the Department had level is reasonable) urged the amounts of short test salary levels from paired the $455 per week standard Department to choose a method that the past in part to account for the fact salary level set in 2004 with a more results in a higher salary level. The vast that management and professional rigorous duties test, it was still lower majority of these commenters, including salaries grew faster than the rate of than necessary to achieve a threshold NELA, Nichols Kaster, the Rudy, inflation after 1970, noting that CEO pay equivalent to the inflation-adjusted Exelrod, Zieff & Lowe law firm, the among the top 350 U.S. corporations amount of the 1975 long test salary Texas Employment Lawyers was almost 11 times higher in 2014 than level. Association, and the United Food and it was in 1978, after adjusting for The Department agrees with Commercial Workers International inflation. Other commenters, including commenters that a significant increase Union (UFCW), asserted that the USW, similarly cited the large growth in in the salary threshold is required to Department should set the standard high-level executive pay in recent ensure the FLSA’s overtime protections salary level equal to the 50th percentile decades in support of the Department’s are fully implemented. The salary level of earnings of full-time salaried workers proposal. test should provide an ‘‘index to the nationally. The Center for Effective Commenters urging a higher salary ‘bona fide’ character of the employment Government stated that the Department level also asserted that the Department’s for which exemption is claimed’’ and should set the standard salary level proposed salary level excludes from ensure that the EAP exemption ‘‘will equal to the 60th percentile of earnings overtime protection too large a not invite evasion’’ of the FLSA’s of full-time salaried workers nationally. percentage of employees in traditionally minimum wage and overtime NELP recommended that the nonexempt occupations and is too low requirements ‘‘for large numbers of Department adjust for inflation the short to adequately minimize the risk of workers to whom the wage-and-hour test salary level adopted by the inappropriately classifying overtime- provisions should apply.’’ Stein Report Department in 1975, or in the eligible workers as overtime exempt. at 19. The current salary level, however, alternative, adopt a threshold of $1,122 AFL–CIO stated that the Department has is less than the 10th percentile of per week. previously set the long test salary level weekly earnings of full-time salaried at an amount about 25 percent higher workers both nationally and in the 30 Jobs With Justice illustrated this phenomenon than the average starting salary for in its comment by recounting the experience of a South. The salary threshold’s function store manager who was classified as exempt even newly hired college graduates, and they in differentiating exempt from though she made only $34,700 per year and asserted that this would yield a standard nonexempt employees takes on greater regularly worked 70 hours per week, spending her salary level of $52,000 per year. AFL– importance, moreover, when there is time performing routine tasks such as ‘‘unloading CIO contended that the salary test must merchandise from trucks, stocking shelves and be set at a ‘‘high enough level that large only one standard duties test that has no ringing up purchases.’’ See also In re Family Dollar limitation on the amount of nonexempt FLSA Litigation, 637 F.3d 508, 511, 516–18 (4th Cir. numbers of eligible workers are not work that an exempt employee may 2011) (holding that a retail manager paid $655 per stranded above the threshold.’’ NELA perform, as has been the case since week plus bonus was an exempt executive even likewise urged the Department to ‘‘aim though she ‘‘devoted most of her time to doing . . . for a threshold where the number of 2004. As the Department has long mundane physical activities’’ such as unloading recognized, if too low a salary level freight, stocking shelves, working the cash register, non-exempt employees earning salaries accompanies a duties test that does not or sweeping the floors); Soehnle v. Hess Corp., 399 above the threshold equals the number limit nonexempt work, employers may Fed. App’x 749, 750 (3d Cir. 2010) (holding that a of otherwise exempt employees earning gas station manager who was paid an annual salary less than the threshold’’—an amount we utilize the salary test to employ of $34,000, worked approximately 70 hours per ‘‘otherwise nonexempt employees,’’ week, and spent 85 percent of time operating a cash estimated in the NPRM would be who perform large amounts of register was an exempt executive). roughly equal to the 50th percentile of

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weekly earnings of full-time salaried suggested a lower percentile of full-time West Virginia—more than 50 percent of workers nationally. See 80 FR 38560. salaried workers nationwide than the nonhourly workers earn less than $970 The Department understands Department proposed. For example, the per week, the amount the Department commenters’ concerns that the proposed Chamber, which preferred that the predicted the proposed salary level standard salary level was lower than the Department use a different data source would be in 2016. PPWO cited to a 50th percentile of full-time salaried set to set the salary level, stated in the study showing that 100 percent of first- workers ($1,065 based on 2013 data) alternative that a salary level at up to line supervisors of food preparation and and updating the 1975 short test salary the 30th percentile of earnings of full- serving workers in Mississippi—an ($1,083 based on 2013 data). As the time salaried workers nationally would occupational category for which the Department stated in the NPRM, ‘‘better reflect the actual dividing line Department predicted 10 to 50 percent however, we are concerned that a between exempt and non-exempt of workers would likely pass the duties standard salary threshold at that level, employees.’’ In addition, several test when we quantified the impact of in the absence of a lower salary long test commenters focused on the salary level our proposal 31—would fall below the to fall back on, would deny employers amount rather than, or in addition to, proposed salary level. The National the ability to use the exemption for too the methodology used to derive the Association of Home Builders (NAHB) many employees in low-wage areas and level. For example, a non-profit analyzed state-level data and found that industries who perform EAP duties. organization providing senior care 50 percent or more of first line In contrast to commenters recommended a salary level of up to construction supervisors in Arkansas, representing employees, a great number $40,000; FMI stated that most of its Mississippi, New Mexico, and of commenters representing employers grocer members would not see a Tennessee would be affected by the and many individual employers significant disruption at a salary level of Department’s proposal. The National objected that the Department’s proposed up to $38,376; and the BOK Financial Network to End Domestic Violence salary level was too high. While Corporation advocated for a $30,000 commented that for one of its member commenters supporting the proposed salary level. Finally, some commenters, organizations in a rural state, nine out threshold or advocating for a higher such as the Partnership to Protect of eleven staff members earn less than threshold asserted that the proposal is Workplace Opportunity (PPWO) and the proposed salary level, and a lender lower than indicated by historical short IFA, asserted that the Department’s with locations across Alabama, test levels, commenters advocating for a proposed salary level should be lower, Louisiana, Mississippi, and Tennessee lower threshold asserted that the but declined to propose a specific stated that 81 percent (62 out of 74) of proposed threshold is out of step with number or method. Most of these its branch managers earn less than historical long test levels. For example, suggestions do not represent a $51,000 per year in base salary. Some the Jackson Lewis law firm asserted that meaningful departure from the commenters, for example, the HR Policy the proposed threshold is higher than methodology the Department has Association and National Association of any past long test salary level for the historically used to set the lower long Manufacturers (NAM), expressed executive exemption, when adjusted for test salary level, and the Department concern that employees performing the inflation to 2015 dollars. The Chamber does not believe that these suggested same duties will be exempt in one stated that the ratio of the proposed salary levels are sufficient to account location but overtime protected in salary level to the minimum wage is too fully for the elimination of the long another. high, based on an analysis they duties test, as explained below. In addition to these comments, performed that weighted the historic The Department received many multiple commenters noted that salaries long test salary levels three times more comments stating that by using a may vary widely within a state or heavily than historic short test salary nationwide data set, the proposal fails to region, especially between rural or levels. adequately account for salary disparities smaller communities and urban areas. Some commenters requesting a lower among regions and areas, industries, Several commenters, including salary threshold, such as the American and firms of different sizes. Some Columbia County, Pennsylvania, Association of Orthopaedic Executives, commenters, including the Assisted Community Transportation Association Associated Builders and Contractors Living Federation of America and the of the Northwest, Elk Valley Rancheria (ABC), and the Montana Conservation American Seniors Housing Association Indian Tribe, Jackson Lewis, the Corps, urged the Department to instead (ALFA), Jackson Lewis, and PPWO, Jamestown S’Klallam Tribe, the adjust the 2004 salary level for inflation. asserted that adopting the proposal National Board for Certified Counselors, Many others stated that the Department would effectively eliminate the the National Newspaper Association, should set the salary level at the 20th exemption for certain industries or in NRF, and the Northern Michigan percentile of earnings of full-time certain parts of the country and, as a Chamber Alliance, commented that the salaried employees in the South and in result, would exceed the Department’s proposed salary level is too high for the retail industry, as we did in 2004. statutory authority. rural areas and small communities. HR See, e.g., American Hotel and Lodging Multiple commenters asserted that the Policy Association stated that 14 Association (AH&LA); Dollar Tree; NRF. proposed salary level is too high for percent of chief executives and 32 The NRA stated that it could support low-wage regions. See, e.g., Chamber; percent of general and operations Alternative 3 in the NPRM, a salary FMI; International Association of managers in small and rural areas level derived from the Kantor long test Amusement Parks and Attractions; earn less than the salary level calculated method taking the 10th percentile of King’s Daughters’ School; NRF; PPWO; using the proposed methodology and earnings of likely exempt employees in Society for Human Resource 2014 data. Commenters also compared low-wage regions, employment size Management (SHRM); and many earnings and the cost of living in lower- groups, city sizes, and industries. Fisher individual commenters. Several wage communities to very high wage & Phillips urged the Department to set commenters cited to an analysis urban areas and asserted that the the salary level at the 20th percentile of conducted by Oxford finding earnings of exempt employee salaries that in eight southern states—Arkansas, 31 See Table A2—Probability Codes by ‘‘in the lowest geographical and Florida, Louisiana, Mississippi, North Occupation, 80 FR 38594; see also 80 FR 38553– industry sectors.’’ Some commenters Carolina, Oklahoma, Tennessee, and 54.

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Department’s proposal fails to fully salaried employees in Louisiana, sufficiently account for regional analyze and take into account these Mississippi, and Oklahoma ($784 per variation in wages. Accordingly, we differences. See, e.g., America Outdoors week or $40,786 annually), which it have adjusted the data set used to set (comparing rural areas to Washington, described as the three states with the the salary level to further reflect salary DC, New York City, and San Francisco); lowest salaries. Many other disparities in low-wage areas. Under Ashley Manor LLC; National Pest commenters, including the International this Final Rule, the Department will set Management Association. Bancshares Corporation, the National the standard salary level equal to the Several commenters also asserted that Association of Federal Credit Unions, 40th percentile of weekly earnings of the proposed salary level ($50,440 based the National Council of Young Men’s full-time salaried workers in the lowest- on projections for 2016) would have a Christian Associations of the United wage Census Region. Based on fourth disproportionate impact on employers States of America (YMCA), and many quarter 2015 data, the lowest-wage in low-wage industries, such as the individual commenters, urged the Census Region is the South, and the retail and restaurant industries. HR Department to adopt different salary 40th percentile of weekly earnings of Policy Association stated that in the levels for different regions of the full-time salaried workers in the South retail, accommodation, and food country or for different industries or is $913.32 See Table B. By comparison, services and drinking places industries, sizes of businesses. the 40th percentile nationally is $972, over one-third of general and operations Commenters representing employee and the 40th percentile in the highest- managers would fall below the proposed interests, however, disagreed that the wage Census Region (the West) is salary level in 2014 dollars. FMI stated Department should make further $1,050. that ‘‘millions of employees in retail adjustment for low-wage regions and who clearly meet the duties industries. EPI commented that because TABLE B—40TH PERCENTILE OF EARN- requirements for retail earn below the Department’s proposed standard INGS FOR FULL-TIME SALARIED $50,000.’’ NRA cited a 2014 survey salary level falls within historic short WORKERS BY CENSUS REGION finding that the median base salary paid test levels, the Department’s earlier to restaurant managers is $47,000 and to adjustments to account for regional 40th percentile of crew and shift supervisors is $38,000, wage disparities are ‘‘baked in.’’ See earnings of full- and multiple chain restaurant also AFL–CIO. This is because the Census region time salaried businesses submitted comments stating Department historically set the short test workers (in 4th quarter that if the Department increased the level as a function of a long test level, 2015) salary level to our proposed threshold which had been adjusted to reflect low- and updated it annually, ‘‘there might wage regions and industries. UFCW South ...... $913 be no exempt employees in many of our similarly asserted that the Department Midwest ...... 994 restaurants.’’ should not have proposed a salary Northeast ...... 1,036 The Department also heard from threshold lower than the average short West ...... 1,050 multiple commenters, such as IFA, the test salary level to account for low-wage All Census Regions ...... 972 National Federation of Independent regions and industries, because the data Businesses (NFIB), NGA, the National from which the Department drew the This adjustment will ensure that the Independent Automobile Dealers percentile includes the earnings of salary level ‘‘is practicable over the Association, the National Newspaper employees in low-wage industries and broadest possible range of industries, Association, Senator David Vitter, and regions. In addition, AFL–CIO and EPI business sizes and geographic regions.’’ Representative James Inhofe, that our stated that the Department should be 69 FR 22171 (citing Kantor Report at 5). proposal would have a disproportionate less concerned about the impact of Setting the salary level equal to the impact on small businesses. The Office regional wage variation than in prior weekly earnings of the 40th percentile of Advocacy of the United States Small rulemakings. According to an analysis of full-time salaried workers in the Business Administration (Advocacy) conducted by EPI, over the past four lowest-wage Census Region represents stated that the proposed salary decades, wages in lower-wage states the 22nd percentile of likely exempt threshold would ‘‘add significant have ‘‘moved much closer to national employees in the South, the 19th compliance costs .... on small norms.’’ percentile of likely exempt employees in entities, particularly to businesses in The Department has considered these the Midwest, and the 16th percentile of low-wage regions and in industries that comments and appreciates the strong likely exempt employees in both the operate with low profit margins.’’ views in this area. While our proposal West and the Northeast.33 The 40th Several commenters, including the did account for lower salaries in some percentile of full-time salaried workers Chamber, Littler Mendelson, Fisher & regions and industries by setting the in the South also represents the 20th Phillips, and the Seyfarth Shaw law salary level lower than both the average percentile of likely exempt employees firm, noted that the Department has historical salary ratio associated with working in small establishments and the historically adjusted the salary level to the short duties test ($1,019 per week 28th percentile of likely exempt account for low-wage regions and according to the data set used in the employees who do not live in industries and small establishments, Final Rule) and the median of full-time and asserted that the Department failed salaried workers ($1,146 according to 32 The South Census Region includes Alabama, to do so in this rulemaking. These and the data set used in the Final Rule), we Arkansas, Delaware, the District of Columbia, other commenters urged the Department have determined that further adjustment Georgia, Florida, Kentucky, Louisiana, Maryland, to account for such variations by setting to account for regional variation is Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, Virginia, and West the salary level at a point near the lower warranted. The proposed salary level Virginia. range of salaries in the lowest-wage ($972 based on the fourth quarter 2015 33 The population for determining employees regions or industries. For example, data) is in the lowest quarter of the who are likely exempt under the standard duties among other alternatives, the Chamber historical range of the short test salary, test is limited to potentially affected EAP workers (i.e., white collar, salaried, not eligible for another asked the Department to consider but it is not at the bottom of the range, non-EAP overtime exemption, and not in a named setting the salary level at the 40th and based on the comments, we are occupation) earning at least $455 but less than percentile of earnings of full-time concerned that this salary would not $913.

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metropolitan areas.34 This increase from amount slightly lower than might be on these comments and for the reasons the traditional 10 percent of exempt indicated by the data. In addition, this discussed above, the Department has employees excluded by the Kantor long method is consistent with our previous decided to use a regional data set that test method reflects the shift to a salary practice of examining data broken out results in a lower standard salary level level appropriate to the standard duties by geographic area in setting the salary than the national data set we proposed test. Because the long duties test level. The Final Rule methodology also in the NPRM. included a limit on the amount of benefits from continuity with our 2004 The Department is mindful that any nonexempt work that could be methodology, in which we set the salary salary level must adequately demarcate performed, it could be paired with a low level equal to a percentile of the bona fide EAP employees in higher- salary that excluded few employees earnings of full-time salaried workers in wage, as well as lower-wage areas. As performing EAP duties. In the absence the South. Finally, the approach we have previously explained when of such a limitation in the duties test, it adopted in this Final Rule fulfills the discussing the salary level to be paired is necessary to set the salary level higher Department’s goals of making the salary with the more rigorous long duties test, (resulting in the exclusion of more methodology simpler and more the threshold ‘‘can be of little help in employees performing EAP duties) transparent. See 80 FR 38527. identifying’’ bona fide EAP employees because the salary level must perform The Department believes that the when ‘‘large numbers’’ of traditionally more of the screening function standard salary level set in this Final nonexempt workers in large cities earn previously performed by the long duties Rule will appropriately distinguish more than this amount. Weiss Report at 10. By setting the salary equal to the test. Accordingly the salary level set in between those who likely are bona fide 40th percentile of salaries in the lowest- this Final Rule corrects for the EAP employees and those who likely wage Census Region, a higher percentile mismatch in the 2004 Final Rule are not, when paired with the current than we chose in 2004, the Department’s between a low salary threshold and a duties test and will not require a return methodology is sufficiently protective of less rigorous duties test. to a limit on the performance of The decrease in the salary level due employees in higher-wage regions and nonexempt work. The Final Rule salary to the change to the lowest-wage region accounts for the fact that the standard level, like the Department’s proposed data set addresses commenters’ salary level will be paired with a less salary threshold, exceeds the inflation- concerns that the salary test would rigorous standard duties test that does adjusted 2004 salary level and the levels eliminate the exemption for certain not specifically limit the amount of suggested by the Kantor long test and industries or certain parts of the nonexempt work that can be performed. country. For example, while PPWO 2004 methods (all of which were based The $913 salary level is within the asserted that the proposed salary level on the lower long test salary), but is at historical range of short test salary would have excluded from the the low end of the historical range of levels, based on the ratios between the exemption all first line supervisors of short test salary levels, based on the short and long test salary levels, albeit food preparation and service workers in historical ratios between the short and at the low end of that range. To the Mississippi, the revised salary level long test salary levels. A substantially extent that salaries in lower-wage adopted in this Final Rule excludes only higher standard salary threshold, such regions have converged with salaries 78 percent of these workers. This leaves as the levels advocated by some elsewhere in the country, as some 22 percent of such workers covered by commenters representing employees, commenters suggested, tying the salary the exemption in Mississippi— would fail to account for the absence of level to salaries in the lowest-wage appropriately within the 10 to 50 a long test, which historically allowed Census Region is even less likely to percent of employees in this occupation employers to claim the exemption at a result in a threshold that is nationwide predicted to pass the lower salary level for employees who inappropriate for other areas. standard duties test under the satisfy a more restrictive duties test. The Department believes the Final Department’s probability codes. See This is particularly true given that the Rule methodology strikes an appropriate section VI Appendix A. Likewise, 55 salary threshold will apply nationwide, balance between minimizing the risk of percent of first line supervisors of including in low-wage regions and low- employers misclassifying overtime- construction trades and extraction wage industries. In the NPRM, the eligible workers as exempt, while workers in the South earn above the Department considered setting the reducing the undue exclusions from Final Rule’s salary threshold, even standard salary equal to the 50th exemption of bona fide EAP employees. though only 0 to 10 percent of such percentile of earnings of full-time As the Department explained in the workers nationwide are likely to pass salaried workers nationwide ($1,146 per NPRM, we have long recognized that the standard duties test. Id. The revised week or $59,592 annually according to there will always be white collar salary is approximately equivalent to the data set used in this Final Rule); we overtime-eligible employees who are the 2014 median base salary paid to also considered adjusting the 1975 short paid above the salary threshold, as well restaurant managers cited by NRA. test salary level of $250 for inflation as employees performing EAP duties Setting the salary level equal to the ($1,100 per week or $57,200 annually). who are paid below the salary 40th percentile of earnings of full-time We declined to adopt either alternative, threshold. Under the Final Rule, 5.7 salaried workers in the lowest-wage however, due to our belief that the million white collar employees who fail Census Region is consistent with the salary level generated through these the standard duties test will now also Department’s historical practice of methods would result in overtime fail the salary level test eliminating their examining a broad set of data on actual eligibility for too many employees in risk of misclassification as exempt. The wages paid to salaried employees and low-wage regions and industries who Department estimates that 732,000 of then setting the salary level at an are bona fide EAP employees. See 80 FR these white collar salaried workers are 38534. As discussed above, the overtime-eligible but their employers do 34 The Department does not know which Department received a great number of not recognize them as such. See section employees work for small businesses and therefore comments in response to the NPRM that VI.C.ii. An additional 4.2 million randomly assigns workers to small businesses. The number of likely exempt employees who do not live confirm our concern about the employees who meet the standard in metropolitan areas is based on employees who applicability of such a salary level in duties test (but may not have met the do not live in a Metropolitan Statistical Area. low-wage regions and industries. Based long duties test prior to 2004) will no

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longer qualify for the EAP exemption— bona fide EAP employees when ‘‘large setting the standard salary level.37 In and therefore will become overtime numbers’’ of traditionally nonexempt developing this Final Rule, the eligible—because they are paid less than workers in high wage areas earn in Department examined weekly earnings the new salary level. See section VI.C.ii. excess of the salary level. Weiss Report of full-time salaried employees in the Although the Department recognizes at 10. In California and New York, for retail and restaurant industries to that an estimated 6.5 million white example, 69 percent of first-line determine if adjustment based on these collar employees who fail the standard supervisors in construction, 51 percent industries was appropriate. In the retail duties test will still earn at least the new of and legal assistants, and 31 industry, the 40th percentile of full-time salary level, these overtime-eligible percent of secretaries and administrative salaried employees nationally is $848 employees will be protected by the assistants earn $913 or more per week, per week, a salary below the low end of application of the duties test. despite the fact that the probability of the historical range of the short test Other measures confirm the these workers passing the standard salary ($889) and therefore one that appropriateness of the new standard duties test is between 0 to 10 percent. would not work effectively with the salary level. The Department has With respect to commenters who standard duties test. In the restaurant traditionally considered newly hired expressed concern that employees industry (food services and drinking college graduates to be overtime eligible performing the same duties will be places), the 40th percentile of full-time and the Final Rule salary level is exempt in one location and overtime salaried employees nationally is $724 slightly higher than the average salary protected in another, the Department per week. This salary is not only below for college graduates under 25 years notes that this has always been the case the low end of the historical short test old.35 See Weiss Report at 19. Setting the and may occur at any salary level. range, but also only slightly above the salary level at the 40th percentile of Lowering the salary threshold below the historical average of the long test salary weekly earnings of full-time salaried amount set in this Final Rule would level ($719).38 39 The Department workers in the South also places it far result in a salary level that is therefore concluded that setting the enough above the minimum wage to inappropriate for traditionally salary level based on wages in these provide an effective means of screening nonexempt workers in high wage areas, industries would require significant out workers who should be overtime especially when paired with the less changes to the standard duties test, protected. Following each update from rigorous standard duties test. which commenters representing 1949 to 1975, the ratio of the short test The $913 salary level adopted in this employers overwhelmingly opposed, salary level to the earnings of a full- Final Rule corresponds to the low end see, e.g., NRF, NRA, FMI, and which time, nonexempt, minimum wage of the historical range of salaries for the would be inconsistent with the worker equaled between approximately short duties test on which the current Department’s goal of simplifying the 3.0 and 6.25.36 The proposed salary standard duties test is based ($889 to exemption. The Department believes, level is 3.15 times full-time minimum $1,231). The Department considered the moreover, that the lower salary level wage earnings ($913/($7.25 × 40)), possibility of adopting a salary level yielded by using the lowest-wage which is within the historical range. equal to the 35th percentile of weekly Census Region is appropriate over the To the extent that some commenters earnings of full-time salaried employees range of industries, including low-wage advocated an even further downward in the South, which would yield a industries, because it captures adjustment to the salary level to account salary level of $842 per week based on differences across regional labor markets for low-wage regions and industries, the fourth quarter 2015 data. However, without attempting to adjust to specific Department believes that such an given that this would result in a salary industry conditions. adjustment would not be appropriate level lower than the bottom of the With respect to the Chamber’s given that the Department has decided historical range of short test salary suggestion that the Department limit the not to introduce a specific limitation on levels, based on the historical ratios data set to the three lowest-wage states the performance of nonexempt work between the short and long test salary in the South (for which the 40th into the standard duties test. Moreover, levels, the Department determined that percentile of weekly earnings is $784), we note that the standard salary level setting the salary level at the 35th this methodology yields a salary level must be practicable in high-wage areas percentile of the lowest-wage Census significantly below the historical range as well as in low-wage ones. As we have Region would not work effectively with of short test salary levels and for all the previously stated, the salary threshold the standard duties test. The reasons discussed above would ‘‘can be of little help in identifying’’ Department also considered adopting a higher salary level within the historical 37 In the past, salaries in low-wage areas and low- 35 Several commenters asserting that the range of short test salaries as advocated wage industries have been closely aligned, and in Department’s proposed salary level is too high, by many employee representatives, but 2004 salaries in the South and in the retail industry including the American Council of Engineering were similar. See 69 FR 22168 (‘‘[T]he lowest 20 and the American Institute of Certified we remain concerned about the adverse percent of full-time salaried employees in the South Public Accountants, suggested that increasing the effect such a threshold might have on region earn approximately $450 per week. The salary level could lead employers to classify recent low-wage regions. Accordingly, the lowest 20 percent of full-time salaried employees in college graduates or junior employees as Department has concluded that the 40th the retail industry earn approximately $455 per nonexempt. The Department has long recognized week.’’). This historical parity does not exist at the that ‘‘college graduates just starting on their percentile of weekly earnings of full- 40th percentile of workers in the restaurant and working careers . . . normally have not achieved time salaried workers in the South retail industries, and adjusting the salary level bona fide administrative or professional status, nor represents the best dividing line further to account for wages in these industries are their salaries commensurate with those of fully between employees who are overtime would require changes to the standard duties test. trained and experienced professional or 38 The Department calculated the historic average administrative employees.’’ Weiss Report at 19. eligible and those who may not be of the long test salary level by averaging the 20 36 The 6.25 ratio is an outlier that was set in overtime eligible, when paired with the values set for the long test (executive, December 1949 (when the short test was created) standard duties test. administrative, and professional) from 1938 to 1975 and the minimum wage increased from $.40 to $.75 Historically the Department has in 2015 dollars. The historical average salary level per hour one month later (which reduced the ratio looked to low-wage industries as well as for the long test is $719. to 3.33). To return to the 6.25 ratio, the weekly 39 The Department notes there are also significant salary level would have to be set at $1,812.50, low-wage regions in setting the long test levels of misclassification of overtime-eligible white which is around the 80th percentile of full-time salary and, in 2004, we looked collar workers as exempt in these industries. See salaried employees nationally. specifically to the retail industry in section VI.C.ii.

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therefore fail to work appropriately with provides a sufficient data set to capture been effectively inoperative for many the standard duties test. If the differences across regional labor markets years. Finally, some commenters Department had instead looked to and produces a salary level that is asserted that the Department improperly Census divisions, the West South appropriate on a national basis. equates the standard duties test with the Central division,40 which includes The Department also declines to less rigorous short duties test. See, e.g., Louisiana and Oklahoma has a 40th adopt different salary levels for different World Floor Covering Association percentile of weekly earnings of full- regions of the country or for different (‘‘DOL did not eliminate the long duty time salaried workers of $878, and the industries or sizes of businesses. The test and keep the short duty test in 2004. East South Central division,41 which Department has always maintained a Rather, it combined the short and long includes Mississippi, has a 40th salary level applicable to all areas and duties tests by relaxing the strict percentile of weekly earnings of full- industries. As the Department explained standards under the long duty test and time salaried workers of $849. Both of when we rejected regional salary increasing duties under the short duty these would also result in a salary level thresholds in the 2004 Final Rule, test.’’) The Chamber and the Iowa that is lower than the bottom of the adopting multiple different salary levels Association of Business and Industry historical short test salary range and is not administratively feasible ‘‘because pointed out that in 2004 the Department would thus necessitate changes to the of the large number of different salary added to the standard executive duties duties test. Moreover, the Department levels this would require.’’ 69 FR 22171. test an additional requirement (that the believes that the best practice is to set Furthermore, as discussed earlier, the employee be one who has ‘‘the authority the salary level based on an entire Department believes the methodology to hire or fire other employees or whose region, as we did in 2004, rather than adopted in this Final Rule will suggestions and recommendations’’ as based on a select and very small subset adequately account for commenters’ to these matters ‘‘are given particular of states or on a Census division.42 The concerns about geographic and other weight’’), and the Iowa Association of three Census divisions that make up the disparities by setting the salary level Business and Industry also noted that South Census Region have lower wages based on salaries in the lowest-wage the Department added a ‘‘matters of at the 40th percentile of weekly earnings Census Region. significance’’ qualification to the of full-time salaried workers than any In addition to asserting that the administrative standard duties test. other Census divisions. By focusing on proposed salary level is inappropriate The Department disagrees with these the lowest-wage Census Region—made for low-wage regions and industries, comments, and we continue to believe up of the three lowest-wage Census commenters requesting a lower salary that the salary level set in 2004 was too divisions—we have removed the effect level also criticized the methodology the low to effectively screen out from the of the three higher earnings Census Department used in our proposal, took exemption overtime-protected white Regions on the salary level, ensuring the issue with the justifications collar employees when paired with the salary level is not driven by earnings in underpinning the proposal, and standard duties test. As an initial high- or even middle-wage regions of predicted that the proposed salary level matter, we disagree with commenters’ the country. Moreover, establishing the would negatively impact employers and suggestion that the standard duties test salary level based on a Census Region employees. Some commenters criticized does not closely approximate the the Department for using a different historic short duties test because of 40 The West South Central division comprises percentile to set the salary threshold minor differences between the two tests. Arkansas, Louisiana, Oklahoma, and Texas. than it has in the past. See, e.g., FMI; In 2004, the Department described these 41 The East South Central division comprises National Roofing Contractors differences as merely ‘‘de minimis,’’ and Alabama, Kentucky, Mississippi, and Tennessee. Association (asserting that the explained that the new standard duties 42 A number of commenters noted that the Department’s proposal is higher than the minimum ‘‘threshold would extend to the 40th test is ‘‘substantially similar’’ to the old salary level necessary for an EAP employee to be percentile of wage earners, up sharply short duties test. 69 FR 22192–93; 69 FR exempt from state overtime laws in two high-wage from methodologies used when 22214. The key difference between the states, California ($41,600 in 2016) and New York previously determining the threshold old short test and the old long test was ($35,100 in 2016). See, e.g., Corpus Christi Chamber of Commerce; FMI; IFA; Littler Mendelson. The that used the 10th and 20th percentile’’). that the long test imposed a bright-line salary thresholds for the white collar exemption in Several commenters also disagreed 20 percent cap on the amount of time California and New York are based on multipliers with the Department’s explanation that an exempt employee could spend on of the full-time equivalents of those states’ it was necessary to set a percentile that nonexempt duties (40 percent for minimum wages; the salary level in California is 2 would not only reflect increases in times the state minimum wage, and the salary level employees in the retail or service in New York is typically 1.875 times the state nationwide salary levels since 2004, but industries). The short duties test, in minimum wage. See Cal. Lab. Code Sec. 515(a); also correct for the fact that the salary contrast, did not impose a specific N.Y. Comp. Codes R. & Regs, 12 §§ 142–2.1, 2.14. level set in 2004 was too low—when limitation on nonexempt work because These multipliers are lower than the historical ratio paired with a duties test based on the of the Department’s short test salary level and the the short test was intended to apply federal minimum wage (which has never been historical short duties test—to only to workers who earned salaries lower than 2.98, see 80 FR 38533), and they effectively screen out overtime- high enough that such a limitation was approximate the historical ratio between the protected white collar employees from unnecessary. The standard duties test Department’s long test salary level and the federal the exemption. Many of these developed in 2004 takes the short test minimum wage (which, between 1958 and 1975, ranged from 1.85 to 2.38). The Department believes commenters asserted that the approach and does not specifically limit that the salary level yielded by our methodology, Department did account for the nonexempt work. which is 3.15 times the current federal minimum elimination of the long duties test, by When moving to a standard duties test wage, better corresponds to the standard duties test, increasing ‘‘the percentile used from based on the short duties test in 2004, which—like the old short duties test—does not include a quantitative limit on nonexempt work. 10th to 20th.’’ Littler Mendelson; see the Department relied on the The Department also notes that California requires also AH&LA; NRF. The Chamber methodology we had historically used exempt EAP employees to spend at least 50 percent commented that the Department did not to set the long test salary threshold, with of their time performing their primary duty, not need to adjust for the elimination of the two changes. First, the Department set counting time during which nonexempt work is performed concurrently. See Cal. Lab. Code Sec. long duties test in 2004 because the long the salary level based on the earnings of 515(a), (e); see Heyen v. Safeway Inc., 157 Cal. Rptr. test salary level was so in need of exempt and nonexempt full-time 3d 280, 302 (Cal. Ct. App. 2013). updating that the long duties test had salaried employees. In previous

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rulemakings, the Department had Accordingly, the Department set the that ‘‘employees below it would clearly looked only at salary data on employees standard salary level using a not meet any duties test,’’ or would be who met the EAP exemption, who earn methodology that yielded a result very unlikely to satisfy the duties higher salaries on average than consistent with the methodology we had requirements. NRA; see also HR Policy nonexempt salaried employees. See 69 historically used to set the salary level Association; Jackson Lewis; SHRM. FR 22166–67. Second, recognizing that paired with the long duties test, even SHRM and others asserted that the ‘‘employees earning a lower salary are though the new standard duties test was proposal would for the first time set the more likely non-exempt,’’ the based on the short duties test. This was salary level such that a large number of Department offset the first change by a methodological error, even if employees who satisfy the duties test making an additional adjustment. Id. employers at the time were primarily would be excluded from the exemption, The 2004 Final Rule set the salary level using the less rigorous short duties test. which would therefore make them to exclude from exemption The fact that the long duties test was overtime eligible. These commenters ‘‘approximately the lowest 20 percent of unused because the Department had pointed to the Department’s statement, all salaried employees,’’ whereas neglected to update the salary when setting the long test salary previously the Department set the salary associated with it for 29 years does not thresholds in 1949 and 1958, that the level to exclude ‘‘approximately the mean that we did not need to account thresholds should not defeat the lowest-paid 10 percent of exempt for the removal of the long test when the exemption for ‘‘any substantial number salaried employees.’’ 69 FR 22168 standard test was established. The of individuals who could reasonably be (emphases added and in original); 69 FR Department is now correcting this error classified for purposes of the Act as 22166 (emphases added). By setting the by setting the salary level equivalent to bona fide executive, administrative, or salary threshold at a higher percentile of the 40th, rather than the 20th, percentile professional employees,’’ and should a data set that included employees of weekly earnings of full-time salaried provide a ‘‘ready method of screening likely to earn lower salaries, the workers in the lowest-wage Census out the obviously exempt employees.’’ Department explained that we reached a Region (the South). This percentile Weiss Report at 8–9; Kantor Report at final salary level that was ‘‘very results in a salary level that is at the low 2–3. Commenters asserted that because consistent with past approaches’’ to end of the historical range of short test only those who are ‘‘very likely to setting the long test salary threshold. 69 salary levels, based on the historical satisfy’’ the duties tests earn salaries FR 22167. ratios between the short and long test above the Department’s proposed Although the Department also salary levels, but is appropriately higher threshold, see Jackson Lewis (emphasis recognized the need to make an than the historical long test salary in comment), the Department has turned additional adjustment to the long test levels. By making this change to our the historical purpose of the salary level salary level methodology because of the 2004 methodology, the Department ‘‘on its head.’’ See PPWO. PPWO, move to the standard duties test, see 69 better accounts for the fact that the SHRM, and others further commented FR 22167, the salary level included in standard duties test is significantly less that the Department’s proposal the 2004 Final Rule ultimately did not rigorous than the long duties test and, improperly renders the duties test do so. The Department indicated that therefore, the salary threshold must play superfluous and makes the salary level the change in percentile could account a greater role in protecting overtime- test the ‘‘sole’’ determinant of exempt for both the fact that the data now eligible employees. status. ‘‘included nonexempt salaried The Chamber, FMI, and SHRM also 2. Purpose of the Salary Level Test employees’’ and ‘‘the proposed change stated that the Department lacks the from the ‘short’ and ‘long’ test Several commenters that stated that authority to set wages for, or establish structure.’’ Id.; see 68 FR 15571. At the the Department’s proposed threshold is a salary level with the goal of, same time, however, the Department too high asserted that the proposal alters improving the conditions of executive, acknowledged that the change to the the purpose of the salary test and administrative, and professional 20th percentile of exempt and inappropriately minimizes the role of employees. IFA asserted that because nonexempt salaried employees the duties test by excluding from the the Department’s proposal makes produced a salary that was in fact exemption too many employees who nonexempt what IFA characterized as a roughly equivalent to the salary derived satisfy the standard duties test. In significant number of employees who would clearly meet the duties test, the through the methodology previously support of this point, SHRM noted the proposal ‘‘expands the number of used to set the long test salary levels. Department’s estimate that 25 percent of employees eligible for overtime beyond See 69 FR 22168. As the data tables in white collar workers subject to the salary level test who currently meet the what Congress envisioned.’’ the 2004 Final Rule show, the $455 Commenters representing employees, salary level excluded only 8.2 percent of duties test would be overtime-protected under the Department’s proposed salary however, disagreed that the purpose of likely exempt employees in the South the salary level is to identify employees and 10.2 percent of likely exempt level. HR Policy Association stated that, if the salary level was set according to who are very likely to fail the duties employees in retail. See 69 FR 22169, tests. NELA and other commenters Table 4; see also 69 FR 22168 (‘‘The the Department’s proposed methodology, 25 percent of accountants asserted that the primary purpose of the lowest 10 percent of likely exempt salary level is to prevent employers and auditors, 24 percent of business and salaried employees in the South earn from inappropriately classifying as 43 financial operation managers, and 11 just over $475 per week.’’). exempt those who are not ‘‘bona fide’’ percent of ‘‘chief executives’’ would not executive, administrative, or 43 qualify for the EAP exemption in 2014. While the 2004 method and the Kantor long professional employees. NELA noted test method produced similar salaries in 2004, the Several commenters representing salary levels yielded by these methods now diverge employers stated that the salary level that the proposed threshold is lower significantly. Today, the 2004 method would has historically been set at a level such than the salaries of roughly 41 percent produce a salary level of $596 per week, while of salaried workers who fail the duties using the Kantor long test method would result in a salary level of $684 per week. See section VI.C.iii. duties test, it would result in a noticeably lower test, according to the NPRM, and AFL– Thus, not only would using the 2004 methodology salary level than the average long test salary level CIO commented that under the today fail to account for elimination of the long between 1940 and 2004 in 2015 dollars. proposal, ‘‘the percentage of overtime-

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eligible white collar salaried employees 10 to 50 percent of such workers are importance involved in a particular above’’ the salary level ‘‘will still be likely to pass the standard duties test. employee’s job,’’ Weiss Report at 9, and considerably higher than the percentage By contrast, of salaried white collar ‘‘the best single test of the employer’s of employees below the threshold who workers who currently meet the good faith in characterizing the meet the duties test.’’ Commenters standard duties test, 5.0 million (22.0 employment as of a professional representing employees also disagreed percent) earn less than $913 per week, nature.’’ Stein Report at 42. Thus, the that the Department’s proposal would and will thus be eligible for overtime Department acknowledged shortly after prevent employers from taking under this Final Rule. Whenever the we first promulgated the part 541 advantage of the exemption for a Department increases the salary level, it regulations that, in the absence of a substantial number of bona fide is inevitable that ‘‘some employees who clause ‘‘barring an employee from the executive, administrative, or have been classified as exempt under exemption if he performs a substantial professional employees. For instance, the present salary tests will no longer be amount of nonexempt work,’’ it EPI noted that BLS scores occupations within the exemption under any new becomes ‘‘all the more important’’ to set by skill, knowledge, and responsibility, tests adopted.’’ Kantor Report at 5. As the salary level ‘‘high enough to prevent and finds an hourly wage of about $24 we have explained, such employees abuse.’’ Stein Report at 26. This inverse (or $970 for a 40-hour workweek) is include ‘‘some whose status in correlation between the salary level and below the salary level associated with management or the professions is the duties requirements was the basis of supervisory responsibilities. questionable in view of their low the separate short and long tests, which As the Department explained in the salaries,’’ and some ‘‘whose exempt co-existed until 2004. NPRM, the purpose of the salary level status, on the basis of their duties and As reflected in many comments test has always been to ‘‘distinguish responsibilities, is questionable.’’ Id. favoring a lower salary level, the bona fide executive, administrative, and Moreover, as we have long been aware, Department historically paired the long professional employees from those who if too low a salary level is paired with duties test—which limited that amount were not intended by Congress to come a duties test that does not specifically of nonexempt work an exempt within these exempt categories.’’ 80 FR limit nonexempt work, employers may employee could perform—with a salary 38524. Any increase in the salary level inappropriately classify as exempt level designed to minimize the number must therefore ‘‘have as its primary workers who perform large amounts of of employees satisfying that test who objective the drawing of a line nonexempt work. See 40 FR 7092. The would be deemed overtime-eligible separating exempt from nonexempt Department believes that many of the based on their salaries. Even then, the employees.’’ Id. The salary methodology workers who will no longer be exempt Department noted that the long test established in this Final Rule fulfills as a result of this rulemaking would salary level should exclude the ‘‘great this purpose by effectively and have failed the long duties test and are bulk’’ of nonexempt employees from the efficiently demarcating between white currently inappropriately classified EAP exemption. Weiss Report at 18. collar employees who are overtime because of the mismatch between the When the Department enacted the short protected and those who may be bona current standard duties test and the test in 1949, however, we recognized fide EAP employees. standard salary level. To the extent that that this more permissive ‘‘short-cut The Department does not believe that commenters expressed concerns that the test’’ for determining exempt status— the methodology adopted in this Final proposal would exclude from which did not specifically limit the Rule would defeat the exemption for too exemption too many bona fide EAP amount of time an exempt employee many employees who pass the standard employees in certain areas and could spend on nonexempt duties— duties test, or render the standard duties industries, the Department has must be paired with a ‘‘considerably test superfluous. There will always be recalibrated the methodology in this higher’’ salary level. Id. at 23. This some employees performing EAP duties Final Rule to better take into account salary level, the Department explained, who are paid below the salary salaries in low-wage regions and ‘‘must be high enough’’ to qualify for the threshold, as well as overtime-eligible industries, as discussed earlier, while EAP exemption ‘‘only those persons employees who are paid above the remaining cognizant of the about whose exemption there is salary threshold (and thus whose status corresponding but opposite impact on normally no question.’’ Id. Accordingly, turns on the application of the duties high-wage regions and industries. See the Department set the short test test). See 80 FR 38527. Under the Final section VI.C.ii. threshold such that those who earned Rule, 6.5 million white collar workers Commenters asserting that the above this level would meet the who earn above the required salary level Department’s proposal turned the requirements of the long duties test— do not satisfy the standard duties test, purpose of the salary level test ‘‘on its including the limit on performing representing 47 percent of the total head’’ misconstrue the relationship nonexempt work—‘‘with only minor or number of white collar workers who fail between the salary level test and the insignificant exceptions.’’ Id. In other the duties test. For these overtime- duties test as it has existed throughout words, the short test salary threshold eligible salaried workers, the standard most of the history of the part 541 was sufficiently high that an employee duties test rather than the salary test regulations. The fact that an employee earning above this level was not only will dictate their exemption status. For satisfies the duties test, especially the ‘‘very likely,’’ but nearly certain, to example, 48 percent of secretaries and more lenient standard duties test, does satisfy the long duties test, as well as the administrative assistants in banking not alone indicate that he or she is a short duties test. Between 1949 and nationwide earn at or above the $913 bona fide executive, administrative, or 1975, the Department adhered to these per week salary level adopted in this professional employee. The salary level principles by enacting short test salary Final Rule, although at most 10 percent test and duties test have always worked levels at approximately 130 to 180 of such workers are likely to pass the in tandem to distinguish those who percent of the long test salary levels. standard duties test. Likewise, 71 Congress intended the FLSA to protect The standard duties test adopted in percent of first-line supervisors of from those who are ‘‘bona fide’’ EAP 2004, and unchanged by this Final Rule, mechanics, installers, and repairers in employees. The Department has long is essentially the same as the old short the utilities industry nationwide earn at recognized, moreover, that ‘‘salary is the duties test. It does not specifically limit least $913 per week, even though only best single indicator of the degree of the amount of time an exempt employee

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can spend performing nonexempt exempt status.’’ In addition, IABI, the executive, administrative, and duties. Accordingly, the Department International Foodservice Distributors professional employees who Congress disagrees with commenters that suggest Association, and others criticized the intended to exempt from the FLSA’s that the current duties test can be paired Department for declining to further minimum wage and overtime appropriately with a salary level derived restrict the CPS sample by filtering out requirements. Including them in the from the same methodology we have various categories of employees—such data set achieves a sample that is more historically used to set the salary level as teachers, lawyers, or federal representative of EAP salary levels paired with the long duties test. The employees—based on statutory and throughout the economy. Moving to an Department also disagrees, however, regulatory exclusions from FLSA even more standardized sample that with commenters that suggest the coverage or the salary requirement. does not require adjustments also serves current standard duties test could be The Department continues to believe, the Department’s goal of making the paired with a salary level derived from as we did in 2004, that CPS data is the salary methodology as transparent, the 50th percentile of full-time salaried best available data for setting the salary accessible, and as easily replicated as workers or from the 1975 short test threshold. The CPS is a large, possible, and is consistent with the salary level without also reinstating a statistically robust survey jointly President’s directive to simplify the part lower-salaried long test. The administered by the Census Bureau and 541 regulations. methodology adopted in this Final Rule BLS, and it is widely used and cited by 4. Comments Requesting a Phase-In of results in a salary level that is higher industry analysts. It surveys 60,000 the Proposed Increase than indicated by historical long test households a month, covering a methodologies, but at the low end of the nationally representative sample of Many employers and commenters historical salary range of short test workers, industries, and geographic representing them also expressed salary levels, based on the ratios areas and includes a breadth of detail concern about the magnitude of the between the short and long test salary (e.g., occupation classifications, salary, Department’s proposed increase from levels. The Department believes that hours worked, and industry). As the the 2004 salary level. Under the this approach strikes an appropriate Department explained in the NPRM, the proposal, the salary level would have balance between protecting overtime- CPS offers substantial advantage over increased from $455 a week to $972 per eligible workers and reducing undue data drawn from the pool of our own week based on fourth quarter 2015 data, exclusions from exemption of bona fide investigations, because the Department’s a 113.6 percent overall increase and 9.5 EAP employees. It also does so without investigations contain too few percent average per year increase. Under necessitating a return to the two-test observations to yield statistically the Final Rule, the salary level will structure or imposing a quantitative meaningful results. See 80 FR 38528. increase to $913 per week, a 100.7 limit on nonexempt work—alternatives The Department considers CPS data percent overall increase and 8.4 percent that many of these same commenters representing compensation paid to average per year increase. Several strenuously opposed. See section IV.F. nonhourly workers to be an appropriate commenters, including the Chamber, proxy for compensation paid to salaried Littler Mendelson, and NAHB, 3. Data Used To Set the Standard Salary workers, as we explained in the NPRM. described the proposed percentage Level See 80 FR 38517 n.1. The Department increase in the salary level as Some commenters representing believes that most nonhourly workers ‘‘unprecedented.’’ Many commenters employers also raised concerns about are likely to be paid a salary, and urged the Department to gradually the Department’s use of the CPS data on although the data may include earnings phase-in an increase to the salary level. full-time nonhourly employees. The of workers paid on a fee basis, the EAP SHRM, for example, stated that a Chamber and Fisher & Phillips exemption can apply to bona fide phased-in approach will provide some advocated that rather than calculate the administrative and professional flexibility to employers, allowing them salary level using the CPS data, the employees compensated in this manner. to gather information about the hours Department should create our own data See § 541.605. Moreover, as explained that currently nonexempt employees set of exempt salaried employees drawn in greater detail in section IV.C., the work and to budget for any increased from WHD investigations and field Department has adopted a change to the wages and other costs. Independent research. NAM stated that the CPS data salary basis test in this Final Rule which Sector noted that an appropriate phase- provides an ‘‘apples-to-oranges’’ will newly allow employers to satisfy as in period would allow non-profit comparison because it reflects all much as 10 percent of the standard organizations to adjust to a new salary nonhourly compensation, while the salary level requirement through the level without reducing programs and Department’s proposal excludes certain payment of nondiscretionary bonuses services. Some commenters advocating forms of compensation (for example, and incentive pay (including an incremental approach, such as PPWO some incentive pay) from counting commissions). The Department and the Chamber, opposed the proposed toward the salary threshold, and other acknowledges that the CPS data set may salary level, but requested a gradual commenters made similar assertions. include some compensation excluded phase-in if the Department moves The Chamber, Fisher & Phillips, and the from the salary test; however, we are not forward with the proposal. Others did Iowa Association of Business and aware of any statistically robust source not oppose the Department’s proposed Industry (IABI) also disagreed with the that more closely reflects salary as threshold, so long as the Department Department’s conclusion that CPS data defined in our regulations, and the phases in the increase. See, e.g., on compensation paid to nonhourly commenters did not identify any such National League of Cities; the workers is an appropriate proxy for source. Northeastern Retail Lumber Association; compensation paid to salaried workers. Finally, the Department disagrees that United Community Ministries; Walmart; Employees sampled might be paid on a we should have excluded the salaries of Washington Metro Area Transit piece-rate or commission basis, for employees in various job categories, Authority (WMATA). example, and thus, the Chamber stated, such as teachers, doctors, and lawyers, Contrary to some commenters’ the ‘‘non-hourly worker category is at because they are not subject to the part assertions, the magnitude of the salary best a rough and imprecise measure of 541 salary level test. These white collar increase proposed by the Department is workers paid on the basis required for professionals are part of the universe of not unprecedented. The 2004 Final Rule

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increased the then-current long test advocates predicted that workers will would be reclassified to nonexempt salary level for executive and benefit from the increased salary level; status and those employees who work administrative employees by 193.5 those who receive a salary increase to overtime would be converted to hourly percent (from $155 to $455), and remain exempt will benefit directly, and pay, with their earnings remaining the increased the then-current short test those who are reclassified as overtime same after their hourly rates of pay were salary level by 82 percent (from $250 to eligible will benefit in other ways, as adjusted, while an additional 231,500 $455). See 69 FR 22123 (explaining that detailed below. retail employees would be reclassified the final rule nearly ‘‘triples’’ the Employers and their representatives, to nonexempt status and have their ‘‘minimum salary required for including AH&LA, CUPA–HR, NAM, hours and earnings reduced.44 exemption’’). Further, as EPI pointed NRF, and the National Small Business Not all employers indicated such high out in its comment, in the Association (NSBA), suggested that they numbers of employees would be approximately 11 years between 1938 would reclassify many employees to reclassified, converted to hourly pay, or and 1949, the administrative long test overtime-protected status. For example, limited in hours. For example, NAM salary test increased 150 percent. The the NGA surveyed its members, and 98 stated that 41 percent of manufacturers Department acknowledges that this percent stated they would reclassify stated they would reclassify employees rulemaking enacts a sizeable increase to some currently exempt workers, and 80 and 37.2 percent stated they would then the 2004 salary level; however, such an percent stated that they would reclassify reduce employees’ hours. NAHB stated increase is necessary in order to reflect 50 percent or more because they cannot that 33 percent of survey respondents increases in actual salary levels afford to increase their salaries. NCCR indicated they would need to make nationwide since 2004 and correct the commented that one restaurant chain some change regarding construction 2004 Final Rule’s mismatch between the stated it likely would reclassify 90 supervisors, and 56 percent of that standard duties test and the standard percent of its managers and another subgroup indicated they would take salary level based on the long duties test with more than 250 table steps to minimize their overtime. level. As we explained in the NPRM, service restaurants estimated that 85 However, only 13 percent of this is the first time that the Department percent of its managers have base respondents stated they would reduce has needed to correct for an incongruity salaries below the proposed threshold. salary, and only 13 percent stated they between the existing salary level and the CUPA–HR stated that 87 percent of would switch employees from a salary applicable duties test. That said, under those responding to its survey of higher to an hourly rate. our proposal, the salary level effective education human resource professionals Numerous employers and their in 2016 would have been $50,544; stated ‘‘they would have to reclassify representatives, including AH&LA, under the Final Rule, we project that the any exempt employee currently making CUPA–HR, NCCR, Nebraska Furniture salary level will not reach $50,000 until less than $47,500’’ (emphasis in Mart, NRA, NRF, OneTouchPoint, Pizza the first update on January 1, 2020. comment). , Seyfarth Shaw, SHRM, Additionally, as explained in section Many employers and their SIFMA, and the Salvation Army, also II.G., this Final Rule has a delayed representatives stated that they would commented that the employees who effective date of December 1, 2016— convert newly nonexempt employees to were reclassified to nonexempt status more than the 120-day delayed effective hourly pay and pay them an hourly rate would be further disadvantaged because date following publication of the 2004 that would result in employees working they would lose valuable fringe benefits, Final Rule. The Department believes the same number of hours and earning such as life insurance, long-term that the timing of the effective date of the same amount of pay as before, even disability insurance, increased vacation this Final Rule will help minimize after for overtime premium time, incentive compensation, tuition disruption as employers adjust to the pay. Also, some employers indicated reimbursement, and increased new salary level. they might reduce their workers’ hours, retirement contributions. They noted especially over time, in an attempt to that many employers offer such benefits 5. Impacts of the Increased Salary Level avoid paying any overtime premium only to exempt employees, or provide Commenters identified many impacts pay, so the formerly exempt workers’ them to exempt employees at a greater that they believed would flow from the hours and pay ultimately could be rate or at a reduced cost. In addition, proposed increase in the standard salary lower. See, e.g., AH&LA; CUPA–HR; ANCOR and others stated that level. Commenters representing Jackson Lewis; NAM; NRF; NSBA. nonexempt workers’ fringe benefits employers and employees differed Some commenters gave specific would be negatively affected because dramatically on some of the predicted estimates of the percentage of newly employers would take funds away from impacts of the rule. In addition, where nonexempt employees who would have such benefits in order to pay for the commenters representing employers and their overtime hours limited. Associated increased costs of the rule. AGC employees agreed on likely outcomes, General Contractors of America (AGC) surveyed its construction contractor they viewed the advantages and surveyed its construction contractor members, and 40 percent expected disadvantages of those outcomes quite members and more than 60 percent differently. expected to institute policies and 44 NRF commissioned Oxford Economics to Many employers and their practices to ensure that newly overtime- examine the impact of the Department’s rulemaking representatives stated that employers eligible employees do not work more on the retail and restaurant industries and attached three documents produced by the firm to its would not be able to afford to increase than 40 hours per week. ANCOR comments on the NPRM. The first document is a the salaries of most of their currently surveyed service provider organizations report titled ‘‘Rethinking Overtime—How exempt employees to the proposed and more than 70 percent stated that Increasing Overtime Will Affect the Retail and Restaurant Industries’’ and was published before level. Therefore, they stated that they they would prohibit or significantly the Department issued the NPRM. The second were likely to reclassify many of these restrict overtime hours. SHRM similarly document is a letter dated July 17, 2015 that employees to overtime-protected status, commented that 70 percent of its survey updates the estimates provided in the ‘‘Rethinking which they asserted would disadvantage respondents stated they would Overtime’’ paper in light of the Department’s proposal. The third document is a letter dated the employees in a number of ways and implement restrictive overtime policies. August 18, 2015 that examines states’ prevailing would not increase their total NRF cited an Oxford Economics report wage levels and the Department’s automatic compensation. In contrast, employee and stated that 463,000 retail workers updating proposal.

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affected employees to lose some fringe Maryland Chamber of Commerce; limited in their ability to advance in benefits. With regard to those employees SIFMA; Women Impacting their careers. who remain exempt and receive a (WIPP); YMCA. Commenters stated that Finally, employer representatives higher salary, some employer many employers do not allow identified a number of other negative representatives, including AH&LA, nonexempt employees this same consequences that they believed would NCCR, and NRF, stated that the flexibility in work location and in the flow from the adoption of the proposed employees would not actually benefit ability to work during non-traditional increase in the standard salary level. For because employers would make other hours, as it is more difficult to monitor example, some employer groups, changes, such as reducing or their hours and ensure proper including FMI, NRF, and WIPP, eliminating bonuses or other incentive compensation for all hours worked. For emphasized that they believed compensation, in order to keep their example, SHRM stated that 67 percent employers would eliminate full-time total labor costs the same. These of its survey respondents indicated jobs and create part-time jobs. FMI, commenters viewed this as problematic decreased workplace flexibility and NGA, Seyfarth Shaw, and SHRM because these employees are in middle autonomy were likely results of the indicated that employers would use management positions that are ‘‘key Department’s proposal. part-time workers to ensure that newly steps on the ladder of professional Employer groups also stated that overtime-eligible employees did not success’’ and incentive compensation is employees reclassified to nonexempt have to work overtime hours. ANCOR, an important motivator. AH&LA stated status will lose out on after-hours NGA, Seyfarth Shaw, and the YMCA that reducing incentive compensation management training programs and also predicted that, as the hours of the ‘‘curtails the ability of employers to committee meetings and thus have newly nonexempt workers are reward their star employees,’’ although fewer opportunities for career restricted, employers will respond by they acknowledged that this concern advancement. See, e.g., AH&LA; increasing the workload burden and would be mitigated if incentive ANCOR; Construction Industry Round scope of responsibility of the managers compensation could count toward the Table; Credit Union National and supervisors who remain exempt. increased salary level. NAHB’s survey Association; CUPA–HR; Jackson Lewis; Employees and employee advocates, results showed that 55 percent of those Kentucky Pharmacists Association; on the other hand, predicted that employers who indicated that some Maryland Chamber of Commerce; workers would benefit in a variety of change for construction supervisors NCCR; NRF; New York State Restaurant ways from the proposed increase in the would be necessary would reduce or Association; PPWO; SIFMA; SHRM. standard salary level. First, they saw eliminate bonuses, while 33 percent Many of these commenters also stated direct benefits from the proposed salary stated they would reduce or eliminate that newly overtime-protected workers because, for those who remain exempt but currently earn less than the other benefits. will not be permitted to work extra hours to get the job done as a way to proposed increase, they will receive Employer groups also stated that prove their talents and dedication, and additional pay each week in order to employees reclassified to nonexempt they will not be asked to perform the raise them to the new salary level. status and converted to hourly pay most challenging and important Employees who are reclassified to would be harmed by the loss of managerial functions. Employers nonexempt status will get more time flexibility and the loss of the guarantee asserted that these changes will ‘‘hollow outside of work to spend with their of receiving the same salary every out’’ the ranks of middle management, families or to engage in leisure activities workweek. Employers and their limit existing career paths, and if their hours are reduced, and thus they representatives, including AH&LA, negatively affect the newly nonexempt will have a better work-life balance; American Bankers Association (ABA), employees’ promotion potential and alternatively, they will be paid time- the Chamber, FMI, IFA, New Jersey future earnings. See, e.g., Michigan and-a-half for any overtime hours they Association of Mental Health and Chamber of Commerce; NCCR; NRF. work. Finally, work opportunities will Addiction Agencies, OneTouchPoint, Many employers and their be spread as workers who had been PPWO, SIFMA, Seyfarth Shaw, and representatives also emphasized that the unemployed or underemployed will SHRM, asserted that exempt status gives loss of exempt status will have a gain additional hours. Employee employees the flexibility to come in negative impact on employee morale. advocates viewed these outcomes as late, leave early, and respond to They stated that employees sought out consistent with the fundamental unexpected events such as taking a sick their management role and view their purpose of the FLSA’s overtime child to the doctor. Moreover, they can exempt status as an indication of the provision. See, e.g., AFL–CIO; American do so without fear of losing pay for the employer’s recognition of their Federation of Teachers (AFT); time spent away from work. Newly achievements and their position as part Society-Employment Law Center (ELC); overtime-eligible employees, these of the management team. They stated National Women’s Law Center (NWLC); commenters asserted, will have to that the loss of exempt status will be Partnership. account for their time and they will perceived as a demotion and Some advocates, including AFL–CIO, have to think more carefully about devaluation of their roles in the AFT, and NELP, emphasized the taking unpaid time off to deal with organization, even if other aspects of benefits of spreading employment in personal and family issues. Employer their compensation remain the same. light of the harms that come from representatives noted that another See, e.g., ANCOR; Chamber; CUPA–HR; working long hours, citing studies benefit of exempt status is that many FMI; Jackson Lewis; NAM; NCCR; NGA; showing that long hours are related to employers allow exempt employees to NRA; Pizza Properties; SIFMA; SHRM; stress and injuries at the workplace and perform some of their work remotely Salvation Army. NRF cited a survey it increased incidences of certain chronic and outside of normal business hours, commissioned of 200 salaried retail and diseases like heart disease, diabetes, and such as from home during the evening, restaurant managers showing that the depression. They also cited studies as best suits the employees’ personal change in status would make 45 percent showing the high cost to businesses schedules. See, e.g., AH&LA; American of managers feel like they were associated with absenteeism and Staffing Association; CUPA–HR; HR ‘‘performing a job instead of pursuing a turnover due to workplace stress and Policy Association; Jackson Lewis; career,’’ and 31 percent would feel stated that would improve

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by reducing turnover. The AFT noted greater levels of work stress than hourly than forty hours a week and can barely that if employers cut formerly exempt workers, and they worked mandatory afford child care for the time she is workers’ hours and add more overtime at the same frequency as missing with her family.’’ The UAW, nonexempt jobs, that would ‘‘likely hourly workers and more days of representing postdoctoral scholars, have a salutary effect on wages since the overtime in general. made the same point regarding status, low wage growth in our economy is Many of the comments from concluding that ‘‘their low pay indicates related to employment slack.’’ individual exempt employees similarly that their employers do not view them EPI disputed the employers’ claim emphasized their lack of flexibility. For or treat them as bona fide that wages and hours would remain the example, a retail store manager professionals.’’ same after employees were reclassified described working 55–60 hours a week, Numerous individual employees also to nonexempt status. EPI emphasized with store staffing kept at the bare stated that they would not perceive a that this view assumes that employees minimum of two-person coverage. change from exempt to overtime- have no bargaining power. However, EPI Therefore, the manager has little protected status as a demotion. For stated that a ‘‘consistent finding of both ‘‘flexibility when an employee calls out example, one employee stated that he labor and macroeconomics is that sick. I have to pick up the slack.’’ A chef sometimes works seven days and more nominal wages are ‘sticky,’ meaning that similarly stated that he routinely works than 55 hours per week, and that he employers rarely will lower them.’’ EPI 20–30 hours of overtime per week, and would ‘‘gladly move down to non- concluded this is particularly likely to has to modify his schedule to meet the exempt and punch a time card. At least be the case now, given that the demands of the business, including by I would finally be paid fairly for all the unemployment rate for college filling in if an overtime-eligible cook hours I am putting in.’’ A retail store graduates was just 2.6 percent in July gets sick. Another exempt employee manager similarly stated that he works 2015 and for those in ‘‘management, who reported working 1136 hours of an average of 55–60 hours per week and professional, and related’’ occupations overtime in three years (an average of looks forward to either receiving an was just 3.1 percent. Therefore, approximately 49 hours of work per increased salary or the return of his employers will not be able to reduce week) stated, ‘‘[i]f I complete my work personal life. He rejected the view that employees’ wage rates when they are in 30 hours I still have to stay for the exempt employees would feel demoted reclassified to nonexempt status to the required work hours of the company & by a change in status, saying he does not full extent that would be necessary for longer as required or requested.’’ A want a meaningless title and would not the employees to receive no additional manager of a community home for the ‘‘be embarrassed if my employees find compensation for overtime hours intellectually disabled concurred, out I’ve been bumped to hourly again.’’ worked. NELP similarly emphasized stating that the homes ‘‘have to be Another store manager with 12 years of that, at a time when even low-wage staffed 24 hours a day, 365 day[s] per experience emphasized ‘‘I am NOT employers are raising their starting year. To reduce[ ] organizational concerned with the transition from wages in order to attract and retain a overtime, managers are expected to being exempt to non exempt if that were qualified workforce, it would be ‘‘a work when employees call in sick, are to happen.’’ A convenience store foolhardy business practice’’ for on leave, and when a client is in the manager who works an average of 60– employers to risk losing formerly hospital and needs a 24 hour sitter. 65 hours per week stated that 7 of the exempt workers by decreasing their Managers also pitch in to help other 8 exempt employees he knows quit in wages and hours. homes when there is a need.’’ Other the past year due to being overworked Worker advocates also disputed exempt workers similarly noted that without any additional compensation, employers’ claims that workers would they are scheduled to staff specific shifts and he stated that workers feel that an lose privileges and flexibility after they and also are required to fill in for hourly exempt position is ‘‘a demotion rather were converted. For example, EPI workers who call out sick, when than a promotion.’’ Another exempt pointed to research based on the positions are vacant, when extra hours employee stated that he believes that General Social Survey showing that are needed such as around the holidays, businesses often use salaried positions salaried workers and hourly workers or when the employer has to cut payroll as a way to cut down on overtime costs, experience similarly limited workplace to meet its targets. and that the employers ‘‘who are flexibility at levels below $50,000 per With regard to the loss of ‘‘status,’’ bemoaning the loss of ‘status’ for their year. The research showed that 43–44 NELP commented that, even if employees are probably those who have percent of hourly workers paid between employers do reclassify some employees used this trick to get more hours worked $22,500 and $49,999 were able to to nonexempt status, there is no reason for less money.’’ ‘‘sometimes’’ or ‘‘often’’ change their to consider that a demotion. NELP In response to some employers’ starting or quitting times. That stated the employer can continue to give assertions that they will reclassify many percentage only increased to 53–55 nonexempt employees whatever job of their currently exempt employees to percent for salaried workers in that titles are appropriate and is not required overtime-protected status, convert them same range. Only when salaries rose to otherwise diminish their stature. to hourly pay, modify their pay so that above $60,000 did 80 percent of salaried SEIU emphasized that it is not the they work the same number of hours workers report being able to designation of ‘‘exempt’’ that provides and earn the same amount, and ‘‘sometimes’’ or ‘‘often’’ change their status to workers, but rather the pay and potentially reduce their hours in the starting or quitting times. Employees benefits that should accompany that long run, the Department estimates that paid hourly actually reported more designation. For example, most 60.4 percent 45 of exempt affected flexibility in the ability to take time off registered nurses, who perform bona during the work day to take care of fide professional duties and whose 45 The Department stated in the NPRM that 74.7 personal matters or family members, earnings typically exceed the proposed percent of all affected workers were Type 1 workers with 41 percent of hourly workers salary, nonetheless prefer to be paid who did not regularly work overtime and did not earning $40,000–$49,999 stating it was hourly and be overtime eligible. SEIU work overtime in the survey week; therefore, we assumed they would not be paid an overtime ‘‘not at all hard’’ compared to only 34 concluded that ‘‘[b]eing classified as premium despite becoming overtime protected. See percent of salaried workers. Finally, ineligible for overtime is little comfort 80 FR 38574. However, as explained in section salaried workers reported slightly to a worker who routinely works more Continued

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employees do not currently work any well-being of employees by minimizing the EPI comment indicate that hourly- overtime hours. As explained in detail excessive working hours. paid workers and salaried workers in the economic impact analysis in The Department recognizes that these earning between $22,500 and $49,999 section VI.D.iv., we expect there to be outcomes are averages and some have little difference in workplace relatively little change in the weekly employees ultimately may receive lower flexibility with regard to an employee’s earnings or weekly hours of such earnings if their employers reduce their ability to modify his or her starting time employees. We agree that for the hours more extensively in an effort to or quitting time; a substantial increase remaining employees, who do regularly ensure that no overtime hours are in such flexibility is not seen until or occasionally work overtime hours, worked. However, such employees will workers earn above $60,000. Moreover, the impact of the rule will depend upon receive extra time off. Therefore, the workers paid hourly who earn between how their employers choose to respond, Department partially concurs with the $40,000 and $49,999 actually reported and we recognize there likely will be a comments of the individual employees more flexibility to take time off during variety of responses from which and employee advocates who stated that the day than salaried workers in that employers can choose. For example, the overall impact of the rule would pay range. Many of the comments the employers will raise the salaries of some benefit employees in a variety of ways, Department received from individual employees to the new required level; whether through an increased salary, exempt employees similarly reflected a employers will reclassify some other overtime earnings when they have to lack of current flexibility, with employees to nonexempt status and work extra hours, time off, and/or employees indicating they were provide minimum wage and overtime additional hours of work for those who routinely scheduled to work well in protections and may attempt to were previously unemployed or excess of 40 hours per week and also minimize the overall cost by modifying underemployed. had to fill in for other employees who those employees’ regular rates of pay Some employers also asserted that were out sick or on vacation or when and reducing their hours. The economic employees reclassified as nonexempt positions were unfilled. Therefore, the Department does not believe that impact analysis discusses the range of would lose fringe benefits such as life workers will incur the significant possible outcomes. However, as insurance, disability insurance, change in flexibility that some explained in section VI.D.iv., based increased vacation time, and bonuses employers envisioned if the employer upon our review of the economic and other incentive compensation that reclassifies them as nonexempt. literature, the Department concludes they provide only to exempt employees. The Department notes that employers Employers also asserted that that the most likely outcome is that employees whose exemption status affected workers who work overtime may choose to continue to provide such benefits to workers who employers like changes would lose the ability to work hours and who are reclassified to from home and outside of normal overtime-protected status on average ABA and IFA described as ‘‘critically important’’; the design and scope of business hours, and they would lose the will receive increased earnings, because ability to attend after-hours training employers will not be able to fully such fringe benefit and incentive compensation programs are within the opportunities and meetings or to stay adjust their regular rate of pay to the late to ‘‘get the job done.’’ The extent necessary to provide only the employers’ control. We see no compelling reason why employers Department understands employers’ same level of earnings. As further concerns regarding the need to control explained in the economic impact cannot redesign their compensation to provide such fringe benefits and keep accurate records of the work analysis, workers whose exemption hours of overtime-eligible employees.49 and bonus payments based upon, for status changes also will see their work However, this Final Rule does not example, the employees’ job titles rather hours decrease on average, and the extra prohibit employers from continuing to than based upon their exemption hours will be spread among other allow such employees flexibility in the status.47 workers.46 The Department views these time and location where they work; With regard to the employer claim outcomes as fully consistent with the most employees affected by this Final that employees reclassified to overtime- dual purposes of the FLSA’s overtime Rule are employees who employers now protected status would lose flexibility in requirement: (1) Spreading employment trust to exercise discretion and their schedule or the ability to take a by incentivizing employers to hire independent judgment with respect to few hours off when needed for personal additional employees, but rewarding matters of significance on behalf of the those employees who are required to purposes, the Department notes that the company or to supervise other work overtime with time-and-a-half pay employees who are affected by this employees and play a role in hiring, for overtime hours; and (2) avoiding Final Rule currently earn a salary firing, and promoting other employees. detrimental effects on the health and between $455 per week and $913 per Employers should be able to trust such week (or between $23,660 and $47,476 valued employees to follow the per year). The results of the General employers’ instructions regarding when, VI.D.iv., in response to comments that the 48 Department underestimated the number of affected Social Survey research discussed in where, and for how many hours they workers who work overtime, the Department has 47 may work and to accurately record their now classified a share of workers who reported they Where nondiscretionary bonuses or incentive 50 do not usually work overtime, and did not work payments are made to nonexempt employees, the hours worked. Moreover, as noted overtime in the reference week (previously payments must be included in the regular rate when identified as Type 1 workers) as Type 2 workers calculating overtime pay. The Department’s analyzed source of information in the social who work occasional overtime. Accordingly, we regulations at §§ 778.208–.210 explain how to sciences. See http://www3.norc.org/GSS+Website/ now estimate that 60.4 percent of affected workers include such payments in the regular rate About+GSS/. will not receive any overtime premium. calculation. One way to calculate and pay such 49 The Department included in the fall 2015 46 Not all employers will choose to cover the bonuses is as a percentage of the employee’s total Regulatory Agenda our intent to publish a Request additional hours by hiring new employees. earnings. Under this method, the payment of the for Information seeking information from Employers will balance the benefits of the bonus includes the simultaneous payment of stakeholders on the use of electronic devices by additional hours of work against the costs of hiring overtime due on the bonus payment. See § 778.210. overtime-protected employees outside of scheduled workers for those hours. In some cases, this will 48 The General Social Survey, which started in work hours. result in hiring new workers; in other cases, 1972, is the largest project funded by the Sociology 50 The Department notes that there is no employers will have incumbent workers provide Program of the National Science Foundation. particular order or form of records required. See 29 those additional hours. Except for the U.S. Census, it is the most frequently CFR 516.1(a). Employers may choose whatever form

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above, an estimated 60.4 percent of negative impact on employees’ morale. and the Wage and Hour employees affected by this Final Rule do However, the Department believes that Institute predicting that finalizing the not work overtime hours now; the for most employees their feelings of proposed salary level would increase Department believes that any changes importance and worth come not from (rather than decrease) litigation. Jackson for this substantial portion of affected their FLSA exemption status but from Lewis commented that the duties test is workers will be minimal. Further, the the increased pay, flexibility and fringe the main driver of litigation over the Department notes that most employers benefits that traditionally have EAP exemption, and ‘‘there will be no currently have both exempt and accompanied exempt status, as well as end to litigation’’ so long as employers nonexempt workers and therefore have from the job responsibilities they are must continue to apply the standard systems already in place for employers assigned. None of these are duties tests to employees earning above to track hours. Nonetheless, for those incompatible with overtime protection. the salary threshold. Jackson Lewis and employees who do work overtime and Many exempt employee commenters NAM further asserted that the rule will who become overtime eligible, the expressed significant concern and low result in additional litigation brought by employers will have to evaluate, for morale regarding their current situation, ‘‘very dissatisfied’’ newly overtime- example, whether training and other and they looked forward to an improved protected employees. Finally, Fisher & activities that currently occur outside situation under the new rule. Given the Phillips commented that the ‘‘collateral the normal work day, and for which employers’ emphasis on the important results’’ of selecting a particular salary employees currently receive no extra roles that these employees play in the level, including avoiding or reducing pay, should be moved to within the success of their organizations, the litigation, are not appropriate factors for normal work day or whether they are Department anticipates that employers setting the salary level required for the important enough to warrant payment will strive to adapt to this rule in a way EAP exemption. for any extra hours worked. However, that minimizes the financial impact on As we stated in the NPRM, the because the Department has concluded their business while providing the number of wage and hour filed that white collar employees earning a maximum benefits, flexibility, and in federal courts increased substantially salary of less than $913 per week are not opportunities to their employees. If in the period between 2001 and 2012, bona fide EAP workers, the Department employers make these changes in a way from approximately 2,000 to concludes that if the employees perform that communicates the value they approximately 8,000 per year, with extra work to ‘‘get the job done’’ they continue to place on the contributions stakeholders advising the Government should be paid for all such time. of newly overtime-eligible workers, we Accountability Office that one of the Regarding the employer assertion that are confident that employers can reasons for the increased litigation was the change in exemption status will prevent employees from seeing their employer confusion about which harm employees because they will not new entitlement to overtime protection workers should be classified as EAP be able to take time off without losing as a demotion. exempt. See 80 FR 38531. Thus, these pay for the time away from work, the 6. Impacts on Litigation statistics support the Department’s Department notes that employers are not conclusion that the current standard required to change employees’ pay basis The Department also received several salary level was not effective in 2004 at from salaried to hourly simply because comments predicting the impact distinguishing between exempt and increasing the salary level would have they are no longer exempt. Employers nonexempt workers and is substantially on litigation. Commenters representing may continue to pay employees a salary, less effective today. Litigation under the employees, such as the International even when the employees are entitled to FLSA remains high, with approximately Association of Fire Fighters (IAFF), overtime pay if they work in excess of 8,000 FLSA cases continuing to be filed stated that increasing the threshold 40 hours per week. See §§ 778.113–.114. each year.51 Moreover, even if newly overtime- would more clearly demarcate between Although we did not establish the eligible employees are converted to employees who are entitled to overtime standard salary level in this Final Rule and those who are not, decreasing hourly status, employers are not for the purpose of reducing litigation, misclassification, and therefore, required to dock such employees for the we believe that reduced litigation will litigation, involving the EAP exemption. hours they take off. Therefore, be one of the beneficial impacts of that According to the joint comment employers have the authority to increase. The salary level will once submitted by 57 labor law professors, determine how to structure the pay again serve as a clear and effective line ‘‘the excessive importance of the duties plans of the newly overtime-eligible of demarcation, thereby reducing the test has resulted in the relatively high employees, and employers need not potential for misclassification and volume of litigation surrounding the structure their pay plans in a manner litigation. See Weiss Report at 8 (the exemptions and the many successful that results in the potentially adverse salary tests prevent ‘‘the claims that have been asserted against effects that the employers identified. misclassification by employers of Finally, employers asserted that the employers in recent years,’’ so raising obviously nonexempt employees, thus loss of exempt status would have a the salary level ‘‘will benefit employers by providing them more certainty and tending to reduce litigation. They have simplified enforcement by providing a of recordkeeping works best for their business and relieve them of the litigation and other their employees. For example, employers may costs of disputes over classification and ready method of screening out the require their employees to record their hours misclassification.’’ Weirich Consulting obviously nonexempt employees, worked; alternatively, some employers might making an analysis of duties in such decide to record the hours themselves. Where an & (Weirich Consulting) employee works a fixed schedule that rarely varies, commented in support of the salary cases unnecessary.’’). Given the new the employer may simply keep a record of the level change because it will make it standard salary level, there will be 9.9 schedule and indicate the number of hours the easier ‘‘to determine more efficiently— million fewer white collar employees worker actually worked only when the worker for whom employers could be subject to varies from the schedule (‘‘exceptions reporting’’). and without needless litigation— 29 CFR 516.2(c). Furthermore, the Department whether or not particular employees are 51 believes that most employers already maintain exempt.’’ Other commenters See http://www.uscourts.gov/statistics/table/c- recordkeeping systems for their overtime-eligible 2/statistical-tables-federal-/2014/12/31; employees and that these systems can accommodate representing employers disagreed, http://www.uscourts.gov/statistics/table/c-2/ newly overtime-eligible employees. however, with Jackson Lewis, NAM, federal-judicial-caseload-statistics/2015/03/31.

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potential litigation regarding whether to compensate for the increased costs of must also exist within our own they meet the duties test (4.2 million the proposed salary; some noted this is organizations.’’ Similarly, Maryland currently EAP-exempt employees who because the for the services they Nonprofits commented that ‘‘[t]he will be newly entitled to overtime provide are set in government contracts nonprofit community recognizes better because they earn less than the new or by Medicaid, or because their than most the harsh economic realities standard salary and 5.7 million revenue is based on grants reflecting that lead to this proposed rule, and we overtime-eligible white collar labor costs at the time the grant is made strongly endorse its purpose.’’ employees paid between $455 and $913 and there may be no option for seeking Other commenters indicated that the per week whose exemption status no an increase in funding. Several impact on non-profit employers would longer depends on the application of the nonprofits expressed concern that they not be as significant as most non-profits duties test).52 are constrained in their ability to feared. For example, the comment increase salaries for their staff because submitted by 57 labor law professors 7. Comments About Non-Profit funders evaluate them based on their noted that an economist found that Employers ability to keep , including management employees working for A substantial number of commenters salary costs, low, or because the terms non-profits earned an average of $34.24 also addressed the impact that the of their grants may strictly limit how per hour in 2007, which far exceeds the proposed standard salary would have on much of the grant can be allocated for proposed salary level, and that they non-profit employers. While many of overhead. See, e.g., Boy Scouts of presumably earn more than that now. the concerns that the non-profit America; Food Bank of Northern Therefore, they concluded that the employers expressed were the same as Nevada; The Groundwater Foundation; regulations ‘‘should not have a those identified by other employers, Operation Smile. Based upon these deleterious effect on these valuable some of these commenters also funding issues, many commenters stated organizations or their efforts to addressed particular concerns that they that the unintended consequence of the accomplish their important missions.’’ believe they would face due to their increased standard salary level would EPI also stated that, where a non-profit non-profit status. be a decline in the quantity or quality is engaged in revenue-producing Many non-profit employers, including of the critical services they provide to activities and, thus, is competing with Habitat for Humanity, the National vulnerable individuals. See, e.g., CUPA– for-profit businesses, it ‘‘is only fair’’ Multiple Sclerosis Society, the New HR; Father Flanagan’s Boys’ Home; that ‘‘it should be held to the same Jersey Association of Mental Health and Lutheran Services in America; National employment standards’’ to achieve a Addiction Agencies, Operation Smile, Multiple Sclerosis Society; Salvation level playing field with regard to the Catholic Charities, and the U.S. Public Army. Therefore, many non-profit employees who are involved with that Interest Research Group (USPIRG), organizations requested that the commercial business or who are emphasized that non-profits generally Department provide special relief for engaged in interstate commerce. Other pay lower salaries than for-profit non-profits such as: An exemption from commenters, such as the Wisconsin employers, and therefore the proposed the salary requirement; a reduced salary Association of Family and Children’s salary level would not serve as an level for non-profits; an incremental Agencies, questioned the wisdom of a effective dividing line between phased-in increase of the salary level non-profit exemption, explaining that employees performing exempt and over a period of a year or more for non- for-profit agencies may perform the same services as non-profits and rely on overtime-protected work in the non- profits; a delayed implementation date the same government funding streams profit sector. for non-profits; and the elimination of and a non-profit exemption would not For example, USPIRG stated that 75 automatic updating for non-profits. See, help the similarly situated for-profit percent of employees it has classified as e.g., Alliance for Strong Families and exempt receive a salary below the 40th service providers. Communities; Boy Scouts of America The Department recognizes and percentile of full-time salaried workers (BSA); Boys and Girls Clubs of America; values the enormous contributions that nationally. Operation Smile commented Habitat for Humanity; Independent non-profit organizations make to the that the proposed standard salary would Sector; United Community Ministries; country. Nonprofit organizations increase its payroll costs by nearly $1 YWCA. provide services and programs that million per year and affect more than 50 Nevertheless, despite their concerns benefit many vulnerable individuals in percent of its workforce. Habitat for regarding the potential impact of the a variety of facets of life, including Humanity similarly stated that the proposed salary level, many non-profit services that benefit the vulnerable majority of its affiliates pay their highest employers expressed their general workers who the Department also works paid employee less than $50,440 and support for the intent and purpose of to protect by ensuring that their estimated that approximately 40 percent the rule. See, e.g., Catholic Charities; workplaces are fair, safe, and secure. In of its affiliates’ staff members would be Easter Seals; Independent Sector; response to the commenters’ concerns, directly affected by the proposed salary Maryland Nonprofits; PathStone we note that (as discussed in detail increase. Corporation; United Community above) we have modified the proposed A number of non-profit commenters, Ministries; YWCA. Moreover, some non- salary level to account for the fact that including the Alliance for Strong profits, citing their role as both salaries are lower in some regions than Families and Communities, ANCOR, employers and service providers, others. This change yields a salary at the Catholic Charities, Easter Seals, Habitat supported the application of the NPRM low end of the historical range of short for Humanity, and USPIRG, emphasized to non-profits as proposed. For example, test salaries. This lower final salary that they do not have the same ability PathStone Corporation, and a comment level will also provide relief for non- as other employers to increase prices or submitted by CASA on behalf of 21 profit employers, just as it does for reduce the profits paid to shareholders additional non-profit organizations, employers in low-wage industries. stated they fully supported the proposed However, regarding the commenters’ 52 The Department estimates that 732,000 of these regulation, with the joint CASA suggestions that we create a special white collar salaried workers are overtime-eligible but their employers do not recognize them as such. comment emphasizing that the ‘‘justice exemption from the salary requirement, See section VI.C.ii. we seek for our clients in the world a lower salary level, a delayed

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implementation date, or a phase-in weekly earnings for affected workers in Census Region addresses some of these period for non-profits, we note that the non-profits will be $741.68 while the concerns and results in a salary level Department’s EAP exemption median weekly earnings of affected met by the NIH FY 2016 stipend level regulations have never had special rules workers in the private sector will be for post-doctoral researchers with at for non-profit organizations; the $745.54. The Department recognizes least three years of experience and is employees of non-profits have been however, that non-profit entities may only $208 a year above the stipend level removed from minimum wage and have a higher share of affected workers for a post-doctoral researcher with two overtime protection pursuant to the EAP than for-profit entities, but does not years of experience. exemptions only if they satisfied the believe that this will unduly impact this 8. Other Comments same salary level, salary basis, and sector. If all affected workers in the non- duties tests as other employees. profit sector who regularly work Like non-profit employers, other The Department concludes that such overtime were increased to the new commenters, including local special treatment is not necessary or salary level this would increase the total governments,58 Indian tribes, for-profit appropriate. As the comment from the amount that non-profits pay EAP entities receiving government funding, 57 labor law professors noted, a study workers by 0.5 percent, compared to an and commenters writing on behalf of of National Compensation Survey data increase of 0.3 percent in other small businesses, asserted that they do showed that the average hourly wage of sectors.57 Therefore, the Department not have the same ability as other full-time management employees in the concludes that treating non-profit employers to increase prices or reduce not-for-profit sector was $34.24 per hour employers differently than other their profits.59 See, e.g., BFT Holding; in 2007 ($1,369 per 40-hour workweek), employers, such as by creating a special Charlotte County Government; which substantially exceeds the Final salary level or an extended phase-in Jamestown S’Klallam Tribe. Some Rule’s required salary of $913 per period is not appropriate and is not commenters representing these groups, week.53 The average hourly wage for necessary, particularly given the fact as well as other commenters, requested such management workers at non- that the Final Rule modifies the special treatment for certain industries profits had increased to $38.67 by 2010 proposed rule by basing the standard or employers. For example, some small ($1,547 per 40-hour week), which is salary level on salaries in the lowest- businesses and commenters more than 50 percent higher than the wage Census Region. representing them, including the 2016 required standard salary.54 Finally, the Department also received American Association for Enterprise Moreover, the average hourly wages of comments from a number of non-profit Opportunity, California Association for non-profit employees are not uniformly higher education institutions. As Micro Enterprise Opportunity, and lower than those of employees in other discussed above, some commenters WIPP, requested an exemption for small sectors. For example, in 2007 the from the higher education community entities from the salary level or from the average hourly wages of both full-time also asked for guidance on the FLSA’s requirements generally. business and financial operations application of the EAP exemption to Likewise, the Gila River Indian employees and computer and educational institutions. Additionally, Community and the Ute Mountain Ute mathematical science employees however, several commenters expressed Tribe submitted comments urging the working at non-profits, $26.49 and concern about the impact that the Final Department to ‘‘open consultation with $32.00 per hour, respectively, exceeded Rule would have on higher education, Indian tribes on the use of a lower salary the average hourly earnings of such with some suggesting a lower salary threshold for tribal entities’’ based on workers employed in State level for educational institutions. See, ‘‘the unique economic and demographic government.55 Wages of full-time e.g., Iowa Association of Community factors that tribes face.’’ The Department workers in healthcare practitioner and College Trustees; CUPA–HR; Purdue did not propose special treatment for technical occupations for non-profits University; South Carolina Independent small businesses, tribal governments, or averaged $28.85 per hour in 2007, Colleges and Universities. We recognize other entities, and did not request higher than those for employees in the that higher education is a complex and comment on these issues. The same occupations in State and local important sector in our economy, Department believes such special treatment is not necessary given that the governments ($23.89 and $27.30, including a variety of both private and Final Rule modifies the proposed rule respectively). Similarly, the 2007 public institutions, from small by basing the standard salary level on average earnings of registered nurses community colleges to large research salaries in the lowest-wage Census were $30.80 per hour at non-profits, institutions. Commenters representing research Region and this lower final salary level higher than those of registered nurses at institutions raised concerns about the will provide relief for these private establishments ($30.58) and at 56 impact of the proposed rule on stakeholders. State and local governments ($29.60). Conversely, some commenters Based on CPS data, the Department postdoctoral researchers. For example, requested that the Department apply the projects that for FY 2017, the median CUPA–HR noted that the National Institutes of Health (NIH) stipend levels 58 The Department notes that state and local 53 See http://www.bls.gov/opub/mlr/cwc/wages- for post-doctoral researchers are ‘‘well below’’ the proposed salary level and governments have greater options for satisfying in-the-nonprofit-sector-management-professional- their overtime obligations than do private and-administrative-support-occupations.pdf. The that post-doctoral researchers with less employers. In particular, under certain conditions, non-profit series was stopped in 2010 and the 2007 than five years of experience would no state or local government agencies may provide report on management, professional and longer meet the salary level for their employees with compensatory time off (comp administrative support occupations is the most exemption. The Department notes that time) instead of cash payment for overtime hours. recent data available. The comp time must be provided at a rate of one- 54 See http://www.bls.gov/ncs/ncswage2010.htm the Final Rule salary level based on the and-one-half hours for each overtime hour worked. (Table 33). 40th percentile in the lowest-wage For example, if a newly overtime-eligible state 55 See http://www.bls.gov/opub/mlr/cwc/wages- government employee works 44 hours in a single in-the-nonprofit-sector-management-professional- 57 This is an overestimate as to both the non-profit workweek, he would be entitled to 6 hours of and-administrative-support-occupations.pdf. and for-profit sectors. As explained in section VI.D. compensatory time off. See 29 CFR part 553. 56 See http://www.bls.gov/opub/mlr/cwc/wages- iv., we anticipate employers will increase the salary 59 Comments from state and local governments in-the-nonprofit-sector-healthcare-personal-care- level only for workers for whom it is less expensive and from Indian tribes are also addressed in section and-social-service-occupations.pdf. to pay the updated salary level than pay overtime. VIII.

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salary level test to employees who have nonexempt employee a salary to work hour depending on the industry,62 and historically not been subject to that test. part time without violating the so the disparity with the federal For example, the Department received provisions of the FLSA so long as the minimum wage is expected to remain multiple comments from teachers, salary equals at least the minimum wage for the foreseeable future. Accordingly, university faculty, and their when divided by the actual number of the Department proposed to continue representatives, asking us to repeal hours the employee worked. See our longstanding practice of setting the § 541.303(d), which provides that the FLSA2008–1NA (Feb. 14, 2008). special salary level test for employees in salary level requirement does not apply Employers can meet this standard with American Samoa at approximately 84 to teaching professionals. See, e.g., a salary of as little as $145 for twenty percent of the standard salary level, National Association for the Education hours of work per week, and $217.50 for which would have resulted in a salary of Young Children (NAEYC); NWLC; 30 hours of work per week—far below of $816 based on fourth quarter 2015 New Faculty Majority Foundation; even the 2004 salary level.61 data for full-time salaried workers SEIU. As the NAEYC acknowledged in Finally, a small number of nationwide. its comment, this request is ‘‘beyond the The Department received only one commenters, including the National scope’’ of the NPRM, which did not comment on this aspect of our Automobile Dealers Association, propose changes to or invite comment proposal—Nichols Kaster supported the suggested that the Department should on § 541.303(d) or on § 541.600(e), proposed increase. We conclude that the which also provides that the salary eliminate the salary level test entirely, proposed methodology remains requirement does not apply to teachers so that the exempt status of every appropriate, and the Final Rule and certain other professionals. See also employee would be determined on the accordingly sets the special salary level NWLC; SEIU. The Department notes basis of their job duties and for American Samoa at 84 percent of the that regardless of their salary, teachers responsibilities alone. The Department standard salary level set in the rule, qualify for the professional exemption has repeatedly rejected this approach, which equals $767 per week. The only if they have a primary duty of and we do so again in this rulemaking. Department has revised § 541.600(a) teaching, tutoring, instructing or The Department has long recognized accordingly. lecturing in the activity of imparting that ‘‘the amount of salary paid to an knowledge and are employed and employee is the ‘best single test’ of ii. Motion Picture Producing Industry engaged in this activity as a teacher in exempt status,’’ and is the principal The Department has permitted an educational establishment by which delimiting requirement preventing employers to classify as exempt they are employed.60 See § 541.303(a). abuse. 69 FR 22172; Stein Report at 24. employees in the motion picture A number of comments, including a Further, as the Department explained in producing industry who are paid at a joint comment from the AIA–PCI, 2004, eliminating the salary test is base rate of at least $695 per week (or requested that the Department prorate contrary to the goal of simplifying the a proportionate amount based on the the new salary level for part-time application of the exemption, which the number of days worked), so long as they employees. The Department declines President has directed us to do in this meet the duties tests for the EAP this request. That employers currently rulemaking, and would require a exemptions. See § 541.709. This ‘‘can afford to pay part-time exempt ‘‘significant restructuring of the exception from the ‘‘salary basis’’ employees the full salary required for regulations,’’ including the ‘‘use of more requirement was created in 1953 to exempt status, even if they work just 15 rigid duties tests.’’ 69 FR 22172. address the ‘‘peculiar employment or 20 hours per week,’’ as Seyfarth Shaw conditions existing in the [motion B. Special Salary Tests noted in support of this request, merely picture] industry,’’ 18 FR 2881 (May 19, underscores the need to significantly i. American Samoa 1953), and applies, for example, when a increase the 2004 salary level. The motion picture industry employee Department has never prorated the As explained in our proposal, the works less than a full workweek and is salary level for part-time positions, and Department has historically applied a paid a daily base rate that would yield we considered and rejected a special special salary level test to employees in at least $695 if six days were worked. rule for part-time employees performing American Samoa because minimum See id. Consistent with our practice in EAP duties in 2004. See 69 FR 22171. wage rates there have remained lower the 2004 Final Rule, the Department The Department continues to believe than the federal minimum wage. See 80 proposed to increase the required base that such a rule would be difficult to FR 38534. The Fair Minimum Wage Act rate proportionally to the proposed administer, and notes that the FLSA of 2007, as amended, provides that increase in the standard salary level test, does not define full-time employment or industry-specific minimum wages rates resulting in a proposed base rate of part-time employment, but leaves this in American Samoa will increase by $1,404 per week (or a proportionate matter to be determined by employers. $0.40 on September 30, 2018, and amount based on the number of days Employees hired to work part time, by continue to increase every three years worked). This method would have most definitions, do not work in excess thereafter until each equals the federal resulted in a base rate of $1,487 based of 40 hours in a workweek, and minimum wage. See Sec. 1, Public Law on fourth quarter 2015 data for full-time overtime pay is not at issue for these 114–61, 129 Stat. 545 (Oct. 7, 2015). The salaried workers nationwide. employees. An employer may pay a minimum wage in American Samoa The Department did not receive any currently ranges from $4.58 to $5.99 an substantive comments on this subject; 60 The National Head Start Association and two commenters, Nichols Kaster and the several other commenters associated with Head Start asked the Department to consider adopting the 61 SIFMA noted that some employees who will UAW, offered general support for this position that all Head Start and Early Head Start not meet the salary threshold because they work proposal. The Final Rule adopts the facilities are ‘‘educational establishments,’’ and part time, may nevertheless have responsibilities methodology set forth in our proposal, therefore that teachers at these facilities can meet during certain periods (for example, tax season) that the professional exemption. The NPRM did not require them to work more than 40 hours in a week. and using the new standard salary level propose changes to or invite comment on In such instances, if the employee earns less than § 541.303(a) or § 541.204(b) (which defines the standard salary level, the employee is eligible 62 See WHD Minimum Wage Poster for American ‘‘educational establishment’’), and the Final Rule to receive overtime premium pay for hours worked Samoa, available at: http://www.dol.gov/whd/ makes no changes to these sections. over 40 in a week. minwage/AmericanSamoa/ASminwagePoster.pdf.

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($913) results in a base rate of $1,397 payments made to employees and, with 38535–36, 38537 n.36. However, the per week (or a proportionate amount the exception of the total annual Department did seek comment on the based on the number of days worked).63 compensation requirement for highly appropriateness of counting The Department has revised § 541.709 to compensated employees, has not commissions toward the salary level incorporate this change. included bonus payments of any kind in requirement. this calculation. During stakeholder The requirement that exempt iii. Other Comments Requesting Special listening sessions held prior to the employees be paid on a salary basis has Salary Tests publication of the NPRM, several been a part of the Department’s part 541 The Department also received business representatives asked the regulations since 1940. As the approximately a dozen comments Department to include nondiscretionary Department said at that time, ‘‘a salary concerning application of the proposed bonuses and incentive payments as a criterion constitutes the best and most salary level to Puerto Rico. Nearly all of component of any revised salary level easily applied test of the employer’s these commenters urged the Department requirement. These stakeholders good faith in claiming that the person to either exempt Puerto Rico from the conveyed that nondiscretionary bonuses whose exemption is desired is actually updated standard salary level and incentive payments are an of such importance to the firm’’ that he requirement (thus keeping the salary important component of employee or she is properly within the exemption. level at $455) or to reinstate a special compensation in many industries and Stein Report at 26, see also id. at 19, 36. salary level test for Puerto Rico (set stated that such compensation might be Since 1940, therefore, the regulations between the current and proposed curtailed if the standard salary level was have required that an exempt EAP salary levels).64 In 1949, the Department increased and employers had to shift employee be paid a predetermined and established a special salary level for compensation from bonuses to salary to fixed salary that is not subject to Puerto Rico because its minimum wage satisfy the new standard salary level. reduction because of variations in the rate was below the FLSA minimum In recognition of the increased role quality or quantity of work performed. wage. See 14 FR 7705–06 (Dec. 24, bonuses play in many compensation More recently, the Department has 1949); Weiss Report at 21. The Fair systems, and as part of the Department’s noted ‘‘that payment on a salary basis Labor Standards Amendments of 1989 efforts to modernize the overtime reflects an employee’s discretion to removed Puerto Rico from the special regulations, the Department sought manage his or her time and to receive minimum wage provisions and instead comments in the NPRM regarding compensatory privileges commensurate applied the section 6(a)(1) minimum whether the regulations should permit with exempt status.’’ 69 FR 22177. wage to Puerto Rico. See Sec. 4, Public nondiscretionary bonuses and incentive While, as the Department noted in the Law 101–157, 103 Stat. 938 (Nov. 17, payments to count towards satisfying a NPRM, employers are allowed to pay 1989). This change eliminated the portion of the standard salary level test additional compensation beyond the justification for maintaining a special for the executive, administrative, and required salary in the form of bonuses, salary test in Puerto Rico, and so in the professional exemptions.65 Specifically, those payments have not counted 2004 Final Rule we established that the the Department asked whether towards the payment of the required standard salary level test applies to employers should be allowed to use minimum salary level. The Puerto Rico. Puerto Rico continues to be nondiscretionary bonuses and incentive Department’s discussion in the NPRM of subject to the section 6(a)(1) minimum payments, paid no less often than including nondiscretionary bonus wage, and the Department has monthly, to satisfy up to 10 percent of payments in the standard salary level consistently maintained a uniform the standard salary level test. To ensure was informed by our concern that salary level for all states and also for all the integrity of the salary basis permitting the standard salary level to territories subject to the FLSA minimum requirement, the Department stressed be satisfied by bonus payments that wage. the importance of strictly limiting the frequently correlate to the quantity and C. Inclusion of Nondiscretionary amount of the salary requirement that quality of work performed could Bonuses, Incentive Payments, and could be satisfied through the payment undermine the utility of the salary basis Commissions in the Salary Level of nondiscretionary bonuses and requirement in identifying bona fide Requirement incentive pay, as well as the maximum EAP employees. time period between such payments. The Department received a variety of As indicated in the NPRM, the The Department did not propose any comments concerning whether the Department has consistently assessed changes to how bonuses are treated regulations should permit compliance with the salary level test by under the ‘‘total annual compensation’’ nondiscretionary bonuses and incentive looking only at actual salary or fee requirement of the HCE test, and stated payments to satisfy a portion of the that we were not considering changing standard salary level test. Commenters 63 The Department calculated this figure by representing employers generally dividing the new salary level ($913) by the current the exclusion of board, lodging, or other salary level ($455), and then multiplying this facilities from the salary calculation or supported this change as an product (rounded to the nearest hundredth) by the expanding the salary level test improvement over the current current base rate ($695). This produces a new base regulations, though many objected that rate of $1,396.95, which we rounded to the nearest calculation to include discretionary bonuses, payments for medical, the option the Department was whole dollar ($1397). considering was too restrictive. Most of 64 Commenters included the Cadillac Group of disability, or life insurance, or Companies, Caribbean Restaurants, the Puerto Rico contributions to retirement plans or the commenters representing employees Bankers Association, the Puerto Rico Chamber of other fringe benefits. See, e.g., 80 FR that addressed this idea opposed it on Commerce, the Puerto Rico Hotel & Tourism the grounds that it would complicate Association, the Puerto Rico Manufacturers Association, the Secretary of Labor for Puerto Rico 65 Promised bonuses such as those announced to the test for exemption and undermine (the Honorable Vance Thomas), the Training and employees to induce them to work more efficiently the worker protections established by Labor Affairs Advisory and Human Resources or to remain with the firm are considered non- the salary basis requirement. Administration Office (OCALARH, by its Spanish discretionary. See 29 CFR 778.211(c). Examples Commenters representing employers acronym), one individual commenter, and one include individual or group production bonuses, offered a range of reasons for generally anonymous commenter. Two individual employee and bonuses for quality and accuracy of work. commenters from Puerto Rico offered general Incentive payments, including commissions, are supporting the inclusion of support for the Department’s proposal. also considered non-discretionary. nondiscretionary bonuses and incentive

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payments. Many commenters, including not allowing nondiscretionary bonuses industry are not structured to be paid ACRA, the National Association of and incentive payments to satisfy some with such frequency and it would place Convenience Stores (NACS), and the portion of the increased salary level a significant administrative burden on NRA, agreed that such payments are a would likely reduce the prevalence of employers to calculate and pay key part of exempt employees’ those forms of compensation. incentive compensation on a monthly or compensation in their industries. For Among commenters that supported more frequent basis.’’ AH&LA and many example, EBS Building Supplies stated the inclusion of nondiscretionary other commenters requested that the that its managers ‘‘can earn as much in bonuses and incentive payments in the Department credit bonuses and bonus payments as they earn in regular standard salary guarantee amount, many incentive payments paid on an annual salary during the year,’’ and Mill Creek objected that the option considered in basis against the salary level. HR Policy Companies stated that nondiscretionary the Department’s NPRM was too Association pointed out that bonuses performance incentives can account for restrictive to be of much practical use paid annually are already included ‘‘up to 40% of a person’s total for employers. For example, several within the ‘‘total compensation compensation and are a most critical commenters representing employers requirement’’ under the HCE test, while part of our strategy to align the goals of criticized the Department’s proposal to the Society of Independent Gasoline first line supervisors and professionals cap the crediting of nondiscretionary Manufacturers (SIGMA) stated that with the goals of the company.’’ bonuses or incentive payments at no ‘‘permitting employers to count bonuses WorldatWork conducted a survey of more than 10 percent of the standard annually incentivizes them to hire its human resources manager members salary level, noting that bonuses, employees on an annual basis, and found that ‘‘62% of respondents incentive payments, and commissions ultimately promoting job security and said their employers offer often comprise a far greater portion of long-term employment.’’ In the absence nondiscretionary incentive bonuses tied an exempt employee’s total of crediting annual bonuses, SIGMA and to productivity and/or profitability.’’ compensation. The Chamber stated that several other commenters, including Several trade associations reported ‘‘unless the Department reconsiders its IABI, AIA–PCI, the American Institute similar feedback from their members. proposed $50,440 salary level, a limit of of Certified Public Accountants, PPWO, The World Floor Covering Association 10 percent (or, $5,044) is too low to and Weirich Consulting, urged the stated that its ‘‘members have indicated provide any relief or make the Department to credit bonuses and that many managers and administrators additional administrative burdens worth incentive payments paid on a quarterly receive bonuses based on the sales of the effort.’’ FMI, the National basis or less frequently. Other the stores that they manage or oversee,’’ Association of Truck Stop Operators, commenters favored the quarterly and the National Pest Management Printing Industries of America, RILA, frequency outright. See, e.g., American Association stated that 93 percent of its Weirich Consulting, and a number of Resort Development Association; member companies reported providing other commenters requested that the Fraternity Executives Association. some form of nondiscretionary bonuses. Department allow such compensation to Fisher & Phillips and the NACS The Chemical Industry Council of count for up to 20 percent of the opposed imposing any timeframe Illinois and the National Council of standard salary level. Other commenters limitation, but conceded that Farmer Cooperatives respectively suggested a higher percentage, including ‘‘experience suggests [quarterly] is a not- emphasized that nondiscretionary CalChamber Coalition (at least 30 uncommon frequency for the payment bonuses ‘‘are an integral part’’ or ‘‘play percent), ACRA (at least 40 percent), of such amounts.’’ an important role’’ within an and HR Policy Association (50 percent). Several commenters requested that employee’s total compensation package. Many commenters, including Fisher & the Department allow employers to RILA noted that in the retail industry Phillips, the National Beer Wholesalers make catch-up (or ‘‘true-up’’) payments ‘‘many retail managers and other Association, and the National Pest to eliminate the risk of non-compliance exempt employees earn bonuses or Management Association, opposed the in the event that an employee’s bonuses other incentive payments designed to imposition of any percentage cap on the or incentive payments drop such that encourage a sense of ownership proportion of the salary level test that the employee fails to satisfy the salary consistent with their important could be satisfied with such payments. level requirement in a given period. For leadership roles within the Several commenters, however, example, SIFMA wrote that they saw organization,’’ and that ‘‘[c]ounting non- supported the Department’s 10 percent ‘‘no basis for distinguishing the use of discretionary bonuses toward the limitation. See, e.g., Concord Hospitality true-up payments outside of the context minimum threshold for exemption is Enterprises; Fraternity Executive of highly compensated employees,’’ and consistent with the purpose of the salary Association. remarked that ‘‘[a]llowing true-up level test—the payment, criteria, or Commenters also criticized the payments to count helps ensure that amount of these bonuses often reflects Department’s decision to consider exempt employees are receiving the the exempt status of the recipients.’’ crediting nondiscretionary bonuses and guaranteed income they anticipated and Many commenters that opposed the incentive payments toward the salary is consistent with the historical salary Department’s proposed increase to the level test only if they are paid on a basis approach of ensuring guaranteed standard salary level, including monthly or more frequent basis. income.’’ If annual catch-up payments CalChamber Coalition, Fisher & Phillips, According to AIA–PCI and PPWO, such are not permitted, NRA urged the FMI, Littler Mendelson, and the a limitation fails to account for the fact Department ‘‘to permit employers to National Association of Professional that bonus payments ‘‘are typically make catch-up payments based on when Insurance Agents, acknowledged that made less often than monthly because they pay the bonuses, i.e., monthly, allowing employers to satisfy a portion they are tied to productivity, revenue semi-annually, or quarterly.’’ of the salary level with bonuses and generation, profitability, and other Many commenters that supported the incentive payments would to some larger and longer-term business results crediting of incentive payments urged extent mitigate the financial burden of that can fluctuate significantly on a the Department to also allow employers the proposed increase. Other month-to-month basis.’’ See also NRA. to credit commissions. Several commenters, including IFA and the AH&LA stated that many ‘‘supplemental commenters agreed with PPWO that ‘‘all Sheppard Mullin law firm, stated that compensation programs in the lodging forms of compensation should be used

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to determine whether the salary level bonuses, and thus, the commenters opined that such a change ‘‘erodes the has been met,’’ pointing out that the concluded that such bonuses ‘‘have no salary basis test . . . [by] replac[ing] the CPS earnings data for nonhourly bearing on whether an employee should certainty of a salary with the uncertainty employees that the Department is using be excluded from overtime of fluctuating compensation,’’ and to derive the standard salary level requirements.’’ The Georgia Department would have the practical effect of includes discretionary bonuses and of Administrative Services and the reducing the standard salary level. commissions. Many commenters Mississippi State Personnel Board each NELA and Rudy, Exelrod, Zieff & Lowe disputed the Department’s observation cautioned that there is ‘‘no guarantee agreed, stating that the Department’s in the NPRM that ‘‘employees who earn that the work rewarded by the bonus or proposal ‘‘runs contrary to the stated commissions are usually sales incentive payment will be FLSA exempt purpose of the salary basis test, which employees who . . . are generally in nature,’’ while KDS Consulting stated is to make sure exempt employees are unable to satisfy the standard duties that crediting bonuses and incentive guaranteed a minimum level of income test,’’ 80 FR 38536. AT&T stated that it payments would undermine the premise that is dependable and predictable to ‘‘has management positions whose ‘‘that management values the salaried meet their families’ monthly expenses responsibilities involve the supervision worker’s position for some reason before they are exempted from the of sales teams and support sales outside of time and task.’’ protections of the overtime provisions of channels that receive commissions as Several commenters asserted that the FLSA.’’ These commenters further part of their salaries and that have been allowing nondiscretionary bonuses and indicated that ‘‘[c]hanging the salary found to be exempt under the executive incentive payments to satisfy a portion threshold calculation to include and administrative exemptions,’’ and of the standard salary level would nondiscretionary bonuses would also the Chamber and FMI likewise dramatically complicate application of create a perverse incentive to employers commented that in the real and the EAP exemptions, and introduce to move towards implementing more insurance industries ‘‘[m]any exempt periodic uncertainty regarding the deferred compensation pay structures.’’ employees who perform little direct exempt status of employees who would Nichols Kaster wrote that ‘‘an exempt sales work share commissions.’’ A few need such payments to meet the salary employee who chooses not to leave other commenters pointed to a 2006 level requirement. Nichols Kaster stated work early for a parent-teacher opinion letter advising that certain that allowing nondiscretionary bonuses conference for fear of missing a weekly ‘‘registered representatives’’ in the and incentive payments to satisfy 10 production metric loses some of the financial services industry qualify for percent of the standard salary level benefit of her exempt status: The receipt the administrative exemption even ‘‘could alter employees’ exempt status of her full pay for any week in which though they receive commissions and on a weekly basis,’’ and put employers she performs any work without regard bonuses in addition to their salary. See in a position where they ‘‘would incur to the number of days or hours worked’’ FLSA2006–43 (Nov. 27, 2006). substantial compliance costs reviewing (internal quotation marks and citation Other commenters urged the their payroll on a weekly or monthly omitted). Moreover, Nichols Kaster Department to count discretionary basis to determine which employees asserted that ‘‘an ‘attendance bonus’ that bonuses toward the salary level. For satisfied the salary basis test’’ (emphasis penalizes an employee for partial day example, PPWO stated that ‘‘[s]uch in comment). AFL–CIO and IAFF each absences would be nothing more than payments are in many ways even more wrote that the proposal would be ‘‘in an end-around the existing prohibition reflective of an individual employee’s direct contradiction to the purpose of on partial day deductions from salary.’’ efforts and contributions (and by the proposed rule, which is to clarify, implication their exercise of streamline and simplify the Finally, some commenters warned of independent judgment and other regulations,’’ while NELA and Rudy, possible negative consequences that characteristics of the duties’ test) than Exelrod, Zieff & Lowe commented that might result from allowing bonuses and nondiscretionary bonuses.’’ ‘‘[a]dding this component to the incentive payments to satisfy a portion Many commenters opposed threshold inquiry would only make the of the standard salary level. For permitting nondiscretionary bonuses calculation more confusing and spur example, the Georgia Department of and incentive payments to satisfy a additional transaction costs to what Administrative Services and the New portion of the standard salary level test. should be a straightforward Mexico State Personnel Board stated Some commenters stated that computation.’’ Nichols Kaster, NELA, that crediting such payments would nondiscretionary bonuses and incentive and The Labor Board, Inc., each warned create ‘‘a competitive disadvantage for payments do not indicate an employee’s that allowing bonuses to satisfy a public sector employers,’’ because exempt status. For example, NELA and portion of the standard salary level public employers are not able to provide Rudy, Exelrod, Zieff & Lowe wrote that would likely increase FLSA litigation, non-discretionary bonuses and the types of nondiscretionary bonuses while AFL–CIO noted that permitting incentive payments. KDS Consulting described in the Department’s nondiscretionary bonuses and incentive speculated that allowing bonuses and regulations—including ‘‘bonuses that payments to satisfy a portion of the incentive payments to satisfy a part of are announced to employees to induce standard salary level ‘‘could lead to the standard salary level would them to work more steadily, rapidly, or anomalous results’’ where employees undermine the incentivizing value of efficiently; bonuses to remain with the with similar job duties could be such payments, to the extent that employer; attendance bonuses; classified differently depending on the employers must pay them to maintain individual or group production bonuses; criteria for the bonuses. the exempt status of their employees. and bonuses for quality and accuracy of Commenters also contended that After considering the comments, the work’’—are ‘‘intended to incentivize allowing nondiscretionary bonuses and Department has decided to permit workers of all types to perform their incentive payments to satisfy a portion nondiscretionary bonuses and incentive duties well; but, do not afford them any of the standard salary level would payments (including commissions) to benefits of ownership.’’ These undermine the scheduling flexibility satisfy up to 10 percent of the standard commenters noted further that lower and income security associated with weekly salary level test, provided these level employees whom they have exempt status, as codified in the salary forms of compensation are paid at least represented also received these types of basis requirement. Nichols Kaster quarterly. The Final Rule revises

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§ 541.602(a) to incorporate this new personnel, such as supervisors of a sales variations in the quality or quantity of flexibility. team, to earn commissions based on the their work and thus is indicative of their The Department analyzed comments sales of the employees they supervise. exempt status.66 We believe that a 10 mindful of the need to ensure that the Since such supervisors may satisfy the percent limit is also appropriate given salary level test accounts for employer duties test, the Department has that we are including nondiscretionary payment practices without concluded that it is appropriate to treat bonuses, incentive payments, and compromising the critical function of commissions like other types of commissions as part of the salary level the salary basis test, which is to serve nondiscretionary bonuses and permit test for the first time and the full impact as a key indicator of exempt status. them to be used to satisfy a portion of of this change on determination of EAP Commenters representing employer the salary level test. Accordingly, we status is not yet known. Because this is interests persuasively explained that have concluded that permitting the first time we have included nondiscretionary bonuses are an commissions to count against a limited nondiscretionary bonuses, incentive important part of many employer portion of the standard salary will not payments, and commissions, the compensation systems that cover EAP undermine the effectiveness of the Department may revisit this threshold if employees. Modifying the tests for salary basis test in identifying exempt future experience supports additional exemption to incorporate this fact is employees. This change will also ensure changes to § 541.602(a)(3). consistent with the President’s directive that exemption status does not depend The Department takes note of to modernize the part 541 regulations. on (and that this rulemaking does not comments from government employers The Department also recognizes the interfere with) whether an employer that expressed their view that inclusion concerns expressed by employee chooses to label or structure a of nondiscretionary bonuses and advocates, however, that in some nondiscretionary incentive payment as a incentive payments in the salary level instances nondiscretionary bonuses may ‘‘bonus’’ or as a ‘‘commission.’’ This creates a competitive disadvantage for not be indicative of exempt status and change is also consistent with the them. The Department believes that by that counting such compensation Department’s position that certain limiting to 10 percent the amount of toward the standard salary level may ‘‘registered representatives’’ in the nondiscretionary bonuses and undermine the flexibility and income securities and financial services commissions that can count toward the security associated with exempt status. industry who receive commissions may required weekly minimum salary level, While we share the concern that some qualify for the administrative we strike an appropriate balance which bonus and incentive programs cover exemption. See FLSA2006–43 (Nov. 27, allows employers to use expanded both overtime exempt and overtime- 2006). sources of income to meet the required eligible employees, and the correlation In the NPRM, the Department stated salary level, does not unduly harm of those programs with exempt status is that we were not considering expanding government employers, and ensures that therefore questionable, we are the salary level test calculation to the salary basis requirement remains ‘‘a persuaded overall that the provision of include discretionary bonuses or valuable and easily applied criterion nondiscretionary bonus and incentive changing the exclusion of board, that is a hallmark of exempt status.’’ 69 payments has become sufficiently lodging, or other facilities from the FR 22175. The Department also correlated with exempt status (for salary calculation, a position that the acknowledges the concern articulated example, as of the overtime Department has held consistently since by AFL–CIO that this change to the part exempt employee’s exercise of the salary requirement was first 541 regulations may result in employees management skill or exercise of adopted. The Department also declined with similar job duties being classified independent judgment) that its to consider including in the salary differently depending on the criteria for inclusion on a limited basis in the requirement payments for medical, the bonuses. However, such standard salary requirement is disability, or life insurance, or discrepancies are unavoidable with a appropriate. However, because such contributions to retirement plans or salary requirement and already exist, for payments also correlate directly or other fringe benefits. The Department example, when regional differences in indirectly in many instances with either reemphasizes here that such forms of pay structure result in two employees the quantity or quality of work compensation remain excluded from the performing the same job in different performed, we believe that careful limits salary level test calculation. locations having different exemption must be set on how nondiscretionary Many commenters asked the status. bonuses and incentive pay are applied Department to increase beyond 10 The Department also requested to the salary level test. percent the portion of the standard comments on whether payment on a The Department also sought weekly salary level employers could monthly basis is an appropriate interval comments on the appropriateness of satisfy using nondiscretionary bonuses for nondiscretionary bonuses to be including commissions as part of and incentive payments. After credited toward the weekly salary nondiscretionary bonuses and other consideration, the Department declines requirement. Numerous commenters incentive payments that could partially these requests. Because the Department stated that a policy requiring payment satisfy the standard salary level test. In has long found that the payment of a no less frequently than on a monthly the NPRM, we raised the concern that fixed predetermined salary not subject basis would fail to reflect current bonus it may be inappropriate to count to change based on the quantity or commissions toward the salary level quality of work is a strong indicator of 66 This 10 percent limit concerns an employer’s because employees who earn exempt EAP status, it is important to ability to count nondiscretionary bonuses, incentive commissions are usually sales strictly limit the percentage of the salary payments, and commissions toward the salary level requirement without violating the salary bases employees who—with the exception of requirement that nondiscretionary requirement. This limit does not impact an outside sales employees—are generally bonuses and incentive payments can employer’s continued ability to provide an exempt unable to satisfy the duties test for the satisfy. Accordingly, setting the limit employee with additional compensation without EAP exemptions. Comments from the above 10 percent could undermine the losing the exemption or violating the salary basis requirement, provided the employment Chamber, FMI, AT&T, and others have premise of the salary basis test by arrangement also includes a guarantee of at least the convinced us that it is not uncommon depriving workers of a predetermined minimum weekly-required amount paid on a salary for employees who are not sales salary that does not fluctuate because of basis. See § 541.604(a).

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payment practices and would make it bonuses and incentive payments employers are already permitted to difficult for employers to utilize the new (including commissions) paid does not fulfill almost two-thirds of the HCE total regulation. The Department believes it is equal the standard salary level for 13 annual compensation requirement with appropriate to increase the permissible weeks, the employer has one pay period commissions, nondiscretionary bonuses, bonus payment interval, and is to make up for the shortfall (up to 10 and other forms of nondiscretionary persuaded by comments from PPWO percent of the standard salary level). deferred compensation (paid at least and others suggesting that quarterly (as Any such catch-up payment will count annually). Thus, when conducting the opposed to monthly) payments of only toward the prior quarter’s salary HCE analysis employers must remain nondiscretionary bonus and amount and not toward the salary mindful that employees must receive commission income give employers amount in the quarter in which it was the full standard salary amount each sufficient opportunity to measure, paid. For example, assume Employee A pay period on a salary or fee basis. quantify, and calculate payments tied to is an exempt professional employee Finally, nothing adopted in this Final productivity or profits. This lengthened who is paid on a weekly basis, and that Rule alters the Department’s interval should also limit the the standard salary level test is $913 per longstanding position that employers compliance costs that some commenters week. In January, February, and March, may pay their exempt EAP employees suggested employers would incur from Employee A must receive $821.70 per additional compensation of any form having to review payroll on a monthly week in salary (90 percent of $913), and beyond the minimum amount needed to (or more frequent) basis to determine the remaining $91.30 in satisfy the salary basis and salary level which employees satisfied the salary nondiscretionary bonuses and incentive tests. See § 541.604(a). Similarly, as level test. Accordingly, § 541.602(a)(3) payments (including commissions) must noted in the NPRM, overtime-eligible establishes that in order for be paid at least quarterly. If at the end (i.e., nonexempt) employees may also nondiscretionary bonuses and incentive of the quarter the employee has not receive bonuses and incentive payments (including commissions) to received the equivalent of $91.30 per payments. Where nondiscretionary satisfy a portion of the standard salary week in such bonuses, the employer has bonuses or incentive payments are made level test for the executive, one additional pay period to pay the to overtime-eligible employees, the administrative, and professional employee a lump sum (no greater than payments must be included in the exemptions, such compensation must be 10 percent of the salary level) to raise regular rate when calculating overtime paid at least quarterly. the employee’s earnings for the quarter pay. The Department’s regulations at In response to commenter concerns, equal to the standard salary level.67 The §§ 778.208–.210 explain how to include the Department has also determined that Department recognizes that some nondiscretionary bonuses in the regular it is appropriate to permit a ‘‘catch-up’’ businesses pay significantly larger rate calculation. payment at the end of each quarter. This bonuses; where larger bonuses are paid, D. Highly Compensated Employees will help decrease the administrative however, the amount attributable As noted in the NPRM, the burden on employers and ensure that toward the EAP standard salary level is Department’s 2004 Final Rule created a exempt employees receive the capped at 10 percent of the required new highly compensated exemption for compensation to which they are salary amount. certain EAP employees. Section entitled. The Department declines to The Department reemphasizes that 541.601(a) provides that such permit employers to make a yearly this rulemaking does not change the employees are exempt if they earn at catch-up payment like under the test for requirement in § 541.601(b)(1) that least $100,000 in total annual highly compensated employees, as this highly compensated employees must compensation and customarily and would significantly undermine the receive at least the standard salary regularly perform any one or more of the integrity of the salary basis requirement, amount each pay period on a salary or exempt duties or responsibilities of an which ensures that exempt workers fee basis without regard to the payment executive, administrative, or receive the standard salary level on a of nondiscretionary bonuses and professional employee. Section consistent basis so that it serves as the incentive payments. While few 541.601(b)(1) states that employees must hallmark of their exempt status. This commenters addressed this precise concern is not implicated in the HCE receive at least $455 per week on a issue, the Clearing House Association salary or fee basis, while the remainder context because such employees must urged the Department to permit all types receive the entire standard salary of the total annual compensation may of bonuses and incentive payments to include commissions, nondiscretionary amount each pay period on a salary or satisfy the entire HCE total fee basis and the annual catch-up bonuses, and other nondiscretionary compensation requirement, including compensation. The regulation also payment applies only to that part of the standard salary amount due each total annual compensation in excess of clarifies that total annual compensation pay period. While nondiscretionary does not include board, lodging, and the standard salary amount. bonuses and incentive payments The Final Rule permits employers to other facilities, and does not include (including commissions) may be meet the standard salary level payments for medical insurance, life counted toward the HCE total annual requirement for executive, insurance, retirement plans, or other administrative, and professional exempt compensation requirement, the HCE test fringe benefits. Pursuant to employees by making a catch-up does not allow employers to credit these § 541.601(b)(2), an employer is payment within one pay period of the payment forms toward the standard permitted to make a final ‘‘catch-up’’ end of the quarter. In plain terms, each salary requirement. We conclude that payment during the final pay period or pay period an employer must pay the permitting employers to use within one month after the end of the exempt executive, administrative, or nondiscretionary bonuses and incentive 52-week period to bring an employee’s professional employee on a salary basis payments to satisfy the standard salary compensation up to the required level. at least 90 percent of the standard salary amount is not appropriate because If an employee does not work for a full level required in §§ 541.100(a)(1), year, § 541.601(b)(3) permits an 67 If the employer chooses not to make the catch- 541.200(a)(1), or 541.300(a)(1), and, if at up payment, the employee would be entitled to employer to pay a portion of the the end of the quarter the sum of the overtime pay for any overtime hours worked during required annual compensation, based salary paid plus the nondiscretionary the quarter. upon the number of weeks of

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employment (and one final payment not propose any changes to the HCE level to $150,000 per year.’’ 68 These may be made, as under paragraph (b)(2), duties test. commenters asserted that such a level within one month after the end of Commenters provided both support ‘‘is the proper approach if the employment). for, and opposition to, the Department’s exemption truly is going to exclude only The Department stated in the NPRM proposal to increase the total annual those at the very top of the ladder,’’ and that we continue to believe that an HCE compensation requirement for the HCE indicated that a substantial increase from the current HCE compensation test for exemption is an appropriate exemption, with some commenters level is warranted to ‘‘reflect the means of testing whether highly preferring a higher compensation level purpose of this test.’’ The commenters compensated employees qualify as bona and others preferring a lower level. fide executive, administrative, or also cited to the 2004 Final Rule in Additionally, some commenters which the Department stated that professional employees, but we suggested that the HCE exemption proposed to increase the total annual ‘‘virtually every salaried ‘white collar’ should be eliminated entirely, while employee with a total annual compensation requirement and update others suggested that the HCE duties test it automatically on an annual basis. In compensation of $100,000 per year should be modified or eliminated. Both the 2004 Final Rule, the Department would satisfy any duties test.’’ 69 FR commenters representing employers and concluded that the requirement for 22174. Nichols Kaster similarly stated those representing employees generally $100,000 in total annual compensation that the 90th percentile of salaried provided much less comment on, and struck the right balance by matching a earnings is ‘‘too low to offset the analysis of, the HCE proposal than they much higher compensation level than minimal duties test of the HCE did regarding the other issues raised in was required for the standard salary exemption.’’ Nichols Kaster favored level test with a duties test that was the NPRM, however, with many eliminating the HCE exemption entirely significantly less stringent than the commenters mentioning the HCE and stated that the ‘‘statutory text of the standard duties test, thereby creating a proposal only in passing or not at all. FLSA does not contain an exemption for test that allowed only appropriate Among those who supported the highly compensated employees workers to qualify for exemption. See 69 proposal as written, the American (HCEs).’’ This commenter also stated FR 22174. This total annual Federation of Government Employees that there ‘‘is no causal connection compensation requirement was set more (AFGE) indicated that the ‘‘new salary between high compensation and exempt than four times higher than the standard threshold for the HCE exemption job duties,’’ and thus expressed the view salary requirement of $455 per week, provides a more accurate representation that ‘‘[s]uch a test does not accurately which totals $23,660 per year. See id. at of which employees might be classified define or delimit bona fide exempt 22175. Such a balancing of a as exempt from the FLSA based on their employees.’’ However, Nichols Kaster stated that if the Department retains the substantially higher compensation salary,’’ and stated that the 90th HCE exemption, the compensation level requirement with a minimal duties test percentile of annual earnings of full- should be increased to the 95th still is appropriate, so long as the time salaried workers ‘‘provides an percentile, should not include ‘‘catch- required annual compensation objective basis for determining which up’’ pay, and should be based only on threshold is sufficiently high to ensure employees are truly ‘highly- that it continues to cover only salary payments. compensated’ and likely to meet the Other commenters opposed the employees who ‘‘have almost invariably qualifications of exemption from the been found to meet all the other Department’s proposed increase to the FLSA.’’ The Printing Industries of HCE exemption’s total annual requirements of the regulations for America also supported the proposal, exemption.’’ Id. at 22174. compensation requirement. Tracstaffing stating that ‘‘we believe this is an opined that there ‘‘is no compelling In the NPRM, the Department appropriate level for this particular reason to increase the minimum salary proposed to update § 541.601 by test.’’ The Partnership indicated that level for highly compensated salaried increasing the total annual increasing the HCE compensation employees.’’ H–E–B similarly stated that compensation required for the highly threshold to the 90th percentile ‘‘[t]here is no public policy justification compensated test in order to ensure that accounts for the fact that its 2004 value for paying overtime to an individual it remains a meaningful and appropriate has eroded over time and ‘‘is receiving a six figure annual income.’’ standard when matched with the appropriate to ensure that only the most SIFMA advocated ‘‘maintaining the minimal duties test. The Department highly paid employees are categorically $100,000 threshold for the highly noted that over the past decade, the excluded from overtime requirements, compensated test, as the ‘bright line’ percentage of salaried employees who as was the rule’s intent when it was $100,000 mark furthers the goal of earn at least $100,000 annually has adopted in 2004.’’ simplifying the analysis of who qualifies increased substantially to approximately for the test.’’ The Chamber, the National 17 percent of full-time salaried workers, Some commenters stated that the Lumber and Building Material Dealers more than twice the share who earned proposed HCE total annual Association, NSBA, PPWO, Seize This that amount in 2004; therefore, we compensation requirement should be Day Coaching, and several other proposed to increase the total annual increased so that the percentage of compensation requirement to the employees falling within the new compensation level matched the 68 In the 2004 Final Rule, the Department set the annualized weekly earnings of the 90th total annual compensation amount at a level percentile of full-time salaried workers percentage covered in 2004. For approximating the highest 10 percent of likely nationally ($122,148 in 2013) to bring example, NELA and Rudy, Exelrod, exempt employees. In the NPRM, we noted that the the annual compensation requirement Zieff, & Lowe indicated that ‘‘[i]n 2004, HCE total annual compensation level covered 6.3 percent of full-time salaried workers approximately the highest 6.3 percent of all full- more in line with the level established time salaried employees at the time it was set. 80 in 2004. Consistent with the 2004 earned a salary higher than the HCE FR 38562; see 69 FR 22169 (Table 3). In regulations, the Department also compensation level of $100,000 . . . [so commenting on the current proposal, some proposed that at least the standard in] order to maintain the . . . 93.7 commenters addressed the proposal in terms of percentile figure, the Department would likely exempt employees (10 percent) while other salary requirement must be paid on a commenters addressed the proposal in terms of all salary or fee basis. The Department did need to increase the HCE compensation salaried employees (6.3 percent).

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commenters all similarly commented white collar employee would satisfy any level. The Chamber stated that the that the compensation level should duties test. The Department notes that ‘‘Department should set the highly remain the same for the HCE exemption the value of tying the HCE compensated test using actual salary test. The Clearing House Association compensation level to wage data is that levels of exempt employees working in and SIFMA commented that the HCE it will keep the HCE compensation level the South and in the retail sector that exemption should not have an in tandem with increases in actual would meet the highly compensated associated duties test. wages and therefore not grow either too exemption requirements.’’ The The Department has considered the slowly or too quickly. Therefore, the Department notes that no regional comments regarding the HCE test for Final Rule increases the total annual adjustment has been made to the HCE exemption and revises § 541.601 to set compensation requirement to the compensation level in this Final Rule, the total annual compensation required annualized weekly earnings of the 90th just as this was not part of the 2004 for the highly compensated exemption percentile of full-time salaried workers Final Rule’s determination of the at the annualized weekly earnings of the nationally, which based on fourth compensation level required for the 90th percentile of full-time salaried quarter of 2015 data is $134,004.70 HCE exemption. The HCE exemption workers nationally as proposed Additionally, the Department must use a national wage rate to ($134,004 based on the fourth quarter of proposed to maintain the requirement effectively ensure that workers such as 2015). The Department disagrees with that at least the standard salary amount secretaries in high-wage areas, such as comments asserting that the HCE must be paid on a salary or fee basis. New York City and Los Angeles, are not exemption compensation level should Under the current rule, employees for inappropriately exempted based upon not be increased. The highly whom the HCE exemption is claimed the HCE exemption’s minimal duties compensated earnings level should be must receive the full standard salary test. set high enough to avoid the unintended amount of $455 weekly on a salary or The Department proposed in the exemption of employees who clearly are fee basis. See § 541.601(b). The NPRM to annually update the HCE total outside the scope of the exemptions and Department proposed to maintain this annual compensation requirement. As are entitled to the FLSA’s minimum requirement, updating the amount that explained in greater detail in the wage and overtime pay must be paid on a salary or fee basis to automatic updating section, the protections.69 See 69 FR 22174. the 40th percentile of weekly earnings Department will automatically update The Department notes that it has been of full-time salaried employees the HCE compensation level every three 12 years since the HCE annual nationally. The Final Rule maintains years, beginning on January 1, 2020. compensation level was set and, as with this requirement, but modifies the The Department did not propose any the standard salary level, the 2004 value amount of the standard salary to the changes to the HCE duties test created has eroded over time. In FY2017, 40th percentile of weekly earnings of in 2004 and makes no change to the approximately 20 percent of full-time full-time salaried workers in the lowest- HCE duties test in this Final Rule. With salaried workers are projected to earn at wage Census Region. The Department respect to the call by some commenters least $100,000 annually, about three further stated that should it adopt a to eliminate the duties test for the HCE times the share who earned that amount provision in the Final Rule permitting exemption, the Department notes that in 2004. See section VI.C.iv. In order to employers to take a credit against the we have consistently declined to adopt ensure that the HCE compensation level payment of the standard salary level for a salary-only test, because our statutory remains a meaningful and appropriate nondiscretionary bonuses, that credit authority is to define and delimit who standard when matched with the would not be applicable to the HCE is employed in a bona fide executive, minimal duties test, the Department is exemption. 80 FR 38537 n.36. As administrative or professional capacity, increasing the HCE compensation level previously discussed in section IV.C., and salary alone is not an adequate to the annualized weekly earnings of the the Department received almost no definition. In the 2004 Final Rule, the 90th percentile of full-time salaried comments addressing the exclusion of Department expressed our agreement workers nationally. This level, which is bonus payments from satisfaction of the with commenters ‘‘that the Secretary generally consistent with the level salary requirement for HCE employees. does not have authority under the FLSA established in the 2004 Final Rule, is an The Final Rule maintains the to adopt a ‘salary only’ test for appropriate proxy for identifying those requirement that employees for whom exemption, and reject[ed] suggestions white collar workers who may qualify as the HCE exemption is claimed must from employer groups to do so,’’ and bona fide EAP workers without receive the standard weekly salary further noted that ‘‘[t]he Department has sweeping in overtime-eligible workers amount on a salary or fee basis and does always maintained that the phrase ‘bona in high-wage regions. In response to the not permit employers to credit fide executive, administrative, or comments from employee nondiscretionary bonuses for up to 10 professional capacity’ in the statute representatives suggesting the new HCE percent of that salary payment as is requires the performance of specific compensation level should be even permitted under this Final Rule under duties.’’ See 69 FR 22173. The higher, the Department does not agree the standard salary test. Employers can Department continues to require, as we that a compensation level higher than already credit such payments toward did in the 2004 Final Rule, that an the 90th percentile is necessary to the portion of the HCE total employee have a primary duty that ensure that virtually every salaried compensation requirement in excess of includes performing office or non- the standard salary level; the manual work to qualify for the HCE 69 As the Department has previously noted this Department does not believe that exemption, and workers such as includes employees such as secretaries in high- ‘‘carpenters, electricians, mechanics, wage markets. Courts have also found that real allowing such payments to also satisfy estate appraisers and chief inspectors also do not a portion of the standard salary level for plumbers, iron workers, craftsmen, qualify for the HCE exemption. See Boyd v. Bank HCE employees would be appropriate. operating engineers, longshoremen, of America Corp., 109 F.Supp.3d 1273 (C.D. Ca. A few commenters requested a construction workers, laborers, and 2015) (real estate appraisers); Zubair v. EnTech other employees who perform work Engineering P.C., 808 F.Supp.2d 592 (S.D.N.Y. regional adjustment for the HCE salary 2011) (chief inspector who tested ‘‘concrete and involving repetitive operations with paint sample and recommended project 70 See www.bls.gov/cps/research_series_earnings_ their hands, physical skill and energy improvement to the overall paint systems’’). nonhourly_workers.htm. are not exempt under this section no

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matter how highly paid they might be.’’ The Department sought comments on automatically update the salary level.71 § 541.601(d). two alternative automatic updating Commenters that opposed automatic With respect to Nichols Kaster’s methodologies. One method would updating discussed this issue more comment asserting that the HCE update the threshold based on a fixed frequently and in much greater detail exemption lacks a meaningful duties percentile of earnings of full-time than those that favored the Department’s test, the Department notes that pursuant salaried workers. The other method proposal. to § 541.601(a), HCE employees must would update the threshold based on Organizations representing employee customarily and regularly perform any changes in the Consumer Price Index for interests, including AFL–CIO and one or more of the exempt duties or All Urban Consumers (CPI–U). The NWLC, asserted that the Department has responsibilities of an executive, Department also proposed to authority to establish an automatic administrative, or professional automatically update the total annual updating mechanism through notice and employee as identified in the compensation requirement for the HCE comment rulemaking. These regulations. As noted in the 2004 Final exemption with the same method commenters stated that just as the Rule, the ‘‘Department continues to find chosen to update the standard salary Department has authority under 29 that employees at higher salary levels test. Regardless of the method selected, U.S.C. 213(a)(1) to establish the salary are more likely to satisfy the the Department proposed that automatic level test, we likewise have authority to requirements for exemption as an updating for both thresholds would automatically update the salary level to executive, administrative, or occur annually, but invited comment ensure it remains effective. Several professional employee.’’ 69 FR 22174. regarding whether a different updating commenters emphasized that Congress Therefore, ‘‘the purpose of section frequency would be more appropriate. has never limited the Department’s ability to update the salary level. For 541.601 was to provide a short-cut test Finally, the Department proposed to example, EPI stated that ‘‘Congress in for such highly compensated employees publish the updated rates at least 60 1938 gave the authority to define and who have almost invariably been found days before they take effect, and invited delimit the terms ‘bona fide executive, to meet all the other requirements of the comment regarding whether the administrative, or professional’ to the regulations for exemption.’’ Id. (internal updated rates should take effect based Secretary of Labor and has never taken quotation marks omitted). As we noted on the effective date of the Final Rule, it back, except with respect to very in the 2004 Final Rule, the ‘‘Department on January 1, or on some other specified particular occupations,’’ and a comment has the authority to adopt a more date. The Department received many from 57 labor law professors similarly streamlined duties test for employees comments in response to these stated that automatic updating is paid at a higher salary level.’’ 69 FR proposals. ‘‘within [the Department’s] discretion 22173. We continue to believe that the The Final Rule establishes that the and authority’’ because ‘‘Congress existing HCE duties test is appropriate Department will automatically update granted the agency wide discretion in for those earning at the 90th percentile the standard salary level test by implementation of the statutory of full-time salaried workers, especially maintaining the salary level at the 40th language.’’ Other commenters, including in light of the fact that the required percentile of weekly earnings of full- AFSCME and NELP, highlighted that compensation level will be routinely time salaried workers in the lowest- automatic updating is consistent with updated and, therefore, will remain a wage Census Region. The Department the FLSA’s purpose. meaningful test. will update the annual compensation In contrast, a number of organizations E. Automatic Updates requirement for highly compensated representing employer interests employees by maintaining this level at challenged the Department’s authority As the Department noted in the the annualized value of the 90th to add an updating mechanism. Many of NPRM, even a well-calibrated salary percentile of the weekly earnings of full- these commenters, including ABC, level that is fixed becomes obsolete as time salaried workers nationwide. In ALFA, CUPA–HR, NRA, PPWO, and wages for nonexempt workers increase response to commenter concerns, the Seyfarth Shaw, stated that Congress has over time. Lapses between rulemakings Department has modified the frequency never granted the Department authority have resulted in EAP salary levels that and advance-notice elements of the to institute automatic updating, and are based on outdated salary data, and updating mechanisms. The Final Rule asserted that section 13(a)(1)’s silence thus are ill-equipped to help employers establishes that automatic updates to the on this issue reflects that Congress did assess which employees are unlikely to standard salary level and the HCE not intend the salary level test to be meet the duties tests for the exemptions. annual compensation requirements will automatically updated. These and other To ensure that the salary level set in this occur every three years on the first of commenters stressed that whereas rulemaking remains effective, the the year, and that the Department will Congress has never amended section Department proposed to modernize the publish the updated rates in the Federal 13(a)(1) to expressly include automatic regulations by establishing a mechanism Register at least 150 days before their updating, Congress has expressly for automatically updating the standard effective date, and post the updated authorized indexing under other salary test, as well as the total annual salary and compensation levels on the compensation requirement for highly 71 WHD Web site. The first automatic Some commenters, like the Equal Employment compensated employees. The Advisory Council (EEAC), addressed the update will take effect on January 1, Department explained that the addition Department’s authority to automatically update the 2020. The automatic updating provision HCE compensation requirement by noting that its of automatic updating would ensure is set forth in new § 541.607. reservations regarding automatic updating of the that the salary test level is based on the standard salary level apply equally to the best available data (and thus remains a i. The Department’s Legal Authority To Department’s proposal to automatically update the HCE exemption’s threshold. We do not separately meaningful, bright-line test), produce Automatically Update the Salary Level address this issue since, like the standard salary more predictable and incremental level, our authority to automatically update the changes in the salary required for the Most commenters that addressed HCE threshold is grounded in section 13(a)(1), and EAP exemptions, and therefore provide automatic updating focused on the the discussion in this section therefore applies merits of the Department’s proposal, but equally to our adoption of a mechanism to certainty to employers, and promote automatically update the HCE total compensation government efficiency. some discussed our authority to requirement.

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. Many commenters, including U.S.A., Inc. v. Natural Res. Def. Council, conditions indicate that changes to the the Chamber, CUPA–HR, and FMI, Inc., 467 U.S. 837,843 (1984)). salary level calculation method may be highlighted that Congress has never That other statutes expressly provide warranted. provided for automatic increases to the for indexing does not alter our The Department also received several FLSA minimum wage, and the Chamber interpretation of the FLSA. The comments asserting that automatic added that Congress has not indexed the Department’s authority to set and updating violates the APA and section minimum hourly wage for exempt update the salary level test is based in 13(a)(1)’s requirement that the EAP computer employees under section the language of the FLSA, and the fact exemption be defined and delimited by 13(a)(17) of the FLSA, the cash wage for that there are indexing provisions in regulations of the Secretary subject to tipped employees under section 3(m) of other statutes does not limit that the provisions of the APA. These the FLSA, or any of the FLSA’s authority. Moreover, three of the four commenters asserted, albeit on slightly subminimum wages. non-indexed FLSA wage rates that the different grounds, that notice and Chamber and other commenters comment rulemaking must precede any These comments reveal disagreement referenced—the section 6(a)(1) salary level change. CUPA–HR about the scope of the Department’s minimum wage, the minimum hourly emphasized that under section 13(a)(1) delegated authority under section wage for exempt computer employees any updating must be done by 13(a)(1) to define and delimit the EAP under section 13(a)(17), and the cash regulation, and EEAC asserted that ‘‘the exemptions. The Department disagrees wage for tipped employees under FLSA exemptions have the full force with the position that section 13(a)(1)’s section 3(m)—are set by statute.72 In and effect of law’’ and the ‘‘APA silence on automatic updating contrast, the salary level is purely a requires notice-and-comment forecloses the Department from creature of regulation. Whether rulemaking each time an agency issues, establishing an updating mechanism. Congress has indexed statutorily- repeals, or amends a legislative rule.’’ While it is true that section 13(a)(1) does established rates within the FLSA does NRF stated that any increase should be not reference automatic updating, it also not inform, let alone undermine, the ‘‘based on an individualized evaluation does not reference a salary level or Department’s authority to use notice of economic conditions rather than an salary basis test, a duties test, or other and comment rulemaking to create a automatic arbitrary formula,’’ and longstanding regulatory requirements. mechanism for keeping the regulatory several commenters stressed that the Rather than set precise criteria for salary level up to date. Department must consider prevailing defining the EAP exemptions, Congress The Department also received several conditions and provide for public delegated that task to the Secretary by comments stating that automatic comment before updating the salary expressly giving the Department the updating violates section 13(a)(1)’s level. See, e.g., Jackson Lewis; NAM; broad authority to define and delimit mandate that the Secretary define and PPWO. who is a bona fide executive, delimit the EAP exemption from ‘‘time The Department believes that administrative, or professional to time.’’ For example, the Chamber automatically updating the salary level employee. As we explained in the commented that this statutory language fully complies with the APA and NPRM, since 1938 the Department has gives ‘‘no indication that Congress section 13(a)(1). Through this used this authority to promulgate many wanted to put these regulations on auto- rulemaking the Department is significant regulatory changes to the pilot,’’ but instead supports that promulgating an automatic updating EAP exemptions, including adding a ‘‘Congress wants the Department to mechanism by regulation and in separate salary level for professional ‘continually revisit’ the Part 541 accordance with the APA’s notice and regulations’’ (emphasis in comment) comment requirements. The updating employees and a separate duties test for (quoting 80 FR 38537). However, mechanism is not an ‘‘arbitrary administrative employees in 1940, promulgating an automatic updating formula,’’ but the product of an adopting separate short and long test mechanism does not conflict with exhaustive rulemaking process that took salary levels in 1949, and eliminating section 13(a)(1)’s ‘‘time to time’’ into consideration the views of the long duties test and creating a single language. The salary level percentile thousands of commenters. These standard salary level test and a new adopted in this rulemaking reflects the comments raised a wide range of HCE exemption in 2004. These changes Department’s analysis of the appropriate relevant issues, including the impact of were all made without specific line of demarcation between exempt an updating mechanism, and greatly Congressional authorization. Despite and nonexempt workers; providing that influenced the content of the Final Rule. numerous amendments to the FLSA this dividing line will continue to For example, in response to these over the past 78 years, Congress has not remain up to date over time fulfills the comments (and as discussed in detail altered the Department’s authority to Department’s obligation to ensure that below) the Department adopted a fixed promulgate, update, and enforce the only ‘‘bona fide’’ EAP workers qualify percentile approach to automatic salary test regulations. The Department for exemption. Moreover, maintaining updating, changed the updating concludes that just as we have authority the salary level at the 40th percentile of frequency from annually to every three under section 13(a)(1) to establish the salaries in the lowest-wage Census years, increased the period between salary level test, we likewise have Region by updating it every three years announcing the updated salary level authority to adopt a methodology in no way precludes the Department and the effective date of the update from through notice and comment from revisiting this methodology from 60 days to at least 150 days, and set rulemaking for automatically updating ‘‘time to time’’ should cumulative January 1 as the effective date for future the salary level to ensure that the test changes in job duties, compensation salary level updates. As to commenter remains effective. This interpretation is practices, and other relevant working concerns about accounting for consistent with the well-settled prevailing economic conditions, both principle that agencies have authority to 72 The Chamber also referenced the FLSA’s the NPRM and this Final Rule contain ‘‘ ‘fill any gap left, implicitly or subminimum wage rates. While the Secretary sets detailed 10-year projections of the costs explicitly, by Congress.’ ’’ Long Island some subminimum wage rates, the FLSA establishes the existence of such rates. See, e.g., 29 and transfers associated with automatic Care at Home, Ltd. v. Coke, 551 U.S. U.S.C. 214(a) (minimum wage for learners, updating. See section VI.D.x.; 80 FR 158, 165 (2007) (quoting Chevron, apprentices, and messengers). 38586–89. Moreover, maintaining the

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salary level at a fixed percentile of commenters raised that in our 1970 These commenters’ reading of the earnings will help ensure the test rulemaking we stated, in response to a 2004 Final Rule is overly broad, as we continues to reflect prevailing wage comment, that automatic updating did not conclude that the Department conditions, and does not preclude the would ‘‘require further study,’’ 35 FR lacks legal authority to institute Department from revising the updating 884, and that we declined a similar automatic updating. Our reference to mechanism in the future through notice request in 2004. See, e.g., Chamber; automatic updating simply reflected our and comment rulemaking if we FMI. The Department acknowledged conclusion at that time that an inflation- determine that conditions warrant. We these prior statements in the NPRM. based updating mechanism, such as one disagree with commenter statements While we agree with commenters that based on changes in the prices of that notice and comment rulemaking our decision to institute automatic consumer goods, that unduly impacts must precede every salary level update updating in this Final Rule departs from low-wage regions and industries would when the underlying salary setting our 1970 and 2004 rulemakings, these be inappropriate. As explained in the methodology is unchanged and reject past statements in no way foreclose our NPRM, closer examination reveals that the notion that in directing the current action. The 1970 rulemaking concerns raised when setting a new Department to define and delimit the stated that the request to automatically salary level using an inflation index are EAP exemption by regulations, Congress update the salary level ‘‘appears to have far less problematic in the automatic intended to prohibit the Department some merit, particularly since past updating context. See 80 FR 38540. For from establishing an automatic updating practice has indicated that example, in the automatic updating mechanism through notice and approximately 7 years elapse between context there is little risk of using an comment rulemaking. amendment of the salary level outdated salary level as a baseline for Relatedly, a few commenters requirements.’’ 35 FR 884. The time inflation-based adjustments, and the interpreted our NPRM statement that between rulemakings has increased inability of inflation-based indicators to automatic updating would remove ‘‘the since 1970 (this will be the third salary account for changes in working need to continually revisit this issue level update in 46 years), underscoring conditions is therefore less concerning. through resource-intensive notice and the merit of automatic updating. See id. Regardless, our prior concerns comment rulemaking,’’ 80 FR 38537, as Consistent with our earlier statement about inflation-based updating are not an attempt to impermissibly circumvent that automatic updating ‘‘would require implicated here because the Department the APA. See, e.g., Chamber; NRA. This further study,’’ the Department has has chosen to automatically update the statement was not an attempt to sidestep proposed the addition of an updating salary level based on a fixed percentile the APA, but rather part of our mechanism in this rulemaking and of earnings of full-time salaried workers. explanation for seeking comment on the considered the wide-range of comments As explained in detail in section IV.A., merit of using an updating mechanism received on the issue. While in the 2004 in response to commenter concerns that to keep the salary level test current. The Final Rule we declined to institute setting the salary level using the 40th Department has dedicated considerable automatic updating and instead percentile of a nationwide data set resources toward this rulemaking, expressed our intent ‘‘in the future to would adversely impact low-wage including conducting extensive update the salary levels on a more regions and industries, the Department outreach prior to issuing the NPRM, regular basis, as [we] did prior to 1975,’’ is setting the salary level at the 40th drafting a comprehensive NPRM, 69 FR 22171, our subsequent experience percentile of full-time salaried workers receiving and reviewing more than has prompted us to reexamine this in the lowest-wage Census Region, 270,000 timely comments, and drafting matter. which yields a lower salary level that a Final Rule addressing these will exclude fewer employees comments. The Department recognizes Several commenters, including IFA performing EAP duties in low-wage and appreciates the commenters’ views. and Littler Mendelson, specifically regions and industries. Tying the salary We disagree, however, that section referenced our refusal to institute level and updating mechanism to a 13(a)(1) or the APA prohibits us from inflation-based indexing in the 2004 fixed percentile of earnings in the establishing a mechanism to keep the Final Rule. In that rulemaking we lowest-wage Census Region squarely salary level up to date so that it stated, in response to a comment, that addresses the concern we raised in the continues to work effectively with the ‘‘the Department has repeatedly rejected 2004 Final Rule, and ensures that our duties test. Instead, we conclude that requests to mechanically rely on updating mechanism is appropriate for introducing an updating mechanism inflationary measures when setting the that ensures that the EAP exemptions salary levels in the past because of all areas and industries. remain up to date is a reasonable concerns regarding the impact on lower- Several commenters, including exercise of the Department’s statutorily- wage geographic regions and CUPA–HR and FMI, also deemed the established authority to define and industries.’’ 69 FR 22172. We then Department’s proposal inconsistent with delimit the EAP exemptions.73 stated that such ‘‘reasoning applies our statement in the 2004 Final Rule The Department also received several equally when considering automatic that ‘‘the Department finds nothing in comments highlighting that in two prior increases to the salary levels’’ and that the legislative or regulatory history that rulemakings we rejected commenter ‘‘the Department believes that adopting would support indexing or automatic requests to automatically update the such approaches in this rulemaking is increases.’’ 69 FR 22171. But as salary level. Specifically, some both contrary to congressional intent explained in our proposal, the lack of and inappropriate.’’ Id. In its comment, on-point legislative history—either 73 This approach is consistent with the the Chamber interpreted this language favoring or disfavoring automatic Department’s approach taken when issuing as expressing our conclusion ‘‘that updating—is unsurprising given the regulations to establish required wage rates in other programs for which we have enforcement Congress did not give the Department origin and evolution of the salary level responsibility. See 20 CFR 655.120 (describing authority to provide automatic increases test. Congress did not set forth any method for updating adverse effect wage rates for to the salary level’’ and stated that ‘‘the criteria, such as a salary level test, for H–2A visa program); 20 CFR 655.211 (using Chamber is unaware of any legislative or defining the EAP exemptions, but Employment Cost Index to update required wage for employees engaged in herding or the production of legal development that would justify instead delegated that task to the livestock under the H–2A program). [our purported] reversal.’’ Secretary. The Department established

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the first salary level tests by regulation Similarly, Executive Order 13563 overtime and overtime-protected white in 1938, using our delegated authority to directs agencies to take certain steps collar workers, and continue to work define and delimit the EAP exemptions. when promulgating regulations, effectively with the duties tests. The See 29 U.S.C. 213(a)(1). The fact that the including using the ‘‘best available Department’s proposal explained that salary level tests were created by techniques to quantify anticipated this change would ensure that these regulation after the FLSA was enacted present and future benefits and costs as thresholds are based on the best accounts for the lack of legislative accurately as possible’’ and adopting available data and reflect prevailing history addressing the salary level tests regulations ‘‘through a process that salary conditions, and will produce or updating methods. As previously involves public participation.’’ 76 FR more predictable and incremental discussed, despite numerous 3821 (Jan. 18, 2011). The current changes in the salary required for the amendments to the FLSA over the past rulemaking fully satisfies all aspects of EAP exemptions. The Department 78 years, and the Department making Executive Order 13563, see section VI; received numerous comments many significant changes to the EAP 80 FR 38545, and commenters have addressing our automatic updating exemptions, Congress has not altered cited no portion of this directive that proposal. the Department’s authority to would require notice and comment Commenters were sharply divided promulgate, update, and enforce the rulemaking to precede future automatic over whether the Department should salary test regulations. We agree with salary level increases made through the automatically update the salary level.74 commenters that instituting an updating mechanism established in this Employees and commenters automatic updating mechanism departs rulemaking. representing employee interests from the Department’s past practice, but Finally, Fisher & Phillips and the overwhelmingly supported this change, believe this is an appropriate Southeastern Alliance of Child Care while most employers and commenters modernization and within the Associations stated that because the representing employer interests opposed Department’s authority. Department did not propose specific automatic updating. Overall, those The Department also received several regulatory text concerning automatic supporting automatic updating comments addressing the impact of updating, ‘‘adoption of any such generally agreed with the Department’s automatic updating on compliance with indexing mechanism would be unlawful rationale presented in the NPRM and the Regulatory Flexibility Act (‘‘RFA’’) and without effect’’ under the APA. emphasized the benefits to employees and Executive Order 13563, Improving These commenters did not specify the and employers of maintaining an up-to- provision of the APA that is purportedly Regulation and Regulatory Review. date salary level, while those in violated. The APA requires that the opposition challenged the Department’s Seyfarth Shaw urged the Department to notice of proposed rulemaking rationale and emphasized the burdens not proceed with automatic updating in published in the Federal Register annual updating would impose on part because this mechanism would include either the terms or substance of employers. Several employers favored ‘‘effectively bypass[]’’ these authorities. the proposed rule or a description of the automatic updating, but requested that PPWO raised similar RFA concerns and subjects and issues involved. See 5 updates occur less frequently than on an characterized the Department’s U.S.C. 553(b)(3). The Department’s annual basis. Additionally, some rulemaking as a ‘‘ ‘super-proposal,’ proposal fully satisfies this standard, commenters that opposed automatic deciding once and for all what (in the which does not require the NPRM to updating nonetheless expressed a Department’s belief) is best without ‘‘contain every precise proposal which preference for a particular updating consideration of its impact now or in (the agency) may ultimately adopt as a methodology should the Department go the future.’’ PPWO further stated that ‘‘it rule,’’ much less the specific regulatory forward with this aspect of our would not be possible for the text. Ethyl Corp. v. EPA, 541 F.2d 1, 48 proposal. Department to accurately estimate the (D.C. Cir. 1976) (en banc) (internal Commenters that supported automatic impact of the automatic increases in quotation marks and citations omitted). updating focused primarily on the future years as the workforce and the The proposed regulatory text for each benefits of maintaining an up-to-date economy are always changing.’’ exemption states that the salary level salary level. Many commenters agreed The RFA requires a regulatory will be updated annually (on a to-be- with the Department’s proposal, stating flexibility analysis to accompany any determined date) and that the that automatic updating is a transparent agency rule promulgated under 5 U.S.C. Department will publish a notice with way to maintain an effective salary level 553. See 5 U.S.C. 603–604. In the updated levels at least sixty days and avoid the negative effects of accordance with this requirement, this before these rates become effective. See infrequent salary level updates. For rulemaking estimates the future costs of 80 FR 38610–11. The proposal also example, NELP stated that automatic automatic updating using the fixed explains why, rather than propose updating ‘‘is by far the most reasonable, percentile approach. The RFA only regulatory text for a specific updating efficient and predictable way to ensure requires that such analyses accompany method, the Department sought that the standard for exemption remains rulemaking, and commenters have not comments on two alternatives (each of true to the statute’s intended purposes,’’ cited any RFA provision that would which we discussed in depth). See 80 AFL–CIO stated that a ‘‘transparent require the Department to conduct a FR 38539. The Department’s NPRM updating process would provide greater new regulatory flexibility analysis fully satisfies the APA. certainty and predictability for before each automatic salary level employers and workers alike,’’ and update. In response to PPWO’s concern ii. Rationale for Automatically Updating about this rulemaking setting the salary Salary Levels 74 Relatively few commenters specifically level updating process ‘‘once and for The Department proposed to establish addressed the proposal to automatically update the HCE total annual compensation level, and those all,’’ we reiterate that this Final Rule automatic updating mechanisms to that did generally stated that their views mirrored does not preclude further rulemaking ensure that the standard salary test and their comments on the proposal to automatically should the Department determine that the HCE total annual compensation update the standard salary level. Accordingly, this future conditions indicate that revisions requirement remain meaningful tests for discussion focuses on the standard salary level but also applies to the Department’s adoption of an to the salary level updating distinguishing between bona fide EAP automatic updating mechanism for the HCE methodology may be warranted. workers who are not entitled to compensation requirement.

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Bend the Arc, Employment Justice updates have harmed workers earning compensation requirements in our final Center, Maintenance Cooperation Trust just above the salary threshold when it rule. PPWO stated that the Fund, and several other worker is first set, as these workers have ‘‘no ‘‘Department’s own actions in reaching advocacy groups stated that indexing protection against working long hours out to the regulated community before ‘‘the salary threshold to an objective for diminishing returns.’’ publication of the NPRM, as well as measure provides a predictable and A number of commenters also raised soliciting input on the salary level in the efficient way to ensure that those the related view that automatic updating NPRM itself, demonstrate the workers intended to be covered by the would decrease inappropriate importance of notice-and-comment on [FLSA] get its protections.’’ Many other classification of lower salaried white the salary level.’’ commenters made similar statements. collar employees as exempt. AFGE, Many commenters stated that the See, e.g., AARP; AFT; EPI; the Gillespie IAFF, and others noted that the salary Department should only update the Sanford law firm; Labor and level’s effectiveness at distinguishing salary level when conditions warrant, Employment Committee of the National between exempt and nonexempt not automatically. CUPA–HR Lawyers Guild-New York City Chapter; workers diminishes over time as the commented that the rates of increase NWLC. wages of employees increase and the and the duration between updates have Commenters supporting automatic real value of the salary threshold falls. always varied as the Department has updating also frequently discussed, and SEIU and a number of worker advocacy tailored the salary levels ‘‘to ensure that viewed the Department’s proposal as a groups, including Equal Justice Center, the exemptions remained true to their solution to, the Department’s past NDWA, and Texas RioGrande Legal Aid, purpose in the face of changing inability to regularly update the salary asserted that infrequent salary level workforces and changing economic level. These commenters emphasized updates have permitted employers to circumstances.’’ NGA cited the that automatic updating would increase sweep too many low-salaried workers statement in the 2004 Final Rule that predictability in both the frequency and into the exemption, with NELP citing ‘‘salary levels should be adjusted when size of salary level changes, benefiting the proximity of the current salary wage survey data or other policy employers and employees. See, e.g., threshold to the poverty level as a concerns support such a change,’’ 69 FR Comment from 57 labor law professors; ‘‘potent example’’ of how the ‘‘current 22171, and stated that the Department AFL–CIO; Partnership. Several method of setting fixed levels results in should only change the salary level commenters representing employer outdated thresholds and ballooning when changes in earnings are interests viewed automatic updating as numbers of workers improperly subject substantial. Similarly, AH&LA, Island a means of producing more predictable to employer classification as exempt.’’ Hospitality Management, NCCR, and salary level changes. See, e.g., American Some commenters, including AFL–CIO NRF all stated that a salary increase Council of Engineering Companies; CVS and UFCW, asserted that failing to ‘‘should be based on an individualized Health. Similarly, SIGMA supported regularly update the standard salary evaluation of economic conditions automatic updating because ‘‘[s]udden, level also exposes growing numbers of rather than an automatic arbitrary large adjustments to the threshold workers who fail the standard duties formula.’’ Other commenters expressed without warning can cause dislocation test to the ‘‘risk of misclassification.’’ similar views. See, e.g., Agricultural in the industry, increase compliance The Department received numerous Retailers Association and the Fertilizer costs, and provide disincentives to comments from employers and groups Institute; National Council of Farmers employing people on a salaried rather representing employers opposing the than an hourly basis.’’ ANCOR stated introduction of an automatic updating Cooperatives. PPWO contended that the that ‘‘steadier, more predictable’’ salary mechanism. These commenters raised a salary level needs to be ‘‘fixed’’ only level changes would ‘‘likely benefit variety of concerns and urged the ‘‘when it approaches the end of its providers who will be able to adjust to Department not to finalize this aspect of usefulness.’’ EEAC and Fisher & Phillips smaller, more frequent changes better our proposal. Consistent with how stated that the Department could simply than to larger, less frequent ones.’’ many commenters organized their reallocate resources as necessary to Some commenters that supported comments, these views are aptly maintain an appropriate salary level automatic updating, including Athens separated into two broad categories: without automatic updating. for Everyone, NELA, Rudy, Exelrod, Those addressing whether automatic Several commenters raised the related Zieff & Lowe, and many others, stressed updating is appropriate as a general concern that automatic updating could that a fixed salary level harms matter, and those discussing potential harm the economy by increasing the employees because inflation causes the financial and administrative effects of financial burden on employers during salary threshold’s real value to decline automatically updating the salary levels economic downturns. The Chamber over time. AFSCME submitted on an annual basis. Both of these broad stated that either proposed updating campaign comments from 24,122 of its categories of comments are discussed method would be slow to reflect actual members who agreed that ‘‘overtime below. economic conditions, and would protections have been eroded by Some commenters cited the prevent employers from ‘‘lowering inflation,’’ and highlighted the ‘‘need to Department’s past refusal to institute salaries to quickly respond to decreased index these protections to keep them automatic updating and emphasized revenue experienced in bad economic from being eroded again in the future.’’ that the part 541 regulations have times.’’ Fisher & Phillips stated that NELA and Rudy, Exelrod, Zieff & Lowe benefited from the rulemaking process. automatic updating during periods of also stated that this decline particularly For example, the Chamber, FMI, and high inflation could ‘‘contribute to a harms workers earning just below the others stated that rulemaking has serious inflationary spiral.’’ Analogizing fixed salary level when it is first set, generated vigorous public debate about to the minimum wage context, because they will ‘‘soon see that figure the salary levels, and that the CalChamber Coalition stated that fall below their salary’’ and lose Department has increased and automatic updates during economic overtime protection even if ‘‘the real decreased proposed salary levels in downturns may lead employers to value of their salary stays entirely response to public comment—including reclassify more employees as constant.’’ Likewise, Nichols Kaster in 2004 when the Department increased nonexempt, reduce hours, and increase stated that infrequent salary level the proposed salary level and HCE layoffs.

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Some commenters worried that elicited strong and diverse reactions to a regional data set in the standard automatic updating would create an from stakeholders. After review of salary level setting context apply untenably high salary level that would submitted comments, the Department equally in the salary updating context, harm low-income regions and remains convinced that instituting an and new § 541.607 accordingly industries, and small businesses. For automatic updating mechanism is the incorporates this data set change.75 The example, Alpha Graphics stated that best means of ensuring that the salary Department recognizes that salaries do automatic updating would produce ‘‘an level test continues to provide an not change at the same rate nationwide, inappropriately high level in a matter of effective means of distinguishing and this modification will ensure that a few years,’’ and NGA stated that salary between overtime-eligible white collar any future increase in earnings will only level increases would harm employees and those who may be bona impact the standard salary level to the independent grocers with low profit fide EAP employees, and continues to extent that those gains are also realized margins because the updating work appropriately with the duties test. by employees in the lowest-wage mechanism ‘‘would not provide the The Department shares commenters’ Census Region. This change will also necessary protection for low-wage concerns that a fixed and outdated further guard against commenter industries and geographic areas.’’ See salary level increases the number of concerns that using a nationwide data also, e.g., ALFA; NFIB. SHRM expressed low-salaried employees at risk of being set could lead to a standard salary level concern that automatic updating based inappropriately classified as exempt as increase that does not reflect the on a national salary level would not the real value of the salary threshold prevailing economic climate.76 account for the fact that salaries in all falls, and that workers earning near the Experience has shown that the salary regions and industries do not rise at the fixed salary level when it is set are level test is only a strong measure of same pace, and it questioned whether particularly vulnerable. The Department exempt status if it is up to date, and that the Department could realistically use also agrees with commenters that the left unchanged the test becomes additional rulemaking to correct for updates to the salary level should reflect substantially less effective as wages for regional disparities that may arise in the prevailing economic conditions. The overtime-protected workers increase future. Department’s updating mechanism over time. As we explained in the Several commenters asserted that directly addresses both of these issues NPRM, competing regulatory priorities, updating is problematic regardless of by ensuring that the salary test level is overall agency workload, and the time- the updating method the Department based on the best available data and intensive nature of notice and comment chooses, with some suggesting that the reflects current salary conditions. As rulemaking have all contributed to the salary level and automatic updating are explained in more detail below, the Department only having updated the incompatible concepts. Seyfarth Shaw Department will use the updating salary level once since 1975 (in 2004). stated that any updating method ‘‘would mechanism established under new In the 2004 Final Rule the Department establish an ad hoc, artificially-created § 541.607 to reset the salary level using expressed the intent to ‘‘update the level determined by statistical the most recent BLS data on earnings for salary levels on a more regular basis,’’ assumptions.’’ See also Wendy’s salaried workers. Linking the salary 69 FR 22171, yet more than a decade (describing the updating methods as level to earnings ensures that economic has passed since the last update. While ‘‘based on untested and complicated changes that impact employee salaries some commenters viewed this inaction methodologies’’). EEAC expressed are reflected in the salary level test. and the Department’s past decision not concern that if the salary-setting Also, because regular updates will to institute automatic updating as methodology in this rulemaking results ensure that the salary level is in step reason for withdrawing our current in an incorrect salary level (as the with prevailing economic conditions, proposal, we believe this history Department now states was the case in the Department does not believe that the underscores the appropriateness of 2004) automatic updating would updating mechanism will lead to undue adding an automatic updating provision compound this error indefinitely. salary level increases during economic to the regulations. NACS, the Southeastern Alliance of downturns or other inopportune times. Contrary to several commenters’ Child Care Associations, and others Salary level changes will occur at concerns, prior Department statements stated that establishing an automatic regular intervals using a set about the salary level test in no way updating mechanism is inconsistent methodology and a publicly available undermine the Department’s decision with the Department’s recognition that data source. This improvement to the ‘‘the line of demarcation’’ provided by current regulations will benefit now to incorporate an automatic the salary test ‘‘cannot be reduced to a employers and employees by replacing updating mechanism into the standard formula.’’ infrequent, and thus more drastic, salary regulations. The Department’s statement As to the effect of automatic updating level changes with gradual changes that the ‘‘line of demarcation’’ between on salary level predictability, PPWO occurring at predictable intervals. exempt and nonexempt employees stated that ‘‘it will be difficult, if not The Department is committed to ‘‘cannot be reduced to a standard impossible, for employers and ensuring that the updating mechanism formula,’’ 80 FR 38527, simply reflects employees to determine with precision yields a salary that is appropriate for 75 each year’s new salary level in advance low-wage industries and geographic Similarly, for the same reasons that the Department declines commenter requests to of the Department’s pronouncement in areas. As previously discussed in institute a special salary level for non-profit the Federal Register,’’ and AIA–PCI and section IV.A.iv., in response to employers, we also decline to exempt non-profit the Clearing House Association agreed commenters’ concerns, the Department employers from automatically updated salary that this uncertainty is demonstrated by is setting the salary level at the 40th levels. 76 As explained in section IV.D., as in the 2004 the Department’s statement in the percentile of weekly earnings of full- Final Rule, the Department is using a nationwide NPRM that ‘‘the public will not be able time salaried workers in the lowest- data set to set the HCE compensation level in this to exactly replicate the weekly earnings wage Census Region (currently the rulemaking, and we will use nationwide data to and percentiles’’ used to calculate the South). Commenters raised similar update the HCE compensation level. The use of nationwide data is necessary to ensure that salary level, 80 FR 38528 n.24. concerns about using a nationwide data overtime-eligible workers in high-wage areas are not The Department recognizes that our set for automatic updating. The reasons inappropriately exempted based upon the HCE automatic updating proposal has that supported changing from a national exemption’s minimal duties test.

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our continued belief that no single why the Department does not share The Department received many formula can unerringly separate exempt commenter concerns about resetting the comments expressing concern about the and nonexempt employees, and that the salary level without further rulemaking. financial and administrative burden that salary test must therefore work in The Department agrees with annual updating would impose on tandem with the duties test for the EAP commenters that past salary level employers. In particular, many exemption to function effectively. The changes have benefited from (and commenters stated that annual updating salary level test remains the ‘‘best single required) notice and comment would require employers to conduct a test’’ of exempt status, Stein Report at rulemaking. This rulemaking is no yearly ‘‘classification analysis’’—to 19, and the method for setting and exception, as public feedback was assess employee exemption status and updating the salary level adopted critical to finalizing the new standard determine whether salary increases to through this rulemaking represents the salary level and the automatic updating preserve exempt status are warranted— Department’s best determination of the mechanism. In response to public and then incur additional costs appropriate dividing line between comments, the Department has changed implementing any changes. AIA–PCI; exempt and nonexempt workers, when the data set used for setting and see also, e.g., Business Roundtable; paired with the standard duties test. updating the salary level, and (as Maryland Chamber of Commerce; While the precise updating ‘‘formula’’ discussed in greater detail below) PPWO. Several commenters described chosen—the 40th percentile of weekly chosen to update the salary using the these costs in detail. For example, the earnings of full-time salaried workers in ‘‘fixed percentile’’ approach, increased Chamber’s comment identified many the lowest-wage Census Region—is new, the period between notice of the common concerns: the underlying methodology is broadly updated salary level and its effective The annual salary increase proposed by the consistent with the Department’s past date, and changed the updating Department will require an employer to: salary setting methods, see section frequency. But unlike salary updates Analyze whether business conditions allow a IV.A.i., and the salary setting and made up to this point, which have all salary increase or whether they need to updating methodology have been involved some change to the salary reclassify employees as non-exempt; prepare promulgated through notice and setting methodology, salary level new compensation plans for reclassified comment rulemaking. updates under new § 541.607 will use a employees; develop materials to explain the The Department agrees with fixed methodology that (through this reclassification to employees; review timekeeping and payroll systems to ensure commenters that stated that automatic rulemaking) has already been subject to updating will increase predictability in compliance with the FLSA recordkeeping notice and comment. Public feedback requirements and compliant overtime both the frequency and size of salary was critical to finalizing the updating level changes, benefiting employers and calculations; review or adopt new policies for mechanism, but is unnecessary when the reclassified employees, including policies employees alike. We find to be simply maintaining the salary level prohibiting off-the-clock work, when unfounded comments that salary level using this mechanism. Of course, employees will be permitted to work unpredictability is evident from our should the Department choose to make overtime, payment for waiting time, training statement that ‘‘the public will not be any changes to the updating time and travel time, etc.; train the able to exactly replicate the weekly methodology in the future, such changes reclassified employees, and the managers earnings and percentiles [used to who supervise them on recording time and would require notice and comment other wage-hour topics. If the salary change calculate the salary level] from the rulemaking.78 public-use files made available by BLS.’’ is implemented as proposed, a large number The Department also disagrees with 80 FR 38528 n.24. This explanatory of workers will have to be added to commenters that stated that we should footnote addressed the public’s ability timekeeping systems. This may require server simply reallocate agency resources as and system upgrades to account for the to duplicate BLS’ deciles table using the necessary to maintain an updated salary additional users. Best practices take time. public-use data. The referenced level. Whereas most regulations require discrepancy is very small, and in no Additionally, ABA stated that automatic a one-time expenditure of resources to way compromises the public’s ability to updating would require employers to promulgate, and then once issued can estimate future salary level changes consider whether to restructure the remain both unchanged and forceful for based on the trend in quarterly earnings duties of newly nonexempt employees, many years if not decades, without data published by BLS.77 As discussed and NFIB stated that it would require automatic updating the Department in the NPRM and above in section employers to annually ‘‘reassess IV.A.iv., the Department will update the would have to engage in nearly potential raises, bonuses, or salary level using the deciles table for continuous rulemaking to ensure that promotions’’ for employees. Seyfarth Census Regions as published by BLS, the salary test accurately reflects Shaw and others stated that the without modifying the data in any way employee salary levels. The new Department significantly or otherwise engaging in complex data automatic updating mechanism will underestimated the cost and time analysis. This process is transparent, enable the Department to maintain an obligations associated with these predictable, and straightforward. effective and up-to-date salary level, actions. The essentially ministerial act of while preserving our ability to revisit Multiple commenters also applying the updating mechanism to the underlying salary setting emphasized that annual updating would maintain the salary level underscores methodology through rulemaking as negatively impact employer budgets and future conditions warrant. For the above budget planning. NALP, NGA, NRF, 77 As we noted in the NPRM, to ensure the reasons, the Department is finalizing our Wendy’s, and others stated that not confidentiality of survey respondents the data in all proposal to institute a regulatory knowing employee exemption status BLS public-use files use adjusted weights and mechanism for automatically updating therefore minor discrepancies between internal BLS from year to year would make it more files and public-use files exist. See 80 FR 38528 the salary level. difficult for employers to forecast costs n.24. This means that the public will be able to or profit margins. CUPA–HR stated that estimate future salary levels based on BLS’ regularly 78 Additionally, and as acknowledged in the in response to a survey of its members published regional deciles, but will not be able to NPRM, 80 FR 38522, the Department will consider precisely recreate the salary amounts in the conducting a retrospective review of this Final Rule about the Department’s proposal, 91 published deciles due to minor adjustments in the at an appropriate future time. See Executive Order percent of respondents stated that publically available data. 13563 (Jan. 18, 2011); see also 5 U.S.C. 610. automatic updating as proposed would

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negatively impact their budgets, while on the company to provide a salary updating is not a permanent fixed 63.6 percent said this change would increase to an underperforming standard salary level, but instead larger negatively impact financial planning employee . . . simply to maintain the changes to the standard salary level that ability. The California State Association employee’s exempt status,’’ and NGA would occur during irregular future of Counties stated that annual updating stated that if ‘‘managers know they will updates. would be especially hard for public receive an automatic raise each year by The Department believes that in entities because ‘‘public sector salaries meeting minimum performance several respects commenters overstated are generally not as flexible as private standards, they have little incentive to the impact of automatic updating on sector salaries and have many work increased hours and take on more employers. In some instances additional constraints, including responsibility while also maintaining a commenters failed to account for bargaining agreements, restricted high performance level.’’ Relatedly, existing employer practices. For sources of revenue, and civil service several commenters, including IFA, example, the concern that automatic rules.’’ Similarly, several commenters Littler Mendelson, and Fisher & updating will require employers to stated that updating would be Phillips, stated that in addition to develop policies and trainings to particularly difficult for non-profit raising employee salaries to maintain explain reclassification to newly employers that have limited ability to their exempt status, employers will have overtime-eligible employees ignores that increase revenue in response to to raise the salaries of those earning employers already have overtime- increased labor costs. See, e.g., above the salary threshold to avoid eligible employees and thus typically American Academy of Otolaryngic compression in compensation scales have these procedures in place. Allergy; BSA; USPIRG. WorldatWork among exempt employees. Additionally, many commenters stated that budget overruns resulting Some commenters stated that conflated the distinction between costs from annual salary increases could automatic updating would also associated with the current salary deplete capital available for other adversely impact employees. AH&LA, increase (to $913), and those due to business areas such as research and NRF, and others stated that annual future automatic updates. For example, development, business equity for future updating would create instability in the cost of adding newly overtime- growth, or voluntary employer employee compensation and benefits eligible workers to timekeeping systems contributions to retirement plans, and (which are often tied to exempt status) and reviewing timekeeping and payroll FMI stated that budgetary uncertainty and that employers would likely reduce systems to ensure compliance with and the ‘‘specter of unexpected cost exempt employee benefits to cover FLSA recordkeeping requirements are increases provides disincentives for annual updating’s administrative costs. likely overstated. These costs are businesses to engage in capital spending Similarly, AT&T stated that uncertainty primarily incurred when employees are and increase hiring and thereby grow about employees’ year-to-year initially reclassified, and the the economy.’’ exemption status will likely cause Department predicts that the number of companies to ‘‘hedge against reclassified employees at future updates Several commenters expressed unanticipated overtime payments, will be much smaller than the number concern that updating could create thereby putting downward pressure on reclassified at the initial salary increase ‘‘salary compression’’ issues and annual salary increases.’’ Other since the updating mechanism will impede employers’ ability to give merit- commenters stated that possible changes change the salary level regularly and based salary increases. To illustrate in exempt status and employers’ incrementally, and the salary level is these interrelated concerns, SHRM inability to provide merit increases will based on actual wages of salaried provided a hypothetical in which ten undermine employee morale. See, e.g., workers. exempt employees earn $975 per week CUPA–HR; Seyfarth Shaw. IFA asserted The Department is also not persuaded (above the 2016 salary level of $970 that such complexities illustrate that an that automatic updating (at any predicted in the NPRM), and an automatic updating mechanism is frequency) will force employers to employer budgets for a three percent inconsistent with the President’s reward underperforming employees, annual salary increase (totaling directive to ‘‘modernize’’ the EAP impede merit-based pay increases, or $15,210). SHRM contended that without regulations. create salary compression issues. These automatic updating the employer could The Department acknowledges interrelated concerns arise from the reward better performing employees employers’ strong views on the financial faulty premise that the automatic with large raises and give lower raises and administrative considerations updating mechanism will in effect or no raise to average or poor associated with annual automatic require employers to increase salaries of performers. If, however, the salary level updating, and we agree that updating all affected workers. This is not the case were automatically increased by two the salary level annually may increase as employers have many options for percent, the employer ‘‘would be the impact on employers. In particular, managing their workforces. The required to adjust all ten salaries up to we agree that this change may require updating mechanism simply adjusts the $989 per week in order to maintain their employers to reassess employee salary level to ensure that it reflects exempt status,’’ significantly reducing exemption status more frequently and in prevailing salary conditions and can the total amount available for merit some instances to more closely monitor effectively work in combination with increases. SHRM concluded that after hours of newly overtime-eligible the duties test to identify exempt and several automatic updates ‘‘the gap in employees. These costs are discussed in nonexempt employees. Because any pay between more senior and less greater detail in the Department’s increase in the salary level is based on senior, more experienced and less economic impact analysis, see section actual increases in workers’ salaries, experienced, or more productive and VI.D.x. However, the link between employers may find that they are less productive employees will become automatic updating and other costs already paying their exempt employees smaller over time, creating significant commenters have raised is less clear and wages above the updated salary level. morale problems and other management was generally not supported by data in Where this is not the case, employers challenges.’’ AIA–PCI stated that the comments. Moreover, many can respond to salary level updates by automatic updating would in many commenters did not address the fact (for example) increasing employee pay instances place ‘‘an artificial obligation that the alternative to automatic to retain overtime exempt status,

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reclassifying employees to overtime- Companies; American Resort The Department received numerous eligible status, decreasing hours of Development Association; WMATA, as comments addressing these two newly overtime-eligible employees to did several commenters that opposed proposed updating methods, although avoid overtime, paying overtime to updating generally, see BSA (no more many commenters that supported newly overtime-eligible workers, than every two or three years); Fisher & automatic updating did not express a redistributing hours among the Phillips (‘‘not less than every three methodology preference. See, e.g., workforce, and/or hiring new years’’). Other commenters favored AARP; American Association of employees. Similarly, employers are other updating periods. See, e.g., University Women; Legare, Atwood & under no obligation to reward Association of Regional Center Agencies Wolfe law firm; Santa Clara County underperforming employees with a raise (‘‘no more frequently than biennially’’). Probation Officers’ Union. (a concern discussed in a number of In response to commenter concerns Commenters that favored automatic comments). Employers can reclassify about the burdens of annual updating, updating and expressed a preference for such employees to nonexempt status, and mindful of the range of views a methodology generally preferred the redistribute employee workloads, or expressed on the appropriate updating fixed percentile approach, although take any number of other managerial frequency, new § 541.607 provides that some favored the CPI–U method. Both actions in lieu of increasing their salary updating will occur every three years. of these groups of commenters preferred to maintain the exemption. This change from the Department’s either method to no automatic updating. The Department is more persuaded by proposal strikes an appropriate balance Commenters that opposed any form of commenter concerns that annual between ensuring that the salary level automatic updating generally expressed updating would inject uncertainty into remains an effective ‘‘line of concerns with both updating methods. the annual employer budgeting process. demarcation’’ and not burdening In some instances, however, these While the ripple effects of this employers or their workforces with commenters preferred a particular uncertainty on employee compensation possible changes to exemption status on method (typically the CPI–U) should the are open to debate, the immediate a yearly basis. Increasing the time Department institute automatic impact on employers is clear. Although period between updates will also updating. Additionally, a few commenters often raised budgeting decrease the direct costs associated with commenters suggested automatic concerns as part of their general updating because regulatory updating methods not included in the opposition to automatic updating, closer familiarization costs are only incurred Department’s proposal. examination reveals that these concerns The majority of commenters that in years in which the salary is updated are closely linked to the updating supported automatic updating and and the number of affected workers will frequency. For example, comments that expressed a methodology preference drop in years in which the salary is updating would impact employers’ favored the fixed percentile approach. unchanged leading to lower managerial ability to forecast profit margins, Many of these commenters explained costs in those years. Triennial updates determine store and supply chain labor that the reasons for initially setting the costs, and and implement yearly using a fixed and predictable method salary level at a fixed percentile of salary increases, are all most directly should significantly mitigate the annual earnings of full-time salaried workers implicated by annual updating, as are budget planning concerns that also supported updating using the same government and non-profit commenter commenters raised. Additionally, method. For example, NWLC stated that concerns tied to the lack of short-term employers will always know when the just as the Department determined that control over revenue streams and salary level will be updated, and ‘‘looking to the actual earnings of employee costs. Even some of the between updates can access BLS data to workers provides the best evidence of commenters that opposed automatic estimate the likely size of this change. the rise in prevailing salary levels and, updating agreed that lengthening the Lengthening the updating frequency to thus, constitutes the best source for period between updates would help three years also responds to commenter setting the proposed salary alleviate some employer concerns. See, concerns that minor year-to-year requirement,’’ 80 FR 38533, automatic e.g., CUPA–HR (updating every five fluctuations in employee earnings updating should be based on changes in years ‘‘could avoid many of the negative should not trigger reclassification earnings rather than changes in prices. consequences associated with automatic analyses. AFGE, EPI, IWPR, NEA, and many annual increases’’); BSA. Accordingly, iii. Automatic Updating Method others agreed that salary level updates the Department is modifying our should reflect changes in wages and not proposal, which would have updated The Department’s proposal discussed prices, and thus favored updating using the salary level annually. and requested comments on two a wage index (i.e., the fixed percentile Commenters that favored automatic alternative updating methodologies— approach) rather than a price index (i.e., updating often also favored annual updating using a fixed percentile of full- the CPI–U). NELP, the Partnership, and updates. See, e.g., Nichols Kaster; time salaried employee earnings or others added that a wage index is more UFCW. Commenters that opposed using the CPI–U. As we explained in appropriate because wages are less automatic updating expressed more our proposal, the fixed percentile volatile than prices and increase in a varied opinions. AT&T, CUPA–HR, approach would allow the Department more consistent and predictable fashion. SIFMA, and others favored updating no to reset the salary level test by applying Commenters that favored the fixed more frequently than every five years, the same methodology proposed to set percentile approach also highlighted the with some noting that this was the the initial salary level, whereas the CPI– link between wages and the EAP shortest interval between the U approach would update the salary exemptions’ purpose and function. Department’s past salary level updates amount based on changes to the CPI– NELP stated that using a wage index is (since 1940). Notably, several of the U—a commonly used economic consistent with the fact that the commenters representing employer indicator for measuring inflation. The exemptions are intended to cover interests that supported some form of Department’s proposal did not express a higher-paid employees in the workforce, automatic updating favored revisiting preference for either updating method and NELA stated that this method the salary level every three years, see and instead sought comments on these reflects ‘‘the fact that the EAP American Council of Engineering two alternatives. exemption is, in many respects,

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premised on an employee’s relative apply further upward pressure on the status. One exception was EPI, which position in the workplace’’ and ‘‘is the 40th percentile, and CUPA–HR and stated that employer projections of fairest way to maintain consistency in Seyfarth Shaw added that this effect accelerated salary growth due to mass workers’ FLSA eligibility in light of would also occur to the extent conversion of employees to hourly pay inevitable economic change.’’ employers paid overtime to newly were inaccurate because they Of the relatively few commenters nonexempt salaried workers but did not underestimated employee bargaining representing employer interests that convert them to hourly pay. power by failing to account for low supported some form of automatic Given these predictions, several unemployment rates and the fact that updating, several favored the fixed commenters estimated the impact that ‘‘nominal wages are ‘sticky,’ meaning percentile method. For example, SIGMA automatic updating using the fixed that employers rarely will lower them.’’ (which favored automatically updating a percentile approach would have on the EPI added that employers will have a salary level based on the 2004 method salary level. Many stated that salary difficult time converting salaried every three to five years) stated that this level growth would far exceed the 2.6 workers to hourly status because the approach ‘‘will help the threshold keep percent average annual growth rate for new salary level will ‘‘establish a clearly pace with actual wage changes in the the 40th percentile of full-time salaried observable new norm in the workplace’’ ,’’ while an inflation-based index workers’ weekly earnings that the and so it will ‘‘be obvious to employees ‘‘will risk harming workers and Department estimated occurred between that any reclassification will be done to businesses’’ because inflation and wages 2003 and 2013, 80 FR 38587. See, e.g., disadvantage them.’’ For these reasons, ‘‘can increase at very different rates.’’ IFA; Littler Mendelson; Seyfarth Shaw. EPI concluded that the ‘‘wholesale Printing Industries of America and at Other commenters, including the reclassification of current salaried least eight of its member businesses Chamber and FMI, submitted an Oxford workers to hourly status . . . seems an agreed that ‘‘[a]ny indexing should Economics letter (prepared for the NRF) unlikely outcome.’’ reflect wage changes.’’ Similarly, CVS which projected that by 2016 annual While employer commenters that Health and several non-profit updating would produce a salary level opposed the fixed percentile approach commenters (which incorporated or of approximately $1,400 per week generally focused on the concerns referenced a comment submitted by assuming all salaried employees below discussed above, some commenters also ANCOR) favored the fixed percentile the standard salary level would be objected to this approach based on the approach over the CPI–U, provided in converted to hourly. The Chamber and same concerns they raised with respect part that the Department account for PPWO referenced (but did not submit) to the underlying salary level. regional salary level disparities and an article from Edgeworth Economics, Commenters criticized the CPS data set, update the salary level on a less an employer consulting firm, which see, e.g., Fisher & Phillips, expressed frequent basis than annually. stated that if 25 percent ‘‘of the full-time concern that the proposed methodology Most commenters representing nonhourly workers earning less than results in too high a salary level for low- employers opposed any form of [the 40th percentile salary level] were wage areas, see, e.g., ACRA, and automatic updating, and many of these re-classified as hourly workers,’’ after asserted that updating using the same commenters strongly opposed automatic five annual updates the salary level methodology would ‘‘compound the updating using the fixed percentile would equal $72,436 annually ($1,393 Department’s error,’’ see PPWO, in method. The predominant concern per week). Other commenters provided setting the salary level. These among commenters that opposed the their own projections of salary level test commenters opposed any form of fixed percentile approach was that this growth. For example, WorldatWork automatic updating, but deemed the method would produce drastic increases stated that after five annual updates the fixed percentile method particularly in the salary threshold level arising from salary level would reach $233,217, and troubling. the updating method itself, rather than HR Policy Association stated that if ‘‘the The Department also received many from market forces. Some of these bottom 20 percent of salaried comments from organizations and commenters predicted that employers employees’’ are converted to hourly individuals favoring automatic updating will respond to each salary level update status the salary level would increase on using the CPI–U. Overall, these by converting all or a certain percentage average by 18 percent per year over five commenters addressed this issue in less of all full-time salaried employees years. Such projections led several detail than those that favored the fixed earning below the new EAP salary level commenters to conclude that automatic percentile approach, often only stating to hourly status. See, e.g., Dollar Tree; updating using the fixed percentile that the salary level should be updated HR Policy Association. Others predicted approach would render the duties test based on inflation. While the majority of employers would convert all or a certain increasingly obsolete and in effect these comments favoring updating using percentage of affected employees (i.e., eliminate the availability of the EAP the CPI–U came from individuals, a few those EAP employees earning between exemptions in many regions and employers and commenters representing the old and new salary levels) to hourly industries. See, e.g., NRA; Seyfarth them also supported this approach. For status. See, e.g., Chamber; FMI; Jackson Shaw. ABA captured the views of example, HMR Acquisition Company Lewis; NAM; Small Business Legislative several employer representatives in favored indexing the salary level to Council. Both of these groups of stating that, because of concerns that the inflation (provided the Department also commenters stated that such conversion fixed percentile method would unduly lowers and phases in the new salary would decrease the number of salaried accelerate salary level test growth, level requirement). Many individual workers in the CPS data set by removing automatic updating using the CPI–U is commenters also recommended those at the lower end of the salary a ‘‘less harmful approach to a bad idea.’’ updating using the CPI–U. For example, distribution, which would produce an See also NRA. one human resources professional upward shift (or ‘‘ratcheting’’) of the Most commenters representing suggested increasing the salary salary level with each successive employee interests did not discuss biennially ‘‘with the national rate of update. CUPA–HR, Fisher & Phillips, whether automatic updating using the inflation,’’ another human resources and others further stated that if fixed percentile approach would lead professional favoring this method stated employers increase employee salaries to employers to convert large numbers of that changes in the CPI–U are ‘‘smaller preserve exempt status, this would newly nonexempt employees to hourly and easier for employers to absorb,’’ and

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one individual stated that updating and Lutheran Services in America full-time salaried workers in the using the CPI–U ‘‘will make sure that Disability Network stated that this country’s lowest-wage Census Region. the rises in the salary level and highly updating method ‘‘will The Department agrees with the view compensated level will mirror economic disproportionately impact different of many commenters that the same changes, rather than create a base regions, potentially worsening the reasons that justify setting the salary percentile change yearly that may or income disparity and inadvertently level at a fixed percentile of earnings of may not work for all regions of the harming workers.’’ See also, e.g., ACRA; full-time salaried workers also support country.’’ Board Game stated ANCOR; SIGMA. Other commenters updating using this method. As that updating using the CPI–U ‘‘is both referenced the Department’s past explained at length in section IV.A., predictable and fair in preventing decision not to automatically update the setting the initial salary level equal to erosion of the salary test,’’ while the salary level using an inflationary index. the 40th percentile of earnings of full- Illinois Credit Union League stated that Although this fact was usually raised to time salaried workers in the South credit unions are ‘‘familiar with the assert that the Department lacked reflects the Department’s best CPI–U and utilize this standard when authority to automatically update the determination of the appropriate line of considering salary increases.’’ salary level, Fisher & Phillips referenced demarcation between exempt and As previously discussed, among the Department’s recognition in the nonexempt workers. This method commenters representing employer NPRM that ‘‘inflation has been used as provides necessary protection for interests that opposed any form of a method for setting the precise salary workers by accounting for the automatic updating, concerns that the level only in the breach,’’ (emphasis in elimination of the more stringent long fixed percentile approach would comment), as indicating that the CPI–U duties test, while at the same time not quickly escalate the salary level led would not be an appropriate updating excluding from exemption too many some commenters to reluctantly prefer methodology. 80 FR 38533. employees performing EAP duties in the CPI–U. However, these commenters Finally, a few commenters suggested low-wage geographic areas, and yielding often stressed that they only preferred that the Department automatically a lower salary that is appropriate across this method if the Department refused to update the salary level using methods industries. Likewise, applying this same withdraw the automatic updating other than those discussed in the methodology for automatic updating is proposal, and they generally did not NPRM. For example, AFL–CIO and the most effective and transparent way provide any additional grounds for AFSCME urged the Department to to ensure that future salary levels continue to fulfill these objectives and supporting use of the CPI–U as an consider updating the salary level using updating mechanism. The Colorado work appropriately with the duties test. BLS’ Employment Cost Index for total Youth Corps Association and Firehouse Unlike the CPI–U method, updating compensation of management, Subs appeared to support automatic the salary level based on the 40th professional, and related workers. See updating using the CPI–U provided that percentile of earnings of full-time also UFCW. Many commenters, the Department set the initial salary salaried workers in the country’s lowest- including several disability services level lower. NRA (which opposed either wage Census Region also eliminates the providers, favored updating using updating method) provided similar risk that future salary levels will deviate ‘‘regional salary data.’’ See, e.g., qualified support, stating that ‘‘for CPI– from the underlying salary setting Lutheran Services in America. WMATA U indexing to be considered reasonable, methodology established in this stated that automatic updates affecting the salary level itself needs to be rulemaking. Ensuring that the salary reasonable.’’ government entities should be tied to level does not depart from the Other commenters representing ‘‘the federal government’s adjustments designated percentile ensures that the employer interests that opposed any to General Schedule pay schedules,’’ salary level does not become too low— form of automatic updating provided and the American Resort Development leading to an increased risk of reasons not to update the salary level Association favored a fixed annual inappropriate classification of low- using the CPI–U. The Chamber, FMI, increase of, for example, two percent. salaried employees as exempt—or too and others stressed that prices and Fisher & Phillips, which opposed both high—depriving employers of the salaries are only correlated in the long- methods, wanted the Department to exemption for employees performing run. Seyfarth Shaw opined that the issue a new proposal to update the bona fide EAP duties, and also ensures ‘‘CPI–U is a volatile index’’ and that the salary level using internal Department that the standard salary level continues basket of goods used to calculate the data on likely exempt workers. to work effectively with the standard CPI–U is ‘‘not tied in any direct way to The Department recognizes duties test. For the same reasons, the employees’ wages rates’’ and is ‘‘not an commenters’ strong views on the Department also declines to appropriate indicator of wage growth (or proposed automatic updating automatically update the salary level decline).’’ Relatedly, ACRA stated that alternatives and has considered the using any of the suggested alternatives the fact that there have ‘‘been periods comments concerning this issue. The (such as the Employment Cost Index, where the CPI–U has outpaced wages Department has determined that GS-Pay Scale, and others). These and other periods where wages have automatically updating the salary level methods would result in different salary grown faster than CPI–U’’ illustrates that using a fixed percentile of earnings will level setting and updating the CPI–U is ‘‘an unreliable benchmark best ensure that the salary level test methodologies and thus increase the for wages.’’ effectively differentiates between bona risk of future salary levels diverging Several commenters worried that fide EAP workers who are not entitled from the appropriate line of updating using the CPI–U would have to overtime and overtime-eligible white demarcation between exempt and an adverse impact on low-wage regions collar workers and continues to work nonexempt workers, which would in and industries because inflation does effectively with the duties test. turn necessitate additional rulemaking not impact all regions uniformly. For Accordingly, new § 541.607 will reset to reset the salary level or updating example, Dollar Tree observed that the the salary level triennially using the methodology. CPI–U ‘‘focuses exclusively on urban same methodology used in this The Department also concludes that it areas, and therefore fails to account for rulemaking to set the initial salary is preferable to update the salary level the rural economy and cost of living,’’ level—the 40th percentile of earnings of based on changes in earnings rather

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than changes in prices. As many salary level—from $250 to $455.79 As simply stated—without citing any commenters observed, a wage index discussed in more detail in section supporting data—that automatic provides the best evidence of changes in VI.D.ix., if the salary level increase in updating would produce this effect, prevailing salary levels. While wages 2004 led employers to convert with several commenters mistakenly and prices may be correlated in the significant numbers of workers to contending that such a conversion to long-run, linking the salary level to hourly status (as commenters assert will hourly status was automatic. Even those earnings is the most direct way to result from this rulemaking), then we commenters that provided more ensure that the salary level reflects would expect to see a notable increase detailed economic analyses often rested prevailing economic conditions and can in the share of workers earning just their views on the same faulty thus fulfill its intended function. This below the new threshold ($455) who are assumption. For example, the submitted approach is also consistent with the paid hourly relative to the share of Oxford Economics letter assumed ‘‘that Department’s longstanding practice of workers earning just above the new the lowest 40% of the salaried full-time basing the salary requirement on actual threshold who are paid hourly. The wage distribution in 2016 were salaries paid to workers. The salary Department looked at the share of full- converted to hourly status.’’ Some level test works in tandem with the time white collar workers paid on an commenters predicted the impact of duties test to operate effectively, and we hourly basis before and after the 2004 automatic updating on the salary level agree with the Chamber, FMI, and Final Rule (January–March 2004; if a set percentage of employees were others that changes in job duties are January–March 2005) both below and converted to hourly pay. For example, more closely correlated with changes in above the standard salary level (at least HR Policy Association predicted the wages than in prices. Similarly, using an $250 but less than $455 per week; at effect if ‘‘the bottom 20 percent of earnings index for automatic updates is least $455 but less than $600 per week). salaried employees’’ were converted to most consistent with the Department’s The Department found that following hourly status, and the Chamber and long-held view that ‘‘the best single test the 2004 Final Rule, the share of full- PPWO (quoting an article from of the employer’s good faith in time white collar workers being paid Edgeworth Economics) commented on attributing importance to the employee’s hourly actually decreased marginally in the impact if 25 percent ‘‘of the full-time service is the amount [the employer] the group below the standard salary nonhourly workers earning less than pays for them.’’ Stein Report at 19. New level and increased slightly in the group [the 40th percentile salary level] were § 541.607 provides that automatic above the standard salary level. See re-classified as hourly.’’ But while these updates will be based on CPS data for section VI.D.ix. These results do not commenters stressed the purported the 40th percentile of earnings of full- suggest that the 2004 salary level impact of these employee conversion time salaried workers in the country’s increase caused an increase in the share rates on the salary level, none explained lowest-wage Census Region. This data of workers paid hourly below the new why these rates are accurate estimates of will be readily available and threshold, and thus provide no evidence employer responses.81 transparent, and at the designated that salary level increases due to The Department believes that percentile is representative of those automatic updating will result in commenters that asserted that employees who may be bona fide employers converting significant ‘‘ratcheting’’ will occur have greatly executive, administrative, or numbers of affected EAP workers to overestimated the number of employees 80 professional workers. hourly pay status. that employers may convert to hourly Commenters that opposed the fixed In addition to the lack of historical status, and the impact that any such data supporting commenters’ concerns, percentile approach focused primarily conversion would have on the salary commenters failed to persuasively on their concern that this methodology level. Some commenters assumed that support their key assumption that would lead to drastic salary level all (or a certain percentage of all) full- automatically updated salary levels will increases that would render the EAP time salaried workers earning below the lead to widespread conversion of exemptions virtually obsolete in certain salary level would be converted to employees to hourly pay status. Most of industries and geographic areas. The hourly status and dropped from the data these commenters, including Dollar linchpin of this ‘‘ratcheting’’ set. This assumption is plainly Tree, Jackson Lewis, and several others argument—and the crux of most erroneous because it fails to account for opposition to the fixed percentile whether the employees perform white 79 The 2004 Final Rule increased the salary level collar work and are subject to the EAP updating method—is the belief that from the previous long test level of $155 per week employers will respond to an (executive and administrative exemptions) or $170 exemption. Of the 18.6 million full-time automatically updated salary level by per week (professional exemption) to $455 per salaried white collar workers earning converting newly nonexempt workers to week. For purposes of this analysis, the Department below the $913 salary level, only 4.2 compared the increase from the short test salary million are currently exempt and earn hourly status, thus removing them from level ($250 per week) since the long test was no the data set of full-time salaried longer operative due to increases in the minimum between the current and new salary workers. The Department examined this wage. levels. The remaining 14.4 million 80 issue closely and concludes that past To further test whether the widespread workers are not currently classified as conversion to hourly pay status of newly exempt under the EAP exemption, and experience and the comments nonexempt employees predicted by some themselves do not substantiate commenters would occur, the Department also so there is no reason to believe that their commenter concerns. performed a similar analysis of increases in the employers will convert them to hourly To evaluate the likelihood that salary state EAP salary level in California in 2007–2008 pay status as a result of this rulemaking. and 2014. In 2007–2008, the results showed a Accordingly, salary level predictions level increases will lead employers to decrease in the share of full-time white collar convert affected employees to hourly workers paid on an hourly basis below the new 81 pay status, the Department first salary level, thus providing no evidence of a Oxford Economics stated that its model was ‘‘ratcheting’’ effect. In 2014, the share of full-time ‘‘not meant as a literal prediction of what the new examined historical data concerning white collar workers paid on an hourly basis below rule would mean, since some non-exempt workers how employers responded to the 2004 the salary level increased marginally, but this still report salaried status in the Current Population Final Rule’s salary increase. This prior impact was not significantly different from the Survey, and since the process would be iterative.’’ rulemaking raised the standard salary change in the rest of the U.S. and thus provides no However, Oxford Economics did not attempt to evidence that this effect was caused by changes to quantify these other factors to produce a more level to 182 percent of the short test the salary level. accurate estimate.

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that are grounded in the belief that a group would not constitute more than a For the above reasons, the Department certain percentage of all salaried small fraction of the population of full- concludes that automatically updating workers will no longer be included in time salaried workers that comprises the the salary level using a fixed percentile the BLS data set because they will be data set used to calculate the salary of earnings will not cause the salary converted to hourly pay status level. The Department believes that level to diverge from prevailing regardless of whether or not they are employers will have little incentive to economic conditions, and thus we do affected by the rule are unsupported. change the pay status of those affected not share commenters’ concerns about Other commenters predicted that employees who do not work overtime ‘‘ratcheting’’ or believe that they provide employers would convert all (or a (60.4 percent of affected employees); a basis for declining to adopt the fixed significant percentage of) affected EAP similarly, employers will not change the percentile updating method. Moreover, employees to hourly status. The salaried status of those employees who the Department’s decision to reset the Department believes that these work overtime and whose salary is salary level triennially (instead of predications are also inaccurate because raised to maintain their exempt status annually) would further minimize any they fail to account for whether the (2.3 percent of affected employees). The ratcheting if such an effect were to affected employees work overtime. As Department therefore believes that an occur. discussed in the economic impact upper bound estimate of any potential Beyond concerns about a possible analysis of this Final Rule, the majority ‘‘ratcheting’’ effect would assume the ratcheting effect, commenters raised of workers affected by this rulemaking conversion to hourly pay status of all relatively few additional objections to do not work more than 40 hours per newly nonexempt employees working the fixed percentile method of week, and so employers will have no either occasional or regular overtime automatic updating. The Department need to change their compensation and (approximately 37.3 percent of affected agrees with commenters that updating can continue to pay them a salary. Even employees). Based on this assumption, the salary level using an inappropriate as to those affected EAP workers who the Department estimated that the salary earnings percentile would produce an will become nonexempt and regularly or level as set in this Final Rule (based on improper salary level. However, for the occasionally work overtime (which the weekly earnings of full-time salaried reasons previously discussed at length, Department estimates will be workers in the South) could be the Department has concluded that approximately 39 percent of the total approximately two and a-half percent setting the salary level at the 40th number of affected EAP workers when higher due to this effect in 2026, after percentile of earnings of full-time the salary level is updated to $913), three updates. This estimate is salaried workers in the lowest-wage there is no reason to believe that significantly smaller than the estimates Census Region produces the appropriate employers will engage in wholesale provided by commenters that argued line of demarcation between exempt conversion of these employees to hourly use of a fixed percentile for updating and nonexempt workers. Similarly, the status. Employers commented at great would lead to widespread conversion of Department’s decision to change the length during outreach discussions prior salaried employees to hourly pay status. updating mechanism from a nationwide to the publication of the NPRM and in See section VI.D.ix. to a regional data set addresses the submitted comments that employees commenter concerns about the impact desire to be salaried because of status The sample used to set the standard of the fixed percentile approach on low- concerns. Also, the FLSA and salary level—full-time salaried workers wage regions and industries. regulations promulgated under it in the South—represents 20 million expressly permit paying nonexempt workers, including, for example, blue- The Department believes that the employees a salary so long as they collar salaried workers to whom this chosen updating method is also receive overtime compensation when rulemaking does not apply and responsive to many of the reasons that they exceed 40 hours during a overtime-eligible white collar commenters provided for supporting workweek. See §§ 778.113-.114. The employees. The Department estimates updating using the CPI–U. For example, Department therefore anticipates that that 671,000 affected EAP employees in some commenters lauded the CPI’s employers will continue to pay many the South regularly or occasionally work familiarity and widespread acceptance. affected EAP workers who work overtime, which represents just 3.3 The CPS data set is publicly available, overtime on a salary basis, and these percent of the sample. For the reasons as is BLS’ deciles table for Census workers therefore will remain part of the discussed above, many of these workers Regions that the Department will use for distribution of full-time salaried are likely to remain salaried. But as automatic updates. Other commenters workers. As discussed in detail later, noted above, even if we assume that all stressed that updating using the CPI–U our analysis of the impacts of the 2004 affected employees who occasionally or would ensure that the salary level keeps Final Rule further supports our regularly work overtime are converted pace with inflation. These commenters assumption that employers will not to hourly pay status (and therefore are were generally concerned with the convert large numbers of newly no longer part of the sample), the impact adverse effect of a fixed salary level, as overtime-eligible salaried employees to on the salary level will be minimal opposed to the effect of updating using hourly pay status. Accordingly, the pool because they constitute such a small the CPI–U versus another approach. The of workers who are likely to be percentage of the sample. For the same Department believes that a regularly converted to hourly pay is much smaller reasons, the Department does not share updated salary level reflecting changes than supposed by those commenters commenter concerns that the salary in salaries paid will largely alleviate this that assert that the fixed percentile level will drastically increase if inflation concern, particularly to the approach will lead to drastic salary level employers raise affected employees’ extent that changes in wages and prices increases. salaries to preserve their exempt status. are correlated over time. For all the To the extent that some affected EAP The Department estimates that above reasons, the Department has workers are converted to hourly status approximately 43,000 affected decided to automatically update the and not included in the BLS data set of employees in the South will fall into salary level using the 40th percentile of all salaried workers, the Department this category, constituting just 0.2 earnings of full-time salaried workers in believes this will have a negligible percent of the 20 million workers in the the country’s lowest-wage Census impact on the salary level because this sample. Region.

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The Department’s proposal also The Department also proposed to and will be based on BLS data for the sought public comment on whether publish a notice with the new salary second quarter of 2019. automatic updates to the salary level level in the Federal Register at least 60 The Department also proposed to should take effect based on the effective days before the updated rates would update the HCE total annual date of the Final Rule, on January 1, or become effective. Commenters that compensation requirement with the on some other specified date. The explicitly addressed this issue generally same method and frequency used to majority of commenters that addressed favored a longer notice period. For update the standard salary level test. this issue favored January 1. For example, the American Council of example, Tinker Federal Credit Union Relatively few commenters specifically Engineering Companies supported addressed this aspect of the stated that this date corresponds with automatic updating but stated that ‘‘120 Department’s proposal, and those that when their internal pay changes become days’ notice would be more workable did generally supported updating using effective, and AH&LA stated that for employers.’’ Many commenters that the same method—the fixed percentile updating the salary level mid-year could opposed automatic updating similarly approach or the CPI–U—used for cause newly nonexempt employees to sought more advance notice should the updating the standard salary level. See, ‘‘lose eligibility for a bonus and fringe Department go forward with the benefits that he or she was counting on proposal. See, e.g., ABA (at least six e.g., NEA; NELA; Partnership; and when the year began.’’ Other months); CUPA–HR (at least one year); several individual commenters. commenters, including Nichols Kaster, SHRM (at least one year). Finally, some Similarly, those that opposed Quicken Loans, and several small commenters deemed 60 days of notice automatically updating the standard businesses, also favored January 1. In inadequate, but did not suggest an salary level also opposed automatically contrast, other organizations favored a alternative. See, e.g., Credit Union updating the HCE total annual July 1 effective date for automatically National Association; NFIB; Seyfarth compensation requirement. See, e.g., updated salary levels. ANCOR and Shaw; University of Wisconsin. PPWO; Seyfarth Shaw. In light of these numerous other non-profit organizations comments, and given our decision to favored this date because their funding In response to commenter concerns, update the standard salary level using the Department is increasing from 60 to is linked to state budget cycles, and the the fixed percentile method, the Final at least 150 days the amount of notice ‘‘majority of states have a budget cycle Rule provides that the Department will provided before the updated salary level that ends in June.’’ automatically update the HCE total takes effect. The Department believes As multiple commenters observed, annual compensation level triennially to that this change will provide employers employers operate on varying fiscal keep it at the annualized value of the sufficient time to adjust to the new calendars, and so it is impossible for the 90th percentile of the weekly earnings Department to select an effective date salary level, especially since (as of full-time salaried workers for automatically updated salary levels previously discussed) between updates nationwide. This updating methodology that will suit everyone. After reviewing employers will be able to access BLS will ensure that only those who are ‘‘at commenter submissions on this issue, data to help anticipate the approximate the very top of [the] economic ladder’’ the Department has determined that size of the salary level change, while future automatic updates to the salary also ensuring that salary level updates satisfy the total annual compensation level will take effect on January 1. The are based on the most recent available requirement and are thus subject to a Department believes this effective date data. This increase to 150 days is also minimal duties test analysis. 69 FR aligns with the pay practices of many more than the amount of notice the 22174. The Department also finalizes employers and, when combined with Department has provided in each of our our proposal to update the portion of the 150-day advance notice period, will prior rulemakings increasing the salary the total annual compensation level that best promote a smooth transition to new threshold. Accordingly, § 541.607(g) employers must pay on a salary basis salary levels. While we recognize that states that the Department will publish ($913 as of the effective date of this rule) some commenters favored new rates notice of the new salary level no later so that it continues to mirror the amount taking effect on July 1 to account for than 150 days before the updated rate of the standard salary requirement as it state budgeting cycles, any disruption takes effect. is updated. As previously discussed in sections IV.C., highly compensated caused by the January 1 effective date is As discussed in more detail in the mitigated by the Department’s decision employees must receive at least the economic impact analysis, the standard salary amount each pay period to update the salary level every three Department will set the new salary level on a salary or fee basis without regard years and increase the amount of notice using BLS’ deciles table of Census to the payment of nondiscretionary before automatically updated rates take Regions, without modifying the data in bonuses and incentive payments. effect. These changes ensure that those any way.83 In order to ensure that the who favored a different effective date updated salary level is based on the Finally, the Department proposed to have ample notice of both when the most recent data, the Department will automatically update the special salary Department will issue new salary levels use data from the second quarter level test for employees in American and when these rates will apply.82 (April—June) of the year prior to the Samoa by keeping it at 84 percent of the update. For example, the salary level standard salary level, and to 82 The U.S. Department of Treasury-Office of Human Capital Strategic Management asked that that will take effect on January 1, 2020 automatically update the base rate test each automatically updated salary level become will be published in the Federal for motion picture industry employees effective at ‘‘the start of the pay period following Register on or before August 4, 2019, by changing the base rate the date of the annual adjustment’’ in order to avoid proportionately to the change in the having a new salary level take effect in the middle of a pay period. We appreciate this comment, but salary level changes will occur triennially and the standard salary level. See 80 FR 38541. have decided not to institute this requested change. Department will publish the new salary level in the The Department did not receive any The Department has always made new salary levels Federal Register at least 150 days before it takes comments opposing these proposed effective on a specific date, rather than in relation effect. updating mechanisms, and new to employer pay periods. We believe this practice 83 This deciles table is currently available at: remains appropriate, and that any administrative http://www.bls.gov/cps/research_series_earnings_ §§ 541.607(b) and (c) finalize these burden on employers will be minimal given that nonhourly_workers.htm. proposals.

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F. Duties Requirements for Exemption stringent short test for higher paid Finally, the Department solicited Examination of the duties performed employees, with a salary level based on feedback regarding whether to add by the employee has always been an the long test for lower paid employees, additional examples of specific integral part of the determination of has exacerbated these concerns and led occupations to the regulations to exempt status, and employers must to the inappropriate classification as provide guidance in administering the establish that the employee’s ‘‘primary EAP exempt of employees who pass the EAP exemptions, particularly for duty’’ is the performance of exempt standard duties test but would have employees in the computer and work in order for the exemption to failed the long duties test. As we noted information technology industries. See apply. Each of the categories included in the NPRM, this issue can arise when 80 FR 38543. After considering the comments in section 13(a)(1) has separate duties a manager is performing exempt duties received in response to the questions requirements. As previously discussed, less than 50 percent of the time, but it posed in the NPRM, the Department has from 1949 until 2004 the regulations is argued that those duties are sufficiently important to nonetheless be decided against making any changes to contained two different duties tests for considered the employee’s primary the standard duties test or adding new executive, administrative, and duty. It can also arise when a manager examples to the regulations at this time. professional employees depending on who is performing nonexempt duties The Department recognizes that the salary level paid—a long duties test much of the time is deemed to perform stakeholders have strong and divergent for employees paid a lower salary, and exempt duties concurrently with those views about the standard duties test. We a short duties test for employees paid at nonexempt duties, and it is argued the also recognize that changes to the duties a higher salary level. The long duties employee is exempt on that basis. test can be more difficult for employers test included a 20 percent limit on the While the Department believed that and employees to both understand and time spent on nonexempt tasks (40 the proposed salary level increase, implement. As explained in greater percent for employees in the retail or coupled with automatic updates to detail below, the Department believes service industries). In the 2004 Final maintain the effectiveness of the salary that the standard salary level adopted in Rule, the Department replaced the level test, would address most of the this Final Rule coupled with automatic differing short and long duties tests with concerns relating to the application of updating in the future will adequately a single standard test for executive, the EAP exemption, we invited address the problems and concerns that administrative, and professional comments on whether adjustments to motivated the questions posed in the employees that did not include a cap on the duties tests were also necessary. The NPRM about the standard duties test. the amount of nonexempt work that Department did not propose any As an initial matter, many could be performed. specific changes to the duties tests, but commenters asserted that the The Department has always instead requested comment on a series Department lacks the legal authority to recognized that the salary level test of specific issues: enact any changes to the job duty works in tandem with the duties A. What, if any, changes should be requirements in this Final Rule without requirements to identify bona fide EAP made to the duties tests? first proposing specific regulatory employees and protect the overtime B. Should employees be required to changes in a new NPRM. As we rights of nonexempt white collar spend a minimum amount of time explained earlier with respect to our workers. The Department has often performing work that is their primary automatic updating mechanism, nothing noted that as salary levels rise a less duty in order to qualify for exemption? in the APA or other referenced laws robust examination of the duties is If so, what should that minimum requires an agency’s proposal to include needed. This inverse correlation amount be? regulatory text for all provisions that between the salary level and the need C. Should the Department look to the may appear in a final rule. See section for an extensive duties analysis was the State of California’s law (requiring that IV.E.i. basis of the historical short and long 50 percent of an employee’s time be There were some areas of agreement duties tests. While the salary provides spent exclusively on work that is the among the commenters in response to an initial bright-line test for EAP employee’s primary duty) as a model? Is the questions posed in the NPRM. For exemption, application of a duties test some other threshold that is less than 50 example, a wide cross-section of is imperative to ensure that overtime- percent of an employee’s time worked a commenters opposed the idea of eligible employees are not swept into better indicator of the realities of the reintroducing the long test/short test the exemption. While the contours of workplace today? structure that existed before the 2004 the duties tests have evolved over time, D. Does the single standard duties test rulemaking. A joint comment submitted the Department has steadfastly for each exemption category by 57 labor law professors stated ‘‘it is maintained that meeting a duties test appropriately distinguish between now true that reimplementation of the remains a core requirement for the exempt and nonexempt employees? two-tiered standards would serve to exemption. Should the Department reconsider our complicate, rather than simplify, the test As explained in the NPRM, however, decision to eliminate the long/short for the exemption currently in use.’’ the Department is concerned that under duties tests structure? Commenters representing employers the current regulations employees in E. Is the concurrent duties regulation stated that resurrecting the pre-2004 lower-level management positions may for executive employees (allowing the long test/short test structure would be classified as exempt and thus performance of both exempt and contravene the President’s expressed ineligible for overtime pay even though nonexempt duties concurrently) intent to modernize and simplify the they are spending a significant amount working appropriately or does it need to FLSA’s overtime regulations, and of their work time performing be modified to avoid sweeping expressed concern about the burden nonexempt work. In such cases, there is nonexempt employees into the such an approach would impose. See, a question as to whether the employees exemption? Alternatively, should there e.g., Fisher & Phillips; FMI; Littler truly have a primary duty of EAP work. be a limitation on the amount of Mendelson; RILA; Seyfarth Shaw; The Department believes that our nonexempt work? To what extent are Sheppard Mullin. Commenters pairing in the 2004 rulemaking of a exempt lower-level executive employees representing employee interests, such as standard duties test based on the less performing nonexempt work? NELA, explained that ‘‘having two tests

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resulted in inefficient litigation as to success of the FLSA by allowing employee advocates expressed the point which test applied to which employees employers to exempt too many workers as a preference for a 50 percent limit on for which periods of time,’’ concluding performing substantial amounts of nonexempt work. See, e.g., AFL–CIO; that ‘‘it is best to proceed with a nonexempt work, including workers EPI; Nichols Kaster; Outten & Golden standard duties test supported by a earning more than the standard salary law firm. UFCW supported a 40-percent realistic and fully indexed salary level level proposed in the Department’s limit on the performance of nonexempt test.’’ See also Employee Rights NPRM. In contrast, the American work, while Legare, Attwood & Wolfe ; Rudy, Exelrod, Zieff & Staffing Association and NSBA stated supported reinstatement of the 20- Lowe. that the standard duties test percent limit on nonexempt work that Many commenters also seemed to appropriately emphasizes the existed under the former long duties appreciate the inverse relationship importance of an employee’s primary test. between the duties test and the salary duty, not incidental nonexempt tasks he In support of such requirements, level test. For example, although it or she may also perform. Several AFL–CIO, EPI, NELA, Nichols Kaster, disagreed with the Department’s commenters representing employers and several other commenters asserted proposed standard salary level, HR asserted that the duties test must that employees who spend a majority of Policy Association stated it ‘‘strongly account for the fact that exempt their time performing nonexempt duties agrees with the Department that the employees now perform more of their should not qualify under the law as proposed salary level increase addresses own clerical duties without the support ‘‘bona fide’’ EAP workers. Legare, the concerns relating to executive of nonexempt administrative support Attwood & Wolfe stated that while the employees performing nonexempt staff. See, e.g., Joint Comment of the percentage of time an employee spends duties.’’ See also Employers Association International Public Management performing duties is not a perfect of New Jersey. EEAC noted that ‘‘a Association for Human Resources and indicator of her primary duty, it is a robust salary threshold and strict duties the International Municipal Lawyers ‘‘very good proxy.’’ ELC, the Moreland tests’’ (emphasis in comment) would Association. law firm, NELA, and several others inappropriately screen out employees Employee and employer organizations asserted that adding a ‘‘bright-line’’ who should be classified as exempt. similarly disagreed over whether the quantitative component to the standard Commenters including AFL–CIO and current standard duties test adequately duties test would simplify compliance the Alaska Department of Labor and works to prevent the misclassification of or reduce FLSA litigation attributable to Workforce Development, however, workers who do not meet the duties test the subjectivity of the primary duty test, asserted that the proposed salary level and thus should receive overtime pay. while AFL–CIO stated that was not sufficiently high to work with Commenters representing employees, implementing a more objective duties the current duties test and therefore the like NELP, stated that ambiguities in the test would lead to fewer ‘‘anomalous duties test needed to be strengthened. existing duty requirements ‘‘enable outcomes’’ from decisions Comments on the merits of changing employers to easily and successfully analyzing similar sets of facts. the current duties requirements were manipulate employee job titles to sweep Several commenters representing sharply divergent, with many employee more workers into the EAP employers addressed the issue of advocates supporting additional exemptions.’’ Some employers, concurrent duties—that is, the provision requirements to strengthen the standard however, disagreed that non-compliance in the executive duties test that permits duties test and most employer by employers is prevalent, with SHRM employees to perform nonexempt duties organizations strongly opposing any asserting that there is no evidence that while simultaneously performing changes. Commenters representing the standard duties test leads to ‘‘mass exempt management duties. See employees generally asserted that misclassification of employees.’’ The § 541.106. A number of employer changes to the standard duties test are New Jersey Employers Association representatives noted that the needed to narrow the scope of an FLSA commented that purported non- Department examined this issue in 2004 exemption they believe has been compliance in specific industries like when the concurrent duties regulation applied too broadly, as well as to reduce restaurant or retail does not justify was promulgated as a separate provision litigation and compliance costs imposing burdensome new and asserted that there was no need for attributable to the ambiguity and requirements on all employers the Department to alter the conclusions subjectivity of the primary duty test. throughout the entire economy. we reached at that time. See, e.g., Commenters representing employers Commenter views diverged even more Chamber; FMI; IFA; Littler Mendelson. generally opposed changes to the sharply in response to the specific Other commenters discussed how the current duties test on the grounds that issues raised for consideration. Many regulation applied to particular work the kind of changes contemplated by the employee advocates supported the environments. See, e.g., ACRA Department in the NPRM would be introduction of a minimum requirement (‘‘Managers and assistant managers excessively burdensome and disruptive for time spent on an employee’s primary employed by ACRA’s members often for employers and undermine the duty to the standard duties test. A large ‘lead by example’ by illustrating to President’s goal of modernizing the EAP number of these commenters endorsed subordinate employees how to provide regulations. the adoption of a California-style rule, top-notch customer service and take As a general matter, commenter views which would require at least 50 percent pride in all aspects of one’s job.’’); RILA on the adequacy of the regulation’s of an employee’s time to be spent (‘‘Leading by example by lending a hand existing duty requirements reflected exclusively on work that is the at the cash register or on the sales floor their broader disagreement over whether employee’s primary duty. See, e.g., is essential to employee training and employees who pass the primary duty AFSCME; Bend the Arc; ELC; morale, as well as good customer test but perform substantial amounts of Employment Justice Center; IWPR; service.’’); Southeastern Alliance of nonexempt work should qualify as Moreland law firm; National Women’s Child Care Associations (‘‘The ‘‘bona fide’’ EAP workers. AFL–CIO, Law Center; NDWA; NELP; Northwest ‘concurrent duties’ concept is of AFT, and SEIU, for example, stated that Workers Justice Project; Partnership; particular relevance to the child care the standard duties test undermines the SEIU; Shriver Center; Women industry. Consider, as an illustration, a breadth of coverage critical to the Employed; Workplace Fairness. Other director who, in cleaning and/or feeding

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a young student, simultaneously trains NRA, Petroleum Marketers Association earnings of full-time salaried workers in a new teacher on how students are to be of America, PPWO, and SHRM, stated the lowest-wage Census Region and cleaned and/or fed in compliance with that imposing any quantitative updating that salary level on a regular state regulatory requirements.’’). UFCW, restrictions or eliminating the basis going forward will address these however, questioned whether concurrent duties regulation would concerns, which we believe are most employees were, in fact, leading by prevent exempt employees from prevalent among low-salaried white example and pitching-in or, instead, ‘‘pitching in’’ during staff shortages or collar employees. While this salary level were being required by their employers busy periods, increasing labor costs or is lower than that proposed in the to perform such large quantities of negatively affecting business efficiency NPRM, the Department believes that it nonexempt work that their primary duty and customer service. A few is sufficient to work effectively in could not be said to be management. See commenters representing employers combination with the current duties UFCW (‘‘many employers maintain also asserted such changes would test. The Department will consider the policies which require exempt managers undermine the sense of teamwork in the impact of this rule going forward to to spend substantial periods of time workplace. See, e.g., American Resort ensure that the salary level and the performing nonexempt hourly work’’ Developmental Association; NCCR; duties test continue to work together to because they ‘‘do not budget sufficient Weirich Consulting. appropriately distinguish between hours for nonexempt employees to AIA–PCI, NFIB, PPWO, and many exempt EAP employees and overtime- complete the work.’’). Some individual others objected that introducing a cap protected white collar workers.84 commenters echoed this concern. For on nonexempt work to the standard The Department also understands the example, a retail store manager duties test would also impose concerns of employers and their described working 55–60 hours a week significant recordkeeping burdens on advocates that prohibiting managers and because of low staffing noted that employers, and several commenters, from ‘‘pitching-in’’ could negatively he has little ‘‘flexibility when an including the Chamber, Littler affect the workplace. The Department employee calls out sick. I have to pick Mendelson, and RILA, noted that the believes, however, that there is an up the slack.’’ Similarly, a manager of a Department previously acknowledged important difference between a manager community home for the intellectually such concerns in the 2004 Final Rule. who occasionally demonstrates how to disabled stated that ‘‘[t]o reduce See 69 FR 22127. Some commenters, properly stock shelves to instruct a new organizational overtime, managers are including AH&LA and NFIB, also employee, or who occasionally opens an expected to work when employees call asserted that the recordkeeping burden additional cash register to assist in in sick, are on leave, and when a client would at least partially fall onto exempt clearing a line of waiting customers, and is in the hospital and needs a 24 hour employees themselves. In addition, a manager who must routinely perform sitter.’’ many commenters representing significant amounts of nonexempt work While few commenters representing employers asserted that introducing a because her employer does not provide employees specifically addressed the quantitative component to the duties appropriate staffing on all shifts. See concurrent duties provision, many test would increase FLSA litigation due AH&LA (‘‘In short, when an exempt endorsed California’s duties test, which to the administrative difficulties manager makes the decision that he or NWLC observed does not allow associated with tracking the hours of she needs to perform non-exempt duties employers to credit ‘‘time during which exempt employees. See, e.g., AIA–PCI; to help the operation run smoothly, the non-exempt work is performed CalChamber Coalition; Seyfarth Shaw; manager’s primary duty continues to be concurrently.’’ See Heyen v. Safeway Weirich Consulting. FMI, IFA, Littler managing his or her staff and the Inc., 157 Cal. Rptr. 3d 280, 299–304 Mendelson, and the Chamber all noted operations of their department.’’); NRA (Cal. Ct. App. 2013). AFL–CIO that departing from the holistic (‘‘Performing hands-on work at the explained that it ‘‘is not enough to approach to the standard duties test manager’s own discretion to ensure that require that ‘bona fide’ EAP employees would ‘‘result in the upheaval of the operations are successfully run in no spend 50 percent of their time doing past decade of and agency way compromises the fact that the exempt work: they must spend 50 opinions.’’ manager’s primary responsibility is percent of their time exclusively on After considering the comments, the performing exempt work.’’). In those exempt work.’’ (emphasis in comment); Department has decided against adding situations such as those described by see also NELA; UFCW. Outten & Golden a quantitative limitation on the employee commenters above, where explicitly requested the Department to performance of nonexempt work in the managers as a practical matter must rescind the concurrent duties provision, standard duties test, or making any perform significant amounts of asserting that it contributes to the other revisions to the duties test in this nonexempt work, the Department does confusion surrounding the application rulemaking. The Department continues of the executive exemption and fails to to believe that, at some point, a 84 Some commenters, including AT&T, the account for instances ‘‘when the amount disproportionate amount of time spent Brevard Achievement Center, Eden Financial, and the Nixon Peabody law firm, suggested eliminating of non-exempt work overwhelms [an on nonexempt duties may call into the duties test entirely, making exempt status executive’s] capacity to perform their question whether an employee is, in dependent on the amount of an employee’s salary supervisory functions.’’ fact, a bona fide EAP employee. We also alone. As we have done in prior rulemakings, we Commenters representing employers understand the concerns of some again reject such an approach as precluded by the FLSA. As the Department said in 1949, the strongly opposed the addition of any commenters that contend that the ‘‘Administrator would undoubtedly be exceeding kind of limitation on the performance of qualitative nature of the primary duty his authority if he included within the definition of nonexempt work to the standard duties test may allow the classification of these terms craftsmen, such as mechanics, test and any revisions to the concurrent lower-level employees as exempt and carpenters, or linotype operators, no matter how highly paid they might be.’’ Weiss Report at 23. duties regulation, stating that such thus ineligible for overtime pay even Most recently, in the 2004 Final Rule, we stated changes would fail to account for the though they are spending a significant ‘‘the Secretary does not have authority under the realities of the modern workplace. See, amount of work time performing FLSA to adopt a ‘salary only’ test for exemption.’’ e.g., Chamber; HR Policy Association; nonexempt work. The Department 69 FR 22173. Our conclusion that there is a necessity for the duties tests in order to define who NCCR; NRF; NSBA; SIGMA. Further, expects that setting the standard salary is a bona fide exempt EAP employee has not many commenters, including AH&LA, level at the 40th percentile of weekly changed.

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not believe that the manager is in any existing regulations in this rulemaking. comments on the proposed rule dated meaningful sense able to ‘‘make the We note that the existing examples in July 6, 2015. decision regarding when to perform the regulations do not provide Circumstances Necessitating nonexempt duties’’ and a close categorical exemptions for certain Collection: The FLSA, 29 U.S.C. 201 et examination of the specific facts must occupations but instead set out typical seq., sets the federal minimum wage, be made of whether the employee’s job duties associated with specific overtime pay, recordkeeping and youth primary duty is, in fact, the performance occupations which if performed by an employment standards of most general of exempt work. § 541.106(a). employee generally would, or generally application. Section 11(c) of the FLSA In the NPRM, the Department also would not, qualify the employee for requires all employers covered by the sought feedback regarding whether exemption. In all instances, it is the FLSA to make, keep, and preserve additional occupation examples should application of the duties test to the records of employees and of wages, be added to the regulations, and, if so, specific facts of the employee’s work hours, and other conditions and which specific examples would be most that determines whether the employee practices of employment. An FLSA helpful to include. Some commenters, satisfies the requirements for the EAP covered employer must maintain the including the American Staffing exemption. Although the Department records for such period of time and Association, the Maryland Chamber of received feedback on suggested make such reports as prescribed by Commerce, and the Poarch Band of regulatory examples from some regulations issued by the Secretary of Creek Indians, agreed that adding new commenters, the stakeholder input we Labor. The Department has promulgated examples to the regulations would be received overall did not justify the regulations at part 516 to establish the helpful in applying the EAP exemption. introduction of any new examples into basic FLSA recordkeeping requirements, The American Trucking Association the EAP regulations at this time. which are approved under OMB control stated that additional regulatory number 1235–0018. examples would be particularly useful V. Paperwork Reduction Act FLSA section 11(a) provides that the for clarifying the administrative The Paperwork Reduction Act of 1995 Secretary of Labor may investigate and employee exemption, which many (PRA), 44 U.S.C. 3501 et seq., and its gather data regarding the wages, hours, commenters asserted is more ambiguous attendant regulations, 5 CFR part 1320, or other conditions and practices of than the executive or professional requires that the Department consider employment in any industry subject to exemptions. A number of commenters the impact of paperwork and other the FLSA, and may enter and inspect offered specific suggestions of information collection burdens imposed such places and such records (and make occupations they would like to see on the public. Under the PRA, an such transcriptions thereof), question addressed in the regulations. See, e.g., agency may not collect or sponsor the such employees, and investigate such American Staffing Association (staffing collection of information, nor may it facts, conditions, practices, or matters firm recruiters and account managers); impose an information collection deemed necessary or appropriate to American Trucking Association (truck requirement unless it displays a determine whether any person has company dispatchers); Information currently valid Office of Management violated any provision of the FLSA. 29 Technology Alliance for Public Sector and Budget (OMB) control number. See U.S.C. 211(a). The information (employees performing various 5 CFR 1320.8(b)(3)(vi). collection approved under OMB control computer-related duties); Joint OMB has assigned control number number 1235–0021 provides a method Comment of Postdoctoral Associations 1235–0018 to the Fair Labor Standards for the Wage and Hour Division of the and individuals (postdoctoral fellows); Act (FLSA) information collections. U.S. Department of Labor to obtain Printing Industries of America OMB has assigned control number information from complainants (customer service representatives). The 1235–0021 to Employment Information regarding alleged violations of the labor Fraternity Executives Association, the Form collections, which the Department standards the agency administers and International Association of Fire Chiefs, uses to obtain information from enforces. This Final Rule revises the and the Michigan Society of Association complainants regarding FLSA existing information collections Executives, requested regulatory violations. In accordance with the PRA, previously approved under OMB examples relevant to associations, the Department solicited comments on control number 1235–0018 (Records to membership organizations and the FLSA information collections and be Kept by Employers—Fair Labor charitable foundations. the Employment Information Form Standards Act) and OMB control ABA and several commenters collections in the NPRM published July number 1235–0021 (Employment representing employees, including 6, 2015, see 80 FR 38516, as the NPRM Information Form). AFL–CIO, however, asserted that was expected to impact these This Final Rule does not impose new regulatory examples distract from the collections. 44 U.S.C. 3506(c)(2). The information collection requirements; longstanding principle that job titles Department also submitted a rather, burdens under existing alone are insufficient to establish the contemporaneous request for OMB requirements are expected to increase as exempt status of an employee. Nichols review of the proposed revisions to the more employees receive minimum wage Kaster stated that regulatory examples of FLSA information collections, in and overtime protections due to the exempt occupations ‘‘encourage accordance with 44 U.S.C. 3507(d). On proposed increase in the salary level employers to manipulate job September 29, 2015, OMB issued a requirement. More specifically, the descriptions to classify non-exempt notice for each collection (1235–0018 changes adopted in this Final Rule may employees as exempt.’’ Finally, AFL– and 1235–0021) that continued the cause an increase in burden on the CIO and NELA each stated that previous approval of the FLSA regulated community because including additional examples of information collections and the employers will have additional generally exempt or generally Employment Information Form employees to whom certain long- nonexempt occupations is neither collections under the existing terms of established recordkeeping requirements helpful nor necessary. clearance. OMB asked the Department apply (e.g., maintaining daily records of Upon further consideration, the to resubmit the information collection hours worked by employees who are not Department has decided against request upon of the Final exempt from the both minimum wage introducing any new examples to the Rule and after considering public and overtime provisions). Additionally,

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the changes adopted in this Final Rule the pool of workers for whom an for approval, and intends to publish a may cause an initial increase in burden employer will be required to make and notice announcing OMB’s decision if more employees file a complaint with maintain records has increased under regarding this information collection WHD to collect back wages under the the Final Rule, and as a result the request. A copy of the information overtime pay requirements. burden hours have increased. Included collection request can be obtained at Public Comments: The Department in this PRA section are the regulatory http://www.Reginfo.gov or by contacting sought public comments regarding the familiarization costs for this Final Rule. the Wage and Hour Division as shown burdens imposed by information We note however, that this is a in the FOR FURTHER INFORMATION collections contained in the proposed duplication of the regulatory CONTACT section of this preamble. rule. Several employer commenters and familiarization costs contained in the OMB Control Number: 1235–0018. those representing them stated that economic impact analysis, see section Affected Public: Businesses or other employers would need to maintain VI. for-profit, farms, not-for-profit records of hours worked for more A number of commenters also institutions, state, local and tribal employees as a result of our proposal to expressed concern about potential governments, and individuals or increase the salary level. See, e.g., changes to the duties tests. Some households. American Feed Industry Association; commenters specifically articulated Total Respondents: 5,511,960 National Roofing Contractors concern about implementing a (2,506,666 affected by this Final Rule). Association; Nebraska Furniture Mart. percentage duties test. See, e.g., Total Annual Responses: 46,057,855 American Society of Association Many of these comments came from (2,552,656 from this Final Rule). Executives (ASAE); Community Bankers individual employers as part of a Estimated Burden Hours: 3,489,585 Association; International Franchise campaign organized by the National (2,506,666 from this Final Rule) Association; Lutheran Services of Automatic Merchandising Association Estimated Time per Response: America; Society for Human Resources (NAMA), stating that the Department’s various. Management. For example, Walmart Frequency: Various. proposal to raise the salary threshold stated that it ‘‘would be concerned if Total Burden Cost (capital/startup): 0. would ‘‘create a challenge by placing a such a proposal includes any Total Burden Costs (operation/ burden on the employers to closely quantitative or time based assessment of maintenance): $126,392,768 track nonexempt employees’ hours to an exempt employee’s duties or further, ($90,791,443 from this Final Rule). ensure compliance with overtime pay a prohibition on concurrent duties. Title: Employment Information Form. and other requirements,’’ and this Such changes would require employers OMB Control Number: 1235–0021. ‘‘tracking of hours would also produce to undertake significant recordkeeping Affected Public: Businesses or other increased human resources paperwork.’’ burdens and add to the uncertainty over for-profit, farms, not-for-profit The Office of Advocacy of the U.S. classifications.’’ Other commenters institutions, state, local and tribal Small Business Administration asserted expressed their view that the governments, and individuals or that increasing the salary level as the Department would violate the PRA by households. Department proposed would add making any changes to the duties tests, Total Respondents: 37,367 (2,017 ‘‘significant’’ paperwork burdens on because the Department did not provide added by this rulemaking). small entities, ‘‘particularly businesses specific proposed changes to the duties Estimated Number of Responses: in low wage regions and in industries tests in the NPRM. See, e.g., ASAE; 37,367 (2,017 added by this that operate with low profit margins.’’ In Christian Camp and Conference rulemaking). addition, some commenters expressed Association, International; Community Estimated Burden Hours: 12,456 (672 concern that the Department’s cost Bankers Association; Diving Equipment hours added by this rulemaking). estimates related to recordkeeping were and Marketing Association; Equal Estimated Time per Response: 20 too low, given that employers would Employment Advisory Committee; minutes (unaffected by this rulemaking). need to set up revised recordkeeping International Bancshares Corporation, Frequency: Once. and payroll systems for newly overtime- International Dairy Association; Other Burden Cost: 0. eligible employees. See, e.g., NSBA; Island Hospitality Management; VI. Analysis Conducted In Accordance Reid Petroleum; SA Photonics; Seyfarth National Council of Chain Restaurants; Shaw; Surescan Corporation. The with Executive Order 12866, Regulatory National Retail Federation; New Jersey Planning and Review, and Executive National Association for Home Care and Association of Mental Health and Hospice asserted that if the Department Order 13563, Improving Regulation and Addiction Agencies; Recreational Regulatory Review were to adopt the proposed salary level, Diving Industry; WorldatWork; YMCA– home care and hospice companies USA. Since the Department has decided Executive Orders 12866 and 13563 would need to ‘‘completely modify their against enacting any changes to the direct agencies to assess the costs and recordkeeping on worker time,’’ and standard duties test or adding new benefits of a regulation and to adopt a ‘‘such changes will double payroll examples to the current regulatory text regulation only upon a reasoned management costs.’’ In response to these at this time, these commenters’ concerns determination that the regulation’s net comments, the Department notes that have been addressed. benefits (including potential economic, we believe that most employers An agency may not conduct an environmental, public health and safety currently have both exempt and information collection unless it has a effects, distributive impacts, and equity) nonexempt workers and therefore have currently valid OMB approval, and the justify its costs. Executive Order 13563 systems already in place for employers Department has submitted the identified emphasizes the importance of to track hours. The Department also information collection contained in the quantifying both costs and benefits, of notes that commenters did not offer proposed rule to OMB for review under reducing costs, of harmonizing rules, alternatives for estimates or make the PRA under the Control Numbers and of promoting flexibility. suggestions regarding methodology for 1235–0018 and 1235–0021. See 44 Under Executive Order 12866, the the PRA burdens. The actual U.S.C. 3507(d); 5 CFR 1320.11. The Office of Management and Budget recordkeeping requirements are not Department has resubmitted the revised (OMB) must determine whether a changing in the Final Rule. However, FLSA information collections to OMB regulatory action is a ‘‘significant

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regulatory action,’’ which includes an receive more monetary and non- Congress’ intent to exempt only ‘‘bona action that has an annual effect of $100 monetary benefits than most blue collar fide’’ EAP workers, who typically earn million or more on the economy. and lower-level office workers. The salaries well above those of any workers Significant regulatory actions are subject exemption applies to employees they may supervise and presumably to review by OMB. As described below, employed in a bona fide executive, enjoy other privileges of employment this Final Rule is economically administrative, or professional capacity such as above average fringe benefits, significant. Therefore, the Department and for outside sales employees, as greater job security, and better has prepared a Regulatory Impact those terms are ‘‘defined and delimited’’ opportunities for advancement. Stein Analysis (RIA) 85 in connection with by the Department. 29 U.S.C. 213(a)(1). Report at 21–22. For example, the this Final Rule as required under The Department’s regulations annualized equivalent of the standard section 6(a)(3) of Executive Order implementing these ‘‘white collar’’ salary level ($23,660, or $455 per week 12866, and OMB has reviewed the rule. exemptions are codified at part 541. for 52 weeks) is now below the 2015 A. Introduction For an employer to exclude an poverty threshold for a family of four employee from minimum wage and ($24,036).86 Similarly, by October 1, i. Background overtime protection pursuant to the EAP 2016, approximately 20 percent of full- The Fair Labor Standards Act (FLSA exemption, the employee generally must time salaried workers are projected to or Act) requires covered employers to: meet three criteria: (1) The employee earn at least $100,000 annually, almost (1) Pay employees who are covered and must be paid a predetermined and fixed three times the share who earned that not exempt from the Act’s requirements salary that is not subject to reduction amount when the HCE test was created. not less than the federal minimum wage because of variations in the quality or The premise behind the standard for all hours worked and overtime quantity of work performed (the ‘‘salary salary level test and the HCE total premium pay at a rate of not less than basis test’’); (2) the amount of salary annual compensation requirement is one and one-half times the employee’s paid must meet a minimum specified that employers are more likely to pay regular rate of pay for all hours worked amount (the ‘‘salary level test’’); and (3) higher salaries to workers in bona fide over 40 in a workweek, and (2) make, the employee’s job duties must EAP jobs. A high salary is considered a keep, and preserve records of the primarily involve executive, measure of an employer’s good faith in persons employed by the employer and administrative, or professional duties as classifying an employee as exempt, of the wages, hours, and other defined by the regulations (the ‘‘duties because an employer is less likely to conditions and practices of test’’). The Department has periodically have misclassified a worker as exempt employment. It is widely recognized updated the regulations governing these if he or she is paid a high wage. Stein that the general requirement that tests since the FLSA’s enactment in Report at 5; Weiss Report at 8. employers pay a premium rate of pay for 1938, most recently in 2004 when, The salary level requirement was all hours worked over 40 in a workweek among other revisions, the Department created to identify the dividing line is a cornerstone of the Act, grounded in created the standard duties test and distinguishing workers who may be two policy objectives. The first is to paired it with a salary level test of $455 performing exempt duties from the spread employment (or, in other words, per week. The Department also nonexempt workers whom Congress reduce involuntary unemployment) by established an abbreviated duties test intended to be protected by the FLSA’s incentivizing employers to hire more for highly compensated employees minimum wage and overtime employees rather than requiring existing (HCE)—i.e., white collar workers with a provisions. Throughout the regulatory employees to work longer hours. The total annual compensation of at least history of the FLSA, the Department has second policy objective is to reduce $100,000. To satisfy the total annual considered the salary level test the ‘‘best overwork and its detrimental effect on compensation requirement, an single test’’ of exempt status. Stein the health and well-being of workers. employee must earn at least $455 per Report at 19. This bright-line test is The FLSA provides a number of week on a salary or fee basis, and total easily observed, objective, and clear. Id. exemptions from the Act’s minimum annual compensation may also include ii. Need for Rulemaking wage and overtime pay provisions, commissions, nondiscretionary bonuses, including one for bona fide executive, and other nondiscretionary The salary level test has been updated administrative, and professional (EAP) compensation. seven times since it was implemented in employees. Such employees perform As a result of inflation, the real value 1938. Table 1 presents the weekly salary work that cannot easily be spread to of the standard salary and HCE levels associated with the EAP other workers after 40 hours in a week compensation thresholds have fallen exemptions since 1938, organized by and that is difficult to standardize to significantly since they were set in exemption and long/short/standard any timeframe; they also typically 2004, making them inconsistent with duties test.87

TABLE 1—HISTORICAL SALARY LEVELS FOR THE EAP EXEMPTIONS

Long test Date enacted Short test Executive Administrative Professional (all)

1938 ...... $30 $30 ...... 1940 ...... 30 50 $50 ...... 1949 ...... 55 75 75 $100 1958 ...... 80 95 95 125

85 The terms ‘‘regulatory impact analysis’’ and 86 This is the 2015 poverty threshold for a family 87 From 1949 until 2004 the regulations contained ‘‘economic impact analysis’’ are used of four with two related people under 18 in the two different tests for exemption—a long duties test interchangeably throughout this Final Rule. household. Available at: http://www.census.gov/ for employees paid a lower salary, and a short hhes/www/poverty/data/threshld/index.html. duties test for employees paid at a higher salary level.

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TABLE 1—HISTORICAL SALARY LEVELS FOR THE EAP EXEMPTIONS—Continued

Long test Date enacted Short test Executive Administrative Professional (all)

1963 ...... 100 100 115 150 1970 ...... 125 125 140 200 1975 ...... 155 155 170 250

Standard Test

2004 ...... $455

In 2004, the Department set the the salary threshold. Between 2004 and 1975 levels. Figure 1 demonstrates how standard salary level at $455 per week. 2015, the real value of the standard the real values of the salary levels have Following more than ten years of salary level declined 20.3 percent, changed since 1938, measured in 2015 inflation, the purchasing power, or real calculated using the Consumer Price dollars. The Final Rule’s standard salary value, of the standard salary level test Index for all urban consumers (CPI– level is below the real value of the short has eroded substantially, and as a result U).88 The decline is even larger when test salary level in all previous years increasingly more workers earn above comparing the salary level in 2015 with when it was updated.

As a result of the erosion of the real between 1938 and 1975, salary test salary level as a line of demarcation value of the standard salary level, more levels were increased approximately between those workers for whom and more workers lack the clear every five to nine years. In our 2004 Congress intended to provide minimum protection the salary level test is meant rulemaking, the Department stated the wage and overtime protections and to provide. Each year that the salary intention to ‘‘update the salary levels on those workers who may be performing level is not updated, its utility as a a more regular basis, as it did prior to bona fide EAP duties, and to maintain distinguishing mechanism between 1975,’’ and added that the ‘‘salary levels its continued validity, in this Final Rule exempt and nonexempt workers should be adjusted when wage survey the Department is setting the standard declines. The Department has revised data and other policy concerns support salary level equal to the 40th percentile the levels just once in the 41 years since such a change.’’ 69 FR 22171. Now, in of weekly earnings of all full-time 1975. In contrast, in the 37 years order to restore the value of the standard salaried workers in the lowest-wage

88 CPI–U data available at: http://data.bls.gov/cgi- bin/cpicalc.pl.

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Census Region. The Department Rotation Group (MORG) data. The provisions under the part 541 EAP determined the ‘‘lowest-wage Census impacts calculated by the Department in exemptions (in the baseline scenario Region’’ by examining Current this analysis are based on FY2013– without the rule taking effect). The other Population Survey (CPS) data for each FY2015 data projected to reflect 14.9 million workers do not satisfy the Census Region to find the region having FY2017. The Department used the same duties tests for EAP exemption and/or the lowest salary amount at the 40th data available to the public to analyze earn less than $455 per week (Table percentile of weekly earnings of full- the impact of this Final Rule.90 Data for 7).92 However, of the 29.9 million EAP- time salaried workers, which currently FY2015 were the most recently available exempt workers, 7.4 million are in is the South.89 Based on the fourth at the time of writing.91 However, the ‘‘named occupations’’ and thus need quarter of 2015 CPS data, the 40th Department pooled three years of data only pass the duties tests to be subject percentile for the South Census Region in order to increase the sample size. to the standard EAP exemptions.93 is $913 per week. To bring the HCE Additionally, because the rulemaking Therefore, these workers are not annual compensation requirement in will take effect December 1, 2016, the considered in the analysis, leaving 22.5 line with the level established in 2004, Department has projected the data to million EAP-exempt workers potentially the Department, in this Final Rule, is represent FY2017 as Year 1 (the fiscal affected by this Final Rule. setting the HCE total annual year most similar to the first year of In Year 1, an estimated 4.2 million compensation level at the 90th implementation). workers will be affected by the increase percentile of annualized weekly Some commenters, such as the United in the standard salary level test (Table earnings of full-time salaried workers States Chamber of Commerce 2). This figure consists of currently EAP- nationally. Based on the fourth quarter (Chamber), National Retail Federation exempt workers subject to the salary of 2015 CPS data, the HCE (NRF), and the Florida Department of level test who earn at least $455 per compensation level is $134,004 Economic Opportunity (FL DEO), week but less than the 40th percentile annually. expressed concern that the estimated of full-time salaried workers in the In addition, this Final Rule has impacts in the Preliminary Regulatory South ($913). Additionally, an introduced a mechanism to Impact Analysis (PRIA) are not estimated 65,000 workers will be automatically update the standard replicable. To the extent that these affected by the increase in the HCE salary and HCE total annual commenters suggested that the entire compensation test.94 Finally, 732,000 compensation levels every three years, PRIA was based on non-public data, the white collar, salaried workers making with the first update taking effect on Department emphasizes that we used between $455 and $913 who do not January 1, 2020. This triennial the non-publicly available data only for meet the duties test are already overtime automatic updating will preserve the determining percentiles of the earnings eligible but do not receive overtime pay effectiveness of the salary level as a distribution. As we noted in the NPRM, because they are misclassified. While dividing line between nonexempt the public will not be able to precisely these workers are not ‘‘affected’’ by the workers and workers who may be recreate the salary amounts in the Final Rule because their entitlement to exempt, eliminate the volatility published deciles because to ensure the overtime will not change, as a result of associated with previous changes in the confidentiality of survey respondents, the change in the salary level their thresholds, and increase certainty for the data in BLS public-use files use exemption status will be clear based on employers with respect to future adjusted weights and therefore minor the salary test alone and they will no changes. It will also simplify the discrepancies between internal BLS files longer be misclassified due to updating process, as the Department and public-use files exist. See 80 FR misapplication of the duties test. In Year will simply publish a notice in the 38528 n.24. Some commenters also 10, with automatic updating,95 5.0 Federal Register with the updated asserted that the methodology used in million workers are projected to be salary and compensation thresholds at the PRIA to estimate the impact of this affected by the change in the standard least 150 days in advance of the update, rulemaking could not be replicated salary level test and 217,000 workers and post the updated salary and because the Department did not will be affected by the change in the compensation levels on the Wage and sufficiently explain our analysis. The HCE total annual compensation test. Hour Division (WHD) Web site. Should Department believes that the analytic the Department determine in the future methodology was thoroughly described 92 Here and elsewhere in this analysis, numbers that changes in the updating throughout the NPRM, PRIA and are reported at varying levels of aggregation, and are methodology may be warranted, the generally rounded to a single decimal point. Appendix A, 80 FR 38545–601. However, calculations are performed using exact Department can engage in notice and Nevertheless, we have provided numbers. Therefore, some numbers may not match comment rulemaking. additional details in this RIA to address the reported total or the calculation shown due to concerns about replicability. rounding of components. iii. Summary of Affected Workers, 93 Workers not subject to the EAP salary level test Costs, Benefits, and Transfers The Department estimates that in include teachers, academic administrative FY2017, there will be 44.8 million white personnel, physicians, lawyers, judges, and outside The Department estimated the collar salaried employees who do not sales workers. number of affected workers and qualify for any other FLSA exemption 94 In later years, earnings growth will cause some quantified costs and transfer payments and therefore may be affected by a workers to no longer be affected in those years because their earnings will exceed the salary associated with this Final Rule. To change to the Department’s part 541 produce these estimates, the Department threshold. Additionally, some workers will become regulations (Table 7). Of these workers, newly affected because their earnings will exceed used data from the CPS, a monthly the Department estimates that 29.9 $455 per week, and in the absence of this Final Rule survey of 60,000 households conducted million would be exempt from the would have lost their overtime protections. In order to estimate the total number of affected workers by the U.S. Census Bureau. Many of the minimum wage and overtime pay data variables used in this analysis are over time, the Department accounts for both of these effects. Thus, in Year 2, an estimated 4.0 from the CPS’s Merged Outgoing 90 To ensure the confidentiality of survey million workers will be affected, and by Year 10, respondents, data in the public-use files use an estimated 5.3 million workers will be affected. 89 For simplicity, in this rulemaking we refer to adjusted weights and top-coded earnings. 95 Future automatic updates to the standard salary the lowest-wage Census Region and the South 91 FY2015 includes October 1, 2014 through and HCE compensation level requirements will interchangeably. September 30, 2015. occur in Years 4, 7, and 10.

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Three direct costs to employers are the standard salary level test and the Department estimates average quantified in this analysis: (1) HCE annual compensation level (these annualized DWL to be $9.2 million.96 Regulatory familiarization costs; (2) will be disaggregated in section In addition to the costs described adjustment costs; and (3) managerial VI.D.iii.). Total average annualized above, this Final Rule will also transfer costs. Regulatory familiarization costs direct employer costs over the first 10 income from employers to employees in are the costs incurred to read and years are estimated to be $295.1 million, the form of wages. The Department become familiar with the requirements assuming a 7 percent discount rate; estimates average annualized transfers of the rule. Adjustment costs are the hereafter, unless otherwise specified, will be $1,189.1 million. The majority of costs accrued to determine workers’ average annualized values will be these transfers are attributable to the new exemption statuses, notify presented using the 7 percent real FLSA’s overtime provision; a far smaller employees of policy changes, and discount rate (Table 2). Deadweight loss share is attributable to the FLSA’s update payroll systems. Managerial (DWL) is also a cost but not a direct minimum wage requirement. Transfers costs associated with this Final Rule employer cost. DWL is a function of the also include additional pay to increase occur because hours of workers who are difference between the wage employers the salaries of some affected EAP newly entitled to overtime may be more are willing to pay for the hours lost, and workers who remain exempt. closely scheduled and monitored to the wage workers are willing to take for Employers may incur additional costs, minimize or avoid overtime hours those hours. In other words, DWL such as hiring new workers. These other worked. represents the decrease in total potential costs are discussed in section The costs presented here are the economic surplus in the market arising VI.D.iii. Benefits of this Final Rule are combined costs for both the change in from the change in the regulation. The discussed in section VI.D.vii.

TABLE 2—SUMMARY OF REGULATORY COSTS AND TRANSFERS, STANDARD AND HCE SALARY LEVELS [Millions 2017$]

Future years a Average annualized value Impact Year 1 Year 2 Year 10 3% real rate 7% real rate

Affected Workers (1,000s)

Standard ...... 4,163 3,893 5,045 ...... HCE ...... 65 73 217 ...... Total ...... 4,228 3,965 5,261 ......

Costs and Transfers (Millions 2017$) b

Direct employer costs ...... $677.9 $208.0 $284.2 $288.0 $295.1 Transfers c ...... 1,285.2 936.5 1,607.2 1,201.6 1,189.1 DWL ...... 6.4 8.7 11.1 9.3 9.2 a These costs/transfers represent a range over the nine-year span. b Costs and transfers for affected workers passing the standard and HCE tests are combined. c This is the net transfer that we primarily describe as being from employers to workers. There may also be transfers of hours and income from some workers to others. Moreover, some of these transfers may be intrapersonal, for instance, higher earnings may be offset by increased hours worked for employees who remain overtime-exempt or may be supplemented by reduced hours for some newly overtime-protected employees.

iv. Terminology and Abbreviations Baseline EAP exempt workers: The determine eligibility for the EAP exemptions. projected number of workers who would be It replaced the short and long tests in effect The following terminology and EAP exempt in FY2017 if the rulemaking did from 1949 to 2004, but its criteria closely abbreviations will be used throughout not take effect. follow those of the former short test. this RIA. BLS: Bureau of Labor Statistics. HCE duties test: The duties test used in CPI–U: Consumer Price Index for all urban conjunction with the HCE total annual Affected EAP workers: The population of consumers. compensation requirement, as set in 2004 potentially affected EAP workers who either CPS: Current Population Survey. and applied to date, to determine eligibility pass the standard duties test and earn at least Duties test: To be exempt from the FLSA’s for the HCE exemption. It is much less $455 but less than the new salary level of the minimum wage and overtime requirements stringent than the standard and short duties 40th percentile of weekly earnings of full- under section 13(a)(1), the employee’s tests to reflect that very highly paid time salaried workers in the lowest-wage primary job duty must involve bona fide employees are much more likely to be Census Region (currently the South) ($913 in executive, administrative, or professional properly classified as exempt. Year 1), or pass only the HCE duties test and duties as defined by the regulations. The Long duties test: One of two duties tests earn at least $100,000 but less than the Department distinguishes among four such used from 1949 until 2004; this more annualized earnings of the 90th percentile of tests: restrictive duties test had a greater number of full-time salaried workers nationally Standard duties test: The duties test used requirements, including a limit on the ($134,004 in Year 1). This is estimated to be in conjunction with the standard salary level amount of nonexempt work that could be 4.2 million workers.97 test, as set in 2004 and applied to date, to performed, and was used in conjunction with

96 The estimate of DWL assumes the market meets 97 Setting the standard salary level at the 40th regulations, such as some workers in Alaska, the theoretical conditions for an efficient market in percentile of weekly earnings of full-time salaried California, and New York. Additionally, 65,000 the absence of this (e.g., all conditions workers in the South is estimated to affect workers are potentially affected by the change in of a perfectly competitive market hold: full 4,163,000 workers. See Table 2. The estimate is the HCE exemption’s total compensation level. Id. based on the effect of the change in overtime information, no barriers to entry, etc.). Since labor Accordingly, throughout this RIA we refer to the protection under the FLSA from this Final Rule. It markets are generally not perfectly competitive, this includes workers who may currently be overtime- total affected workers as 4.2 million (4,163,000 + is likely an overestimate of the DWL. eligible under more protective state EAP laws and 65,000, rounded to the nearest 100,000 workers).

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a lower salary level to determine eligibility proportion of workers who work overtime in SIPP: Survey of Income and Program for the EAP exemptions (see Table 1). our sample matches the proportion of Participation. Short duties test: One of two duties tests workers, measured using SIPP data, who Workers covered by the FLSA and subject used from 1949 to 2004; this less restrictive work overtime at some point in the year. to the Department’s part 541 regulations: duties test had fewer requirements, did not Regular overtime workers: Workers who Includes all workers except those excluded limit the amount of nonexempt work that report they usually work more than 40 hours from the analysis because they are not could be performed, and was used in per week (identified with variable covered by the FLSA or subject to the conjunction with a higher salary level to PEHRUSL1 in CPS MORG). Department’s requirements. Excluded determine eligibility for the EAP exemptions Pooled data for FY2013–FY2015: CPS workers include: Members of the , (see Table 1). MORG data from FY2013–FY2015 adjusted unpaid volunteers, the self-employed, many DWL: Deadweight loss; the loss of to represent FY2015 with earnings inflated to religious workers, and federal employees that can occur when the FY2017 dollars and sample observations (with a few exceptions).101 perfectly competitive equilibrium in a market weighted to reflect projected employment in for a good or service is not achieved. FY2017. Pooled data were used to increase The Department also notes that the EAP: Executive, administrative, and sample size. terms employee and worker are used professional. Potentially affected EAP workers: EAP interchangeably throughout this FY: Fiscal year. The federal fiscal year is exempt workers who are not in named from October 1 through September 30. analysis. occupations and are included in the analysis HCE: Highly compensated employee; a (i.e., white collar, salaried, not eligible for B. Methodology To Determine the category of EAP exempt employee, another (non-EAP) overtime pay exemption). Number of Potentially Affected EAP established in 2004 and characterized by high earnings and a minimal duties test. This is estimated to be 22.5 million workers. Workers Price elasticity of demand (with respect to Hourly wage: For the purpose of this RIA, i. Overview the amount an employee is paid for an hour wage): The percentage change in labor hours demanded in response to a one percent of work. This section explains the Base hourly wage: The hourly wage change in wages. Real dollars (2017$): Dollars adjusted using methodology used to estimate the excluding any overtime payments. Also used number of workers who are subject to to express the wage rate without accounting the CPI–U to reflect the purchasing power for benefits. they would have in FY2017. the EAP exemptions. In this Final Rule, Implicit hourly wage: Hourly wage Salary basis test: The EAP exemptions’ as in the 2004 Final Rule, the calculated by dividing reported weekly requirement that workers be paid on a salary Department estimated the number of earnings by reported hours worked. basis, that is, a pre-determined amount that EAP exempt workers because there is no Straight time wage: Another term for the cannot be reduced because of variations in data source that identifies workers as hourly wage excluding any overtime the quality or quantity of the employee’s EAP exempt. Employers are not work. payments. required to report EAP exempt workers MORG: Merged Outgoing Rotation Group Salary level test: The salary a worker must earn in order to be subject to the EAP to any central agency or as part of any supplement to the CPS. 102 Named occupations: Workers in named exemptions. The Department distinguishes employee or establishment survey. occupations are not subject to the salary level among four such tests: The methodology described here is or salary basis tests. These occupations Standard salary level: The weekly salary largely based on the approach the include teachers, academic administrative level associated with the standard duties test Department used in the 2004 Final Rule. personnel,98 physicians,99 lawyers, judges,100 that determines eligibility for the EAP 69 FR 22196–209. All tables include and outside sales workers. exemptions. The standard salary level was projected estimates for FY2017, which Overtime workers: The Department set at $455 per week in the 2004 Final Rule. begins on October 1, 2016. Some tables distinguishes between two types of overtime HCE compensation level: Workers who meet the standard salary level requirement also include estimates for FY2005 (the workers. first full fiscal year after the most recent Occasional overtime workers: The but not the standard duties test nevertheless Department uses two steps to identify are exempt if they pass a minimal duties test increase to the salary level was occasional overtime workers. First, all and earn at least the HCE total annual implemented) to demonstrate how the workers who report they usually work 40 compensation required amount. The HCE prevalence of the EAP exemption has hours or less per week (identified with required compensation level was set at changed in the 12 years since our last variable PEHRUSL1 in CPS MORG) but in the $100,000 per year in the 2004 Final Rule, of rulemaking. We note that the PRIA used survey (or reference) week worked more than which at least $455 per week must be paid calendar year 2005 whereas this Final 40 hours (variable PEHRACT1 in CPS MORG) on a salary or fee basis. Rule uses FY2005. Therefore, the Short test salary level: The weekly salary are classified as occasional overtime workers. numbers have changed slightly. Figure 2 Second, some additional workers who do not level associated with the short duties test report usually working overtime and did not (eliminated in 2004). illustrates how the U.S. civilian report working overtime in the reference Long test salary level: The weekly salary workforce was analyzed through week are randomly selected to be classified level associated with the long duties test successive stages to estimate the number as occasional overtime workers so that the (eliminated in 2004). of potentially affected EAP workers.

98 Academic administrative personnel (including and optometrists (doctors of optometry or with a population, although the Department believes it admissions counselors and academic counselors) Bachelor of Science in optometry). § 541.304(b). composes a small percent of workers. These need to be paid either (1) the salary level or (2) a 100 Judges may not be considered ‘‘employees’’ workers were also not excluded from the 2004 Final salary that is at least equal to the entrance salary under the FLSA definition. However, since this Rule. for teachers in the educational establishment at distinction cannot be made in the data, all judges 102 RAND recently released results from a survey which they are employed (see § 541.204). Entrance are excluded (the same as was done in the 2004 conducted to estimate EAP exempt workers. salaries at the educational establishment of Final Rule). Including these workers in the model However, this survey does not have the variables or employment cannot be distinguished in the data as FLSA employees would not impact the estimate sample size necessary for the Department to base and so this alternative is not considered (thus these of affected workers. the RIA on this analysis. These survey results were employees were excluded from the analysis, the 101 Employees of firms with annual revenue less submitted by the authors as a comment on the same as was done in the 2004 Final Rule). than $500,000 who are not engaged in interstate proposed rule. Rohwedder, S. and Wenger, J.B. 99 The term physician includes medical doctors commerce are also not covered by the FLSA. (2015). The Fair Labor Standards Act: Worker including general practitioners and specialists, However, these workers are not excluded from this Misclassification and the Hours and Earnings osteopathic physicians (doctors of osteopathy), analysis because the Department has no reliable Effects of Expanded Coverage. RAND Labor and podiatrists, dentists (doctors of dental medicine), way of estimating the size of this worker Population.

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ii. Data exempt workers in a specific occupation FY2006 to FY2014.104 105 The geometric The estimates of EAP exempt workers employed in a specific industry, or growth rate is the constant annual are based on data drawn from the CPS workers in a specific geographic growth rate that when compounded MORG, which is sponsored jointly by location. To increase the sample size, (applied to the first year’s wage, then to the U.S. Census Bureau and the BLS. the Department pooled together three the resulting second year’s wage, etc.) The CPS is a large, nationally years of CPS MORG data (FY2013 yields the last historical year’s wage. representative sample of the labor force. through FY2015). Earnings for each This method only depends on the value Households are surveyed for four FY2013 and FY2014 observation were of the wage in the first available year 106 months, excluded from the survey for inflated to FY2015 dollars using the and the last available year. eight months, surveyed for an additional CPI–U, and the weight of each four months, then permanently dropped observation was adjusted so that the 104 In order to maximize the number of total number of potentially affected EAP observations used in calculating the median wage from the sample. During the last month for each occupation-industry category, three years of each rotation in the sample (month 4 workers in the pooled sample remained of data were pooled for each of the endpoint years. and month 16), employed respondents the same as the number for the FY2015 Specifically, data from FY2005, FY2006, and complete a supplementary CPS MORG. Thus, the pooled CPS FY2007 (converted to FY2006 dollars) were used to calculate the FY2006 median wage and data from questionnaire in addition to the regular MORG sample uses roughly three times FY2013, FY2014, and FY2015 (converted to FY2014 survey.103 This supplement contains the as many observations to represent the dollars) were used to calculate the FY2014 median detailed information on earnings same total number of workers in wage. necessary to estimate a worker’s FY2015. The additional observations 105 In the NPRM only wage growth rates for allow the Department to better estimate exempt workers were used; therefore, growth was exemption status. Responses are based based on historical wage growth for exempt on the reference week, which is always certain attributes of the potentially workers. Since the Final Rule projects all workers’ the week that includes the 12th day of affected labor force. earnings for Year 1, wage growth was estimated for the month. Next, this pooled sample was adjusted all workers based on the historical growth rate for all workers. Additionally, for the Final Rule, the Although the CPS is a large scale to reflect the FY2017 economy by Department projected earnings prior to determining survey, administered to 60,000 further inflating wages and sampling which workers are exempt, necessitating a change households representing the entire weights to project to FY2017. The in the methodology. nation, it is still possible to have Department applied two years of wage 106 The geometric mean may be a flawed measure relatively few observations when growth based on the average annual if either or both of those years were atypical; however, in this instance these values seem typical. looking at subsets of employees, such as growth rate in median wages. The wage An alternative method would be to use the time growth rate is calculated as the series of median wage data to estimate the linear 103 This is the outgoing rotation group (ORG); geometric growth rate in median wages trend in the values and continue this to project however, this analysis uses the data merged over using the historical CPS MORG data for future median wages. This method may be preferred twelve months and thus will be referred to as if either or both of the endpoint years are outliers, MORG. occupation-industry categories from since the trend will be less influenced by them.

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The geometric wage growth rate was because the Department cannot estimate occupational code 2040), ‘directors, also calculated from the BLS’ impacts for these workers since it is religious activities and education’ Occupational Employment Statistics unknown whether they work overtime (2050), and ‘religious workers, all other’ (OES) survey and used as a validity and therefore unknown whether there (2060). Most employees of the federal check.107 Additionally, in occupation- would be any need to pay for overtime government are covered by the FLSA industry categories where the CPS if their status changed from exempt to but are not subject to the Department’s MORG data had an insufficient number nonexempt. The Department reweighted part 541 regulations because their of observations to reliably calculate the rest of the sample to account for this entitlement to minimum wage and median wages, the Department used the change (i.e., to keep the same total overtime pay is regulated by the Office growth rate in median wages calculated employment estimates).109 This of Personnel Management (OPM).111 See from the OES data.108 Any remaining adjustment assumes that the 29 U.S.C. 204(f). Exceptions exist for occupation-industry combinations distribution of hours worked by workers U.S. Postal Service employees, without estimated median growth rates whose hours do not vary is Tennessee Valley Authority employees, were assigned the median of the growth representative of hours worked by and Library of Congress employees. See rates in median wages from the CPS workers whose hours do vary. The 29 U.S.C. 203(e)(2)(A). These covered MORG data. Department believes that without more federal workers were identified and The employment growth rate is the information this is an appropriate included in the analysis using geometric annual growth rate based on assumption.110 occupation and/or industry codes.112 the ten-year employment projection iii. Number of Workers Covered by the Employees of firms that have annual from BLS’ National Employment Matrix revenue of less than $500,000 and who (NEM) for 2014 to 2024 within an Department’s Part 541 Regulations are not engaged in interstate commerce occupation-industry category. An To estimate the number of workers are also not covered by the FLSA. The alternative method is to spread the total covered by the FLSA and subject to the Department does not exclude them from change in the level of employment over Department’s part 541 regulations, the the analysis because we have no reliable the ten years evenly across years Department excluded workers who are (constant change in the number way of estimating the size of this worker not protected by the FLSA or are not population, although the Department employed). The Department believes subject to the Department’s regulations that on average employment is more believes it is a small percentage of for a variety of reasons—for instance, workers. The 2004 Final Rule analysis likely to grow at a constant percentage they may not be covered by, or rate rather than by a constant level (a similarly did not adjust for these considered to be employees under, the workers. decreasing percentage rate). To account FLSA. These workers include: for employment growth, the Department • Military personnel, Table 3 presents the Department’s applied the growth rates to the sample • unpaid volunteers, estimates of the total number of weights of the workers. This is because • self-employed individuals, workers, and the number of workers the Department cannot introduce new • clergy and other religious workers, covered by the FLSA and subject to the observations to the CPS MORG data to and Department’s part 541 regulations, in represent the newly employed. • federal employees (with a few FY2005 and FY2017. The Department In addition to the calculations exceptions described below). projected that in FY2017 there will be described above, some assumptions had Many of these workers are excluded 159.9 million wage and salary workers to be made to use these data as the basis from the CPS MORG: Members of the in the United States. Of these, in the for the analysis. For example, the military on active duty, unpaid baseline scenario without changes in the Department eliminated workers who volunteers, and the self-employed. salary levels, 132.8 million would be reported that their weekly hours vary Religious workers were excluded from covered by the FLSA and subject to the and provided no additional information the analysis after being identified by Department’s regulations (83.0 percent). on hours worked. This was done their occupation codes: ‘clergy’ (Census The remaining 27.2 million workers would be excluded from FLSA coverage However, the linear trend may be flawed if there are 109 The Department also reweighted for workers for the reasons described above and outliers in the interim years. The Department chose reporting zero earnings. The Department delineated in Table 4. to use the geometric mean because individual year eliminated, without reweighting, workers who fluctuations are difficult to predict and applying the reported usually working zero hours and working geometric growth rate to each year provides a better zero hours in the past week. 111 Federal workers are identified in the CPS estimate of the long-term growth in wages. 110 This is justifiable because demographic and MORG with the class of worker variable 107 The OES growth measure compared median employment characteristics are similar across these PEIO1COW. wages in the 2006 and the 2014 OES by industry- two populations (e.g., age, gender, education, 112 Postal Service employees were identified with occupation combination. The difference between distribution across industries, share paid the Census industry classification for postal service the OES and CPS growth measures averaged nonhourly). The share of all workers who stated (6370). Tennessee Valley Authority employees were 0.00173 percentage points, but varied by up to 15.4 that their hours vary (but provided no additional identified as federal workers employed in the percentage points, depending on the occupation- information) is 5.7 percent. To the extent these electric power generation, transmission, and industry category. excluded workers are exempt, if they tend to work distribution industry (570) and in Kentucky, 108 To lessen small sample bias in the estimation more overtime than other workers, then transfer Tennessee, Mississippi, Alabama, Georgia, North of the median growth rate, this rate was only payments, costs, and DWL may be underestimated. Carolina, or Virginia. Library of Congress employees calculated using CPS MORG data when these data Conversely, if they work fewer overtime hours, then were identified as federal workers under Census contained at least 10 observations in each time transfer payments, costs, and DWL may be industry ‘libraries and archives’ (6770) and residing period. overestimated. in Washington, DC.

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TABLE 3—ESTIMATED NUMBER OF WORKERS COVERED BY THE FLSA AND SUBJECT TO THE DEPARTMENT’S PART 541 REGULATIONS, FY2005 AND FY2017

Subject to the Department’s Civilian regulations Year employment (1,000s) Number (1,000s) Percent

FY2005 a ...... 141,519 122,043 86.2 FY2017 ...... 159,914 b 132,754 83.0 a The PRIA provided figures from calendar year 2005, which differ slightly from the fiscal year 2005 figures provided in this analysis. b Estimate uses pooled data for FY2013–FY2015 projected to reflect FY2017.

TABLE 4—REASON NOT SUBJECT TO Department’s part 541 regulations, not excluded as blue collar workers. The THE DEPARTMENT’S PART 541 REG- several other groups of workers are Department used the CPS MORG ULATIONS, FY2017 identified and excluded from further variable PEERNHRY to determine analysis since they are unlikely to be hourly status, and determined that 78.3 affected by this Final Rule. These Reason Number million workers will be paid on an (1,000s) include: hourly basis in FY 2017. • Blue collar workers, Total ...... 27,160 • workers paid hourly, and Also excluded from further analysis Self-employed and unpaid • workers who are exempt under were workers who are exempt under workers a ...... 23,607 certain other (non-EAP) exemptions. certain other (non-EAP) exemptions. Religious workers ...... 550 The Department excludes a total of Although some of these workers may b Federal employees ...... 3,005 87.9 million workers from the analysis also be exempt under the EAP Note: Estimates use pooled data for for one or more of these reasons, which exemptions, even if these workers lost FY2013–FY2015 projected to reflect FY2017. often overlapped (e.g., many blue collar their EAP exempt status they would a Self-employed workers (both incorporated workers are also paid hourly). In and unincorporated) and workers ‘‘without remain exempt from the minimum wage pay’’ are excluded from the MORG supple- FY2017, we project there will be 48.1 and/or overtime pay provisions based ment. We assume workers ‘‘without pay’’ are million blue collar workers (Table 5). on the non-EAP exemption, and thus ‘‘unpaid volunteers.’’ These workers are identi- These workers were identified in the were excluded from the analysis. We fied as the difference between the population CPS MORG data following the of workers in the CPS basic data and the CPS excluded an estimated 4.5 million MORG data. methodology from the U.S. Government workers, including some agricultural b Accountability Office’s (GAO) 1999 Most employees of the federal government and transportation workers, from further are covered by the FLSA but are not covered white collar exemptions report 113 and analysis because they will be subject to by part 541. Exceptions are for U.S. Postal the Department’s 2004 regulatory Service employees, Tennessee Valley Author- impact analysis. See 69 FR 22240–44 another (non-EAP) overtime exemption. ity employees, and Library of Congress See Appendix A: Methodology for employees. (Table A–1). Supervisors in traditionally blue collar industries are classified as Estimating Exemption Status, for details iv. Number of Workers in the Analysis white collar workers because their on how this population was identified. After limiting the analysis to workers duties are generally managerial or covered by the FLSA and subject to the administrative, and therefore they were

TABLE 5—ESTIMATED NUMBER OF WORKERS COVERED BY THE FLSA AND SUBJECT TO THE DEPARTMENT’S PART 541 REGULATIONS, FY2005 AND FY2017 (1,000S)

Reason excluded b Subject to Workers Excluded Another exemption c Year DOL’s Part in the from a Blue collar Hourly 541 Reg. analysis analysis workers workers Transpor- Agriculture tation Other

FY2005 ...... 122,043 39,447 82,595 45,889 73,813 778 1,911 967 FY2017 ...... 132,754 44,845 87,909 48,119 78,310 902 1,912 1,691 Note: FY2017 estimates use pooled data for FY2013–FY2015 projected to reflect FY2017. a Wage and salary workers who are white collar, salaried, and not eligible for another (non-EAP) overtime exemption. b Numbers do not add to total due to overlap. c Eligible for another (non-EAP) overtime pay exemption.

In the 2004 Final Rule the Department Agricultural and transportation workers Agricultural workers were identified by excluded some of these workers from are two of the largest groups of workers occupational-industry combination.114 the population of potentially affected excluded from this analysis, and they Transportation workers were defined as EAP workers, but not all of them. were similarly excluded in 2004. those who are subject to the following

113 GAO/HEHS. (1999). Fair Labor Standards Act: Here only workers also in select occupations were agricultural workers and provides a more White Collar Exemptions in the Modern Work excluded since not all workers in agricultural conservative—i.e., greater—estimate of the number Place. GAO/HEHS–99–164, 40–41. industries qualify for the agricultural overtime pay of affected workers. 114 In the 2004 Final Rule all workers in exemptions. See Appendix A. This method better agricultural industries were excluded. 69 FR 22197. approximates the true number of exempt

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FLSA exemptions: Section 13(b)(1), • perform work activities that provides additional information on how section 13(b)(2), section 13(b)(3), section primarily involve executive, nonhourly workers are paid. In the 13(b)(6), or section 13(b)(10). This administrative, or professional duties as PSID, respondents are asked how they methodology is the same as in the 2004 defined by the regulations (the duties are paid on their main job and are asked Final Rule and is explained in test). for more detail if their response is other Appendix A. The Department excluded The 2004 Final Rule’s HCE test than salaried or hourly. Possible 902,000 agricultural workers and 1.9 requires the employee to pass the same responses include piecework, million transportation workers from the standard salary basis and salary level commission, self-employed/farmer/ analysis. In addition, the Department tests. However, the HCE duties test is profits, and by the job/day/mile. The excluded another 1.7 million workers much less restrictive than the standard Department analyzed the PSID data and who fall within one or more of multiple duties test, and the employee must earn found that relatively few nonhourly FLSA minimum wage and overtime at least $100,000 in total annual workers were paid by methods other exemptions and are detailed in compensation, including at least $455 than salaried. The Department is not Appendix A. However, of these 1.7 per week paid on a salary or fee basis, aware of any statistically robust source million workers, all but 25,600 are while the balance may be paid as that more closely reflects salary as either blue collar or hourly and thus the nondiscretionary bonuses and defined in our regulations, and the impact of excluding these workers is commissions. commenters did not identify any such negligible. Salary Basis source. v. Number of Potentially Affected EAP As discussed above, the Department Salary Level Workers included only nonhourly workers in the Weekly earnings are available in the After excluding workers not subject to analysis using the CPS variable CPS MORG data, which allowed the the Department’s FLSA regulations and PEERNHRY, which identifies workers as Department to estimate how many workers who are unlikely to be affected either hourly or nonhourly. For the nonhourly workers pass the salary level 117 by this Final Rule (i.e., blue collar purpose of this rulemaking, the tests. The Fisher & Phillips law firm, workers, workers paid hourly, workers Department considers data representing Jackson Lewis law firm, NACS, and the who are subject to another (non-EAP) compensation paid to nonhourly Clearing House Association (Clearing overtime exemption), the Department workers to be an appropriate proxy for House) commented that CPS earnings estimated there would be 44.8 million compensation paid to salaried workers. data may be inappropriate because the salaried white collar workers for whom The Department notes that we made the data includes overtime pay, employers might claim either the same assumption regarding nonhourly commissions, or tips. The Department standard EAP exemption or the HCE workers in the 2004 Final Rule. See 69 notes that employers may factor into an FR 22197. Several commenters asserted exemption. To be exempt under the employee’s salary a premium for that the Department’s use of the CPS standard EAP test the employee must: expected overtime hours worked. To the variable PEERNHRY to indicate whether • Be paid a predetermined and fixed extent they do so, that premium would a worker is salaried is inappropriate. For salary that is not subject to reduction be reflected in the data. Similarly, the example, the NRF included an analysis because of variations in the quality or Department believes tips will be an it commissioned from Oxford quantity of work performed (the salary uncommon form of payment for these Economics, which stated that this basis test); 115, 116 workers since tips are uncommon for variable is inappropriate because all white-collar workers. Lastly, the • earn at least a designated salary workers who earn under $455 a week Department believes that commissions amount; the salary level has been set at (and are therefore nonexempt) will make up a relatively small share of $455 per week since 2004 (the salary report that they are ‘‘paid at an hourly earnings among nonhourly level test); and rate.’’ The Department believes this is employees.118 In any event, as discussed an entirely unwarranted assumption: earlier in section IV.C., the Department 115 Hourly computer employees who earn at least $27.63 per hour and perform certain duties are exempt status is not a prerequisite for has adopted a change to the salary basis exempt under section 13(a)(17) of the FLSA. These being salaried; salaried status is a test in this Final Rule that will newly workers are considered part of the EAP exemptions prerequisite for being exempt (the salary but were excluded from the analysis because they basis test). Millions of workers—white 117 The CPS MORG variable PRERNWA, which are paid hourly and will not be affected by this and blue collar alike—are salaried measures weekly earnings, is used to identify Final Rule (these workers were similarly excluded despite being nonexempt, including 3.2 weekly salary. The CPS variable includes all in the 2004 analysis). Salaried computer workers nondiscretionary bonuses and commissions, which are exempt if they meet the salary and duties tests million white-collar workers who do not count toward the standard salary level under applicable to the EAP exemptions, and are included reported earning less than $455 per the current regulations but may be used to satisfy in the analysis since they will be impacted by this week in the CPS. See 80 FR 38522 up to 10 percent of the new standard salary level Final Rule. when this Final Rule takes effect. This discrepancy 116 Additionally, administrative and professional (noting the ‘‘widespread between the earnings variable used and the FLSA employees may be paid on a fee basis, as opposed misconception[ ]’’ that ‘‘payment of a definition of salary may cause a slight overestimate to a salary basis, at a rate of at least the amount salary automatically disqualifies an of the number of workers estimated to meet the specified by the Department in the regulations. employee from entitlement to overtime standard test. Additionally, because the variable Payment on a ‘‘fee basis’’ occurs where an employee includes earnings across all jobs, this could bias is paid an agreed sum for a single job regardless of compensation.’’) upward workers’ earnings on a given job. However, the time required for its completion. § 541.605(a). Some commenters, such as the the Department believes this bias is small because Salary level test compliance for fee basis employees Chamber and the National Association only 4.2 percent of salaried, white collar workers is assessed by determining whether the hourly rate of Convenience Stores (NACS), hold multiple jobs. for work performed (i.e., the fee payment divided expressed concern that the Department 118 In the PSID, relatively few nonhourly workers by the number of hours worked) would total at least were paid by commission. Additionally, according $455 per week if the employee worked 40 hours. is using ‘‘nonhourly’’ workers to to the BLS Employment Cost Index (ECI), about 5 § 541.605(b). However, the CPS MORG does not approximate ‘‘salaried’’ workers, even percent of the private workforce is incentive-paid identify workers paid on a fee basis (only hourly or though this may include workers who workers (incentive pay is defined as payment that nonhourly). Thus in the analysis, workers paid on relates earnings to actual individual or group a fee basis are considered with nonhourly workers are paid on a piece-rate, a day-rate, or production). See: http://www.bls.gov/opub/mlr/ and consequently classified as ‘‘salaried’’ (as was largely on bonuses or commissions. The cwc/the-effect-of-incentive-pay-on-rates-of-change- done in the 2004 Final Rule). Panel Study of Income Dynamics (PSID) in-wages-and-salaries.pdf.

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allow employers to satisfy as much as response to a request from the GAO. provisions of the highly compensated 10 percent of the standard salary level Because WHD enforces the FLSA’s test relative to the standard duties test requirement for employees who meet overtime requirements and regularly (Table 6). To illustrate, WHD the standard duties test through the assesses workers’ exempt status, WHD’s representatives assigned exempt payment of nondiscretionary bonuses, representatives were uniquely qualified probability code 4 to the occupation incentive payments, and commissions. to provide the analysis. The analysis ‘‘first-line supervisors/managers of NACS also asserted that the CPS was used in both the GAO’s 1999 white construction trades and extraction MORG earnings data are unreliable collar exemptions report 120 and the workers’’ (Census code 6200), which because they ‘‘are self-reported and are Department’s 2004 regulatory impact indicates that a worker in this therefore not subject to verification.’’ analysis. See 69 FR 22198. occupation has a 0 and 10 percent The Department acknowledges that the likelihood of meeting the standard EAP CPS, like all surveys, involves some WHD’s representatives examined 499 occupational codes, excluding nine that duties test. However, if that worker measurement error. However, based on earns at least $100,000 annually, he or the literature measuring error in CPS were not relevant to the analysis for various reasons (one code was assigned she has a 15 percent probability of earnings data, the Department believes passing the shorter HCE duties test. that measurement error should not to unemployed persons whose last job significantly bias its results.119 was in the Armed Forces, some codes The occupations identified in GAO’s were assigned to workers who are not 1999 report and used by the Department Duties FLSA covered, others had no in the 2004 Final Rule map to an earlier The CPS MORG data do not capture observations). Of the remaining occupational classification scheme (the information about job duties, and at the occupational codes, WHD’s 1990 Census occupational codes). time of writing the NPRM, there were no representatives determined that 251 Therefore, for this Final Rule, the data available on the prevalence of EAP occupational codes likely included EAP Department used an occupational exempt workers. Due to this data exempt workers and assigned one of crosswalk to map the previous limitation, the Department used four probability codes reflecting the occupational codes to the 2002 Census occupational titles, combined with estimated likelihood, expressed as occupational codes which are used in probability estimates of passing the ranges, that a worker in a specific the CPS MORG 2002 through 2010 data, duties test by occupational title, to occupation would perform duties and to the 2010 Census occupational estimate the number of workers passing required to meet the EAP duties tests. codes which are used in the CPS MORG the duties test. This methodology is very The Department supplemented this FY2013 through FY2015 data.121 If a similar to the methodology used in the analysis in the 2004 Final Rule new occupation comprises more than 2004 rulemaking, and was the best regulatory impact analysis when the one previous occupation, then the new available data and methodology. To HCE exemption was introduced. The occupation’s probability code is the determine whether a worker met the Department modified the four weighted average of the previous duties test, the Department used an probability codes for highly paid occupations’ probability codes, rounded analysis performed by WHD in 1998 in workers based upon our analysis of the to the closest probability code.

TABLE 6—PROBABILITY WORKER IN CATEGORY PASSES THE DUTIES TEST

The Standard EAP test The HCE test Probability code Lower bound Upper bound Lower bound Upper bound (%) (%) (%) (%)

0 ...... 0 0 0 0 1 ...... 90 100 100 100 2 ...... 50 90 94 96 3 ...... 10 50 58.4 60 4 ...... 0 10 15 15

These codes provide information on standard duties test (based on exemption. The probability of qualifying the likelihood an employee in a category probability category 2). However, it is for the exemption increases with met the duties test but they do not unknown which of these ten workers earnings because higher paid workers identify the workers in the CPS MORG are exempt; therefore, the Department are more likely to perform the required who actually passed the test. Therefore, must determine the status for these duties, an assumption adhered to by the Department designated workers as workers. Exemption status could be both the Department in the 2004 Final exempt or nonexempt based on the randomly assigned with equal Rule and the GAO in its 1999 Report.122 probabilities. For example, for every ten probability, but this would ignore the The Department estimated the public relations managers, between five earnings of the worker as a factor in probability of exemption for each and nine were estimated to pass the determining the probability of worker as a function of both earnings

119 For example, researchers have found that 120 GAO/HEHS. (1999). Fair Labor Standards Act: and is better represented with a gamma worker and employer reported earnings correlate White Collar Exemptions in the Modern Work distribution. For the HCE exemption, the 0.90 percent or higher. Bound, J., Brown, C., Place. GAO/HEHS–99–164, 40–41. relationship between earnings and exemption can Mathiowetz, N. Measurement error in survey data. 121 References to occupational codes in this be well represented with a linear function because In Handbook of Econometrics; Heckman, J.J., analysis refer to the 2002 Census occupational the relationship is linear at high salary levels (as codes. Crosswalks and methodology available at: determined by the Department in the 2004 Final Leamer, E.E., Eds.; North-Holland: Amsterdam, The http://www.census.gov/people/io/methodology/. Rule). Therefore, the gamma model and the linear Netherlands, V, 3705–3843. 122 For the standard exemption, the relationship model would produce similar results. See 69 FR between earnings and exemption status is not linear 22204–08, 22215–16.

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and the occupation’s exempt probability reports occupation codes, occupation is use by the GAO in its study of the part category using a gamma distribution.123 generally determined from the initial, 541 exemptions, but we believe the Based on these revised probabilities, in-person, in-depth interview with the probability codes continue to accurately each worker was assigned exempt or respondent, and the interviewer is estimate exemption status given the fact nonexempt status based on a random directed to determine the respondent’s that the standard duties test is not draw from a binomial distribution using duties and responsibilities, not merely substantively different from the former the worker’s revised probability as the accept the occupational title at face short duties tests reflected in the probability of success. Thus, if this value; Census coders then assign the codes.126 The Department looked at method is applied to ten workers who occupation code based on the interview. O*NET 127 to determine the extent to each have a 60 percent probability of Moreover, there are important which the 1998 probability codes being exempt, six workers would be shortcomings of the OES, which made it reflected occupational duties today. The expected to be designated as exempt.124 an inappropriate data source for the Department’s review of O*NET verified However, which particular workers are Department’s purposes. First, the OES the continued appropriateness of the designated as exempt may vary with data do not include individual level 1998 probability codes. each set of ten random draws. For data. For example, earnings are not The Partnership to Protect Workplace details see Appendix A. disaggregated by respondent; only select Opportunity (PPWO) cited an The Chamber attached to its comment decile estimates are presented. This Edgeworth Economics article asserting an Oxford Economic analysis does not allow estimation of the number that the probability codes are commissioned by the NRF, which also of workers earning at least $455.125 inappropriate because there is evidence submitted the analysis, asserting that Second, the OES does not provide that the relationship between salaries that CPS data may not be appropriate to information on hours worked. In order and job duties assumed by the determine how many workers are EAP to estimate costs and transfers using Department is not valid. The article exempt, and specifically how many pass OES data, Oxford Economics had to provides the following example: ‘‘the the duties test. The Oxford Economics apply estimates of hours worked from median pay of ‘Occupational Therapists’ analysis contends that occupational the CPS data to the OES data. This is more than twice as high as the titles in the CPS are less accurate than requires mapping CPS occupational median pay of ‘First Line Supervisors/ the OES survey, a BLS-published data titles to OES occupational titles, and Managers of Retail Sales Workers,’ yet set based on employer surveys, because therefore does not avoid use of the titles the DOL places ‘Occupational the occupational titles in the CPS are Oxford Economics finds inadequate. Therapists’ in the 10 to 50 percent self-reported, while occupational titles The Department believes the direct category for managerial and professional in the OES survey are reported by firms, information on earnings and hours duties, while 50 to 90 percent of the and are therefore better suited to obtain worked from CPS is more germane to positions in ‘First Line Supervisors/ information on actual occupations. the analysis than some potential Managers of Retail Sales Workers’ were Oxford Economics asserts in their inaccuracy in occupational titles, and determined to include managerial and Appendix A that there is title-inflation will result in a more accurate analysis professional duties.’’ However, this in the CPS data, which would imply than trying to map worker criticism is not valid since the positive that the Department’s number of characteristics such as data on hours relationship between salary levels and affected workers was overestimated. worked by earnings from CPS to the passing the duties test was assumed Similarly, the Chamber described the OES. Finally, even if there are slight within probability code categories, not CPS job title information as based on discrepancies in occupational titles, a between probability code categories. ‘‘, limited individual verbal review of the occupational titles in The probability codes only reflect the responses.’’ Appendix A of this RIA will show that likelihood within an occupation of The Department acknowledges that an closely related occupational titles are passing the duties test, not the establishment survey (like the OES) may generally assigned the same probability probability of being exempt. of exemption (for example, different more accurately reflect the occupational Potentially Affected Exempt EAP types of engineers are all classified as titles applied to workers by individual Workers employers; however, we note that probability code 1; and cashiers and businesses, like workers, may also have counter and rental clerks are both The Department estimated that of the an incentive to inflate or deflate classified as probability code 4). 44.8 million salaried white collar occupational titles. In addition, Oxford The Chamber expressed concern that workers considered in the analysis, 29.9 Economics and the Chamber overstate the probability codes used to determine million qualified for the EAP the presumed weaknesses of the CPS the share of workers in an occupation exemptions under the current occupation classification. When the CPS who are EAP exempt are 17 years old regulations (Table 7). However, some of and therefore out of date. Similarly, the these workers were excluded from 123 The gamma distribution was chosen because, Economic Policy Institute (EPI) further analysis because they would not during the 2004 revision, this non-linear commented that we underestimated the be affected by the Final Rule. This distribution best fit the data compared to the other number of exempt workers for this excluded group contains workers in non-linear distributions considered (i.e., normal reason. The Department acknowledges named occupations who are not and lognormal). A gamma distribution is a general type of statistical distribution that is based on two these codes were developed in 1998 for required to pass the salary requirements parameters that control the scale (alpha) and shape (in this context, called the rate parameter, beta). 125 Oxford Economics made assumptions to 126 The Chamber additionally expressed concern 124 A binominal distribution is frequently used for estimate the number of workers earning at least about the use of proxy respondents in the CPS. To a dichotomous variable where there are two $455 per week. The firm chose to include or check whether proxy respondents may cause biased possible outcomes; for example, whether one owns exclude all workers in an occupation based on results, the Department excluded proxy responses a home (outcome of 1) or does not own a home whether ‘‘the threshold wage was below the 10th from the data and found that the share of (outcome of 0). Taking a random draw from a percentile or above the 90th percentile potentially affected workers who are affected by the binomial distribution results in either a zero or a respectively.’’ See Appendix A: Detailed rulemaking remains very similar (it drops from 18.8 one based on a probability of ‘‘success’’ (outcome Methodology Description, at 32, available at https:// percent (see section VI.D.ii.) to 18.1 percent). of 1). This methodology assigns exempt status to the nrf.com/sites/default/files/Documents/ 127 The O*NET database contains hundreds of appropriate share of workers without biasing the retail%20library/Rethinking-Overtime- standardized and occupation-specific descriptions. results with manual assignment. Appendices.pdf. See www.onetcenter.org.

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(although they must still pass a duties 7870)), and outside sales workers (a exempt workers, the Department test) and therefore whose exemption subset of occupation 4950).128 Out of estimates that an additional 5.7 million status is not dependent on their the 29.9 million workers who are EAP salaried white collar workers who do earnings. These occupations include exempt, 7.4 million, or 24.8 percent, are not satisfy the duties test and who physicians (identified with Census expected to be in named occupations in currently earn at least $455 per week occupation codes 3010, 3040, 3060, FY2017. Thus these workers will be but less than the updated salary level, 3120), lawyers (2100), teachers unaffected by changes in the standard will have their overtime protection (occupations 2200–2550 and industries salary level and HCE compensation strengthened because their exemption 7860 or 7870), academic administrative tests. The 22.5 million EAP exempt status will be clear based on the salary personnel (school counselors workers remaining in the analysis are test alone without the need to examine (occupation 2000 and industries 7860 or referred to in this Final Rule as their duties. 7870) and educational administrators ‘‘potentially affected.’’ In addition to the (occupation 0230 and industries 7860 or 22.5 million potentially affected EAP

TABLE 7—ESTIMATED PERCENTAGES OF EAP EXEMPT WORKERS IN NAMED OCCUPATIONS, PRIOR TO RULEMAKING, FY2005 AND FY2017

EAP Exempt % of EAP Workers in EAP Exempt in named oc- exempt in Year the analysis (millions) cupations named (millions) a (millions) b occupations

FY2005 ...... 39.4 24.9 6.4 25.9 FY2017 ...... 44.8 29.9 7.4 24.8 Note: FY2017 estimates use pooled data for FY2013–FY2015 projected to reflect FY2017. a Wage and salary workers who are white collar, salaried, and not eligible for another (non-EAP) overtime exemption. b Workers not subject to a salary level test include teachers, academic administrative personnel, physicians, lawyers, judges, and outside sales workers.

In response to the NPRM, the FL DEO improvements that may exist in the FL has concluded that in FY2017, in the conducted their own analysis of the DEO study. baseline scenario where the rule does number of Florida workers potentially There are three groups of workers not change, of the 22.5 million affected by the proposed rule and who qualify for the EAP exemptions: (1) potentially affected EAP workers, asserted that the Department’s analysis Those passing only the standard EAP approximately 15.4 million will pass in the NPRM overestimates ‘‘by 195,000 test (i.e., passing the standard duties only the standard EAP test, 7.0 million the number of Florida workers who will test, the salary basis test, and the will pass both the standard and the HCE qualify for overtime.’’ The Department’s standard salary level test but not passing tests, and approximately 100,000 will NPRM estimated that 370,000 workers the HCE total annual compensation pass only the HCE test (Table 8). When would be affected in Florida whereas requirement); (2) those passing only the impacts are discussed in section VI.D., the FL DEO estimated 175,100.129 HCE test (i.e., passing the HCE duties workers who pass both tests will be However, FL DEO did not provide test, the salary basis test, and the HCE considered with those who pass only total annual compensation requirement the standard EAP test because the details explaining how they arrived at but not passing the standard duties test); standard salary level test is lower (i.e., their lower number so the Department and (3) those passing all requirements of the worker may continue to pass the has no way to the validity of their both the standard and HCE tests. Based standard salary level test even if he or analysis or to update our own analysis on analysis of the occupational codes she no longer passes the HCE total to incorporate any methodological and CPS earnings data, the Department annual compensation requirement).

TABLE 8—ESTIMATED NUMBER OF WORKERS EXEMPT UNDER THE EAP EXEMPTIONS BY TEST TYPE, PRIOR TO RULEMAKING, FY2005 AND FY2017

Potentially affected EAP workers (millions) Year Pass standard Pass both Pass HCE Total test only tests test only

FY2005 ...... 18.4 15.8 2.6 0.04 FY2017 ...... 22.5 15.4 7.0 0.10 Note: FY2017 estimates use pooled data for FY2013–FY2015 projected to reflect FY2017.

128 Some commenters asserted it is inappropriate salary level because it achieves a sample that is publication and is available at: https:// to exclude these named occupations from the more representative of EAP salary levels throughout www.whitehouse.gov/sites/default/files/docs/ot_ impact analysis, but not from the data set used to the economy (see section IV.A.iv.). state_by_state_fact_sheet.pdf. derive the salary level. These workers were 129 State level data was not included in the NPRM included in the earnings distribution used to set the analysis, but was posted at the time of the NPRM

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C. Determining the Revised Salary and distribution in order for the salary to method, and the Department followed a Compensation Levels serve as a meaningful line of similar methodology in setting the The Final Rule sets the EAP standard demarcation between those Congress salary levels in 1963 and 1970. salary level at the 40th percentile of the intended to protect and those who may A significant change in 2004 from the weekly earnings distribution of full-time qualify for exemption. The salary setting long test Kantor method was that the salaried workers in the lowest-wage methodology adopted in this Final Rule Department used the salaries of both Census Region (currently the South) and continues the evolution of the exempt and nonexempt full-time sets the HCE total annual compensation Department’s approach. Where the salaried workers in the South and the requirement equal to the annual methodology differs from past retail industry to determine the required earnings equivalent of the 90th methodologies, the Department believes salary level (hereafter referred to as the percentile of the weekly earnings the changes are an improvement. A 2004 method), rather than the salaries of distribution of full-time salaried comparison of this new method with exempt workers only. However, because workers nationally.130 These methods methods from past rulemakings, and the the salaries of exempt workers on were chosen in part because they reasons for selecting the new method average are higher than the salaries of generate salary levels that (1) are detailed in the rest of this section. all full-time salaried workers, the appropriately distinguish between As discussed in section IV.A., the Department selected a higher earnings workers who are eligible for overtime historical methodologies used to revise percentile when setting the required and those who may be EAP exempt; (2) the EAP salary levels have varied salary. Based on the Department’s 2004 are easy to calculate and thus easy to somewhat across the seven updates to analysis, the 20th percentile of earnings replicate, creating transparency through the salary level test since it was for exempt and nonexempt full-time simplicity; and (3) are predictable. The implemented in 1938. To guide the salaried workers in the South and retail Department believes that the standard determination of the salary level, the achieved a result very similar to the salary level set using the methodology Department considered methodologies 10th percentile for workers in the established in this rulemaking allows used previously to revise the EAP salary lowest-wage regions and industries who for reliance on the current standard levels. In particular, the Department were estimated to be exempt. See 69 FR duties test without necessitating a focused on the 1958 revisions and the 22169. return to the more detailed long duties most recent revisions in 2004. The 1958 In the current rulemaking, the test. Additionally, the Department methodology is particularly instructive Department replicated the Kantor long believes this salary level will not result in that it synthesized previous test method and the 2004 method to in an unacceptably high risk that approaches to setting the long-test salary evaluate and compare them to the employees performing bona fide EAP level, and the basic structures it adopted chosen salary level.133 Although the duties will become entitled to overtime have been a touchstone to setting the Department was able to replicate the protection by virtue of the salary test. long test salary level in subsequent 1958 and 2004 methods reasonably In the NPRM, the Department rulemakings (with the exception of well, we could not completely replicate proposed setting the EAP standard 1975). those methods due to changes in data salary level at the 40th percentile of the In 1958, the Department updated the availability, occupation classification weekly earnings distribution of full-time salary levels based on a 1958 Report and systems, and incomplete salaried workers nationally. In response Recommendations on Proposed documentation. In general, there are to commenters’ concerns that the Revision of Regulations, Part 541, by four steps in the process: proposed salary level would disqualify Harry S. Kantor (Kantor Report). To 1. Identify workers likely to be too many bona fide EAP employees in determine the revised salary levels the members of the population of interest. low-wage areas and industries, the Department looked at data collected 2. Further narrow the population of Department limited the distribution to during WHD investigations on actual interest by distinguishing the sub- workers in the lowest-wage Census salaries paid to exempt EAP employees, population employed in low-wage Region. grouped by geographic region, industry categories. groups, number of employees, and size 3. Estimate the distribution of i. Methodology for the Standard Salary of city. The Department then set the earnings for these workers. Level and Comparison to Past long test salary levels so that no more 4. Identify the salary level that is Methodologies than about 10 percent of exempt EAP equal to a pre-determined percentile of The Department in this rulemaking is employees in the lowest-wage region, the distribution. setting the standard salary level at the lowest-wage industry, smallest The population of workers considered 40th percentile of weekly earnings of establishment group, or smallest city for purposes of setting the salary level full-time salaried workers in the lowest- group would fail to meet the test. Kantor depends on whether the 2004 method or wage Census Region (currently the Report at 6–7.131 132 The Department the Kantor long test method is used. In South). This methodology differs then set the short test salary level in replicating both methods, the somewhat from previous revisions to relation to, and significantly higher Department limited the population to the salary levels but the general concept than, the long test salary levels. This workers subject to the FLSA and holds: Define a relevant population of methodology is referred to as the Kantor covered by the Department’s part 541 workers, estimate an earnings provisions, and excluded exempt EAP distribution for that population, then set 131 The Kantor long test method was based on an workers in named occupations, and a salary level that corresponds to a analysis of a survey of exempt workers as those exempt under another (non-EAP) determined by investigations conducted by WHD. designated percentile of that Subsequent analyses, including both the 2004 exemption. For the 2004 method, the rulemaking and this Final Rule, have estimated 130 On a quarterly basis, BLS publishes a table of exempt status using multiple data sources. 133 The Department followed the same deciles of the weekly wages of full-time nonhourly 132 Because the salary level test is likely to have methodology used in the 2004 Final Rule for workers, calculated using CPS data, which the largest impact on the low-wage segments of the estimating the Kantor long test method with minor employers can use to help anticipate the likely economy (e.g., low-wage regions and industries), adjustments. In an attempt to more accurately amount of automatically updated salary levels. See salaries in those segments were selected as the basis estimate the Kantor long test method, for example, http://www.bls.gov/cps/research_series_earnings_ for the required salary level under the Kantor long this analysis included non-MSAs as a low-wage nonhourly_workers.htm. test method. sector as Kantor did but the 2004 revisions did not.

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Department further limited the Therefore, for the Kantor long test least one of the low-wage categories and population to full-time salaried workers, method the East South Central Census in the 2004 population (full-time and for the Kantor long test method Division is considered the lowest-wage salaried workers). From these further limited the population of geographical area.134 The Department distributions, alternate salary levels interest by only including those workers used three low-wage industries: Leisure were identified based on pre- determined as likely to be EAP exempt and hospitality, other services, and determined percentiles. For the Kantor 135 (see more detailed methodology in . The long test method, the salary level for the section VI.C. and Appendix A). Department also considered non-MSAs long duties test is identified based on In the 2004 Final Rule, the as a low-wage sector in the Kantor long the 10th percentile of weekly earnings Department identified two low-wage test method. The 2004 revision did not for likely EAP exempt workers, while categories: The South (low-wage consider population density but the the 2004 method salary level is geographic region), and the retail Kantor long test method examined industry (low-wage industry). In the earnings across population size groups. identified based on the 20th percentile current rulemaking, the Department In conclusion, for this analysis the 2004 of weekly earnings for both exempt and identified low-wage categories by method looks at workers in the South nonexempt salaried workers. Using comparing average weekly earnings and the three low-wage industries, 2015 quarter 3 CPS MORG data, the across categories for the populations of whereas the Kantor long test method Kantor long test method resulted in a workers used in the Kantor long test looks at workers in the East South salary level of $684 per week, and the method and the 2004 method. The Central Division, non-MSAs, and the 2004 method resulted in a salary level South was determined to be the lowest- three low-wage industries. of $596 per week.136 Table 9 presents wage Census Region and was used for Next, the Department estimated the the distributions of weekly earnings the 2004 method; however, the distributions of weekly earnings of two used to estimate the salary levels under Department chose to use a more detailed populations: (1) Workers who are in at the method used in this Final Rule, the geographical break-down for the Kantor least one of the low-wage categories and NPRM method, the 2004 method, and long test method to reflect the in the Kantor population (likely exempt the Kantor long test method. geographic categories Kantor used. workers), and (2) workers who are in at

TABLE 9—WEEKLY EARNINGS DISTRIBUTIONS

Weekly Annual earnings a earnings Full-time salaried 2015Q4 b Percentile b Kantor Long Full-time salaried 2015Q4 2004 Method Kantor Long 2004 Method Test Method Test Method 2015Q3 c 2015Q3 c South Nationally 2015Q3 d South Nationally 2015Q3 d

10 ...... $479 $509 $429 $684 $24,908 $26,468 $22,319 $35,560 20 ...... 633 692 596 817 32,916 35,984 31,015 42,491 30 ...... 768 838 726 949 39,936 43,576 37,749 49,332 40 ...... 913 972 844 1,110 47,476 50,544 43,878 57,739 50 ...... 1,054 1,146 988 1,259 54,808 59,592 51,381 65,451 a Weekly earnings multiplied by 52. b BLS. Available at: http://www.bls.gov/cps/research_series_earnings_nonhourly_workers.htm. c Full-time salaried workers in the South or employed in a low-wage industry (excludes workers not subject to the FLSA, not subject to the sal- ary level test, and in agriculture or transportation). Quarter 3 was used instead of Q4 because at the time of the analysis this was the most re- cently available data. d Salaried, white collar workers who earn at least $455 per week, pass the EAP duties test, and either live in the East South Central Division or a non-MSA or are employed in a low-wage industry (excludes workers not subject to FLSA, not subject to the salary level test, and in agriculture or transportation). Quarter 3 was used instead of Q4 because at the time of the analysis this was the most recently available data.

In response to the NPRM, the Iowa disagrees with IABI that we misapplied elimination of the long duties test and Association of Business and Industry the Kantor long-test methodology. As allows for reliance on the current (IABI) commented that the Department discussed at length in the NPRM, the standard duties test; (2) appropriately incorrectly replicated the Kantor long Department replicated the Kantor distinguishes between workers who are test methodology. Kantor determined methodology as closely as possible eligible for overtime and those who may the salary levels by looking separately at given changes in data availability. See be EAP exempt in all regions and low-wage regions, less populated 80 FR 38557. industries; (3) is easy to calculate and geographic regions, and low-wage thus easy to replicate, creating ii. Rationale for the Methodology industries and then identifying a single transparency through simplicity; and (4) Chosen salary level that fits within these salary produces predictable salary levels. numbers. IABI asserted that we The chosen methodology—the 40th The salary level test has historically misapplied the methodology by percentile of full-time salaried workers been intended to serve as an initial aggregating these low-wage sectors into in the lowest-wage Census Region—was bright-line test for overtime eligibility a single group. The Department selected because it (1) corrects for the for white collar employees. As

134 The East South Central Division is a subset of depends on whether the Kantor long test method or industries for consistency and because these three the South and includes Alabama, Kentucky, the 2004 method’s population was used. Therefore, continue to be the three lowest-wage industries. Mississippi, and Tennessee. If the South is used three industries were considered low-wage. For the 136 Quarter 3 was used instead of quarter 4, which instead, the resulting salary levels would increase Final Rule, the ‘‘other services’’ industry was was used for the distribution of all full-time salaried slightly. consistently the lowest-wage industry. However, workers, because at the time the analysis was 135 In the NPRM, the Department found that the the Department continues to use all three low-wage industry with the lowest mean weekly earnings conducted this was the most recently available data.

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discussed previously, however, there classification as exempt, while the effectiveness of the salary level as a will always be white collar overtime- minimizing the number of employees bright-line test delineating exempt and eligible employees who are paid above disqualified from the exemption even nonexempt workers. In the NPRM, the the salary threshold. A low salary level though their primary duty is EAP Department estimated that 13.5 percent increases the number of these exempt work. of overtime-eligible white collar workers employees. The necessity of applying In the Final Rule, the Department earning between the current salary level the duties test to these overtime- corrects for the elimination of the long and the proposed salary level were protected employees consumes duties test and sets a salary level that misclassified. 80 FR 38559. employer resources, may result in works in tandem with the standard The Department updated our estimate misclassification (which imposes duties test to appropriately classify of potential misclassification based on additional costs to employers and white collar workers as entitled to the salary level set in this Final Rule. society in the form of litigation), and is minimum wage and overtime protection The Department’s analysis of an indicator of the effectiveness of the or potentially exempt. Thus, while the misclassification draws on CPS data and salary level. Similarly, there will always standard salary level set by the looked at workers who are white collar, be employees performing bona fide EAP Department is higher than the level the salaried, subject to the FLSA and duties who are paid below the salary Kantor long test or 2004 methods would covered by part 541 regulations, earn at threshold; the inability of employers to generate, it is set at the low end of the least $455 but less than $913 per week, claim the EAP exemption for these range of the historical short test levels, and fail the duties test. Because only employees is also an indicator of the based on the ratios between the short workers who work overtime may receive effectiveness of the salary level. test and long test levels, and much overtime pay, when determining the Selecting the standard salary level will lower than the historical average for the share of workers who are misclassified inevitably affect the number of workers short test. Between 1949 and 2003, the the sample was limited to those who falling into each of these two categories. ratio of the short to long salary tests usually work overtime.138 Workers were ranged from approximately 130 percent considered misclassified if they did not 1. Correcting for the Elimination of the to 180 percent. The low end of this receive overtime pay.139 The Long Duties Test range would result in a salary level of Department estimates that 12.8 percent The Kantor long test method sought to $889; the high end would result in a of workers in this analysis who usually minimize the number of white collar salary of $1,231 (measured in FY2015 work overtime do not receive overtime employees who pass the long duties test dollars). The short salary level updates compensation and are therefore but were excluded from the exemption between 1949 and 2003 averaged $1,100 misclassified as exempt. Applying this by the salary threshold and therefore set per week (measured in FY2015 estimate to the sample of white collar the salary level at the bottom 10 percent dollars).137 At the 40th percentile of salaried workers who fail the duties test of earnings of exempt EAP employees in weekly earnings of full-time workers in and earn at least $455 but less than low-wage regions and industries so as to the South, 9.9 million white collar $913, the Department estimates that prevent ‘‘disqualifying any substantial employees would no longer be subject there are approximately 732,000 white number of such employees.’’ Kantor to the standard duties test (4.2 million collar salaried workers earning at least Report at 5. This method was based on currently EAP exempt employees who $455 but less than $913 who are the long/short test structure, in which would be newly entitled to overtime overtime-eligible but whose employers employees paid at lower salary levels protection due to the increase in the do not recognize them as such.140 These were protected by significantly more salary threshold and 5.7 million employees’ entitlement to overtime pay rigorous duties requirements than are overtime eligible white collar employees will now be abundantly evident. part of the current standard duties test. who are paid between $455 and $913 Table 10 provides estimates of the This approach, however, does not per week whose exemption status extent of misclassification of workers as sufficiently take into account the would no longer depend on the exempt among first-line supervisors/ inefficiencies of applying the duties test application of the duties test). As managers in a variety of industries using to large numbers of overtime-eligible discussed in section IV.A.iv., the the same method of looking at white white collar employees and the Department believes that many of the collar salaried employees who fail the possibility of misclassification of those workers who will no longer be exempt duties test and who report working employees as exempt. are currently inappropriately classified more than 40 hours a week but do not As discussed in section IV.A., for because of the mismatch between the report receiving overtime many decades the long duties test— standard duties test and the standard compensation.141 The Department’s which limited the amount of time an salary level. The final salary threshold analysis found that 41 percent of first- exempt employee could spend on will therefore more efficiently line supervisors/managers of food nonexempt duties and was paired with distinguish between employees who a lower salary level—existed in tandem may meet the duties requirement of the 138 We have excluded workers who are in named occupations or are exempt under another non-EAP with a short duties test—which did not EAP exemption and those who do not, contain a specific limit on the amount exemption. without necessitating a return to the 139 of nonexempt work and was paired with Overtime pay status was based on worker more detailed long duties test. responses to the CPS MORG question concerning a significantly higher salary level. In whether they receive overtime pay, tips, or 2004, the Department eliminated the 2. Appropriately Distinguishing commissions at their job (‘‘PEERNUOT’’ variable). long and short duties tests and created Overtime-Eligible White Collar Workers 140 The Department applies the misclassification the new standard duties test, based on and Those Who May Be EAP Exempt estimate derived here to both the group of workers who usually work more than 40 hours and to those the short duties test. The creation of a The revised salary level also reduces who do not. single standard test that did not limit the likelihood of workers being 141 The occupational category of first-line nonexempt work caused new misclassified as exempt from overtime supervisors and managers illustrates the concept uncertainty as to what salary level is across a range of industries. This category of pay, providing an additional measure of workers may be susceptible to potential sufficient to ensure that employees misclassification because they are the first level of intended to be overtime-protected are 137 This is the average of the values of the short management above overtime-protected line not subject to inappropriate test salary level inflated to 2015 dollars. workers.

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preparation and serving workers, and 35 workers who fail the duties test and places (97,000 workers). In these percent of first-line supervisors/ report working more than 40 hours a industries, the Department estimates the managers of retail sales workers are week but do not receive overtime rate of misclassification to be 41percent misclassified. compensation are retail trade (125,000 of food services and drinking workers The Department also found that the workers) and food services and drinking and 18 percent of retail workers. industries with the largest number of

TABLE 10—ESTIMATES OF MISCLASSIFICATION AMONG FIRST-LINE SUPERVISORS AND MANAGERS COVERED BY THE FINAL RULE WHO EARN AT LEAST $455 AND LESS THAN $913

Overtime eligible salaried workers Percent who Percent First-line supervisors/manager occupations who earn between usually work $455 and $913 misclassified b a per week >40 hours (1,000s)

Total ...... 5,697 15.0 12.8

First-line supervisors/managers of . . .

Retail sales workers ...... 208.5 39.9 34.6 Non-retail sales workers ...... 66.0 32.6 27.5 Production and operating workers ...... 62.4 26.3 24.0 Construction trades and extraction workers ...... 58.5 19.9 19.0 Food preparation and serving workers ...... 55.5 44.9 41.0 Housekeeping and janitorial workers ...... 35.0 22.0 17.2 Mechanics, installers, and repairers ...... 28.9 29.2 27.6 Office and administrative support workers ...... 26.9 14.0 13.1 Personal service workers ...... 21.0 31.5 24.3 Landscaping, lawn service, and grounds keeping workers ...... 17.4 29.3 26.0 Source: CPS extract. Workers who are white collar, salaried, subject to the FLSA and covered by the part 541 regulations, earn at least $455 but less than $913 per week, and fail the duties test. a Percent of overtime eligible salaried workers who usually work more than 40 hours per week. This differs from the 40 percent of all workers who work more than 40 hours in a week at least once per year because it only includes overtime eligible workers and excludes occasional over- time workers. b Share of respondents who report usually working more than 40 hours per week and do not report that they ‘‘usually receive overtime pay, tips, or commissions.’’

Since the NPRM was published, test are currently misclassified as group is the number of salaried white RAND has conducted a survey to exempt.143 collar workers who satisfy the standard identify the number of workers who The Department also assessed the duties test but earn less than a specific may be misclassified as EAP exempt. impact of the standard salary level as a standard salary level. The Department The survey, a special module to the bright-line test for EAP exemption by makes this assessment at the current American Life Panel, asks respondents examining: (1) The number of salaried salary level ($455) and the final salary (1) hours worked, (2) whether they are white collar workers who pass the level ($913), while holding all other paid on an hourly or salary basis, (3) standard salary level test but not the factors determining exempt status duties test and (2) the number of their typical earnings, (4) whether they constant (e.g., not considering whether salaried white collar workers who pass perform certain job responsibilities that the duties test is correctly applied or the standard duties test but not the potential employer response to the are treated as proxies for whether they salary level test.144 This first group is would justify exempt status, and (5) change in the salary level test). equivalent to the number of salaried Examining the impact of the salary whether they receive any overtime pay. white collar workers who are eligible for threshold in isolation from the Using these data, Susann Rohwedder overtime pay because they do not pass 142 application of the duties test or and Jeffrey B. Wenger found ‘‘11.5 the standard EAP duties test, but earn employer adjustments to pay or hours percent of salaried workers were above a specific salary level. The second does not provide a complete picture of classified as exempt by their employer the impact of a new salary threshold. It although they did not meet the criteria 143 The number of misclassified workers does, however, allow the Department to for being so.’’ Using RAND’s estimate of estimated based on the RAND research cannot be directly compared to the Department’s estimates evaluate the effectiveness of the salary the rate of misclassification (11.5 because of differences in data, methodology, and level in protecting overtime-eligible percent), at the new salary level, the assumptions. Although it is impossible to reconcile white collar employees without unduly Department estimates that the two different approaches without further information, by calculating misclassified workers as excluding from the exemption approximately 1.8 million salaried a percent of all salaried workers in its sample, employees performing EAP duties. workers earning between $455 and $913 RAND uses a larger denominator than the As a benchmark, the Department per week who fail the standard duties Department. If calculated on a more directly comparable basis, the Department expects the estimates that at the current standard RAND estimate of the misclassification rate would salary threshold, there are 12.2 million still be higher than the Department’s estimate. salaried white collar workers who fail 144 These populations are limited to salaried, 142 Rohwedder, S. and Wenger, J.B. (2015). The the standard duties test and are white collar workers subject to the FLSA and the therefore overtime eligible, but earn at Fair Labor Standards Act: Worker Misclassification Department’s part 541 regulations, and not eligible and the Hours and Earnings Effects of Expanded for another (non-EAP) exemption, not in a named least the $455 threshold, while there are Coverage. RAND Labor and Population. occupation, and not HCE only. only 838,000 salaried white collar

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workers who pass the standard duties threshold but do not pass the duties test rigorous long duties test, which had a test but earn less than the $455 level. would be reduced almost in half to 6.5 cap on the percentage of time an Thus the number of salaried white million (approximately 47 percent of all employee could spend on nonexempt collar workers who pass the current white collar salaried employees who fail duties, and therefore were not included salary threshold test but not the duties the duties test). At a salary level of $913, under that approach. Further, the test is nearly 15 times the number of the number of salaried white collar number of salaried white collar workers salaried white collar workers who pass workers who would pass the standard who pass the new salary threshold test the duties test but are paid below the duties test but earn less than the salary but not the duties test (6.5 million) is 31 salary threshold. This underscores the level would increase to 5.0 million percent higher than the number of large number of overtime-eligible (approximately 22 percent of all white salaried white collar workers who pass workers for whom employers must collar salaried employees who pass the the duties test but are paid below the perform a duties analysis, and who may standard duties test). While this number salary threshold (5.0 million). be at risk of misclassification as EAP is higher than the number of such exempt. At a salary threshold equal to employees under the Kantor long test Figure 3: Percentage of White Collar the 40th percentile of full-time salaried method (approximately 10 percent), it Salaried Workers by Earnings and workers in the South ($913), the number includes employees who would have Duties Test Status for National, Highest- of overtime-eligible salaried white collar been overtime-eligible because they Wage, and Lowest-Wage Regions workers who would earn at least the would not have passed the more

As illustrated in Figure 3, as the salary threshold (ascending lines).145 As standard duties test. Because the long salary threshold increases there is a previously discussed, the increase in the duties test included a limit on the decrease in the share of overtime- share from the traditional 10 percent of amount of nonexempt work that could eligible white collar workers for whom exempt employees excluded by the be performed, it could be paired with a employers would be required to make Kantor long test method reflects the low salary that excluded few employees an assessment under the duties test and shift to a salary level appropriate to the performing EAP duties. In the absences who would be subject to possible of such a limitation in the duties test, it misclassification (descending lines). At 145 Of employees who are paid on a salary basis is necessary to set the salary level higher the same time, as the salary level of at least $455 per week and meet the standard (resulting in the exclusion of more duties test, approximately 81 percent earn at least increases there is an increase in the employees performing EAP duties) share of salaried white collar workers the new level of $913 per week. Conversely, among overtime-eligible salaried white collar employees because the salary level must perform who pass the standard duties test but earning at least $455 per week, approximately 47 more of the screening function are screened from exemption by the percent earn less than the new salary level.

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previously performed by the long duties wage Census Region ($913 per week) that limits the data set to currently test. falls below the estimate for the East exempt workers—uses the value of the At the current salary level (far left of South Central division. This further current salary level test to identify the Figure 3), there is a very large gap supports that the Department’s change population of workers from which the between salaried white collar workers in the Final Rule to the lowest-wage earnings distribution is determined. who are overtime eligible but earn at Census Region establishes a salary level Therefore, the Kantor long test method least the threshold (about 87 percent of that is appropriate for classifying limits the pool of workers in the sample all salaried white collar workers who workers as entitled to minimum wage used to set the salary level to those who fail the duties test are paid at least $455 and overtime pay or potentially exempt meet the currently required salary level, per week) and salaried white collar in even the lowest wage areas. while the 2004 method and the new workers who pass the standard duties method implemented in this Final Rule 3. Simplicity and Transparency test but do not meet the current salary do not exclude workers with salaries level (about 4 percent of all salaried The method of basing the standard below the current salary level. Since white collar workers who pass the salary threshold on a particular FY2004, the salary levels that would duties test are paid less than $455 per percentile of weekly earnings of full- have been generated by the Kantor week). At the salary level of the 40th time salaried employees in the lowest- method increased by 3.6 percent on percentile of weekly earnings of full- wage Census Region involves less average annually.148 Conversely, since time salaried workers in the South ($913 estimation than previous updates, FY2004, the 40th percentile of earnings per week), the percentage of overtime- making it easier to implement, less of full-time salaried workers in the eligible salaried white collar workers prone to error, and more transparent South has increased by an average of 2.4 who earn above the threshold (and thus than before. The method reduces percent annually. Similarly, the salary would be at risk of misclassification) computation by simplifying the levels that would have been generated still remains higher than the percentage classification of workers to just two by the 2004 method (keeping low-wage of salaried white collar workers who criteria: wage or salaried, and full-time sectors constant) increased 2.5 percent pass the duties test but earn less than or part-time. Application of the Kantor annually on average. This explains why the salary threshold (and would become long test method, in particular, would the salary levels generated by the Kantor overtime protected).146 The salary involve significant work to replicate long test method and the 2004 method threshold would have to be since one would need to identify likely have diverged significantly since 2004 considerably higher (at a weekly salary EAP exempt workers, a process which (in the third quarter of 2015, Kantor = level of approximately $1,100) before requires applying the standard duties $684; 2004 = $596). the percentage of salaried white collar test to determine the population of For example, in 2003 the Kantor long workers who earn less than the workers used in the earnings test method’s population of interest was threshold but pass the duties test would distribution. In addition, both the limited to workers earning at least $155 equal the percentage who are overtime Kantor long test and 2004 methods per week (the 1975 long test salary eligible but earn at least the salary exclude workers not subject to the level); in this Final Rule the Kantor long threshold. While some commenters FLSA, not subject to the salary level test method’s population was restricted favored setting the salary level at this test, or in agriculture or transportation. to workers earning at least $455 per intersection point, the Department The method adopted in this Final Rule week. Therefore the population concludes that the resulting salary level is easier for stakeholders to replicate considered in the Kantor long test would unduly impact low-wage regions and understand because the standard method changes each time the salary and industries. duties test does not need to be applied level is changed. The Department’s The Department has also looked at the to determine the population of workers Final Rule, like the 2004 method, impact of the new salary level on these used in the earnings distribution. considers all full-time salaried workers two groups of workers in low-wage (East International Foodservice Distributors and does not limit the pool to only those South Central) and high-wage (Pacific) Association, IABI, and others criticized workers who meet the current salary Census divisions in addition to the Department for not restricting the level test, thus avoiding this potential 147 nationally. For the East South Central CPS sample to workers subject to the shortcoming of the Kantor long test Census division, the salary level at part 541 regulations or subject to the method. which the percentages of the two groups salary level test. As explained in section are about equal is approximately $995 IV.A.iv., the Department believes these iii. Standard Salary Levels With per week, while in the Pacific Census white collar professionals are part of the Alternative Methodologies division, the salary at which the universe of executive, administrative, When assessing the standard salary percentages of the two groups are equal and professional employees who level, the Department evaluated several is approximately $1,217 per week. The Congress intended to exempt from the alternatives in addition to the level Department’s new salary level of the FLSA’s minimum wage and overtime chosen. This section presents the 40th percentile of weekly earnings of requirements and including them in the alternative salary levels considered and full-time salaried workers in the lowest- data set achieves a sample that is more the bases for identifying those representative of EAP salary levels alternative levels. While commenters 146 Approximately 47 percent of white collar throughout the economy. proposed other methods for calculating salaried workers who do not pass the duties test the salary level, the Department earn at least the new salary level ($913 per week). 4. Consistency and Predictability determined that these alternatives Conversely, approximately 22 percent of employees A method that produces very different who pass the standard duties test earn less than the remained the best comparators for new salary level. salary levels in consecutive years may evaluating the chosen salary level 147 Of the nine Census divisions, the East South reduce confidence that the salary levels methodology. As shown in Table 11, the Central and Pacific divisions correspond to the in any given year are optimal. The alternative salary levels evaluated are: divisions with the lowest and highest earnings growth rate using the Kantor long test using the Kantor long test method. The East South Central includes Alabama, Kentucky, Mississippi, method varies across years. The primary 148 Values calculated using geometric growth and Tennessee. The Pacific includes Alaska, reason for this is because the Kantor rates and starting in FY2004, the last time the salary California, Hawaii, Oregon, and Washington. long test method—or any other method level was increased.

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• Alternative 1: Inflate the 2004 • Alternative 4: Use the 40th earnings to reflect the average historical ratio weekly salary level to FY2015 dollars, percentile of full-time salaried workers between the long and short test salary which results in a salary level of $570 nationally. This was the methodology levels. This results in a salary level of per week. proposed in the NPRM. This results in $1,019 per week. • Alternative 2: Use the 2004 method a salary level of $972 per week. • Alternative 6: Inflate the 1975 short to set the salary level at $596 per week. • • Alternative 3: Use the Kantor long Alternative 5: Adjust the salary duties test salary level, which is $1,100 test level of $684 per week. level from the Kantor long test method in FY2015 dollars.

TABLE 11—STANDARD SALARY LEVEL AND ALTERNATIVES, FY2017

Total increase a Alternative Salary level (weekly/annually) $ %

Alt. #1: Inflate 2004 level b ...... $570/$29,640 115 25.3 Alt. #2: 2004 method c ...... 596/31,015 141 31.1 Alt. #3: Kantor long test c ...... 684/35,568 229 50.3 Final Rule method (40th percentile of full-time salaried workers in lowest-wage Census Region) ..... 913/47,476 458 100.7 Alt. #4: 40th percentile of full-time salaried workers nationally ...... 972/50,544 517 113.6 Alt. #5: Kantor short test c ...... 1,019/52,984 564 123.9 Alt. #6: Inflate 1975 short test level b ...... 1,100/57,205 645 141.8 a Change between salary level or alternative and the salary level set in 2004 ($455 per week). b Value in FY2015$. Inflated using CPI–U to FY2015$ (most recent data available). c Data for 2015, quarter 3.

Alternative 1 inflates the 2004 from exemption too many workers who the Department used the average standard salary level ($455) to FY2015 meet the duties test. difference between the Kantor short and dollars using the CPI–U. This produces Alternative 5 (Kantor short test) is long tests for this alternative, the ratio a salary level of $570 per week. As also based on the Kantor method but, of the short to long salary tests ranged noted above, the 2004 method sets the whereas alternative 3 generates the from approximately 130 percent to 180 standard salary level at approximately salary level associated with the long percent between 1949 and 2004. The the 20th percentile of full-time salaried duties test, alternative 5 generates a low end of this range would result in a workers in the South and retail level more closely resembling the salary weekly salary of $889; the high end industry. Alternative 2 applies this associated with the short duties test, would result in a salary of $1,231. The methodology to more recent data which the Department set as a function Department rejected the use of the (quarter 3 of 2015), resulting in a salary of the Kantor long test. In the 2004 Final Kantor short test, as explained in this level of $596 per week. Alternative 3 Rule, the Department replaced the preamble, because we concluded that a produces the salary level using the structure of separate short and long standard salary level of $1,019 per week Kantor method for the long duties test, duties tests with a single standard might exclude from exemption too resulting in a level of $684 per week. As duties test based on the less restrictive many bona fide EAP workers in certain we explain earlier in the preamble, the short duties test, which had historically regions or industries. Department rejected the use of these been paired with a higher salary level Alternative 6 inflates the 1975 short alternatives because they pair a salary test. However, the Department set the duties test salary level to $1,100 per level appropriate for use with the long standard salary level in 2004 at a level week in FY2015 dollars. Similar to duties test with a duties test appropriate that was equivalent to the Kantor long alternative 5, the Department rejected for use with the short test salary. test salary level, which was associated the use of a short test salary level due Alternative 4 sets the standard salary with the long duties test and limited the to the concern that it might exclude equal to the 40th percentile of weekly amount of nonexempt work that the from exemption too many bona fide EAP workers in certain regions or earnings of all full-time salaried workers employee could perform. In alternative industries. nationally. This is the approach that the 5, the Department therefore considered Section VI.D. details the transfers, Department proposed in the NPRM. revising the standard salary level to costs, and benefits of the new salary This alternative uses the same approximate the short test salary that level and the above alternatives. A methodology as this Final Rule—setting better matches the standard duties test. comparison of the costs and benefits the salary level at the 40th percentile of On average, the salary levels set in 1949 supports the Department’s decision to earnings—but uses a data set including through 1975 were 149 percent higher set the standard salary level of the 40th full-time salaried workers nationwide for the short test than the long test. percentile of weekly earnings of all full- instead of limiting the population to the Therefore, the Department inflated the time salaried workers in the South ($913 lowest-wage Census Region. The 40th Kantor estimate of $684 by 149 percent, per week). percentile of earnings of all full-time which generated a short salary level 149 salaried workers nationally, in the equivalent of $1,019 per week. While iv. Methodology for the HCE Total fourth quarter of 2015, is $972. As Annual Compensation Level and 149 The Department estimated the average historic Alternative Methods discussed in more detail in section ratio of 149 percent as the simple average of the IV.A.iv., the Department declined to fifteen historical ratios of the short duties salary The Department sets the HCE adopt this method in response to level to the long duties salary level (salary levels compensation level equal to the annual commenters’ concerns that the proposed were set in 5 years and in each year the salary level varied between the three exemptions: executive, equivalent of the 90th percentile of the salary level could disproportionately administrative, and professional). If the Department impact workers in low-wage regions and had weighted the average ratio based on the length would have yielded an average historic ratio of 152 industries by inappropriately excluding of time the historic salary levels were in effect, this percent and a salary level of $1,039.

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distribution of earnings of all full-time period, and therefore the Department and between employees, direct salaried workers nationally. BLS does not believe this alternative employer costs, and DWL depend on calculated the salary level from the CPS accurately reflects wage growth since how employers respond to the Final MORG data by limiting the population 2004. Finally, HCE alternative 3 would Rule. to nonhourly workers who work full- set the annual compensation level at In order to increase the sample size time (i.e., at least 35 hours per week) $149,894. The Department believes this and the reliability and granularity of and determining the 90th percentile of compensation level would be too high results in this analysis, the Department the resulting weighted weekly earnings to provide a meaningful alternative test used three years (FY2013–FY2015) of distribution. The 90th percentile of for exemption. Thus, the Department CPS MORG data to represent the weekly earnings in the fourth quarter of concludes that adjusting the HCE total FY2015 labor market. Monetary values 2015 was $2,577. This was then annual compensation to reflect the 90th in FY2013 and FY2014 were inflated to multiplied by 52 to determine the percentile of earnings of full-time FY2015 dollars and the sample was annual earnings equivalent ($134,004). salaried workers nationwide ($134,004) reweighted to reflect the population of This method uses a percentile towards strikes the appropriate balance. potentially affected workers in FY2015. the top of the nationwide earnings Afterwards, this pooled sample was distribution to reflect the minimal D. Impacts of Revised Salary and Compensation Level Test Values adjusted to reflect the FY2017 economy duties criteria associated with the by further inflating wages and sampling highly compensated employee i. Overview and Summary of Quantified weights to match projections for exemption. Impacts FY2017. See section VI.B.ii. The Department also evaluated the following alternative HCE compensation The impacts of increasing the EAP Table 12 presents the projected levels: salary and compensation levels will impact on affected workers, costs, • HCE alternative 1: Leave the HCE depend on how employers respond. transfers, and DWL associated with compensation level unchanged at Employer response is expected to vary increasing the standard EAP salary level $100,000 per year. by the characteristics of the affected from $455 per week to the 40th earnings • HCE alternative 2: Inflate the 2004 EAP workers. For workers who usually percentile of full-time salaried workers level using CPI–U to $125,320 per year work 40 hours a week or less, the in the South, $913 per week; increasing in FY2015 dollars. Department assumes that employers the HCE compensation level from • HCE alternative 3: Set the HCE will reclassify these affected EAP $100,000 to the 90th earnings percentile compensation level at $149,894 per workers as overtime-eligible and will of full-time salaried workers nationally, year, which is approximately the pay them the same weekly earnings for $134,004 annually; and updating both of annualized level of weekly earnings the same number of hours worked. these levels triennially. The Department exceeded by 6.3 percent of full-time While these employees will become estimated that the direct employer costs salaried workers. This is the same overtime eligible, employers can of this Final Rule will total $677.9 percent of such workers that exceeded continue to pay their current salaries million in the first year, with average the HCE compensation level in 2004. and will not need to make any annualized direct costs of $295.1 See 69 FR 22169. adjustments as long as the employees’ million per year over 10 years. In The Department continues to believe hours do not exceed 40 hours in a addition to these direct costs, this Final that HCE alternative 1 is inappropriate workweek. For affected EAP employees Rule will also transfer income from because leaving the HCE compensation who work overtime, employers may: (1) employers to employees. Year 1 level unchanged at $100,000 per year Pay the required overtime premium for transfers will equal $1,285.2 million, would ignore more than 10 years of the current number of overtime hours with average annualized transfers wage growth. In FY2017, approximately based upon the current implicit regular estimated at $1,189.1 million per year 20 percent of full-time salaried workers rate of pay; (2) reduce or eliminate over 10 years. Finally, the 10-year are projected to earn at least $100,000 overtime hours; (3) reduce the regular average annualized DWL was estimated annually, more than three times the rate of pay so total weekly earnings and to be $9.2 million. Potential employer share who earned that amount in the hours do not change after overtime is costs due to reduced profits and 2004 Final Rule analysis. HCE paid; (4) increase employees’ salaries to additional hiring were not quantified alternative 2 uses the CPI–U to inflate the new salary level; or (5) use some but are discussed in section VI.D.iii. the value set in 2004 instead of using combination of these responses. Benefits were also not quantified but are the higher wage growth over that time Transfers from employers to employees discussed in section VI.D.vii.

TABLE 12—SUMMARY OF AFFECTED WORKERS AND REGULATORY COSTS AND TRANSFERS, STANDARD AND HCE SALARY LEVELS

Future years b Average annualized value Impact a Year 1 Year 2 Year 10 3% real rate 7% real rate

Affected Workers (1000s)

Standard ...... 4,163 3,893 5,045 ...... HCE ...... 65 73 217 ......

Total ...... 4,228 3,965 5,261 ......

Direct Employer Costs (Millions FY2017$)

Regulatory familiarization c ...... $272.5 $0.0 $23.1 $37.6 $42.4 Adjustment d ...... 191.4 1.5 5.9 25.4 29.0

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TABLE 12—SUMMARY OF AFFECTED WORKERS AND REGULATORY COSTS AND TRANSFERS, STANDARD AND HCE SALARY LEVELS—Continued

Future years b Average annualized value Impact a Year 1 Year 2 Year 10 3% real rate 7% real rate

Managerial ...... 214.0 206.6 255.1 225.0 223.6

Total direct costs e ...... 677.9 208.0 284.2 288.0 295.1

Transfers from Employers to Workers (Millions FY2017) f

Due to minimum wage ...... $34.3 $28.5 $17.8 $23.2 $23.8 Due to overtime pay ...... 1,250.8 907.9 1,589.4 1,178.5 1,165.3

Total transfers e ...... 1,285.2 936.5 1,607.2 1,201.6 1,189.1

DWL (Millions FY2017) g

DWL ...... 6.4 8.7 11.1 9.3 9.2 a Additional costs and benefits of the rule that could not be quantified or monetized are discussed in the text. b These costs/transfers represent a range over the nine-year span. c Regulatory familiarization costs occur only in years when the salary levels are updated (Years 1, 4, 7, and 10). d Adjustment costs occur in all years when there are newly affected workers, including years when the salary level is not updated. Adjustment costs may occur in years without updated salary levels because some workers’ projected earnings are estimated using negative earnings growth. e Components may not add to total due to rounding. f This is the net transfer that we primarily describe as being from employers to workers. There may also be transfers between workers. More- over, some of these transfers may be intrapersonal (for instance, higher earnings may be offset by increased hours worked for employees who remain overtime-exempt or may be supplemented by reduced hours for some newly overtime-protected employees). g DWL was estimated based on the aggregate impact of both the minimum wage and overtime pay provisions. Since the transfer associated with the minimum wage is negligible compared to the transfer associated with overtime pay, the vast majority of this cost is attributed to the over- time pay provision.

ii. Affected EAP Workers duties test. This number excludes potentially affected EAP workers. The workers in named occupations who are Department also estimated that 65,000 1. Overview not subject to the salary tests or who workers would be affected by an Costs, transfer payments, DWL, and qualify for another (non-EAP) increase in the HCE compensation level benefits of this Final Rule depend on exemption. from $100,000 to the annual earnings the number of affected EAP workers and The Department estimated that equivalent of the 90th percentile of full- labor market adjustments made by increasing the standard salary level from time workers nationally (the number of employers. The Department estimated $455 per week to the 40th earnings potentially affected workers who earn at there were 22.5 million potentially percentile of all full-time salaried least $100,000 but less than $134,004 affected EAP workers: that is, EAP workers in the lowest-wage Census annually and pass the minimal duties workers who either (1) passed the salary Region (South, $913 per week) would test but not the standard duties test, basis test, the standard salary level test, affect 4.2 million workers (i.e., the about 0.3 percent of the pool of and the standard duties test, or (2) number of potentially affected workers potentially affected EAP workers). By passed the salary basis test, passed the who earn at least $455 per week but less Year 10 the total number of affected standard salary level test, the HCE total than $913 per week). These affected workers is predicted to increase to 5.3 compensation level test, and the HCE workers compose 18.5 percent of million.

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Table 13 presents the number of workers affected by the change in the standard salary level.151 Employers affected EAP workers, the mean number HCE annual compensation level average might respond by: Reclassifying such of overtime hours they work per week, 5.5 hours of overtime per week and earn employees to nonexempt status (either and their average weekly earnings. The an average of $2,181 per week ($113,389 paying at least the hourly minimum 4.2 million workers affected by the per year). wage and a premium for any overtime increase in the standard salary level Although most affected EAP workers hours, or its salary equivalent with half- average 1.4 hours of overtime per week who typically do not work overtime time paid for any overtime hours); and earn an average of $734 per week. might experience little or no change in reducing workers’ regular wage rates The average number of overtime hours their daily work routine, those who (provided that the reduced rates still is low because most of these workers regularly work overtime may experience exceed the minimum wage); increasing (3.3 million) do not usually work significant changes. The Department the employees’ salary to the salary level; overtime.150 However, the estimated expects that workers who routinely reducing or eliminating overtime hours; 825,000 affected workers who regularly work some overtime or who earn less work overtime average 11.1 hours of than the minimum wage are most likely or using some combination of these overtime per week. The 65,000 EAP to be tangibly impacted by the revised responses.

TABLE 13—NUMBER OF AFFECTED EAP WORKERS, MEAN OVERTIME HOURS, AND MEAN WEEKLY EARNINGS, FY2017

Affected EAP workers a Mean overtime Mean usual Type of affected EAP worker Number hours weekly (1,000s) % of total earnings

Standard Salary Level

All affected EAP workers ...... 4,163 100 1.4 $734 Earn less than the minimum wage b ...... 11 0.3 29.3 551 Regularly work overtime ...... 825 19.8 11.1 744 CPS occasionally work overtime c ...... 150 3.6 8.5 727

HCE Compensation Level

All affected EAP workers ...... 65 100 5.5 $2,181 Earn less than the minimum wage b ...... Regularly work overtime ...... 30 45.8 12.3 2,153 CPS occasionally work overtime c ...... 3 4.2 8.5 2,309 Note: Pooled data for FY2013–FY2015 projected to reflect FY2017. a Estimated number of workers exempt under the EAP exemptions who would be entitled to overtime protection under the updated salary lev- els (if their weekly earnings do not increase to the new salary levels). b The applicable minimum wage is the higher of the federal minimum wage and the state minimum wage. HCE workers will not be impacted by the minimum wage provision. These workers all regularly work overtime and are also included in that row. c Workers who do not usually work overtime but did in the CPS reference week. Mean overtime hours are actual overtime hours in the ref- erence week. Other workers may occasionally work overtime in other weeks. These workers are identified later when we define Type 2 workers.

150 That is, workers who report they usually work less than the applicable minimum wage (the higher earning the current $455 per week standard salary 40 hours or less per week (identified with variable of the state or federal minimum wage). The implicit level would earn less than the federal minimum PEHRUSL1 in CPS MORG). hourly wage is calculated as an affected EAP wage if they work 63 or more hours in a week 151 A small proportion (0.3 percent) of affected employee’s total weekly earnings divided by total ($455/63 hours = $7.22 per hour). EAP workers earns implicit hourly wages that are weekly hours worked. For example, workers

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The Department considered two types other workers, who did not work largest share of potentially affected of overtime workers in this analysis: overtime in the survey week, may work workers who are affected are ‘‘other regular overtime workers and occasional overtime. Because the survey week is a services’’ (30 percent) and leisure and overtime workers.152 Regular overtime representative week, the Department hospitality (30 percent). Impacts by workers typically worked more than 40 believes the prevalence of occasional industry are considered in section hours per week. Occasional overtime overtime in the survey week, and the VI.D.v. workers typically worked 40 hours or characteristics of these workers, is The management, business, and less per week, but they worked more representative of other weeks (even financial occupation category accounted than 40 hours in the week they were though a different group of workers for the most affected EAP workers by surveyed. The Department considers would be identified as occasional occupation (1.8 million). A large these two populations separately in the overtime workers in a different 153 number of workers are expected to be analysis because labor market responses week). affected in the professional and related to overtime pay requirements may differ 2. Characteristics of Affected EAP occupations category (1.4 million). The for these two types of workers. occupations with the largest share of In a representative week, an estimated Workers 152,000 occasional overtime workers In this section the Department potentially affected workers who are examines the characteristics of affected expected to be affected are farming, will be affected by either the standard 154 salary level or the HCE total annual EAP workers. Table 14 presents the fishing, and forestry (63 percent), compensation level increase (3.6 distribution of affected workers across office and administrative support (39 percent of all affected EAP workers; this industries and occupations. The percent), and services (37 percent). number does not match Table 13 due to industry with the most affected EAP Some commenters expressed concern rounding). They averaged 8.5 hours of workers was education and health about the impacts of the rule on non- overtime in weeks when they work at services (956,000 affected workers). profits organizations. The Department least some overtime. This group Other industries where a large number found that workers in non-profits are represents the number of workers with of workers are expected to be affected somewhat more likely to be affected by occasional overtime hours in the week are professional and business services the rulemaking; 25 percent of the CPS MORG survey was conducted. (704,000), financial activities (571,000), potentially affected workers in private In other weeks, these specific and wholesale and retail trade non-profits are affected compared to 18 individuals may not work overtime but (562,000). The industries with the percent in private for-profit firms.

TABLE 14—ESTIMATED NUMBER OF EXEMPT WORKERS WITH THE CURRENT AND UPDATED SALARY LEVELS, BY INDUSTRY AND OCCUPATION, FY2017

Affected as Workers Potentially share of Industry/occupation/non-profit subject to affected EAP Not-affected Affected potentially FLSA workers (millions) b (millions) c a affected (millions) (millions) (percent)

Total ...... 132.75 22.51 18.29 4.23 19

By Industry

Agriculture, forestry, fishing, & ...... 1.12 0.03 0.03 0.01 16 Mining ...... 1.04 0.23 0.21 0.02 10 Construction ...... 7.41 0.80 0.67 0.13 16 Manufacturing ...... 14.82 3.26 2.89 0.36 11 Wholesale & retail trade ...... 19.03 2.46 1.90 0.56 23 Transportation & utilities ...... 6.95 0.79 0.65 0.13 17 Information ...... 2.86 0.95 0.78 0.17 18 Financial activities ...... 9.21 3.43 2.86 0.57 17 Professional & business services ...... 14.22 4.64 3.94 0.70 15 Education & health services ...... 32.95 3.73 2.77 0.96 26 Leisure & hospitality ...... 12.58 0.78 0.54 0.23 30 Other services ...... 5.36 0.58 0.40 0.18 30 Public administration ...... 5.19 0.85 0.65 0.20 24

By Occupation

Management, business, & financial ...... 19.18 11.36 9.52 1.84 16 Professional & related ...... 30.30 7.66 6.31 1.35 18 Services ...... 23.61 0.20 0.13 0.08 37 Sales and related ...... 13.72 2.16 1.60 0.56 26 Office & administrative support ...... 17.82 0.94 0.57 0.37 39 Farming, fishing, & forestry ...... 0.84 0.00 0.00 0.00 63 Construction & extraction ...... 6.16 0.03 0.02 0.01 21

152 Regular overtime workers were identified in This analysis therefore accounts for workers who 154 There are only 33,000 potentially affected the CPS MORG with variable PEHRUSL1. work overtime at some point in the year, although workers in the farming, fishing, and forestry Occasional overtime workers were identified with they did not work overtime in the reference week. industry. Although a large share of potentially variables PEHRUSL1 and PEHRACT1. As described 153 The Department cannot identify which of the affected workers may be affected in this industry, in section VI.D.iv., some workers who are not many of these workers are exempt under another workers in the CPS sample work occasional observed working overtime in the reference week non-EAP exemption, and therefore their entitlement are assumed to be occasional overtime workers. overtime in a week other than the reference week. to overtime will not change.

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TABLE 14—ESTIMATED NUMBER OF EXEMPT WORKERS WITH THE CURRENT AND UPDATED SALARY LEVELS, BY INDUSTRY AND OCCUPATION, FY2017—Continued

Affected as Workers Potentially share of Not-affected Affected Industry/occupation/non-profit subject to affected EAP potentially FLSA workers (millions) b (millions) c a affected (millions) (millions) (percent)

Installation, maintenance, & repair ...... 4.63 0.04 0.03 0.01 15 Production ...... 8.31 0.08 0.07 0.01 17 Transportation & material moving ...... 8.20 0.03 0.02 0.01 24

By Non-Profit and Government Status

Non-profit, private d ...... 9.12 1.81 1.35 0.46 25 For profit, private ...... 105.08 18.80 15.49 3.31 18 Government (state, local, and federal) ...... 18.55 1.91 1.45 0.46 24 Note: Pooled data for FY2013–FY2015 projected to reflect FY2017. a Workers who are white collar, salaried, not eligible for another (non-EAP) overtime exemption, and not in a named occupation. b Workers who continue to be exempt after the increases in the salary levels (assuming affected workers’ weekly earnings do not increase to the new salary level). c Estimated number of workers exempt under the EAP exemptions who would be entitled to overtime protection under the updated salary lev- els (if their weekly earnings do not increase to the new salary levels). d As discussed in section VI.B.iii, estimates of workers subject to the FLSA do not exclude workers employed by enterprises that do not meet the enterprise coverage requirements because there is no reliable way of estimating this population. The estimates also do not exclude workers at non-covered enterprises who are not individually covered (because the estimates assume all workers are employed by covered entities). Al- though not excluding workers who work for non-covered enterprises would only impact a small percentage of workers generally, it may have a larger impact (and result in a larger overestimate) for workers in non-profits because when determining enterprise coverage only revenue derived from business operations, not charitable activities, are included.

Table 15 presents the distribution of considered in section VI.D.v. Although Department believes the salary level affected workers based on Census the vast majority of affected EAP adopted in this Final Rule (which we Regions and divisions, and MSA status. workers resided in MSAs (3.8 of 4.2 have adjusted downward from the The region with the most affected million, or 89 percent), this largely amount proposed in the NPRM to workers is the South (1.7 million). reflects the fact that 86.7 percent of all account for these low-wage areas) is However, as a share of potentially workers reside in metropolitan areas.155 appropriate. In addition, the vast affected workers in the region, the South Employers in low-wage industries, majority of potentially affected workers is not unduly affected relative to other regions, and non-metropolitan areas reside in metropolitan areas and do not regions (22 percent are affected may perceive a greater impact due to the work in low-wage industries, and compared with 16 to 19 percent in other lower wages and salaries typically paid workers in low-wage regions are not regions). Impacts by region are in those areas and industries. The unduly affected relative to other regions.

TABLE 15—ESTIMATED NUMBER OF POTENTIALLY AFFECTED EAP WORKERS WITH THE CURRENT AND UPDATED SALARY LEVELS, BY REGION, DIVISION, AND MSA STATUS, FY2017

Affected as Workers Potentially Affected share of Region/division/metropolitan status subject to affected EAP Not-affected potentially FLSA workers (millions) b (millions) c a affected (millions) (millions) (percent)

Total ...... 132.75 22.51 18.29 4.23 19

By Region/Division

Northeast ...... 24.77 4.80 4.02 0.79 16 New England ...... 6.69 1.36 1.17 0.19 14 Middle Atlantic ...... 18.08 3.44 2.84 0.59 17 Midwest ...... 29.53 4.73 3.84 0.88 19 East North Central ...... 19.97 3.17 2.58 0.58 18 West North Central ...... 9.56 1.56 1.26 0.30 19 South ...... 48.21 7.84 6.10 1.74 22 South Atlantic ...... 25.02 4.47 3.51 0.95 21 East South Central ...... 7.23 0.94 0.69 0.25 27 West South Central ...... 15.96 2.44 1.90 0.53 22 West ...... 30.25 5.15 4.32 0.82 16 Mountain ...... 9.48 1.51 1.22 0.29 19 Pacific ...... 20.76 3.64 3.10 0.53 15

155 Identified with CPS MORG variable GTMETSTA.

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TABLE 15—ESTIMATED NUMBER OF POTENTIALLY AFFECTED EAP WORKERS WITH THE CURRENT AND UPDATED SALARY LEVELS, BY REGION, DIVISION, AND MSA STATUS, FY2017—Continued

Affected as Workers Potentially share of Not-affected Affected Region/division/metropolitan status subject to affected EAP potentially FLSA workers (millions) b (millions) c a affected (millions) (millions) (percent)

By Metropolitan Status

Metropolitan ...... 114.56 20.82 17.07 3.75 18 Non-metropolitan ...... 17.24 1.59 1.14 0.45 28 Not identified ...... 0.96 0.10 0.08 0.03 25 Note: Pooled data for FY2013–FY2015 projected to reflect FY2017. a Workers who are white collar, salaried, not eligible for another (non-EAP) overtime exemption, and not in a named occupation. b Workers who continue to be exempt after the increases in the salary levels (assuming affected workers’ weekly earnings do not increase to the new salary level). c Estimated number of workers exempt under the EAP exemptions who would be entitled to overtime protection under the updated salary lev- els (if their weekly earnings do not increase to the new salary levels).

iii. Costs monitor their hours to minimize or Living Federation of America, avoid paying the overtime premium. Associated Builders and Contractors, 1. Summary The Department estimated costs for and the College and University Three direct costs to employers were Year 1 assuming that the first year of the Professional Association for Human quantified in this analysis: (1) analysis will be FY2017. The Resources (CUPA–HR) stated that 80 to Regulatory familiarization costs; (2) Department estimated that Year 1 90 percent of respondents to their adjustment costs; and (3) managerial regulatory familiarization costs will member surveys indicated that the costs. Regulatory familiarization costs equal $272.5 million, Year 1 adjustment Department’s costs estimates were are costs to learn about the change in costs will sum to $191.4 million, and understated. Throughout this analysis, the regulation, occurring primarily in Year 1 managerial costs will total $214.0 the Department addresses comments million (Table 16). Total direct relating to regulatory familiarization Year 1 and to a lesser extent in future employer costs in Year 1 are estimated costs, adjustment costs, and managerial years when the salary and compensation to equal $677.9 million. Regulatory costs in turn. We also discuss costs that levels are automatically updated (e.g., familiarization costs, adjustment costs are not quantified and comments Years 4, 7, 10). Adjustment costs are and management costs are recurring and asserting that the regulation will result costs incurred by firms to determine thus are projected for years 2 through 10 in additional unquantified costs in workers’ exemption statuses, notify (section VI.D.x.). section VI.D.iii. Regulatory employees of policy changes, and Many commenters, including PPWO, familiarization costs, adjustment costs update payroll systems. Managerial NRF, and the National Grocers and managerial costs associated with costs occur because employers may Association, stated that the NPRM automatically updating the standard spend more time scheduling newly underestimated the costs of complying salary level are discussed in section nonexempt employees and more closely with the rulemaking. The Assisted VI.D.x.

TABLE 16—SUMMARY OF YEAR 1 DIRECT EMPLOYER COSTS [Millions]

HCE Direct employer costs Standard Compensation Total salary level level

Regulatory familiarization a ...... $272.5 Adjustment ...... $188.5 $2.9 191.4 Managerial ...... 208.6 5.5 214.0 Total direct costs ...... 397.0 8.4 677.9 a Regulatory familiarization costs are assessed jointly for the change in the standard salary level and the HCE compensation level.

2. Regulatory Familiarization Costs some firms provide more autonomy to they do not employ exempt workers, Changing the standard salary and HCE their establishments, and in such cases because all establishments will need to total compensation thresholds will regulatory familiarization may occur at confirm whether this Final Rule impose direct costs on businesses by the establishment level. To be includes any provisions that may requiring them to review the regulation. conservative, the Department uses the impact their workers. Firms with more It is not clear whether regulatory number of establishments in its cost affected EAP workers will likely spend familiarization costs are a function of estimate assuming that regulatory more time reviewing the regulation than the number of establishments or the familiarization occurs at a decentralized firms with fewer or no affected EAP number of firms. The Department level. workers (since a careful reading of the believes that generally the headquarters The Department believes that all regulations will probably follow the of a firm will conduct the regulatory establishments will incur some initial decision that the firm is affected). review for the entire company; however, regulatory familiarization costs, even if However, the Department does not

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know the distribution of affected EAP number of establishments with paid briefed on the rule, we expect in general workers across firms and so an average employees was 7.52 million.158 that mid-level human resource cost per establishment is used. Regulatory familiarization costs in Year specialists will be the individuals In the NPRM, the Department 1 were estimated to be $272.5 million primarily responsible for becoming requested that commenters provide data ($36.22 per hour × 1 hour × 7.52 million familiar with the new rule. Moreover, if possible on the costs of regulatory establishments).159 Regulatory this wage estimate is an average across familiarization, and a few commenters familiarization costs in future years are all firms, some of which will pay higher provided estimates based on personal discussed in section VI.D.x. rates and others lower rates. judgments or responses by members. While the information provided may Wage Rate Time Requirement reflect the experiences of individual The Department estimated in the In the NPRM, the Department commenters, the information does not NPRM that one hour of regulatory estimated each establishment will, on provide a basis for the Department to familiarization time costs $34.19 based average, spend one hour on regulatory revise its estimate of time required for on the wage for a mid-level human familiarization. Firms with more regulatory familiarization. The resources worker adjusted to include affected EAP workers will likely spend Department continues to believe that benefits. We follow the same approach more time reviewing the regulation than our estimate of one hour per in this RIA; however, due to growth in firms with fewer or no affected EAP establishment in the NPRM is a wages, the wage rate used in the Final workers. No data were identified from reasonable average that accounts for Rule is $36.22. The Chamber asserted which to estimate in the NPRM the some businesses requiring more time that time spent on regulatory amount of time required to review the while other businesses require less time. familiarization will generally be regulation, and the Department To estimate the total regulatory conducted by a manager with a base requested that commenters provide data familiarization costs, three pieces of wage better approximated at $60 per if possible. The Department did not information must be estimated: (1) A hour, multiplied by a mark-up of 3.3 to receive any reliable data from wage level for the employees reviewing cover indirect overhead and support.160 commenters, although some the rule; (2) the number of hours The National Association of Landscape commenters suggested different employees spend reviewing the rule; Professionals (NALP) commented that amounts of time based on their personal and (3) the number of establishments 92 percent of the members it surveyed judgment or surveys they conducted. employing workers. The Department’s believe the wage rate should be ‘‘be The American Hotel and Lodging analysis assumes that mid-level human more like $51.00 to $68.00 per hour.’’ 161 Association (AH&LA), the National resource workers with a median wage of The Department believes that we have Roofing Contractors Association, NRF $24.86 per hour will review the Final utilized an appropriate wage rate; we and others commented that regulatory Rule.156 Assuming benefits are paid at a similarly used wage rates for human familiarization will take longer than one rate of 46 percent of the base wage and resources specialists in the 2004 Final hour, with some stating that several one hour of time is required for Rule (using a low to high range of such individuals in each of their regulatory familiarization, the average rates, depending upon employer size, establishments will need to read and cost per establishment is $36.22.157 The rather than a single mid-level wage rate familiarize themselves with the new as we do currently). 69 FR 22222–24. rule. AH&LA estimated it will take at 156 We calculated this wage as the projected Although higher paid managers may be least four hours per establishment to median wage in the CPS for workers with the become familiar with the Final Rule. Census 2010 occupations ‘‘human resources The Chamber commented that an workers’’ (0630); ‘‘compensation, benefits, and job overhead rate of 17 percent would increase total analysis specialists’’ (0640); and ‘‘training and costs (including regulatory familiarization costs, average of 6 hours of time is appropriate development specialists’’ (0650) in FY2013– adjustment costs, and managerial costs) by from because: ‘‘For the very smallest FY2015, projected to FY2017. The Department $677.9 million in Year 1 to $757.0 million, or 11.7 percent. For the reasons stated above, the establishments a familiarization time of determined these occupations include most of the one to two hours may be possible, but workers who would conduct these tasks. Bureau of Department believes this estimate overestimates the Labor Statistics, U.S. Department of Labor, additional costs arising from overhead costs while for larger establishments the number of Occupational Outlook Handbook, 2014–15 Edition. recognizing that there is not one uniform approach labor hours may amount to hundreds or These are the same occupation classifications used to estimating the marginal cost of labor. more.’’ 158 in the NPRM but updated to reflect the Census 2010 Data for 2012 were the most recent available The Department believes these at the time of writing. Survey of U.S. Businesses occupational classification. commenters significantly overestimate 157 The benefits-earnings ratio is derived from the 2012. Available at: https://www.census.gov/econ/ BLS’ Employer Costs for Employee Compensation susb/. Also included in the number of the time necessary for regulatory data using variables CMU1020000000000D and establishments incurring regulatory familiarization familiarization. The EAP exemptions CMU1030000000000D. This fringe benefit rate costs are the 90,106 state and local governments have been in existence in one form or includes some fixed costs such as health insurance. reported in the 2012 Census of Governments: Employment Summary Report. Available at: http:// another since 1938, and were updated The Department believes that the overhead costs _ associated with for this rule are small because www2.census.gov/govs/cog/g12 org.pdf. as recently as 2004. While the 2004 existing systems maintained by employers to track 159 As previously noted, the Department chose to rulemaking promulgated a host of currently hourly employees can be used for newly use the number of establishments rather than the changes, including revisions to the overtime eligible workers. However, acknowledging number of firms to provide a more conservative duties test, the most significant change that there might be additional overhead costs, as a estimate of the regulatory familiarization cost. sensitivity analysis of results, we calculate the Using the number of firms, 5.82 million, would promulgated in this rulemaking is impact of more significant overhead costs by result in a reduced regulatory familiarization cost setting a new standard salary level for including an overhead rate of 17 percent. This rate estimate of $210.7 million in Year 1. exempt workers, and updating that has been used by the Environmental Protection 160 The Chamber also incorrectly stated that the salary level every three years. The Agency (EPA) in its final rules (see for example, Department used the wage for a ‘‘human resources EPA Electronic Reporting under the Toxic office administrative clerk;’’ the Department Department believes that, on average, Substances Control Act Final Rule, Supporting & actually used wages for ‘‘human resources, training, one hour is sufficient to time to read Related Material), and is based upon a Chemical and labor relations specialists.’’ about and understand, for example, the Manufacturers Association study. An overhead rate 161 NALP believes both time and hourly cost are change in the standard salary level from from chemical manufacturing may not be underestimated. It is not clear whether the amount appropriate for all industries, so there may be cited is the hourly wage rate members believe is $455 to $913 per week, and we note that substantial uncertainty concerning the estimates appropriate or the total cost across more than one the regulatory text changes comprise based on this illustrative example. Using an hour of time. only a few pages.

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Recurrence workers in Year 1 is 4.2 million (as because of this rulemaking. 80 FR The Chamber criticized the discussed in section VI.D.ii.). Therefore, 38566. The Department requested that Department for failing to estimate total Year 1 adjustment costs were commenters provide any applicable data estimated to equal $191.4 million concerning this issue, but no applicable regulatory familiarization costs × × occurring after the first year, ($36.22 1.25 hours 4.2 million data were identified from which to commenting that regulatory workers). estimate the amount of time required to familiarization costs would repeat with Adjustment costs may be partially make these adjustments. The each automatic update to the salary offset by a reduction in the cost to Department believes that commenters level. Upon further consideration, the employers of determining employees’ that did address adjustment costs Department agrees there will be some exempt status. Currently, to determine significantly overestimated the time regulatory familiarization costs in future whether an employee is exempt firms necessary for making appropriate years when the salary level is updated must apply the duties test to salaried workplace adjustments. However, the (e.g., 2020, 2023, 2026). However, workers who earn at least $455 per Department agrees that some increase is week. Following this rulemaking, firms because subsequent updates will use the warranted, and thus increased the will no longer be required to apply the same method adopted in this Final Rule, estimated average adjustment time to 75 potentially time-consuming duties test and this rule informs stakeholders that minutes per affected worker. to employees earning less than the Based on feedback from their the salary and compensation levels will updated salary level. This will be a clear members, AH&LA and Island be updated every three years, there is cost savings to employers for employees Hospitality Management estimated that little additional regulatory change with who do not pass the duties test and earn employers will need approximately four which employers will have to at least $455 per week but less than the to seven hours per affected employee. familiarize themselves. Accordingly, the updated salary level. The Department The National Council of Chain Department has added 5 minutes per did not estimate the potential size of Restaurants (NCCR) stated that establishment of regulatory this cost savings. ‘‘[e]mployers have told NCCR that the familiarization time to access and read approximate time needed to make such the published salary levels in future Wage Rate adjustments will be 3–4 hours per years when the salary and compensation The Chamber commented that a more employee,’’ and NRF reported that its levels are automatically updated (see appropriate wage rate would be $200 members ‘‘estimate it would take at least projected costs in section VI.D.x.). per hour, based on a manager’s wage of three to four hours per affected 3. Adjustment Costs around $60 per hour, multiplied by a employee to make applicable mark-up (or loaded) rate of 3.3 to cover adjustments.’’ The American Insurance Changes in the standard salary and indirect overhead and support. The HCE compensation levels will impose Association and the Property Casualty Department believes its use of the Insurers Association of America (AIA– direct costs on firms by requiring them occupation of ‘‘human resources, to re-determine the exemption status of PCI) asserted that adjustments will training, and labor relations specialists’’ require more time than the Department employees, update and adapt overtime and corresponding wage rate policies, notify employees of policy estimated because employers will not appropriately reflects the occupational make adjustments in response to the changes, and adjust their payroll classification and wage rate on average systems. The Department believes the rule ‘‘in a vacuum; legal, HR, and for the individuals who will re- operations all will need to be involved size of these costs will depend on the determine the exemption status of number of affected EAP workers and to assess risk, determine value, and employees, update and adapt overtime ultimately decide whether a position, or will occur in any year when exemption policies, notify employees of policy status is changed for any workers. To classification, or part of a classification changes, and adjust their payroll should be reclassified to non-exempt as estimate adjustment costs three pieces systems. The Department recognizes of information must be estimated: (1) A a result of the Department’s salary level that in some businesses, more senior increase.’’ New Castle Hotels & Resorts wage level for the employees making the staff will conduct at least portions of adjustments; (2) the amount of time similarly stated that a ‘‘hotel’s GM and this work, while in other businesses, HR as well as the Department Head and spent making the adjustments; and (3) more junior staff may perform at least a the estimated number of newly affected the effected manager would all need to portion of this work. Therefore, the be involved together with payroll.’’ EAP workers. The Department again Department continues to rely on its use estimated that the average wage with AIA–PCI also asserted that in many of the ‘‘human resources, training, and cases, information technology systems benefits for human resources, training, labor relations specialists’’ and and labor relations specialists is $36.22 ‘‘cannot be configured to accommodate corresponding wage rate to reflect the exempt and non-exempt employees in per hour (as explained above). No average costs to businesses impacted by applicable data were identified from the same job classification,’’ and thus this Final Rule. The Department also additional time will be required to which to estimate the amount of time disagrees with the mark-up rate required to make these adjustments.162 reconfigure these systems. suggested by the Chamber, because an A report by Oxford Economics, However, in response to comments additional 75 minutes of time will have claiming that the Department submitted by NRF and referenced by little-to-no effect on the cost of overhead other commenters, estimated the underestimated the adjustment time, for and support services. No other this Final Rule, the Department ‘‘transitional costs’’ associated with this commenters provided alternative wage rule.163 The tasks covered by Oxford increased the time from one hour to 75 rates. minutes per affected worker. The Time Requirement 163 Oxford Economics. (2015). Rethinking estimated number of affected EAP Overtime: How Increasing Overtime Exemption To estimate adjustment costs, the Thresholds Will Affect The Retail And Restaurant 162 Costs stated in the 2004 Final Rule were Department assumed in the NPRM that Industries. Two additional documents produced by considered, but because that revision included Oxford Economics were also included by some changes to the duties test, the cost estimates are not each establishment will, on average, commenters: Letter dated July 17, 2015 that updates directly applicable; in addition, the 2004 Final Rule spend one hour of time per affected the estimates provided in the ‘‘Rethinking did not separately account for managerial costs. worker to make adjustments required Continued

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Economics’ transition cost measure order to remain exempt (Oxford the subset of employees requiring more include: ‘‘identifying which employees Economics’ equivalent to Type 4 analysis to make a decision. If, for ought to have salaries adjusted and then workers) requires 1/1000th of a human example, we allocate 0.5 hours per Type making and communicating that resource employee full time equivalent; 1 worker and 50 percent of Type 2 adjustment’’; ‘‘converting a salaried this equates to approximately 2.1 hours workers (i.e., workers whose hours and employee to an hourly rate and then of time per affected worker (i.e., 2,080 base wage rates do not change), then adding that employee to the time FTE hours/1,000).165 These per worker that still leaves 3.0 hours per worker for tracking system (already in use for cost estimates are comparable to the the remaining 50 percent of Type 2 existing hourly employees)’’; Department’s cost estimates. However, workers, and all Type 3 and Type 4 disruptions to normal business for employees reclassified as nonexempt workers. Finally, larger firms are likely operations; time for ‘‘HR personnel [to] as a result of the rulemaking, Oxford to experience economies of scale in communicate and implement the Economics appears to estimate that evaluating affected workers; a decision change’’; time for additional IT support transitioning these workers will require on how to treat a worker with specific for time-tracking system; costs 34.7 hours per worker for ‘‘group 2’’ characteristics (e.g., earnings, hours, associated with the added complexity of workers and 10.4 hours per worker for duties) is likely to be applicable to managing and scheduling people’s time; ‘‘group 3’’ workers.166 These workers multiple workers. and costs associated with ‘‘establishing appear to be very roughly comparable to With respect to the concern raised by an hourly rate (lower than existing base the Department’s Type 2 and 3 workers, AIA–PCI about reconfiguring salary) that is calculated so that overall but with much more extreme information technology systems to compensation (including new overtime assumptions concerning how employers include both exempt and overtime- payments) will leave current total will respond (e.g., all overtime hours protected workers, the Department notes compensation unchanged.’’ These costs will be eliminated instead of reduced as that most organizations affected by the appear to be roughly comparable to the the Department expects). Oxford rule already employ overtime-eligible Department’s adjustment cost category, Economics defines ‘‘group 2’’ workers as workers and have in place payroll although with some inclusion of costs those who ‘‘will have their hourly wage systems and personnel practices (e.g., the Department categorized as rate set in such a way that their total requiring advance authorization for managerial costs. However, Oxford compensation remains unchanged,’’ and overtime hours) so that additional costs Economics also included costs ‘‘group 3’’ workers as those who will associated with the rule should be associated with converting newly ‘‘see their hours cut to 38 per week, relatively small in the short run.167 nonexempt workers from salaried to with their salary cut proportionally.’’ Recurrence hourly status, which the Department The Department believes Oxford recognizes is a choice some employers Economics’ estimates of the time The Chamber also expressed concern may make in responding to this rule, but requirement for adjusting Type 2 and 3 the Department underestimated is not a requirement of the regulation. (Oxford Economics’ ‘‘group 2’’ and projected adjustment costs associated Oxford Economics estimated Year 1 ‘‘group 3’’) workers are too high. It is with automatic updating, stating that transactional costs of $648 million in unreasonable to expect, for example, employers would incur significant the retail and restaurant industry if the that it will take a human resource adjustment costs in years the salary is salary level were set at $808 per week, worker 34.7 hours (almost an entire automatically updated, even if and $874 million if the salary level were workweek) to reclassify each Type 2 subsequent salary level changes affect set at $984 per week. These costs for the worker as nonexempt, and possibly fewer workers than the initial increase retail and restaurant industry alone are adjust his or her implicit hourly wage (to $913). Similarly, PPWO stated that roughly 4 to 5.5 times larger than our rate so the total compensation remains the Department’s cost projections did NPRM estimate for all industries ($160.1 unchanged. As we stated above, in this not account for the fact that million based on a $921 salary level in Final Rule, the Department estimates an ‘‘compliance review activities that take Year 1). The Department has evaluated average of 75 minutes of adjustment place in Year 1 will be repeated on an Oxford Economics’ analysis and time per affected worker. However, annual basis, for different groups of determined that this discrepancy is due employers will need to exert minimal employees that fall below the new in part to Oxford Economics’ estimation effort to determine the change in status salary minimum.’’ See also North of the time requirement for of perhaps 60 percent of affected Dakota Bankers Association (the adjustment.164 workers (e.g., the majority of affected Department should recognize that future Oxford Economics assumed that workers who work no overtime). Thus, salary updates require time to determine adjustment costs for Type 1 workers we assume that the average of 75 whether an employee should be (those who do not work overtime) are minutes per worker is concentrated on classified as exempt or nonexempt, not zero, and that each worker who receives just time to reprogram the payroll). a pay increase to the new salary level in 165 As detailed in section VI.D.iv., the Department Contrary to these comments, the concludes that employers will respond to the Final Department’s estimated adjustment Overtime’’ paper in light of the Department’s Rule differently for different categories of workers, costs include costs in all years for newly proposal; and a letter dated August 18, 2015 that depending upon whether they work overtime and affected workers. The Department limits examines states’ prevailing wage levels and the the nature of the overtime. The Department has adjustment costs in projected years to Department’s automatic updating proposal. divided workers into four categories, based upon 164 Although Oxford Economics’ Table A2 reports the nature of any overtime work. Type 1 workers newly affected workers because there is some values they used to calculate transactional do not work overtime; Type 2 workers work costs, the report NRF submitted to the record does occasional overtime (some on a regular basis and 167 The Department notes that no particular form not explain why they chose these values, nor does some on an unpredictable basis): Type 3 workers or order of records is required and employers may it describe in detail the source for these values, regularly work overtime; and Type 4 workers choose how to record hours worked for overtime- other than noting that it obtained information from regularly work overtime and will earn sufficient eligible employees. For example where an ‘‘interviews with industry experts.’’ Therefore, the wages after the Final Rule is implemented that employee works a fixed schedule that rarely varies, Department could not easily assess the employers will increase their salaries to the new the employer may simply keep a record of the reasonableness of these estimates. See https:// level. schedule and indicate the number of hours the nrf.com/sites/default/files/Documents/ 166 Oxford Economics also estimated costs related worker actually worked only when the worker retail%20library/Rethinking-Overtime- to changing computer systems. This discussion varies from the schedule. This is sometimes referred Appendices.pdf. focuses on Human Resources costs. to as exceptions reporting. 29 CFR 516.2(c).

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no need to ‘‘adjust’’ for workers who are 1 workers (who report that they do not most companies already manage a mix already overtime eligible (due to a prior work overtime) will actually work of exempt and nonexempt employees, adjustment of the EAP salary level) overtime during some week of the year. and already have policies and when the salary level is updated again. Therefore, the number of workers for recordkeeping systems in place for whom we apply managerial costs nonexempt employees. Thus, they are 4. Managerial Costs increased from 808,000 using the NPRM unlikely to need to purchase systems or If employers reclassify employees as methodology to 1.2 million using the hire additional monitoring personnel as overtime eligible due to the changes in Final Rule methodology. a result of this rulemaking. Moreover, the salary levels, then firms may incur To provide a sense of the potential no particular form or order of records is ongoing managerial costs associated magnitude of these costs, the required and employers may choose with this Final Rule because the Department estimated these costs whatever form of recordkeeping works employer may schedule and more assuming that management spends an best for their business and their closely monitor an employee’s hours to additional five minutes per week employees. For example, where an minimize or avoid working overtime- scheduling and monitoring each employee works a fixed schedule that eligible employees more than 40 hours affected worker expected to be rarely varies, the employer may simply in a week. For example, the manager of reclassified as overtime eligible as a keep a record of the schedule and a reclassified worker may have to assess result of this rule, and whose hours are indicate the number of hours the worker whether the marginal benefit of adjusted (1.2 million affected EAP actually worked only when the worker scheduling the worker for more than 40 workers as calculated in section varies from the schedule (‘‘exceptions hours exceeds the marginal cost of VI.D.iv.). As will be discussed in detail reporting’’). 29 CFR 516.2(c). Because paying the overtime premium. below, most affected workers do not simple recordkeeping systems, such as Additionally, the manager may have to currently work overtime, and there is no exceptions reporting systems for spend more time monitoring the reason to expect their hours worked to workers on a fixed schedule, are employee’s work and productivity since change when their status changes from permissible, costs may be minimal. the marginal cost of employing the exempt to nonexempt. Similarly, Time Requirement worker per hour has increased. Unlike employers are likely to find that it is regulatory familiarization and less costly to give some workers a raise Several commenters asserted that adjustment costs, which occur primarily in order to maintain their exempt status. scheduling and monitoring newly in Year 1 and to a much lesser extent For both these groups of workers, overtime eligible workers will require in years when the salary is management will have little or no need more time than the Department automatically updated, managerial costs to increase their monitoring of hours assumes. One human resource manager are incurred more uniformly every year. worked. Under these assumptions, the commented that the time required will Because there was little precedent or additional managerial hours worked per ‘‘be closer to 15 minutes than 5,’’ and data to aid in evaluating these costs, the week were estimated to be 97,300 hours AH&LA stated that its members believe Department examined several sources to ((5 minutes/60 minutes) × 1.2 million these costs ‘‘will be closer to 25 minutes estimate costs. First, prior part 541 workers). to an hour a week.’’ NCCR stated that it rulemakings were reviewed to The median hourly wage in FY2017 received feedback from employers in the determine whether managerial costs for a manager is estimated to be $29.04 restaurant industry who estimated that were estimated. No estimates were and benefits are estimated to be paid at managerial costs will range from one to found. This cost was not quantified for a rate of 46 percent of the base wage, three hours per week. NRF similarly the 2004 rulemaking. Second, a which totals $42.31 per hour.168 169 states that its members estimated that literature review was conducted in an Multiplying the additional 97,300 managerial costs would range from one effort to identify information to help weekly managerial hours by the hourly to three hours per week. guide the cost estimates; again, no wage of $42.31 and 52 weeks per year, The Department believes these estimates were found. The Department the Year 1 managerial costs were commenters’ estimates are excessive. also requested data from the public estimated to total $208.6 million due to For example, 75 percent of currently applicable to this cost estimate; this rule. Although the exact magnitude exempt employees who work overtime however, as discussed below, the would vary with the number of affected average less than 10 hours of overtime Department received no time estimates EAP workers each year, managerial per week. Assuming a newly nonexempt that seemed more appropriate than the costs would be incurred annually. employee averages 10 hours of overtime estimates used in the NPRM. per week, then based on NCCR’s Based on commenters’ concerns, Additional Investment estimate, a manager would spend from discussed below, that managerial costs Some commenters, such as the 6 minutes to 18 minutes monitoring for are applicable to more workers than National Grocers Association and the each hour of overtime worked by that were included in the NPRM, the National Association of Area Agencies employee. The Department believes this Department expanded the number of on Aging asserted that managerial costs estimate is unrealistically high. We also workers for whom employers will be higher than the Department note that commenters did not submit experience additional managerial costs estimated because some employers may any data supporting their 15 minute and (section VI.D.iv.) As in the NPRM, need to purchase new systems or hire 25 minute estimates. Furthermore, we managerial costs are applied to workers additional personnel to monitor hours. recognize that employers routinely who are reclassified as overtime- However, the Department believes that apply efficiencies in their operations, protected and who either regularly work and see no reason why they will not do overtime or occasionally work overtime 168 Calculated as the projected median wage in so with regard to scheduling as well. but on a regular basis. For the Final the CPS for workers in management occupations Rule, however, the Department (excluding chief executives) in FY2013–FY2015, Wage Rate expanded its count of the number of projected to FY2017. The Chamber recommended that the 169 The adjustment ratio is derived from the BLS’ workers who occasionally work regular Employer Costs for Employee Compensation data Department use the mean wage rather overtime (defined later as half of Type using variables CMU1020000000000D and than the median to calculate hourly 2 workers) by assuming that some Type CMU1030000000000D. managerial costs, and also asserted that

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the wage should include all loaded do not work overtime should be Lonnie Golden,171 referenced by the overhead cost. However, the mean and negligible. Furthermore, without National Employment Law Project median wages for managers are very additional information, it is impossible (NELP), found using data from the similar in the CPS data ($32.71 versus to determine the prevalence of the more General Social Survey (GSS) that ‘‘[i]n $29.04, respectively), so using the mean strenuous form of managerial oversight general, salaried workers at the lower wage will not result in substantially described by the Chamber. However, we (less than $50,000) income levels don’t different estimated costs. Furthermore, did increase the number of workers for have noticeably greater levels of work if the distribution of wages is skewed (as whom managerial costs are estimated to flexibility that they would ‘lose’ if they demonstrated here by a mean wage include more occasional overtime became more like their hourly larger than the median wage), the workers, as discussed above. counterparts.’’ median value is more representative of Reclassification to Overtime Eligible the wage most firms will pay. The 5. Other Potential Costs Status Department does not believe it is appropriate to use all overhead costs in In addition to the costs discussed Some commenters asserted that the estimating a marginal cost increase above, there may be additional costs rulemaking will negatively affect the because the relevant cost is the marginal that have not been quantified. In the morale of employees reclassified as value of the cost of labor, which is much NPRM we identified these potential overtime eligible.172 For example, smaller than the loaded overhead cost. costs to include reduced profits and WorldatWork stated that 79 percent of Most overhead costs are largely fixed hiring costs. See 80 FR 38578–80. survey respondents said the proposed and unaffected if an employee works an Commenters addressed a variety of rule would have a negative effect on the incremental hour. For example, other potential costs. reclassified employees’ morale, as exemption classification is a perceived accounting and administrative staff are Reduced Scheduling Flexibility unlikely to work more time; building measure of status desired by employees, rent, heat and electricity are unlikely to Some commenters, such as the ASAE, and Kimball Midwest similarly change if a supervisor or human Thombert, Inc., Applied Measurement commented that ‘‘many of the young resource staff person works an Professionals; and Alaska USA Federal professionals that we employ would incremental hour. However, Credit Union, asserted that exempt view being reclassified to nonexempt as acknowledging that there might be some workers enjoy more scheduling a demotion and an insult to their professional and social status in the overhead costs, we include a sensitivity flexibility claiming that their hours workplace.’’ The Department believes analysis providing an upper bound cost generally are not monitored, and thus 170 that for most employees their feelings of estimate. this rulemaking will impose costs on importance and worth come not from Number of Affected Workers newly overtime-eligible workers by (for their FLSA exemption status, but from The Chamber also asserted that example) limiting their ability to adjust the increased pay, flexibility, fringe managerial costs should apply to all their schedule to meet personal and benefits, and job responsibilities that affected workers whose status changes, family obligations. Other commenters traditionally have accompanied exempt not just those who regularly work suggested that the rulemaking would status, and that these factors are not overtime, because ‘‘even those who impose costs on employers because they incompatible with overtime eligibility. usually work only 40 hours will require will lose flexibility to schedule However, if the worker does prefer to additional management schedule employees. For example, be salaried rather than hourly, then this monitoring to ensure that their hours do TRANSITIONS for the Developmentally change may impact the worker. The not go higher.’’ The Department believes Disabled commented that ‘‘[h]aving likelihood of this impact occurring that although some companies may managers that can work those urgencies depends on the costs to employers and closely monitor hours for workers who and emergencies, then giving them time benefits to employees of being salaried. usually do not work overtime, many off later to make up for those extra Research has shown that salaried companies do not. Many companies hours, helps our managers manage the workers (who are not synonymous with simply prohibit overtime without business without us paying expensive exempt workers, but whose status is express approval and/or assign workers overtime or having someone without correlated with exempt status) are more to a set weekly schedule of hours; in managerial skills deal with those likely than hourly workers to receive such firms monitoring costs for these situations’’ (emphasis in comment). benefits such as paid vacation time and 173 newly nonexempt workers who usually The Final Rule does not necessitate health insurance, are more satisfied 174 that employers reduce scheduling with their benefits, and that when 170 As a sensitivity analysis of results, we employer demand for labor decreases, calculate the impact of more significant overhead flexibility. Employers can continue to costs by including an overhead rate of 17 percent. offer flexible schedules and require 171 Golden, L. (2014). Flexibility and Overtime This rate has been used by the EPA in its final rules workers to monitor their own hours and (see for example, EPA Electronic Reporting under Among Hourly and Salaried Workers. Economic the Toxic Substances Control Act Final Rule, to follow the employers’ timekeeping Policy Institute. Supporting & Related Material), and is based upon rules. Additionally, some exempt 172 The Department notes that to the extent that a Chemical Manufacturers Association study. An workers already monitor their hours for such negative effects are attributable to the overhead rate from chemical manufacturing may billing purposes. For these reasons, and employer converting the employee to hourly pay not be appropriate for all industries, so there may status, employers can avoid this consequence by be substantial uncertainty concerning the estimates because there is little data or literature continuing to pay overtime-eligible employees a based on this illustrative example. Using an on these costs, the Department does not salary and pay overtime when the employee works overhead rate of 17 percent would increase total quantify potential costs regarding more than 40 hours in the workweek. 173 costs (including regulatory familiarization costs, scheduling flexibility to either Lambert, S. J. (2007). Making a Difference for adjustment costs, and managerial costs) by from Hourly Employees. In A. Booth, & A. C. Crouter, $677.9 million in Year 1 to $757.0 million, or 11.7 employees or employers. Moreover, the Work-Life Policies that Make a Real Difference for percent. For the reasons stated above, the limited literature available suggests that Individuals, Families, and Communities. Department believes this estimate overestimates the if there is a reduction in flexibility for Washington, DC: Urban Institute Press. 174 additional costs arising from overhead costs while employees, it would not be as large as Balkin, D. B., & Griffeth, R. W. (1993). The recognizing that there is not one uniform approach Determinants of Employee Benefits Satisfaction. to estimating the marginal cost of labor. commenters suggested. A study by Journal of Business and Psychology, 7(3), 323–339.

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hourly workers tend to see their hours employers that overtime-eligible Quality of Services cut before salaried workers, making employees must be paid on an hourly Some commenters expressed concern earnings for hourly workers less basis. Overtime-eligible employees may that the rulemaking, by restricting work 175 predictable. However, this literature continue to be paid a salary, as long as hours, will negatively impact the quality generally does not control for that salary is equivalent to a base wage of public services provided by local differences between salaried and hourly at least equal to the minimum wage rate governments, see, e.g., City of Galax; workers such as education, job title, or for every hour worked, and the disability services providers, see, e.g., earnings; therefore, this correlation is employee receives a 50 percent American Network of Community not necessarily attributable to hourly premium on that base wage for any Options and Resources (ANCOR); health status. overtime hours each week. §§ 778.113– care providers, see, e.g., Lutheran Some evidence suggests that it is more .114. Services in America; education costly for the employer to employ a providers, see, e.g., La Salle Catholic Reduced Opportunities for Training and salaried worker than an hourly worker. College Preparatory, and others. The If true, employers may choose to Advancement Indian River Schools commented that accompany the change in exemption the ‘‘only way a school system can status with a change to the employee’s Some commenters stated that the rulemaking will reduce training and adjust for this change is to reduce method of pay, from salary to an hourly services to students, given that our basis, since there is no longer as great promotional opportunities. For example, ASAE commented that industry operates with low-overhead.’’ an incentive to classify the worker as The Department believes the impact 176 employers would not permit newly salaried. of the rule on public services will be overtime eligible employees to attend Jackson Lewis asserted that the small. The Department acknowledges conferences and annual meetings. In Department did not adequately consider that some employees who work response to these comments, the other costs associated with reclassifying overtime providing public services may Department notes that if an employer employees from exempt to nonexempt: see a reduction in hours as an effect of ‘‘This is not just a mere matter of believes that training opportunities are the rulemaking. However, if the services accounting for potential changes in sufficiently important, it can ensure are in demand the Department believes direct wage costs. Exempt and non- employees attend the trainings during additional workers may be hired, as exempt employees function very their 40-hour workweek, or pay the funding availability allows, to make up differently in the workplace. overtime premium where training some of these hours, and productivity Reclassifying employees imposes costs attendance causes the employee to work increases, as discussed in section with respect to re-engineering roles, over 40 hours in a workweek. Given VI.D.vii., may offset some reduction in determining new performance metrics, this, and because there is no data and services. Furthermore, the Department and devising compensation programs literature to quantify any potential costs notes that school systems would largely that drive the desired behaviors to workers, we decline to do so in this be unaffected by the rulemaking: consistent with an obligation to pay a analysis. Teachers and academic administrative wage premium after forty hours in a personnel are ‘‘named occupations’’ and Reduced Productivity workweek.’’ We believe these thus do not have to pass the salary level considerations are adequately accounted Some commenters expressed concern test to remain exempt. In addition, the for in the Department’s adjustment cost Department expects many employers estimate, which we increased by 15 that the automatic updating provisions of the rule may reduce productivity. For will adjust base wages downward to minutes from 60 to 75 minutes for each some degree so that even after paying affected worker. example, the Michael Best & Friedrich law firm commented that many the overtime premium, overall pay and Earnings Predictability employees will ‘‘assume they could hours of work for many employees will Some commenters asserted that perform at the same level, or do the bare be relatively minimally impacted, as employers will convert newly minimum, and still receive an automatic indicated in the comments of many nonexempt employees to hourly pay pay increase,’’ and this ‘‘unmotivated employers. and that these employees will lose the workforce will lead to lesser Increased Prices earnings predictability of a guaranteed productivity.’’ This rulemaking does not Some commenters expressed concern salary. See, e.g., AH&LA; Island require any employer to provide an that increased labor costs will be passed Hospitality Management; NCCR; NRF. automatic pay raise when the standard along to consumers in the form of higher These commenters asserted that receipt salary level increases. As always, prices. See, e.g., National Association of of a guaranteed minimum salary employers have the ability to determine Home Builders (NAHB) (stating that of provides peace of mind to employees. which employees deserve raises, and the 33 percent of members surveyed These comments appear to reflect a the size of that raise, and to decide how who predicted some change, 44 percent common misperception among to handle employees whose work is indicated that the proposal ‘‘would unsatisfactory. Additionally, the Final result in higher home prices for 175 Lambert, S. J., & Henly, J. R. (2009). Rule has been modified so that updating Scheduling in Hourly Jobs: Promising Practices for consumers’’); SnowSports Industries of the Twenty-First Century Economy. The Mobility will occur every three years, not America. NRF stated that many of its Agenda. Lambert, S. J. (2007). Making a Difference annually, which should lessen members noted that raising prices for Hourly Employees. In A. Booth, & A. C. Crouter, commenters’ concerns on this issue. would result in a loss of sales. Work-Life Policies that Make a Real Difference for Furthermore, as discussed in section Individuals, Families, and Communities. The Department does anticipate that, Washington, DC: Urban Institute Press. VI.D.vii., the Department believes that in some cases, part of the additional 176 There is not requirement that overtime eligible in some instances employers may in fact labor costs may be offset by higher employees be paid on an hourly basis. Paying such experience increased worker prices of goods and services. However, employees a salary is appropriate so long as the productivity due to factors including because costs and transfers are on employee receives overtime pay for working more than 40 hours in the workweek. See §§ 778.113– efficiency wages, improved worker average small relative to payroll and .114. health, and a reduction in turnover. revenues, the Department does not

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expect this rulemaking to have a firm; Tulsa Regional Chamber. The large scale impacts on employment significant effect on prices. The Department did not consider salary appears to be small. Department projects that, on average, compression in the NPRM because data Conversely, other commenters, such costs and transfers make up less than are not available to estimate this effect. as the International Food Service 0.03 percent of payroll and less than For the same reason, we decline to Distributors Association, expressed 0.01 percent of revenues, although for consider this cost in the analysis concern that employers would eliminate specific industries and firms this accompanying this Final Rule. part-time positions ‘‘where the percentage may be larger. Therefore, the employees value the flexibility.’’ See Substitution of Part-Time Jobs in Place Department expects that any potential also CUPA–HR. The Department of Full-Time Jobs change in prices will be modest. believes it is unlikely that an employer Further, any significant price increases, Some commenters stated that firms will eliminate part-time positions would generally not represent a separate will reduce the number of full-time simply because the workers become category of impacts relative to those positions and replace them with part- eligible for overtime, as an employer estimated in the RIA; rather, price time positions to limit overtime will not have to pay workers employed increases (where they occur) are the payments. See, e.g., Associated General for less than 40 hours per week the channel through which consumers, Contractors of America (AGC); National overtime premium even if they are rather than employers or employees, Newspaper Association; SnowSports newly entitled to overtime pay. bear rule-induced costs (including Industries of America. These Finally, the Home Loan and transfers).177 commenters assume that rather than Investment Company and other cutting the hours of a worker who works commenters also asserted that some Foreign Competition 60 hours per week to 40 hours and workers who currently hold only one Some commenters expressed concern hiring a part-time employee to work the job will need to take a second job to that the rulemaking will hurt the United remaining 20 hours (which would supplement their now reduced hours. States’ ability to compete in the potentially reduce unemployment), This would reduce workers’ utility since international market. See, e.g, Jackson employers will create part-time juggling two jobs is more difficult than Lewis; NACCO Industries; National positions at the expense of full-time holding one job, even if the total hours Association of Manufacturers; National employment. are the same. To address this concern, Association of Wholesale Distributors; As an initial matter, an employer will the Department looked at the effect of Precision Machined Products have an incentive to make these the 2004 rulemaking on the probability Association. The Department does not adjustments only if the cost of paying of multiple job holding. The 2004 believe this is a serious concern due to overtime is greater than the costs rulemaking increased the salary level the small ratio of employer costs and associated with hiring another worker. required to be eligible for exemption transfers to revenues. Further, although the Department from $250 per week (short test salary acknowledges the possibility that firms level) to $455 (standard test salary Substitution of Capital may reduce the number of full-time level).179 To estimate the effect of this Some commenters, such as the positions and replace them with part- update on the share of full-time, white National Parking Association and the time positions, on net the Department collar workers holding multiple jobs, National Beer Wholesalers Association, believes the benefits of additional jobs the Department conducted a difference- asserted that, by increasing the marginal (i.e., external margins) will outweigh in-differences (DD) analysis. This cost of labor, the rule will lead any detriment of reduction in hours for analysis allows the identification of any companies to automate their business current employees (i.e., internal potential regulatory impact, while operations and substitute capital for margins), although the Department controlling for time trends and a broad labor. The Department believes that it is cannot quantify this effect. Due to data range of other relevant factors unlikely that employees performing jobs limitations the Department has not (education, occupation, industry, that can be easily automated will satisfy estimated transfers between workers. geographic location, etc.). The the duties test, and that any such effect We note, however, that most of the Department compared January–March would be negligible due to the small estimates submitted by commenters of 2004 to January–March 2005 180 and ratio of employer costs and transfer large costs, transfers, and employment compared workers earning between payments to operating revenue. impacts rely implicitly on the $250 and $455 and those earning at least $455 but less than $600. The Wage Compression and Spillover Effects assumption that employers make no adjustment to the rulemaking except to Department found no statistically Several commenters stated that pay the overtime premium. This lack of significant change in workers’ employers may increase the wages of employer response is contradicted by probability of holding multiple jobs workers currently paid just above the quantitative analysis of employer before and after the 2004 Final Rule 181 new threshold to maintain a distribution behavior (see Barkume,178 for example), took effect. However, a caveat should of wages, and some asserted that the and by the employer comments on this be noted about interpreting this result as Department failed to account for this rulemaking. Employers will adjust to an indication that the Final Rule will effort to avoid salary compression in our the rule by adjusting base pay for newly not lead to an increase in the holding of economic analysis. See, e.g., nonexempt employees, as well as in multiple jobs. This rule is estimated to Cornerstone Credit Union League; First other ways. After accounting for 179 Premier Bank; HMR Acquisition employer adjustments, the costs and The 2004 Final Rule increased the salary level Company; International Franchise from the previous long test level of $155 per week transfers resulting from the rule are (executive and administrative exemptions) or $170 Association; PPWO; Seyfarth Shaw law small relative to payroll and revenues, per week (professional exemption) to $455 per as are the projected reductions in week. For purposes of this analysis, the Department 177 The deadweight loss associated with price compared the increase from the short test salary increases is appropriately categorized as a cost, but employee hours, and the likelihood of level ($250 per week) since the long test was no it is discussed in detail in in section VI.D.vi because longer operative due to increases in the minimum the methodology whereby it is estimated is more 178 Barkume, A. (2010). The Structure of Labor wage. clearly explained as a follow-up to the transfers Costs with Overtime Work in U.S. Jobs. Industrial 180 The 2004 Final Rule was published April 23, methodology. and Labor Relations Review, 64(1), 128–142. 2004 and went into effect August 23, 2004.

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affect approximately three times as that could not be controlled for in the 181 The difference-in-differences model many workers as the 2004 rule (for analysis of the 2004 rule may lead to a used to examine whether the share of which the Department estimated 1.3 different outcome based on this rule. workers holding multiple jobs increased as a million affected workers), and factors result of the 2004 rule can be written as

where Mi is equal to 1 if worker i is has more salaried). The model was estimated using a Final Rule took effect, the finding is not than one job and 0 otherwise, Ti is equal to probit regression. The relevant marginal statistically significant at conventional 1 if worker i earns at least $250 but less than effect is ¥0.009 (i.e., the amount the thresholds for significance. The Department $455 and 0 if he earns between $455 and likelihood of multiple job holding changes also used a difference-in-difference-in- $600, Pi is equal to 1 for the post-change post rulemaking for workers earning between differences model to examine whether the period (Jan.–Mar. 2005) and 0 for the pre- $250 and $455 per week relative to the share of workers holding multiple jobs change period (Jan.–Mar. 2004), and Ci is a change for workers earning between $455 increased as a result of the California’s set of worker-specific controls (age, and $600), with a standard deviation of increase in the salary threshold from $540 to education, gender, race, ethnicity, 0.006. Thus, while the point estimate shows $640 between 2006 and 2008 and from $640 occupation, industry, state of residence, a decrease in the probability of multiple job to $720 between 2014 and 2015. That model working overtime, whether paid hourly or holding for affected workers after the 2004 can be written as

where Mi is equal to 1 if worker i has may be reduced due to increased of employees working more than 40 multiple jobs and 0 otherwise, Ti is equal to employer costs and transfer payments as hours per week. To the extent that firms 1 if worker i earns between the old threshold a result of this rule, although some of respond to an update to the salary level and the new threshold and 0 if he earns just these costs and transfers may be offset test by reducing overtime, they may do above the new threshold, Pi is equal to 1 for the post-change period and 0 for the pre- by making payroll adjustments or the so by spreading hours to other workers, profit consequences of costs and including: Current workers employed change period, Si is equal to 1 if worker i is in California and 0 if she is in other states transfers partially mitigated through for less than 40 hours per week by that where the salary level was not increased, and increased prices.182 The Department employer, current workers who retain Ci is the same set of worker-specific controls notes that firms have a broad array of their exempt status, and newly hired used in the DD analysis. The model was approaches for adjusting to the workers. If new workers are hired to estimated using a probit regression. For the rulemaking: Firms that face robust absorb these transferred hours, then the change between 2006 and 2008, the relevant ¥ demand may be able to increase product associated hiring costs are a cost of this marginal effect is 0.025 with a standard prices and may make smaller Final Rule. deviation of 0.004, and for the change adjustments to base wages or overtime between 2014 and 2015, the relevant iv. Transfers marginal effect is 0.042 with a standard hours; firms that have little ability to deviation of 0.018. Thus we observe a raise prices may have to make more 1. Overview substantial changes to wages or other statistically significant (at conventional Transfer payments occur when thresholds) increase in the share of workers variables. Further, because costs and income is redistributed from one party holding multiple jobs in one period but a transfers are on average small relative to to another. The Department has statistically significant (at conventional payroll and revenues, the Department quantified two possible transfers from thresholds) decrease in the other. does not expect this rulemaking to have employers to employees likely to result a significant effect on profits. Reduced Profits from this update to the salary level tests: Additionally, increased payroll may Some commenters, including an HR (1) Transfers to ensure compliance with lead to increased consumer spending consultant, a small business owner, and the FLSA minimum wage provision; which may translate into higher profits, a commenter from the restaurant and (2) transfers to ensure compliance offsetting part of the initial reduction in industry, expressed concern that with the FLSA overtime pay provision. profits. Two business owners who establishments with small profit Transfers in Year 1 to workers from commented separately in support of the margins may lose money or go out of employers due to the minimum wage Department’s proposal cited an increase business. The increase in workers’ provision were estimated to be $34.3 in sales as a likely consequence of this earnings resulting from the revised million. The increase in the HCE rulemaking. salary level is a transfer of income from compensation level does not affect firms to workers, not a cost, and is thus Hiring Costs minimum wage transfers because neutral concerning its primary effect on workers eligible for the HCE exemption One of Congress’ goals in enacting the welfare. However, there are potential earn well above the minimum wage. FLSA in 1938 was to spread secondary effects (both costs and Transfers to employees from employers employment to a greater number of benefits) of the transfer due to the due to the overtime pay provision were workers by effectively raising the wages potential difference in the marginal estimated to be $1,250.8 million, utility of income and the marginal $1,152.3 million of which is from the 182 As shown below, because costs and transfers propensity to consume or save between generally compose less than one percent of increased standard salary level, while workers and business owners. Thus, the revenues, the Department expects any such price the remainder is attributable to the Department acknowledges that profits increases to be minor. increased HCE compensation level.

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Total Year 1 transfers were estimated to be $1,285.2 million (Table 17).

TABLE 17—SUMMARY OF YEAR 1 REGULATORY TRANSFERS [Millions]

HCE Transfer from employers to workers Standard Compensation Total salary level level

Due to minimum wage ...... $34.3 $0.0 $34.3 Due to overtime pay ...... 1,152.3 98.5 1,250.8

Total transfers ...... 1,186.6 98.5 1,285.2

Because the overtime premium workers also works many hours per related to wages, a higher mandated depends on the base wage, the estimates week. To demonstrate, in order to earn wage could result in fewer hours of of minimum wage transfers and less than the federal minimum wage of labor demanded. However, the weight of overtime transfers are linked. This can $7.25 per hour, but at least $455 per the empirical evidence finds that be considered a two-step approach. The week, these workers must regularly increases in the minimum wage have Department first identified affected EAP work significant amounts of overtime caused little or no significant job loss.184 workers with an implicit regular hourly (since $455/$7.25 = 62.8 hours). The Thus, in the case of this regulation, the wage lower than the minimum wage, applicable minimum wage is the higher Department believes that any and then calculated the wage increase of the federal minimum wage and the disemployment effect due to the necessary to reach the minimum wage. state minimum wage as of January 2016. minimum wage provision would be The implicit regular rate of pay is Most affected EAP workers already negligible. This is partially due to the calculated as usual weekly earnings receive at least the minimum wage; an small number of workers affected by divided by usual weekly hours worked. estimated 11,200 affected EAP workers this provision. The Department For those employees whose implicit (less than 0.3 percent of all affected EAP estimates the potential disemployment regular rate of pay is below the workers) currently earn an implicit effects (i.e., the estimated reduction in minimum wage, the overtime premium hourly rate of pay less than the hours) of the transfer attributed to the was based on the minimum wage as the minimum wage. The Department minimum wage by multiplying the regular rate of pay. estimated transfers due to payment of percent change in the regular rate of pay the minimum wage by calculating the by a labor demand elasticity of 2. Transfers Due to the Minimum Wage change in earnings if wages rose to the ¥0.075.185 Provision minimum wage for workers who At the new standard salary level ($913 Transfers from employers to workers become nonexempt and thus would per week), the Department estimates to ensure compliance with the higher of have to be paid at least the minimum that 11,200 affected EAP workers will the federal or applicable state minimum wage.183 on average see an hourly wage increase wage are small compared to the In response to an increase in the of $0.91, work 0.7 fewer hours per week, transfers attributed to overtime pay and regular rate of pay to the minimum and receive an increase in weekly are only associated with the change in wage, employers may reduce the earnings of $59.10 as a result of the standard salary level. For purposes workers’ hours, which must be coverage by the minimum wage of this analysis, the hourly rate of pay considered when estimating transfers provisions (Table 18). The total change is calculated as usual weekly earnings attributed to payment of the minimum in weekly earnings due to the payment divided by usual weekly hours worked. wage to newly overtime-eligible of the minimum wage was estimated to In addition to earning below the federal workers. In theory, because the quantity be $660,300 per week ($59.10 × 11,200) or state minimum wage, this set of of labor hours demanded is inversely or $34.3 million in Year 1.

TABLE 18—MINIMUM WAGE ONLY: MEAN HOURLY WAGES, USUAL OVERTIME HOURS, AND WEEKLY EARNINGS FOR AFFECTED EAP WORKERS, FY2017

Usual weekly Usual weekly Total weekly Hourly wage a transfer hours earnings (1,000s)

Before Final Rule ...... $8.13 69.3 $551.2 ...... After Final Rule ...... 9.04 68.6 610.3 ......

183 Because these workers’ hourly wages will be A., T.W. Lester, and M. Reich. (2010). Minimum a Minimum Wage Increase on Employment and set at the minimum wage after this Final Rule, their Wage Effects Across State Borders: Estimates Using Family Income. While an elasticity estimate for employers will not be able to adjust their wages Contiguous Counties. The Review of Economics and adult workers would be more appropriate, the downward to offset part of the cost of paying the Statistics, 92(4), 945–964. Schmitt, J. (2013). Why report stated that the elasticity for adults was overtime pay premium (which will be discussed in Does the Minimum Wage Have No Discernible ‘‘about one-third of the elasticity’’ for teenagers, the following section). Therefore, these workers will Effect on Employment? Center for Economic and generally receive larger transfers attributed to the Policy Research. without providing a specific value. In addition, the overtime pay provision than other workers. 185 This is based on the estimated impact of a literature for adults is more limited. The size of the 184 Belman, D., and P.J. Wolfson (2014). What change in the minimum wage from $7.25 to $9.00 estimated reduction in hours is thus likely to be an Does the Minimum Wage Do? Kalamazoo, MI: W.E. per hour on the employment of teenagers from the upper bound. Upjohn Institute for Employment Research. Dube, Congressional Budget Office. (2014). The Effects of

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TABLE 18—MINIMUM WAGE ONLY: MEAN HOURLY WAGES, USUAL OVERTIME HOURS, AND WEEKLY EARNINGS FOR AFFECTED EAP WORKERS, FY2017—Continued

Usual weekly Usual weekly Total weekly Hourly wage a transfer hours earnings (1,000s)

Change ...... 0.91 ¥0.7 59.1 $660.3 Note: Pooled data for FY2013–FY2015 projected to reflect FY2017. a The applicable minimum wage is the higher of the federal minimum wage and the state minimum wage.

Modeling employer adjustments for pay (after compliance with the model assumes employees are aware of these workers is a two-step process. minimum wage) by 1.5 for all overtime the hourly wage rate they negotiated First, employers adjust wages and hours hours; this is referred to as the ‘‘full and may be more reluctant to accept to meet the minimum wage overtime premium’’ model.186 However, downward adjustments. The labor requirement, as described here. Then, due to expected wage and hour demand model would apply if these workers’ hours will be further adjustments by employers, this would employees had a to be paid at adjusted in response to the requirement likely overestimate the size of the an hourly rate, meaning that employers to pay the overtime premium, which is transfer. Therefore, the Department used could not reduce the regular rate of pay discussed in the following section. The a methodology that allows for employer in response to the requirement to pay a transfers presented here only apply to adjustments, such as changes in the 50 percent premium on hours worked the minimum wage provision. However, regular rate of pay or hours worked. The beyond 40 in a week. However, the minimum wage transfers impact size of these adjustments is likely to increase in the marginal cost of labor overtime transfers because the overtime vary depending on the affected worker’s would lead to a reduction in the hours premium is calculated based on the salary and work patterns. To model of labor demanded as long as labor minimum wage, not the worker’s employer responses, the Department demand is not completely inelastic. The original wage. Thus, the two are not used a method that reflects the average full overtime premium model is a entirely separable. response among all employers for all special case of the labor demand model 3. Transfers Due to the Overtime Pay affected workers. However, individual in which the demand for labor is Provision employer responses will vary. completely inelastic, that is employers Literature on Employer Adjustments will demand the same number of hours Introduction worked regardless of the cost. Two conceptual models are useful for The Final Rule will also transfer In the employment contract model, thinking about how employers may income to affected workers who work in employers and employees negotiate respond to reclassifying certain excess of 40 hours per week. Requiring total pay and hours simultaneously, an overtime premium increases the employees as overtime eligible: The rather than negotiating a fixed hourly marginal cost of labor, which employers ‘‘full overtime premium’’ model and the wage and then determining hours. will likely try to offset by adjusting ‘‘employment contract’’ model.187 These Under this model, when employers are wages or hours. Thus, the size of the models make different assumptions required to pay employees an overtime transfers due to the overtime pay about the demand for overtime hours premium, they adjust the employees’ provision will depend largely on how and the structure of the employment implicit hourly rate of pay downward so employers respond to the updated agreement which result in different that when the overtime premium is paid salary levels. How employers respond implications for predicting employer total employee earnings (and thus total and the ensuing changes in employment responses. employer cost) remain constant, along conditions will depend on the demand The full overtime premium model is with the employees’ hours. The for labor, current wages, employer and based on what we will refer to as the employer does not experience a change employee bargaining power, and other ‘‘labor demand’’ model of determining in cost and the employee does not factors. Employers may respond by: (1) wage and hour conditions. In the labor experience a change in earnings or Paying the required overtime premium demand model, employers and hours. The employment contract model to affected workers for the same number employees negotiate fixed hourly wages would hold if the workers who are of overtime hours at the same implicit and then subsequently negotiate hours reclassified as overtime protected had regular rate of pay; (2) reducing worked, rather than determining both an employment agreement specifying overtime hours and potentially hours and pay simultaneously. This transferring some of these hours to other set total earnings and hours of work. workers; (3) increasing workers’ salaries 186 The implicit regular rate of pay is calculated The employment contract model to the updated salary or compensation as usual weekly earnings divided by usual weekly tends to be more applicable when level; (4) reducing the regular rate of pay hours worked. For example, the regular rate of pay overtime hours are predictable, while for an employee previously ineligible for overtime for workers working overtime; or (5) whose usual weekly earnings was $600 and usual the labor demand model is generally using some combination of these weekly hours was 50 would be $12 per hour. Under more applicable to situations where the responses. How employers will respond the full overtime premium model, this employee need for overtime is unanticipated (for × depends on many factors, including the would receive $660 ((40 hours $12) + (10 hours example, where there are unforeseen, × $12 × 1.5)). relative costs of each of these 187 The employment contract model is also short-term increases in demand). alternatives; in turn, the relative costs of known as the fixed-job model. See Trejo, S.J. (1991). However, the employment contract each of these alternatives are a function The Effects of Overtime Pay Regulation on Worker model may not fully hold even for of workers’ earnings and hours worked. Compensation. American Economic Review, 81(4), workers who work predictable overtime 719–740, and Barkume, A. (2010). The Structure of The simplest approach to estimating Labor Costs with Overtime Work in U.S. Jobs. due to market imperfections, employer these transfer payments would be to Industrial and Labor Relations Review, 64(1), 128– incentives, or workers’ bargaining multiply an employee’s regular rate of 142. power. Four examples are provided.

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• Employers are constrained because regulations.190 Both concluded that seemed reasonable that some premium they cannot reduce an employee’s wages partially adjust toward the level was paid for overtime in the absence of implicit hourly rate of pay below the consistent with the employment regulation, Barkume’s assumption of a minimum wage. If the employee’s contract model in response to the 28 percent initial overtime premium is implicit hourly rate of pay before the overtime pay provision.191 Barkume likely too high for the salaried workers change is at or below the minimum found that employee wage rates were potentially affected by a change in the wage, then employers will not be able adjusted downward by 40 to 80 percent salary and compensation level to reduce the rate of pay to offset the of the amount the employment contract requirements for the EAP cost of paying the overtime premium. model predicted, depending on exemptions.195 • modeling assumptions. Earlier research Employees generally have some, Comments Regarding Transfers albeit limited, bargaining power which had demonstrated that in the absence of may prevent employers from reducing regulation some employers may The few commenters who tried to the employee’s implicit hourly rate of voluntarily pay workers some overtime model employer responses generally pay to fully offset increased costs. premium to entice them to work longer used or cited the same literature the Department used (in particular, • Employers may be hesitant to hours, to compensate workers for Barkume (2010) and Trejo (1991)). reduce the employee’s implicit hourly unexpected changes in their schedules, 192 Susann Rohwedder and Jeffrey B. rate of pay by the entire amount or as a result of collective bargaining. Wenger conducted an analysis for predicted by the employment contract Thus Barkume assumed that workers RAND on the impacts of the rulemaking model because it may hurt employee would receive an average voluntary and, like our analysis, found small morale and consequently overtime pay premium of 28 percent in effects on individual workers’ earnings productivity.188 the absence of an overtime pay and hours.196 • Employers are often limited in their regulation. Including this voluntary overtime pay from employers, he Some organizations conducted ability to pay different regular rates of estimated that in response to overtime surveys to evaluate how employers may pay to different employees who perform pay regulation, the wage adjusted respond. Although these surveys may be the same work and have the same downward by 80 percent of the amount helpful as background information, they qualifications because of fairness that would occur with the employment generally cannot be used in a concerns. In order to keep wages contract model. Conversely, when quantitative analysis due to issues such constant across employees and reduce Barkume assumed workers would as insufficient sample sizes, missing wages for overtime workers, employers receive no voluntary overtime pay sampling methodology, and missing would need to reduce the implicit premium in the absence of an overtime magnitudes. As an example of the last hourly rate of pay for employees who do pay regulation, wages adjusted concern, the American Association of not work overtime as well as those who downward 40 percent of the amount the Orthopaedic Executives (AAOE) do work overtime. This would reduce employment contract model conducted a survey of their members total earnings for these non-overtime predicted.193 194 However, while it and found ‘‘19% of respondents employees (potentially causing indicated that they would change the retention problems, productivity losses, 190 Barkume, A. (2010). The Structure of Labor number of staff hours worked in order 189 and morale concerns). Costs with Overtime Work in U.S. Jobs. Industrial to avoid paying overtime.’’ The Therefore, the likely outcome will fall and Labor Relations Review, 64(1), 128–142. Trejo, Department agrees firms will generally somewhere between the conditions S.J. (1991). The Effects of Overtime Pay Regulation change staffing hours and has included on Worker Compensation. American Economic predicted by the full overtime premium Review, 81(4), 719–740. this in the quantitative analysis. The and employment contract models. For 191 Since both papers were based on cross- modeling question is to what degree example, the implicit hourly rate of pay sectional data, findings were assumed to be at the employers will adjust hours. may fall, but not all the way to the wage final equilibrium wages. However, studies showing Despite the inability to incorporate wage contracts are likely to be stickier in the short these survey results into the analysis, predicted by the employment contract run than in the long run have limited applicability model, and overtime hours may fall but here since this analysis deals exclusively with not be eliminated since the implicit salaried workers seeing an increase in their weekly hourly rate of pay is $9.47 (($9.47 × 40 hours) + × × hourly rate of pay has fallen. The wage while seeing a downward adjustment in their ($9.47 10 hours 1.28)) = $500. If the hourly rate implicit hourly wage rate, and they may be less of pay was fully adjusted to the employment Department conducted a literature aware of their implicit hourly wage rate. The contract model level when overtime pay is newly review to evaluate how the market Department has modeled a sticky adjustment required, the hourly rate of pay would be $9.09 × × × would adjust to a change in the process by assuming the wage elasticity of demand (($9.09 40 hours) + ($9.09 10 hours 1.5)) = requirement to pay overtime. for labor is smaller in Year 1 than in subsequent $500. Forty percent of the adjustment from $10 to years. $9.09 results in an adjusted regular rate of pay of $9.64. Eighty percent of the adjustment from $9.47 Barkume (2010) and Trejo (1991) 192 Barzel, Y. (1973). The Determination of Daily to $9.09 results in an adjusted hourly rate of pay empirically tested for evidence of these Hours and Wages. The Quarterly Journal of of $9.17. The Department took the average of these two competing models by measuring Economics, 87(2), 220–238 demonstrated that two adjusted wages to estimate that the resulting labor market responses to the modest fluctuations in labor demand could justify hourly rate of pay would be $9.40. substantial overtime premiums in the employment 195 Barkume (2010) based this assumption on the application of FLSA overtime pay contract model. Hart, R.A. and Yue, M. (2000). Why findings of Bell, D. and Hart, R. (2003). Wages, Do Firms Pay an Overtime Premium? IZA Hours, and Overtime Premia: Evidence from the 188 For example: Bewley, T. (1999). Why Wages Discussion Paper No. 163, showed that establishing British Labor Market. Industrial and Labor Don’t Fall During a . Cambridge, MA: an overtime premium in an employment contract Relations Review, 56(3), 470–480. This study used Harvard University Press. Brown, C. & Medoff, J. can reduce inefficiencies. 1998 data on male, non-managerial, full-time (1989). The Employer Size Wage Effect. Quarterly 193 Barkume’s estimates are consistent with workers in Britain. British workers were likely paid Journal of Economics, 97(5), 1027–1059. See also Trejo’s 1991 finding that the wage adjustment when a larger voluntary overtime premium than the literature on implicit contracts in labor markets. there is no overtime premium was only about 40 American workers because Britain did not have a 189 For example: Fehr & Schmidt. (2007). ‘‘A percent of the full employment contract model required overtime pay regulation and so collective Theory of Fairness Competition and Cooperation.’’ adjustment. Trejo’s estimates range from 25 percent bargaining played a larger role in implementing Quarterly Journal of Economics. Vol 97 No. 2 pp. to 49 percent and average 40 percent. overtime pay. 867–868. Milgram, Paul. (1988). ‘‘Employment 194 Consider a worker earning $500 and working 196 Rohwedder, S. and Wenger, J.B. (2015). The Contracts Influence Activities and Efficient 50 hours per week. Assuming no overtime premium Fair Labor Standards Act: Worker Misclassification Organization Design.’’ Journal of Political Economy, is paid the imputed hourly rate of pay is $10. and the Hours and Earnings Effects of Expanded Vol. 96 No. 1 pp. 42–60. Assuming a 28 percent overtime premium, the Coverage. RAND Labor and Population.

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they may be informative and select Municipal Lawyers Association believes that ‘‘[b]ecause additional results are presented here. reported from an IPMA–HR survey that revenue is not an option, our agency • The AAOE found ‘‘18% [of ‘‘[a]bout 60% said they would convert would have to reclassify all but 10 of members] indicated that they would not currently exempt employees to non- our positions to non-exempt with no change their current practice operations. exempt and pay them overtime while overtime allowed by any staff.’’ 16% stated that they would increase the same amount would prohibit them The Department’s reading and salaries to the new threshold. 11% from working more than 40 hours per analysis of the literature cited in the would change the affected employees to week without approval. Only 1/3 would rulemaking is that a result between the hourly employees, and 4% stated that raise salaries to at least $970 per week.’’ fixed-job model and the fixed-wage they would eliminate positions within • National Association of Professional model would occur and thus we their practice.’’ This indicates Insurance Agents asked survey modeled our results accordingly. employers will use a variety of respondents with workers who would Specifically, based upon Barkume’s mechanisms to reduce transfer be converted to nonexempt status and findings regarding employer responses payments, as discussed and modeled by who work overtime whether they would and transfer payments, we believe the the Department. decrease overtime hours; 65 percent partial employment contract model is • The 2015 WorldatWork survey responded they would. most appropriate and consistent with found ‘‘73% of respondents stated they Some commenters stated that many the literature. Therefore, we have not would have more nonexempt employers will respond by reducing changed the analysis. Several employees.’’ hours and base wages more than the commenters commented on the • Kansas Bankers Association Department estimated. The National literature we used to support using the compiled member banks’ analyses of the Association of Manufacturers wrote: partial employment contract model. The rule that found ‘‘[o]verwhelmingly . . . While in the initial months following a Center for American Progress expressed the response was not to increase the reclassification, most employees tend to support for our use of Barkume’s newly non-exempt salaries to continue come out about the same in terms of total analysis and stated that this would to keep the position as an exempt work and total compensation, the steady result in some transfer payments since position. In fact, only 2 bank CEOs pressure of the overtime premium tends to employers cannot fully adjust base responded that they would choose to do result in a gradual reduction of the wages. The Washington Center for so. Rather, the overwhelming majority employee’s schedule. The challenge for that Equitable Growth noted the Department of bank CEOs stated those employees employee is that the hourly rate does not ‘‘should make clear that under certain would move to non-exempt status, and normally increase to offset this loss in hours. Instead, the employer looks to give the work conditions the fixed-wage model overtime would be restricted or to other employees. The scaling back of the underlying [the Department’s] analysis prohibited.’’ implies that some workers will see an • employee’s weekly working hours can take a The NAHB presented results from a significant toll on the employee’s earnings, increase in hours. If these workers are member survey that found 33 percent of especially given that the wages lost for each under-employed, the shift in the companies indicated a change in hour of overtime eliminated are at premium composition of those hours from over- company policies, with respect to rates. The net economic effect of the worked to under-worked employees will construction supervisors, would occur. Proposed Rule will be to take working hours be a welfare-improving consequence of Among those firms, ‘‘56% of and pay away from employees currently the proposed rule.’’ respondents indicated that they would classified as exempt and redistribute those hours and pay to other employees. take steps to minimize overtime, such as Identifying Types of Affected Workers cut workers hours.’’ Some commenters, including Jackson The Department identified four types • ANCOR found ‘‘[l]ess than a third Lewis, the National RV Dealers of workers whose work characteristics of providers would be able to increase Association, and the Sheppard Mullin impact how employers were modeled to the salary of full-time exempt workers to law firm, asserted that many employers respond to the changes in both the meet the projected threshold.’’ may follow the full employment standard and HCE salary levels: • Society for Human Resource contract model rather than the partial • Type 1: Workers who do not work Management (SHRM) reported that, employment contract model used by the overtime. according to its survey ‘‘the most Department in the analysis. The Iowa • Type 2: Workers who do not significant result identified was the Association of Community Providers regularly work overtime but implementation of restrictive overtime wrote that ‘‘[i]n order to maintain occasionally work overtime. policies leading to potential reduction current payroll budgets, the • Type 3: Workers who regularly in employees working overtime, with 70 organizations will need to lower the work overtime. • percent of respondents indicating that hourly wages of non-exempt employees, Type 4: Workers who regularly would be a likely outcome.’’ such that their total annual work overtime. These workers differ • AGC reported its survey found compensation, including overtime from the Type 3 workers because it is ‘‘74% of AGC-surveyed construction payments, remains at the prior year’s less expensive for the employer to pay contractors responded that they would level.’’ The Construction Industry the updated salary level than pay likely reclassify some or all of the Round Table asserted that ‘‘empirical overtime and incur managerial costs for impacted exempt workers to a non- research generally supports the ‘fixed- these workers.197 exempt hourly status at their current job’ model rather than the ‘fixed-wage’ The Department began by identifying salaries. The survey results also show model.’’ the number of workers in each type. that: Over 60% of respondents expect Other commenters stated that After modeling employer adjustments, the proposed rule to result in the overtime will be reduced significantly transfer payments were then estimated. institution of policies and practices to more than the Department estimated in Type 3 and 4 workers are identified as ensure that affected employees do not the NPRM. However, little data was work over 40 hours a week.’’ provided to support these claims, 197 It is possible that employers will increase the • salaries paid to some ‘‘occasional’’ overtime International Public Management making them difficult to incorporate workers to maintain the exemption for the worker, Association for Human Resources into the analysis. For example, but the Department has no way of identifying these (IMPA–HR) and the International Audubon Area Community Services workers.

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those who regularly work overtime (CPS classified as Type 1 workers. As population. Therefore, lacking more variable PEHRUSL1 greater than 40). previously discussed, commenters information, the Department determined These workers are divided between expressed concerns that the Department that an appropriate estimate of the Type 3 and Type 4 depending on underestimated the number of workers impact on the implicit hourly rate of whether their weekly earnings are raised who will experience changes in their pay for regular overtime workers after to the updated EAP salary level or they wages or hours, and therefore that we the Final Rule should be determined become nonexempt. Distinguishing underestimated costs, because using the average of Barkume’s two Type 3 workers from Type 4 workers is managerial costs are a function of the estimates of partial employment a four step process. First we identify all number of workers who work overtime. contract model adjustments: A wage workers who regularly work overtime. Therefore, for this Final Rule, the change that is 40 percent of the Then we estimate each worker’s weekly Department supplemented the CPS data adjustment toward the amount earnings if they became nonexempt, to with data from the Survey of Income predicted by the employment contract which we add weekly managerial costs and Program Participation (SIPP) in model, assuming an initial zero for each affected worker of $3.53 ($42.31 order to look at likelihood of working overtime pay premium, and a wage per hour × (5 minutes/60 minutes)). some overtime during the year. Based change that is 80 percent of the Lastly, we identify as Type 4 those on 2012 data, the most recent available, adjustment assuming an initial 28 workers whose expected nonexempt the Department found that 39.4 percent percent overtime pay premium.198 This earnings plus weekly managerial costs of nonhourly workers worked overtime is approximately equivalent to assuming exceeds the updated standard salary at some point in a year. Workers already that salaried overtime workers level; those whose expected nonexempt identified as Types 2, 3, and 4, using the implicitly receive the equivalent of a 14 earnings plus weekly managerial costs methodology in the NPRM, compose 24 percent overtime premium in the are less than the new standard salary percent of affected workers. Therefore, absence of regulation (the mid-point level are classified as Type 3 workers. as a second step, the Department between 0 and 28 percent). The Department assumes that firms will classified a share of workers who Modeling changes in wages, hours, include incremental managerial costs in reported they do not usually work and earnings for Type 1 and Type 4 their determination of whether to treat overtime, and did not work overtime in workers is relatively straightforward. an affected employee as a Type 3 or the reference week (previously Type 1 affected EAP workers will Type 4 worker because those costs are identified as Type 1 workers), as Type become overtime eligible, but since they only incurred if the employee is a Type 2 workers such that a total of 39.4 do not work overtime, they will see no 3 worker. Thus, it is appropriate to percent of affected workers were Type 2, change in their weekly earnings. Type 4 determine if the additional earnings 3, or 4. Therefore, the Department workers will remain exempt because plus the additional managerial costs for estimates fewer Type 1 workers and their earnings will be raised to the an affected worker exceed the revised more Type 2 workers than in the NPRM. updated EAP salary level (either the salary level. In the NPRM managerial Modeling Changes in Wages and Hours standard salary level or HCE costs were not included in the In practice, employers do not seem to compensation level depending on determination of whether a worker is a which test the worker passed). These Type 3 or Type 4 worker. Therefore, in adjust wages of regular overtime workers to the full extent indicated by workers’ earnings will increase by the this Final Rule there are somewhat more difference between their current Type 4 workers than the NPRM the employment contract model, and thus employees appear to get a small but earnings and the amount necessary to methodology would yield. satisfy the new standard salary Identifying Type 2 workers involves significant increase in weekly earnings requirement or comply with the new two steps. First, using CPS MORG data, due to overtime pay coverage. Barkume total annual compensation level. It is the Department identified those who do and Trejo found evidence partially possible employers will increase these not usually work overtime but did work supporting both the employment workers’ hours in response to paying overtime in the survey week (the week contract model and the full overtime them a higher salary, but the referred to in the CPS questionnaire, premium model in response to a 50 Department has not modeled this variable PEHRACT1 greater than 40). percent overtime premium requirement: potential change.199 These workers represent those who A decrease in the regular rate of pay for workers with overtime (but not the full occasionally work overtime and 198 decrease to the employment contract Both studies considered a population that happened to work overtime in that included hourly workers. Evidence is not available specific week. The survey (or reference) model level) and a decrease in the on how the adjustment towards the employment week is always the pay period that amount of overtime worked. Therefore, contract model differs between salaried and hourly includes the 12th day of the month and when modeling employer responses workers. The employment contract model may be with respect to the adjustment to the more likely to hold for salaried workers than for contains responses for all twelve hourly workers since salaried workers directly months. In a different week the identity regular rate of pay, the Department used observe their weekly total earnings, not their of workers who work overtime might a method that falls somewhere between implicit equivalent hourly wage. Thus, applying the differ, but the number working overtime the employment contract model and the partial adjustment to the employment contract full overtime premium model (i.e., the model as estimated by these studies may and the hours of overtime worked are overestimate the transfers from employers to similar because the survey week is partial employment contract model). salaried workers. We note that such an out-of- representative of occasional overtime Barkume reported two methods to sample extrapolation has the potential to introduce patterns. estimate this partial employment uncertainty, just as there is uncertainty associated The second step for identifying Type contract wage, depending on the with other effects, such as the replacement of full- time jobs with part-time jobs, where studies have 2 workers in the Final Rule differs from amount of overtime pay assumed to be suggested directionally non-beneficial effects that the methodology used in the NPRM. In paid in the absence of regulation. As are not statistically significant. Due to the lack of the NPRM, we used only the first step noted above, the Department believes modeling results for salaried employees in the described above to identify Type 2 both the model assuming a voluntary 28 employment contract model, we do not attempt to quantify the magnitude of this uncertainty or workers. Those who did not regularly percent overtime premium and the potential overestimate. work overtime and did not work model assuming no voluntary overtime 199 Cherry, Monica, ‘‘Are Salaried Workers overtime in the survey week were premium are unrealistic for the affected Compensated for Overtime Hours?’’ Journal of

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Modeling changes in wages, hours, Type 3 workers, and provides Since Type 2 and Type 3 EAP workers and earnings for Type 2 and Type 3 employers with more opportunity to work more than 40 hours per week, workers is more complex and uses adjust hours and wages. Since in reality whether routinely or occasionally, they findings from Barkume discussed above. there is likely a mix of these two will receive an overtime premium based The Department distinguishes those occasional overtime scenarios, the on their implicit hourly wage adjusted who regularly work overtime (Type 3 Department combines models as described above. Because employers workers) from those who occasionally, representing these two scenarios when must now pay more for the same or irregularly, work overtime (Type 2 estimating impacts. number of labor hours, they will seek to workers) because employer adjustment Our estimate for how Type 2 workers reduce those hours; in economics, this to the Final Rule may differ accordingly. are affected is based on the assumption is described as a decrease in the The Department believes that employers that 50 percent of these workers who quantity of labor hours demanded (a are more likely to adjust hours worked worked occasional overtime worked movement to the left along the labor and wages for regular overtime workers expected overtime hours and the other demand curve). It is the net effect of because their hours are predictable. 50 percent worked unexpected these two changes that will determine Conversely, it may be more difficult to overtime.201 Workers were randomly the final weekly earnings for affected adjust hours and wages for occasional assigned to these two groups. Workers EAP workers. The reduction in hours is overtime workers because employers with expected occasional overtime calculated using the elasticity of labor may be responding to a transient, hours were treated like Type 3 affected demand with respect to wages. The perhaps unpredicted, shift in market workers (partial employment contract Department used a short-run demand demand for the good or service they model adjustments). Workers with elasticity of ¥0.20 to estimate the provide. In this case, it is likely unexpected occasional overtime hours percentage decrease in hours worked advantageous for the employer to pay were assumed to receive a 50 percent resulting from the increase in average for this occasional overtime rather than pay premium for the overtime hours hourly wages in Year 1, calculated using to adjust permanent staffing. worked and receive no change in base the adjusted base wage and the overtime Additionally, the transient and possibly wage or hours (full overtime premium wage premium.204 The interpretation of unpredicted nature of the change may model). When modeling Type 2 the short run demand elasticity in this make it difficult to adjust wages for workers’ hour and wage adjustments, context is that a 10 percent increase in these workers. we treated those identified as Type 2 wages will result in a 2 percent decrease The Department treats Type 2 affected using the CPS data as representative of in hours demanded. Transfers projected workers in two ways due to the all Type 2 workers. We estimated for years 2 through 10 used a long-run uncertainty of the nature of these employer adjustments and transfers elasticity; this is discussed in section occasional overtime hours worked. If assuming that the patterns observed in VI.D.x.205 these workers work extra hours on an the CPS reference week are For Type 3 affected workers, and the unforeseen, short-term, as-needed basis representative of an average week in the 50 percent of Type 2 affected workers (e.g., to adjust to unanticipated year. Thus, we assume total transfers for who worked expected overtime, we increases in demand), then there may be the year are equal to 52 times the estimated adjusted total hours worked less opportunity for employers to adjust transfers estimated for the single after making wage adjustments using the straight-time wages downward.200 representative week for which we have partial employment contract model. To However, if these workers work extra CPS data. However, these transfers are estimate adjusted hours worked, we set hours on a foreseen, periodic basis (e.g., spread over a larger group including work a few extra hours one week each those who occasionally work overtime adjustments for a subset of workers. If the wage and hour adjustments are linear, then our modeling month, but workers do not consider it but did not do so in the CPS reference assumptions should yield the same aggregate results ‘‘regular overtime’’ because they do not week.202 203 as making smaller adjustments for all workers. work overtime during three weeks each 203 If a different week was chosen as the survey month), then there may be some 201 Trejo’s and Barkume’s adjustments are week, then likely some of these workers would not opportunity for employers to adjust averages; excluding some workers (i.e., half of Type have worked overtime. However, because the data 2 workers) from these adjustments could potentially are representative of both the population and all straight-time wages downward (e.g., so bias the size of the adjustment for the workers who twelve months in a year, the Department believes pre- and post-revision monthly income continue to receive the adjustment. This bias would the share of Type 2 workers identified in the CPS is more similar). That this overtime is exist if Barkume and Trejo estimated the average data in the given week is representative of an periodic and predictable is what makes adjustment for a sample of workers including average week in the year. irregular overtime workers and the size of the 204 This elasticity estimate is based on the it much more similar to that worked by adjustment for these workers differs from other Department’s analysis of Lichter, A., Peichl, A. & workers. It is not clear whether Trejo’s and Siegloch, A. (2014). The Own-Wage Elasticity of Labor Research 25(3): 485–494, September 2004, Barkume’s samples include both occasional and Labor Demand: A Meta-Regression Analysis. IZA found that exempt full-time salaried employees regular overtime workers; however, the DP No. 7958. Some researchers have estimated earn more when they work more hours, but we have Department’s interpretation is that Trejo includes larger impacts on the number of overtime hours chosen not to use her results for the quantification only workers who usually work overtime and worked (Hamermesh, D. and S. Trejo. (2000). The of the effect on hours of an increase in earnings. Barkume includes both. If these assumptions are Demand for Hours of Labor: Direct Evidence from 200 Employers may be reluctant to reset hourly correct, the magnitude of this RIA’s adjustment California. The Review of Economics and Statistics, wage rates to respond to unexpected changes to the made for the workers whose wages and hours are 82(1), 38–47 concludes the price elasticity of need for overtime because the negative impact on adjusted would be appropriate if it were applying demand for overtime hours is at least ¥0.5. The worker morale may outweigh the gains from Trejo’s results but may, due to applying Barkume’s, Department decided to use a general measure of adjusting wages to unexpected shifts in demand. Of result in an underestimate of the average fall in base elasticity applied to the average change in wages relevance is the well-established literature that wages. We believe the magnitude of any potential since the increase in the overtime wage is shows employers do not quickly adjust wages bias will be small because the half of Type 2 somewhat offset by a decrease in the non-overtime downward in response to downturns in the workers who are occasional, regular overtime wage as indicated in the employment contract economy; the same logic applies to our approach to workers in the CPS reference week (and thus treated model. The Department invited comments on the unexpected changes in demand. See, for example: differently) compose only 9 percent of Type 2 and appropriate elasticity to be used in this analysis, but Bewley, T. (1999). Why Wages Don’t Fall During a Type 3 workers. no relevant comments were received. Recession. Cambridge, MA: Harvard University 202 Because these workers do not work overtime 205 In the short run not all factors of production Press. See also Barzel, Y. (1973). The Determination every week, the size of the wage and hour can be changed and so the change in hours of Daily Hours and Wages. The Quarterly Journal adjustments will be smaller than modeled. demanded is smaller than in the long run, when all of Economics, 87(2), 220–238. However, we are only modeling wage and hour factors are flexible.

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the percent change in total hours equal to the adjusted implicit average equals the adjusted hourly wage (i.e., worked equal to the percent change in hourly wage minus the original implicit after the partial employment contract average wages multiplied by the wage average hourly wage divided by the model adjustment) multiplied by 40 elasticity of labor demand.206 The original implicit average hourly wage. hours plus adjusted hours worked in percent change in average wages is The original implicit average hourly excess of 40 multiplied by 1.5 times the wage is equal to original weekly adjusted hourly wage. 206 In this equation, the only unknown is adjusted earnings divided by original hours Figure 4 is a flow chart summarizing total hours worked. Since adjusted total hours worked. The adjusted implicit average the four types of affected EAP workers. worked is in the denominator of the left side of the Also shown are the impacts on exempt equation and is also in the numerator of the right hourly wage is equal to adjusted weekly side of the equation, solving for adjusted total hours earnings divided by adjusted total hours status, weekly earnings, and hours worked requires solving a quadratic equation. worked. Adjusted weekly earnings worked for each type of affected worker.

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Figure 4: Flow Chart of Final Rule's Impact on Earnings and Hours Worked

Affected ...... workers [a] , ______.. ______( I Regular hourly I I wages< MW I , ______.. ______( Regular hourly ...... ,.I Hourly wages wages~ MW I increase to MW I

Do not usually Regularly work workOT OT / ~ / ~ Hourly wages Weekly earnings Do not work Work occasional adjust downward increase to new occasional OT OT[b] to offset some OT salary level [d] compensation [c] I I I I Gain MW/OT Gain MW/OT Gain MW/OT protection protection protection Remain exempt I I I I No change in Weekly earnings Weekly earnings Weekly earnings weekly increase on increase on increase on earnings average [e] average [e] average I I I I No change in Hours decrease on Hours decrease No change in hours average on average hours [f]

Type 1 Type2 Type3 Type4 [a] Affected EAP workers are those who are exempt under the current EAP exemptions and would gain minimum wage and overtime protection or receive a raise to the increased salary or compensation level. [b] There are two methods the Department uses to identify occasional overtime workers. The first includes workers who report they usually work 40 hours or less per week (identified with variable PEHRUSLl in CPS MORG) but in the reference week worked more than 40 hours (variable PEHRACTl in CPS MORG). The second includes reclassifying some additional workers who usually work 40 hours or less per week, and in the reference week worked 40 hours or less, to match the proportion of workers measured in other data sets who work overtime at any point in the year.

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Estimated Number of and Impacts on categorized into the four ‘‘types’’ 817,000 (19.3 percent of all affected EAP Affected EAP Workers identified previously. There are 2.6 workers). Type 3 workers, those who million Type 1 workers (60.4 percent of regularly work overtime and are The Department projects 4.2 million all affected EAP workers), those who expected to become overtime eligible workers will be affected by either (1) an work 40 hours per week or less and thus and be paid the overtime premium, are increase in the standard salary level to will not be paid an overtime premium composed of an estimated 759,000 the 40th percentile of weekly earnings despite their expected change in status workers (17.9 percent of all affected of full-time salaried workers in the to overtime protected (Table 19). The EAP workers). The number of affected South because they earn salaries of at number of Type 1 workers decreased Type 4 workers was estimated to be least $455 per week and less than $913 from the NPRM because some of these 96,000 workers (2.3 percent of all per week, or (2) an increase in the HCE workers are now classified as Type 2 affected workers); these are workers compensation level to the 90th workers (as explained above). Type 2 who the Department believes will percentile of earnings of full-time workers, those who are expected to remain exempt because firms will have salaried workers nationwide because become overtime eligible and do not a financial incentive to increase their they only pass the HCE duties test and usually work overtime but do weekly salaries to the updated salary earn at least $100,000 and less than occasionally work overtime and will be and compensation levels, rather than $134,004 annually. These workers are paid the overtime premium, total pay a premium for overtime hours.207

TABLE 19—AFFECTED EAP WORKERS BY TYPE (1,000s), FY2017

Regular overtime No Occasional Total overtime overtime Newly Remain (T1) (T2) nonexempt exempt (T3) (T4)

Standard salary level ...... 4,163 2,523 815 730 95 HCE compensation level ...... 64.9 32.5 2.7 28.5 1.2

Total ...... 4,228 2,555 817 759 96 Note: Pooled data for FY2013–FY2015 projected to reflect FY2017. *Type 1: Workers without regular OT and without occasional OT and become overtime eligible. *Type 2: Workers without regular OT but with occasional OT. These workers become overtime eligible. Paid overtime premium pay, so aver- age weekly earnings increase, but regular rate of pay and hours fall for 50 percent of workers who regularly work occasional overtime. *Type 3: Workers with regular OT who become overtime eligible. Paid overtime premium pay, so average weekly hours increase, but regular rate of pay and hours fall. *Type 4: Workers with regular OT who remain exempt (i.e., earnings increase to the updated salary level).

The Final Rule will likely impact earnings in Table 22. How these will Type 1 workers will have no change some affected workers’ hourly wages, change depends on the type of worker, in wages, hours, or earnings.208 hours, and weekly earnings. Predicted but on average weekly earnings are Estimating changes in the regular rate of changes in implicit wage rates are unchanged or increase while hours pay for Type 3 workers and the 50 outlined in Table 20; changes in hours worked are unchanged or decrease. percent of Type 2 workers who regularly in Table 21; and changes in weekly work occasional overtime requires

207 As previously described, the Department adjustments, this worker would receive earnings because of transfers of hours from overtime calculated a wage and hour adjustment for all approximately $1,006 per week ((40 × $11.94) + workers. Due to the high level of uncertainty in × × regular overtime workers. Consider, by way of (29.5 ($11.94 1.5)). Since this is greater than the employers’ responses regarding the transfer of example, a worker who initially earned $900 and proposed standard salary level, the Department hours, the Department did not have credible estimated that this worker would have his salary worked 70 hours per week. Suppose the partial evidence to support an estimation of the number of employment contract adjustment results in a regular increased to $913 and remain exempt. hours transferred to other workers. rate of pay of $11.94 and 69.5 hours worked per 208 It is possible that these workers may week. After the partial employment contract experience an increase in hours and weekly

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application of the partial employment 20). Type 2 workers paid between regular rate of pay decrease on average contract model, which predicts a $100,000 and the updated HCE from $41.43 to $38.80 per hour, a decrease in their average regular rates of compensation level would see an decrease of 6.3 percent. Again, although pay. The Department estimates that average decrease in their regular hourly regular hourly rates decline, weekly employers would decrease these wage from $57.73 to $55.02, a decrease earnings will increase on average workers’ regular hourly rates of pay to of 4.7 percent. However, because because these workers are now eligible the amount predicted by the partial workers will now receive a 50 percent for the overtime premium. employment contract model adjustment. premium on their regular hourly wage Type 4 workers’ implicit hourly rates Employers are assumed to be unable to for each hour worked in excess of 40 of pay would increase in order for their adjust the hours or regular rate of pay hours per week, average weekly earnings to meet the updated standard for the occasional overtime workers earnings for Type 2 workers would salary level ($913 per week) or the whose overtime is irregularly scheduled increase.209 updated HCE annual compensation and unpredictable (the remaining 50 Type 3 workers will also receive level ($134,004 annually). The implicit percent of Type 2 workers); therefore, decreases in their regular hourly wage hourly rate for Type 4 affected EAP their earnings will increase because they as predicted by the partial employment workers who had earned at least $455 will receive the overtime premium for contract model. Type 3 affected workers and below $913 per week would their unpredictable overtime hours. As paid below the new standard salary increase on average from $17.32 to a group, Type 2 workers currently level would have their regular hourly $17.54 (a 1.3 percent increase). The exempt under the standard test would rate of pay decrease on average from implicit hourly rate of pay for Type 4 see a decrease in their average regular $14.51 to $13.74 per hour, a decrease of workers who had earned between hourly wage (i.e., excluding the 5.3 percent. Type 3 workers paid $100,000 and $134,004 annually would overtime premium) from $19.00 to between $100,000 and the new HCE increase on average from $49.97 to $18.92, a decrease of 0.4 percent (Table compensation level would have their $50.76 (a 1.6 percent increase).

TABLE 20—AVERAGE REGULAR RATE OF PAY BY TYPE OF AFFECTED EAP WORKER, FY2017

Regular overtime No Occasional Total overtime overtime Newly Remain (T1) (T2) nonexempt exempt (T3) (T4)

Standard Salary Level

Before Final Rule ...... $18.39 $19.36 $19.00 $14.51 $17.32 After Final Rule ...... $18.25 $19.36 $18.92 $13.74 $17.54 Change ($) ...... ¥$0.15 $0.00 ¥$0.08 ¥$0.77 $0.23 Change (%) ...... ¥0.8% 0.0% ¥0.4% ¥5.3% 1.3%

HCE Compensation Level

Before Final Rule ...... $49.62 $56.13 $57.73 $41.43 $49.97 After Final Rule ...... $48.37 $56.13 $55.02 $38.80 $50.76 Change ($) ...... ¥$1.25 $0.00 ¥$2.72 ¥$2.63 $0.79 Change (%) ...... ¥2.5% 0.0% ¥4.7% ¥6.3% 1.6% Note: Pooled data for FY2013–FY2015 projected to reflect FY2017. *Type 1: Workers without regular OT and without occasional OT and become overtime eligible. *Type 2: Workers without regular OT but with occasional OT. These workers become overtime eligible. Paid overtime premium pay, so aver- age weekly earnings increase, but regular rate of pay and hours fall for 50 percent of workers who regularly work occasional overtime. *Type 3: Workers with regular OT who become overtime eligible. Paid overtime premium pay, so average weekly earnings increase, but reg- ular rate of pay and hours fall. *Type 4: Workers with regular OT who remain exempt (i.e., earnings increase to the updated salary level).

Type 1 and Type 4 workers would hours is relatively small and is due to average change across all weeks, have no change in hours. Type 1 the effect on labor demand from the including weeks without overtime, in workers’ hours would not change increase in the average hourly base wage which the decrease in hours is zero. because they do not work overtime and as predicted by the employment Type 2 workers who would no longer thus the requirement to pay an overtime contract model. earn the updated HCE compensation premium does not affect them. Type 4 Type 2 workers who work occasional level would see a decrease in average workers’ hours may increase, but due to overtime hours would be newly weekly hours in applicable weeks from lack of data, the Department assumed overtime eligible and would see a 48.5 to 48.2 (0.5 percent). Type 3 hours would not change. Half of Type negligible decrease in average weekly workers affected by the increase in the 2 and all Type 3 workers would see a hours in weeks where occasional standard salary level would see a small decrease in their hours of overtime is worked (0.1 percent decrease in hours worked from 50.8 to overtime worked. This reduction in decrease) (Table 21).210 This is the 50.3 hours per week (0.8 percent). Type

209 Type 2 workers do not see increases in regular that they do not work overtime do not exceed the to experience a reduction in their hours of work. earnings to the new salary level (as Type 4 workers salary level. Because only half these workers experience a do) even if their new earnings exceed that new 210 The Department estimates that half of Type 2 change in hours and because they work less level. This is because the estimated new earnings workers (those who work unpredictable overtime overtime on average, the aggregate change is smaller only reflect their earnings in that week when hours) will not see a reduction in their hours; than for Type 3 workers. overtime is worked; their earnings in typical weeks however as a group, Type 2 workers are expected

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3 workers affected by the increase in the average decrease from 52.4 to 52.0 hours HCE compensation level would see an per week (0.7 percent).

TABLE 21—AVERAGE WEEKLY HOURS FOR AFFECTED EAP WORKERS BY TYPE, FY2017

Regular OT No Occasional Total overtime OT Newly Remain worked (T2) nonexempt exempt (T1) (T3) (T4)

Standard Salary Level a

Before Final Rule ...... 41.4 38.6 40.3 50.8 53.5 After Final Rule ...... 41.3 38.6 40.3 50.3 53.5 Change ($) ...... ¥0.1 0.0 0.0 ¥0.4 0.0 Change (%) ...... ¥0.2% 0.0% ¥0.1% ¥0.8% 0.0%

HCE Compensation Level a

Before Final Rule ...... 45.5 39.0 48.5 52.4 51.1 After Final Rule ...... 45.3 39.0 48.2 52.0 51.1 Change ($) ...... ¥0.2 0.0 ¥0.3 ¥0.4 0.0 Change (%) ...... ¥0.4% 0.0% ¥0.5% ¥0.7% 0.0% Note: Pooled data for FY2013–FY2015 projected to reflect FY2017. a Usual hours for Types 1, 3, and 4 but actual hours for Type 2 workers identified in the CPS MORG. *Type 1: Workers without regular OT and without occasional OT and become overtime eligible. *Type 2: Workers without regular OT but with occasional OT. These workers become overtime eligible. Paid overtime premium pay, so aver- age weekly earnings increase, but regular rate of pay and hours fall for 50 percent of workers who regularly work occasional overtime. *Type 3: Workers with regular OT who become overtime eligible. Paid overtime premium pay, so average weekly earnings increase, but reg- ular rate of pay and hours fall. *Type 4: Workers with regular OT who remain exempt (i.e., earnings increase to the updated salary level).

Because Type 1 workers do not week (1.6 percent) for those affected by a 2.1 percent increase. For Type 3 experience a change in their regular rate the HCE compensation level. workers affected by the standard salary of pay or hours, they would have no Although both Type 2 and Type 3 level, average weekly earnings would change in earnings due to the Final Rule workers on average experience a increase from $723.86 to $743.83, an (Table 22). While their hours are not decrease in both their regular rate of pay increase of 2.8 percent. Type 3 workers expected to change, Type 4 workers’ and hours worked, their weekly affected by the change in the HCE salaries would increase to the new earnings are expected to increase as a compensation level have an increase in standard salary level or HCE result of the overtime premium. Based average weekly earnings from $2,136.91 on a standard salary level of $913 per compensation level (depending on to $2,196.10, an increase of 2.8 percent. week, Type 2 workers’ average weekly which test they pass). Thus, Type 4 Weekly earnings after the standard earnings increase from $751.47 to workers’ average weekly earnings would $760.11, a 1.1 percent increase. The salary level increased were estimated increase by $12.70 (1.4 percent) for average weekly earnings of Type 2 using the new wage (i.e., the partial those affected by the change in the workers affected by the change in the employment contract model wage) and standard salary level and by $41.58 per HCE compensation level were estimated the reduced number of overtime hours to increase from $2,778.65 to $2,836.63, worked.

TABLE 22—AVERAGE WEEKLY EARNINGS FOR AFFECTED EAP WORKERS BY TYPE, FY2017

Regular No Occasional overtime Total overtime overtime Newly Remain (T1) (T2) nonexempt exempt (T3) (T4)

Standard Salary Level a

Before Final Rule ...... $733.65 $724.45 $751.47 $723.86 $900.30 After Final Rule ...... $739.13 $724.45 $760.11 $743.83 $913.00 Change ($)...... $5.48 $0.00 $8.63 $19.97 $12.70 Change (%) ...... 0.7% 0.0% 1.1% 2.8% 1.4%

HCE Compensation Level a

Before Final Rule...... $2,180.55 $2,155.94 $2,778.65 $2,136.91 $2,535.42 After Final Rule ...... $2,209.75 $2,155.94 $2,836.63 $2,196.10 $2,577.00 Change ($) ...... $29.19 $0.00 $57.98 $59.19 $41.58 Change (%) ...... 1.3% 0.0% 2.1% 2.8% 1.6% Note: Pooled data for FY2013–FY2015 projected to reflect FY2017.

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a The mean of the hourly wage multiplied by the mean of the hours does not necessarily equal the mean of the weekly earnings because the product of two averages is not necessarily equal to the average of the product. *Type 1: Workers without regular OT and without occasional OT and become overtime eligible. *Type 2: Workers without regular OT but with occasional OT. These workers become overtime eligible. Paid overtime premium pay, so aver- age weekly earnings increase, but regular rate of pay and hours fall for 50 percent of workers who regularly work occasional overtime. *Type 3: Workers with regular OT who become overtime eligible. Paid overtime premium pay, so average weekly earnings increase, but reg- ular rate of pay and hours fall. *Type 4: Workers with regular OT who remain exempt (i.e., earnings increase to the updated salary level).

At the new standard salary level, the increase in weekly earnings is $13.91 For workers affected by the change in average weekly earnings of all affected (1.9 percent). Multiplying the average the HCE compensation level, average workers is expected to increase from change of $5.48 by the 4.2 million weekly earnings increase by $29.19 $733.65 to $739.13, a change of $5.48 affected standard EAP workers equals ($57.57 if Type 1 workers, who do not (0.7 percent). However, these figures an increase in earnings of $22.8 million work overtime, are excluded). When mask the impact on workers whose per week or $1,187 million in the first multiplied by 65,000 affected workers, hours and earnings will change because year (Table 23). Of the weekly total, the national increase in weekly earnings Type 1 workers, who do not work $660,000 is due to the minimum wage is $1.9 million per week, or $98.5 overtime, make up more than 60 percent provision and $22.2 million stems from million in the first year. Thus, total Year of the pool of affected workers. If Type the overtime pay provision. 1 transfer payments attributable to this 1 workers are excluded, the average Final Rule total $1,285.2 million.

TABLE 23—TOTAL CHANGE IN WEEKLY AND ANNUAL EARNINGS FOR AFFECTED EAP WORKERS BY PROVISION, FY2017

Total change in earnings Provision (1,000s) Weekly Annual

Total a ...... $24,715 $1,285,162 Standard salary level:. Total ...... 22,820 1,186,646 Minimum wage only ...... 660 34,338 Overtime pay only b ...... 22,160 1,152,308 HCE compensation level:. Total ...... 1,895 98,515 Minimum wage only. Overtime pay only b ...... 1,895 98,515 a Due to both the minimum wage and overtime pay provisions and changes in both the standard salary level and the HCE compensation level. b Estimated by subtracting the minimum wage transfer from the total transfer.

4. Potential Transfers Not Quantified rate of pay does not increase, the worker Philadelphia Chamber of Commerce; There may be additional transfers will earn less due to the lost hours of Kentucky Society of CPAs; Michigan attributable to this Final Rule; however, work. Association of Certified Public Accountants; Rockingham County, the magnitude of these other transfers Additional Work for Some Workers could not be quantified. North Carolina. AGC stated that 40 Affected workers who remain exempt percent of the members it surveyed Reduced Earnings for Some Workers will see an increase in pay but may also expected affected employees to lose Holding regular rate of pay and work see an increase in workload as Emerge some fringe benefits. Other commenters, hours constant, payment of an overtime Center and other commenters noted. such as AIA–PCI, stated that employers premium will increase weekly earnings The Department estimated the net would reduce bonus and incentive pay for workers who work overtime. changes in hours, but as noted in to newly overtime-eligible workers, However, as discussed previously, section VI.D.iv.3, subpart Modeling offsetting some of the earnings gains employers may try to mitigate cost Changes in Wages and Hours, did not achieved through overtime pay. NAHB increases by reducing the number of estimate changes in hours for affected presented results from a survey overtime hours worked, either by workers whose earnings increase conducted of members concerning transferring these hours to other workers (perhaps most notably those whose overtime of construction supervisors, or monitoring hours more closely. salary is increased to the new threshold and stated that of the 33 percent of Depending on how hours are adjusted, so they remain overtime exempt). companies indicating that a change in a specific worker may earn less pay after Reduction in Bonuses and Benefits company policies, with respect to this Final Rule. For example, assume an construction supervisors, would occur, Some commenters stated that exempt worker is paid for overtime 55 percent reported they would ‘‘reduce employers may offset increased labor hours at his regular rate of pay (not paid or eliminate bonuses’’ and 33 percent costs by reducing bonuses or the overtime premium but still acquires indicated they would ‘‘reduce or benefits.211 See, e.g., Greater a benefit from each additional hour eliminate other benefits.’’ This results in approximately 18 percent of worked over 40 in a week). If the 211 Other commenters asserted that some newly employer does not raise the worker’s overtime-eligible employees will lose benefits that respondents predicting reduced bonuses salary to the new level, requiring the their employers tie to exempt status. See, e.g., overtime premium may cause the CUPA–HR; National Association of Electrical compensation plans to provide such fringe benefits Distributors; WorldatWork. As the Department and bonus payments based upon, for example, the employer to reduce the worker’s hours explained in section IV.A.iv., we see no compelling employees’ job titles rather than based upon their to 40 per week. If the worker’s regular reason why employers cannot change their exemption status.

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and 11 percent predicting reduced 1. Bounds on Transfer Payments workers and half of regular overtime benefits. Because the Department cannot workers would receive the full overtime Commenters did not provide any data predict employers’ precise reaction to premium (i.e., such workers would from which to estimate the potential the Final Rule, the Department work the same number of hours but be magnitude of changes to benefits or calculated bounds on the size of the paid 1.5 times their implicit initial hourly wage for all overtime hours). bonuses. Therefore, the Department has estimated transfers from employers to Conversely, in the preferred model the not incorporated these impacts into the workers using a variety of assumptions. Since transfer payments are the largest Department assumed that only 50 cost and transfer estimates. percent of occasional overtime workers Furthermore, the Department believes if component of this Final Rule, the scenarios considered here are bounds and no regular overtime workers would employers reduce benefits or bonuses, receive the full overtime premium. For those reductions will occur instead of around the transfer estimate. Based on the assumptions made, these bounds do the other half of regular overtime the full employer adjustments included not generate bounded estimates for costs workers, the Department assumed in the in the model; that is, an employer who or DWL. upper bound method that they would reduces benefits or bonuses is likely to The potential upper limit for transfers have their implicit hourly wage adjusted reduce base wages by a smaller amount. occurs with the assumption that the as predicted by the partial employment The labor market will constrain to some demand for labor is completely contract model (wage rates fall and extent employers’ ability to reduce labor inelastic, and therefore neither the hours are reduced but total earnings costs, regardless of the types of implicit regular hourly rate of pay nor continue to increase, as in the preferred compensation they use to achieve those hours worked adjust in response to the method). Table 24 summarizes the reductions. changes in the EAP standard salary level assumptions described above. The plausible lower transfer bound v. Sensitivity Analysis and HCE annual compensation level. Under this assumption, employers pay also depends on whether employees This section includes estimated costs workers one and a half times their work regular overtime or occasional and transfers using either different current implicit hourly rate of pay for overtime. For those who regularly work assumptions or segments of the all overtime hours currently worked overtime hours and half of those who population. First, the Department (i.e., the full overtime premium). The work occasional overtime, the presents bounds on transfer payments potential lower bound occurs when Department assumes the employees’ estimated using alternative wages adjust completely and weekly wages will fully adjust as predicted by the employment contract model (in the assumptions. Second, in response to earnings are unchanged as predicted by preferred method their wages adjust commenter concerns that the the employment contract model. The Department believes that both the upper based on the partial employment rulemaking would have a bound scenario and the lower bound contract model).212 For the other half of disproportionate impact on low-wage scenario are unrealistic; therefore, we employees with occasional overtime regions and industries, the Department constructed more credible bounds. hours, the lower bound assumes they considers costs and transfers by region For a more realistic upper bound on will be paid one and one-half times and by industry. transfer payments, the Department their implicit hourly wage for overtime assumed that all occasional overtime hours worked (full overtime premium).

TABLE 24—SUMMARY OF THE ASSUMPTIONS USED TO CALCULATE THE LOWER ESTIMATE, PREFERRED ESTIMATE, AND UPPER ESTIMATE OF TRANSFERS

Lower transfer estimate Preferred estimate Upper transfer estimate

Occasional Overtime Workers (Type 2)

50% full EC model adj ...... 50% partial EC model adj ...... 100% full overtime premium. 50% full overtime premium ...... 50% full overtime premium.

Regular Overtime Workers (Type 3)

100% full EC model adj ...... 100% partial EC model adj ...... 50% partial EC model adj. 50% full overtime premium. * Full overtime premium: Regular rate of pay equals the implicit hourly wage prior to the regulation (with no adjustments); workers are paid 1.5 times this base wage for the same number of overtime hours worked prior to the regulation. * Full employment contract (EC) model: Base wages are set at the higher of: (1) A rate such that total earnings and hours remain the same before and after the regulation; thus the base wage falls, and workers are paid 1.5 times the new base wage for overtime hours (the employment contract model) or (2) the minimum wage. * Partial employment contract model: Regular rates of pay are partially adjusted to the wage implied by the employment contract model. The resulting regular rate of pay is the midpoint of: (1) A base wage that adjusts 40 percent of the way to the employment contract model wage level, assuming no overtime premium was initially paid and (2) a base wage that adjusts 80 percent of the way to the employment contract model wage level, assuming the workers initially received a 28 percent premium for overtime hours worked.

The cost and transfer payment costs do not vary across the scenarios. hourly wages, and time estimates. None estimates associated with the bounds These employer costs are a function of of these vary based on the assumptions are presented in Table 25. Regulatory the number of affected firms or affected made above. Conversely, managerial familiarization costs and adjustment workers, human resource personnel costs are lower under these alternative

212 The straight-time wage adjusts to a level that hours are paid at 1.5 times the straight-time wage. results in a wage less than the minimum wage, the keeps weekly earnings constant when overtime In cases where adjusting the straight-time wage straight-time wage is set to the minimum wage.

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employer response assumptions because workers whose hours change, will be range from $487.5 million to $2,525.3 fewer workers’ hours are adjusted by smaller.213 Depending on how million, with the preferred estimate employers and thus managerial costs, employers adjust the implicit regular equal to $1,285.2 million. which depend in part on the number of hourly wage, estimated transfers may

TABLE 25—BOUNDS ON YEAR 1 COST AND TRANSFER PAYMENT ESTIMATES, FY 2017 [Millions]

Lower transfer Preferred Upper transfer Cost/transfer estimate estimate estimate

Direct employer costs: Reg. familiarization ...... $272.5 $272.5 $272.5 Adjustment costs ...... 191.4 191.4 191.4 Managerial costs ...... 0.0 214.0 62.4 Total direct employer costs ...... 463.9 677.9 526.2 Transfers ...... 487.5 1,285.2 2,525.3 Note 1: Pooled data for FY2013–FY2015 projected to reflect FY2017. Note 2: Estimates due to both the minimum wage and overtime pay provisions and changes in both the standard salary level and the HCE compensation level.

2. Impacts by Regions and Industries CPS data for FY2013–FY2015 that about that the median base salary paid to 20 percent of first-line supervisors of restaurant managers is $47,000 and to In response to commenter concerns food preparation and serving workers in crew and shift supervisors is $38,000. that the proposed standard salary level Mississippi in this industry will exceed As revised, the standard salary level in would disproportionately impact low- the Final Rule salary threshold, while this Final Rule is approximately wage regions and low-wage industries, only 10 to 50 percent will pass the equivalent to the 2014 median base and requests for additional information duties test, which shows the change in on impacts by region and/or industry, salary paid to restaurant managers cited the Final Rule mitigates the impact on by NRA. this section presents estimates of the low-wage regions and industries. impacts of this Final Rule by region and Similarly, the National Association of The Department analyzed impacts to by industry (see section IV.A.iv.). Home Builders (NAHB) analyzed state- low wage regions by comparing the PPWO asserted that the Department’s level data and found that 50 percent or number of affected workers, costs, and probability codes demonstrate that the more of first line construction transfers across the four Census Regions. proposed salary level will supervisors in Arkansas, Mississippi, The region with the most affected disproportionately impact low-wage New Mexico, and Tennessee would be workers is the South (1.7 million). regions and industries. Specifically, affected by the Department’s proposal. However, as a share of potentially PPWO cited a study that found 100 However, 55 percent of first line affected workers in the region, the South percent of first-line supervisors of food supervisors of construction trades and is not unduly affected relative to other preparation and serving workers in extraction workers in the South earn regions (22 percent are affected Mississippi would fall below the new above the Final Rule’s salary threshold, compared with 16 to 19 percent in other threshold, even though the even though only 0 to 10 percent of regions); as a share of all workers in the Department’s probability codes state such workers nationwide are likely to region, the South is also not unduly that 10 to 50 percent of employees in pass the standard duties test. Finally, affected relative to other regions (3.6 this occupation should pass the duties the National Restaurant Association percent are affected compared with 2.7 test. The Department estimated based on (NRA) noted, based on a 2014 study, to 3.2 percent in other regions).

TABLE 26—POTENTIALLY AFFECTED AND AFFECTED WORKERS, BY REGION, FY2017

Affected workers Workers Potentially subject to affected Percent of Region FLSA workers Number Percent of potentially Percent of a b total affected all workers (millions) (millions) (millions) affected workers in in region region

All ...... 132.8 22.5 4.2 100 18.8 3.2 Northeast ...... 24.8 4.8 0.8 18.6 16.4 3.2 Midwest ...... 29.5 4.7 0.9 20.8 18.6 3.0 South ...... 48.2 7.8 1.7 41.1 22.2 3.6 West ...... 30.2 5.1 0.8 19.5 16.0 2.7 Note: Pooled data for FY2013–FY2015 projected to reflect FY2017. a Potentially affected workers are EAP exempt workers who are white collar, salaried, not eligible for another (non-EAP) overtime exemption, and not in a named occupation. b Estimated number of workers exempt under the EAP exemptions who would be entitled to overtime protection under the updated salary lev- els (if their weekly earnings do not increase to the new salary levels).

213 In the lower transfer estimate, managerial costs are zero because hours do not change for any Type 2 or Type 3 workers.

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Total transfers in the first year were percent of all transfers, while the South in other regions. Excluding Type 1 estimated to be $1.3 billion (Table 27). composes 41.1 percent of all affected workers, whose hours do not change, As expected, the transfers in the South workers (see section VI.D.ii.), thus, annual transfers per worker are $699 in are the largest portion because the transfers per affected workers are the South and range from $664 to $1,004 largest number of affected workers is somewhat below average in the South. in other regions. employed in the South. Transfers in the Annual transfers per worker are $270 in South were estimated to be about 36.5 the South and range from $242 to $378

TABLE 27—TRANSFERS BY REGION, FY2017

Total change Percent of Per affected Region in earnings total worker (millions) a

Total ...... $1,285.2 100 $304.00 Northeast ...... 189.9 14.8 241.86 Midwest ...... 314.7 24.5 357.13 South ...... 469.3 36.5 269.96 West ...... 311.3 24.2 378.28 Note: Pooled data for FY2013–FY2015 projected to reflect FY2017. a Due to both the minimum wage and overtime pay provisions and changes in both the standard salary level and the HCE compensation level.

Direct employer costs are composed million). While the three components of Northeast, 22.7 percent in the Midwest, of regulatory familiarization costs, direct employer costs vary as a percent 38.3 percent in the South, and 20.9 adjustment costs, and management of these total costs by region, the percent in the West. Once again, these costs. Total first year direct employer percentage of total direct costs in each proportions are almost the same as the costs were estimated to be $677.9 region is fairly consistent with the share proportions of the total workforce in million (Table 28). Total direct of all workers in a region. Direct each region: 18.5 percent in the employer costs were estimated to be the employer costs in each region as a Northeast, 22.0 percent in the Midwest, highest in the South ($259.6 million) percentage of the total direct costs were 36.7 percent in the South, and 22.8 and lowest in the Northeast ($123.0 estimated to be 18.1 percent in the percent in the West.

TABLE 28—DIRECT EMPLOYER COSTS BY REGION, FY2017

Direct employer costs a All regions Northeast Midwest South West

Costs (Millions)

Regulatory familiarization ...... $272.5 $52.6 $59.9 $95.7 $64.3 Adjustment ...... 191.4 35.6 39.9 78.7 37.3 Managerial ...... 214.0 34.9 54.1 85.1 39.9 Total direct costs ...... 677.9 123.0 153.9 259.6 141.5

Percent of Total Costs by Region

Regulatory familiarization ...... 100 19.3 22.0 35.1 23.6 Adjustment ...... 100 18.6 20.8 41.1 19.5 Managerial ...... 100 16.3 25.3 39.8 18.7 Total direct costs ...... 100 18.1 22.7 38.3 20.9 Note: Pooled data for FY2013–FY2015 projected to reflect FY2017. a All costs include both standard salary level costs and HCE compensation level costs.

Another way to compare the relative from 0.013 percent in the Northeast to Several commenters expressed impacts of this Final Rule by region is 0.023 percent in the Midwest. As a concern that this rulemaking will be to consider the transfers and costs as a percent of revenue, transfers range from more costly in low-wage regions due to proportion of current payroll and 0.003 to 0.004 percent. Thus, although lower revenue; for example, an current revenues (Table 29). Nationally, there are some slight differences among individual commenter wrote ‘‘a direct employer costs are 0.010 percent regions, costs and transfers relative to restaurant in NYC taking in a million or of payroll. By region, direct employer either current payroll or revenue are less more per year may not have any costs as a percent of payroll are also than a tenth of one percent. It is problem paying their manager or approximately the same (between 0.009 unlikely that a difference of 0.012 managers this proposed minimum and 0.012 percent of payroll). Direct percent in costs and transfers as a salary. However a restaurant in a mid- employer costs as a percent of revenue percentage of payroll between the west town that does say half that or are 0.002 percent nationally and in each Northeast (0.022 percent—the lowest 500,000 in sales, simply cannot afford region. percentage) and the Midwest (0.034 such a salary.’’ Similarly, the National Transfers as a percent of payroll show percent—the highest percentage) would Funeral Directors Association asserted greater variation among the regions than create any significant regional the rule will ‘‘be much more disruptive costs, but the levels are still very low. competitive advantage. for funeral homes in smaller rural Transfers as a percent of payroll range communities where many of those

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family-owned businesses are already managers’ salaries might be more less than three percent increase in wrestling with lower revenue levels.’’ apparent than real. In addition, the weekly earnings. In the restaurant However, regional comparisons must Department has noted in our analysis scenario described, this small increase incorporate more than a comparison of that employers will adjust employees’ in earnings applies to a fraction of the a single occupation: while revenues of earnings and hours to reduce the impact restaurant’s labor force, which in itself a typical restaurant in NYC are higher of the rule beyond the simple is a fraction of total costs and revenues. than a typical restaurant in Milwaukee, calculation of multiplying the overtime Therefore, based on the above analysis, so are costs including managers’ premium by the number of overtime the Department does not believe low- salaries, other employees’ wages, food hours worked. For example, in Table 22, wage regions will be unduly affected. costs and overhead, thus the relative the Department indicates that on ability of the NYC restaurant to increase average Type 3 workers will receive a

TABLE 29—ANNUAL TRANSFERS AND COSTS AS PERCENTS OF PAYROLL AND OF REVENUE BY REGION, FY2017

Direct employer costs Transfers Payroll Revenue Region (billions) (billions) As percent of As percent of As percent of As percent of payroll revenue payroll revenue

Total ...... $6,524 $37,261 0.010% 0.002% 0.020% 0.003% Northeast ...... 1,440 7,492 0.009 0.002 0.013 0.003 Midwest ...... 1,393 8,503 0.011 0.002 0.023 0.004 South ...... 2,171 13,362 0.012 0.002 0.022 0.004 West ...... 1,520 7,905 0.009 0.002 0.020 0.004 Notes: Pooled data for FY2013–FY2015 projected to reflect FY2017. Payroll, revenue, costs, and transfers all exclude the federal government. Sources: Private sector payroll and revenue data from 2012 Economic Census. State and local payroll data from 2014 Annual Survey of Pub- lic Employment and Payroll. State and local revenue data from 2012 Census of Governments.

In order to gauge the impact of the between industries are also small, with (transportation and utilities) less than final rule on industries, the Department the range of values of total costs and 1.0 percent of overall profits. The compared estimates of combined direct transfers as a percent of payroll ranging differences between industries are also costs and transfers as a percent of from a low of .01 percent (public small, with the range of values of total payroll, profits, and revenue, for the 13 administration) to a high of 0.09 percent costs and transfers as a percent of profits major industry groups (Table 30).214 (agriculture). ranging from a low of .04 percent This provides a common method of The Department also estimates (financial activities) to a high of 1.46 assessing the relative impacts of the rule transfers and costs as a percent of percent (transportation and utilities). on different industries, and the profits.215 216 Benchmarking against Finally, the Department’s estimates of magnitude of adjustments the rule may profits is potentially helpful in the sense transfers and costs as a percent of require on the part of enterprises in each that it provides a measure of the Final revenue by industry also indicate very industry. The relative costs and Rule’s effect against returns to small impacts (Table 30). The industries transfers expressed as a percentage of investment. However, this metric must with the largest costs and transfers as a payroll are particularly useful measures be interpreted carefully as it does not percent of revenue are leisure and of the relative size of adjustment faced account for differences across industries hospitality and other services. However, by organizations in an industry because in risk-adjusted rates of return which the difference between the leisure and they benchmark against the cost are not readily available for this hospitality industry, the industry with category directly associated with the analysis. The ratio of costs and transfers the highest costs and transfers as a labor force. Measured in these terms, to profits also does not reflect percent of revenue, and the industry costs and transfers as a percent of differences in the firm-level adjustment with the lowest costs and transfers as a payroll are highest in agriculture, other to profits impacts reflecting cross- percent of revenue (public services, and leisure and hospitality. industry variation in market administration) is 0.02 percentage However, the overall magnitude of the structure.217 Nonetheless, the overall points. Table 30 illustrates that the relative shares are small, representing magnitude of costs and transfers as a actual differences in costs relative to less than 0.1 percent of overall payroll percentage of profits are small, revenues are quite small across industry costs across industries. The differences representing in all industries except one groupings.

214 Note that the totals in this table for transfers 216 Table 1 of the IRS report provides information competitive industries with lower rates of return and direct costs do not match the totals in other on total receipts, net income, and deficits. The would adjust to increases in the marginal cost of sections due to the exclusion of transfers to federal Department calculated the ratio of net income labor arising from the rule through an overall, workers and costs to federal entities. Federal costs (column (7)) less any deficit (column (8)) to total industry-level increase in prices and a reduction in and transfers are excluded to be consistent with receipts (column (3)) for all firms by major industry quantity demanded based on the relative elasticities categories. Costs and transfers as a percent of of supply and demand. Alternatively, more payroll and revenue which exclude the federal revenues were divided by the profit to receipts concentrated markets with higher rates of return government. ratios to calculate the costs and transfers as a would be more likely to adjust through some 215 Internal Revenue Service. (2012). Corporation percent of profit. combination of price increases and profit Income Tax Returns. Available at: https:// 217 In particular, a basic model of competitive reductions based on elasticities as well as interfirm www.irs.gov/pub/irs-soi/12coccr.pdf. product markets would predict that highly pricing responses.

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TABLE 30—ANNUAL TRANSFERS, TOTAL COSTS, AND TRANSFERS AND COSTS AS PERCENT OF PAYROLL, REVENUE, AND PROFIT BY INDUSTRY, FY2017

Costs and transfers Transfers Direct costs Industry (millions) (millions) As percent of As percent of As percent of payroll revenue profit a

All ...... $1,282.70 $676.70 0.03% 0.01% 0.09% Agriculture, forestry, fishing, & hunting ...... 4.10 1.40 0.09 0.02 0.34 Mining ...... 11.90 3.50 0.02 0.00 0.08 Construction ...... 50.20 36.60 0.03 0.01 0.21 Manufacturing ...... 125.60 46.00 0.03 0.00 0.05 Wholesale & retail trade ...... 248.50 117.60 0.05 0.00 0.09 Transportation & utilities ...... 44.50 21.80 0.03 0.01 1.46 Information ...... 48.90 21.80 0.03 0.01 0.08 Financial activities ...... 134.90 79.60 0.03 0.01 0.04 Professional & business services ...... 181.50 113.30 0.02 0.01 0.14 Education & health services ...... 183.70 114.80 0.03 0.01 0.21 Leisure & hospitality ...... 142.60 57.40 0.07 0.02 0.40 Other services ...... 71.60 45.20 0.08 0.02 0.46 Public administration ...... 34.80 17.70 0.01 0.00 b Sources: Private sector payroll and revenue data from 2012 Economic Census. State and local payroll data from 2014 Annual Survey of Pub- lic Employment and Payroll. State and local revenue data from 2012 Census of Governments. Profit to revenue ratios calculated from 2012 Inter- nal Revenue Service Corporation Income Tax Returns. a Profit data based on corporations only. b Profit is not applicable for public administration.

Although labor market conditions price (wage) inelastic. The estimate of Type 2 workers). As described above, vary by Census Region and industry, the DWL assumes the market meets the after taking into account a variety of impacts from updating the standard theoretical conditions for an efficient potential responses by employers, the salary level and the HCE compensation market in the absence of this Department estimated the average wage level do not unduly affect any of the intervention (e.g., all conditions of a change for affected EAP workers whose regions or industries. The proportion of perfectly competitive market hold: full hours change. Workers impacted by the total costs and transfers in each region information, no barriers to entry, etc.). change in the standard salary level are is fairly consistent with the proportion Since labor markets are generally not considered separately from workers of total workers in each region. perfectly competitive, the Department’s impacted by the change in the HCE Additionally, the estimated costs and estimate of DWL is likely an compensation level. transfers from this Final Rule are very overestimate. For workers affected by the revised small relative to current payroll or The DWL resulting from this Final standard salary level, and who current revenue—less than a tenth of a Rule was estimated based on the average experience a change in hours, average percent of payroll and less than three- decrease in hours worked and increase wages (including overtime) will increase hundredths of a percent of revenue in in hourly wages calculated in section by $0.69 per hour prior to employer each region and in each industry. VI.D.iv. As the cost of labor rises due to hour adjustments (Table 31). This the requirement to pay the overtime represents the size of the wedge vi. Deadweight Loss premium, the demand for overtime between labor supply and labor Deadweight loss (DWL) occurs when hours decreases, which results in fewer demand. Average hours will fall by 0.40 a market operates at less than optimal hours of overtime worked. To calculate per week. These changes result in an equilibrium output. This typically the DWL, the following values must be average DWL of $0.14 per week per results from an intervention that sets, in estimated: Type 2 (the 50 percent of CPS the case of a labor market, wages above • The increase in average hourly occasional overtime workers who work their equilibrium level. While the higher wages for affected EAP workers (holding foreseeable overtime) and Type 3 wage results in transfers from employers hours constant), worker. An estimated 803,500 workers to workers, it also often causes a • the decrease in average hours per will be eligible for the overtime decrease in the total number of labor worker, and premium on some of their hours worked hours that are being purchased on the • the number of affected EAP each week after employer adjustments market. DWL is a function of the workers. are taken into account. Multiplying the difference between the wage employers Only 50 percent of Type 2 workers with $0.14 per worker per week estimate by were willing to pay for the hours lost overtime hours worked in the survey the number of affected workers results and the wage workers were willing to week (those who work regular or in a total DWL of $5.8 million in the take for those hours. In other words, predictable occasional overtime) and first year of this Final Rule attributable DWL represents the total loss in Type 3 workers are included in the to the revised standard salary level economic surplus resulting from a DWL calculation because the other (803,500 workers in DWL analysis × ‘‘wedge’’ between the employer’s workers either do not work overtime $0.14 per worker per week × 52 weeks). willingness to pay and the worker’s (Type 1), continue to work the same For workers affected by the revised willingness to accept. DWL may vary in number of overtime hours (Type 4), or HCE compensation level and who magnitude depending on market their employers are unable to adjust experience a change in hours, the parameters, but is typically small when their hourly wage because their average hourly wage will increase by wage changes are small or when labor overtime hours worked are $2.01 and average hours worked will supply and labor demand are relatively unpredictable (the other 50 percent of fall by 0.37 per week. This results in an

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average DWL of $0.38 per week for each affected workers results in a DWL of total DWL is estimated to be $6.4 of the estimated 31,200 workers affected $610,000 in the first year attributable to million in Year 1, which is small in by the compensation level who will see the HCE component of this Final Rule comparison to the size of the costs and their hours fall. Multiplying this per (31,200 workers in DWL analysis × transfers associated with this worker estimate by the number of $0.38 per worker × 52 weeks). Thus, proposal.218

TABLE 31—SUMMARY OF DEADWEIGHT LOSS COMPONENT VALUES IN YEAR 1

HCE Component Standard Compensation salary level level

Average hourly wages (holding hours constant) Pre ...... $14.86 $42.84 Post ...... $15.55 $44.85 Change ...... $0.69 $2.01 Average overtime hours Pre ...... 10.60 12.03 Post ...... 10.20 11.65 Change ...... ¥0.40 ¥0.37 Affected EAP workers ...... 803,476 31,225 DWL DWL per worker per week ...... $0.14 $0.38 Total annual DWL (millions) ...... $5.78 $0.61 Note: DWL analysis is limited to workers who experience hour adjustments in the reference week (50 percent of Type 2 workers identified in the CPS and Type 3).

Some commenters expressed concern nonexempt. We believe that most of the prevalence and magnitude of such that the rulemaking will lead to a reduction in these employees’ hours due transfers. reduction in employment or an increase to the increased marginal cost of their vii. Benefits and Effects Not Discussed labor will be offset by increased hours in unemployment. For example, the Elsewhere National Newspaper Association stated for other workers. This may be in the that 41 percent of surveyed members form of hiring of additional staff or In general, benefits of the rulemaking said the proposal would ‘‘lead to an increased hours for part-time or exempt were not quantified due to data overall loss of jobs in the community,’’ employees. By increasing the marginal limitations. However, these benefits are and AGC reported 33 percent of cost of labor for newly overtime-eligible discussed qualitatively. surveyed members ‘‘expect some workers, employers have an incentive to Market inefficiencies may be reflected positions to be eliminated.’’ See also avoid overtime hours worked by newly in employees’ choices concerning Erie Sport Store; Michigan Federation overtime-eligible workers, spreading earnings and hours worked. These for Children and Families; Texas work to other employees (which may inefficiencies may result from the Society of CPAs; Virginia Veterinary increase employment), or making other presence of information asymmetries,219 Medical Association. One small production-related decisions. These labor market immobility, and other business owner wrote: ‘‘If I find that I effects may offset DWL, and, as forms of labor market imperfection that am forced to pay additional money to discussed later, may affect social lead to outcomes that differ from models my existing staff . . . [m]y current welfare. However, we do not attempt to that assume competitive labor markets. employees will continue to work quantify those effects here. For example, empirical research by unwanted hours while another person If firms increase workers’ pay to meet Wozniak and others 220 indicate that a continues to be unemployed.’’ The the new salary level, rather than paying variety of factors (e.g., educational Department acknowledges that by overtime, however, then we may see endowment, exposure to local economic increasing the cost of labor, the total these particular workers working longer shocks early in work history, and lower number of labor hours demanded is hours to justify their increase in pay. earnings) are associated with less expected to fall. However, the This could consequently limit the effective job search networks and lower Department has estimated the net spread of employment that is labor market mobility. These may arise decrease in labor hours to be small traditionally recognized as a goal of from a variety of sources, such as less (334,000 hours per week in Year 1). We overtime laws. The Department sophistication in eliciting outside offers expect this reduction in hours to be acknowledges this may occur in some or less effective search heuristics. largest for affected workers who instances, however, we do not attempt Salaried workers at the lower end of the presently work a significant amount of to estimate transfers between workers compensation scale are more vulnerable overtime and who will become due to uncertainty concerning the to these inefficiencies than those at the

218 Very few commenters addressed the it is ‘‘only $1.58 per worker, per year’’ divides the Opportunities?’’ Journal of Human Resources 45(3): Department’s DWL calculation in the NPRM. The DWL costs across all affected workers. If instead 994–970. Bound, John and Harry Holzer (200) FL DEO derived their own estimate for deadweight these costs are spread across only those workers ‘‘Demand Shifts, Population Adjustments, and loss in Florida, which if applied nationally would whose hours or wages change, the cost per worker Labor Market Outcomes during the 1980s’’ Journal is larger. be significantly larger than the Department’s DWL of Labor Economics 18(1): 20–54. Greenwoods, estimate. However, FL DEO did not explain how 219 Stiglitz, Joseph E. (2000) ‘‘The Contributions Michael, J (1997) ‘‘Internal Migration in Developed they arrived at their estimate, nor did they note any of the Economics of Information to Twentieth specific problems with our calculation. Therefore, Century Economics’’, Quarterly Journal of Countries’’ in Handbook of Population and Family the Department has not adjusted our DWL Economics 115 (4): 1441–1478. Economics, ed Mark Rosenzweig and Oded Stark. calculations. Additionally, FL DEO’s concern that 220 Wozniak, Abigail (2010) ‘‘Are College New York: Elsevier Science. the Department’s DWL estimate is too low because Graduates More Responsive to Distant Labor Market

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higher end. Such workers are also more is the reason employers cannot who generally are not performing bona likely to be functioning in those parts of currently claim the EAP exemption for fide EAP work. This will vastly reduce the labor market more impacted by the above workers) is more subjective legal challenges regarding the duties test trade, technological change, and other and therefore harder to apply. An for employees earning between the factors that may lead to a greater outdated salary level reduces the current salary level ($455) and the number of job seekers than job effectiveness of this bright-line test. At updated level ($913). See, e.g., Little v. vacancies. Given these well documented the new salary level, the number of Belle Tire Distribs., Inc., 588 F. App’x market imperfections, tailored overtime-eligible white collar salaried 424 (6th Cir. 2014) (applicability of government intervention can result in workers earning at or above the salary administrative or executive exemption social benefits. In a frictionless labor level will decrease by 5.7 million, and to tire store assistant manager earning market, we would expect workers to if we use our estimate of $1,100 semi-monthly); Taylor v. find jobs where, at the margin, their misclassification of 12.8 percent, then Autozone, Inc., 572 F. App’x 515 (9th compensation is equivalent to the value an estimated 732,000 of these workers Cir. 2014) (applicability of executive of their leisure time. However, labor are currently entitled to overtime exemption to store managers earning as market frictions of the sort discussed protection but their employers do not little as $800 per week); Diaz v. Team above diminish mobility and therefore recognize them as such. Therefore, Oney, Inc., 291 F. App’x. 947 (11th Cir. lead to suboptimal outcomes for increasing the salary level is expected to 2008) (applicability of executive duties overtime exempt workers with few result in less worker misclassification. test to pizza restaurant assistant outside options, specifically, in them These reductions will have the greatest manager earning $525 per week). Setting having excessive hours of work. In the impact on workers concentrated in the salary level test at the 40th presence of labor market friction, certain occupations and industries as percentile of weekly earnings of full- tailored government intervention can shown in Table 10. Employers will be time salaried workers in the lowest- make these workers better off from a able to more readily determine their wage Census Region ($913) will social welfare perspective. legal obligations and comply with the alleviate the need for employers to law. The resulting effects, although apply the duties test in these types of 1. Strengthening Overtime Protection for unquantified, would be categorized into Other Workers cases, which is expected to result in costs (e.g., increased managerial effort), decreased litigation as employers will In addition to the 4.2 million affected transfers (e.g., increased payments from be able to determine employee EAP workers who will be newly eligible employers to workers) and benefits in exemption status through application of for overtime protection (absent the same manner as effects are the salary level test without the need to employer response to increase the salary categorized in the analysis of EAP perform a duties analysis. See Weiss level to retain the exemption), overtime workers who will be newly eligible for Report at 8 (explaining that the salary protection will be strengthened for an overtime protection. tests ‘‘have amply proved their additional 8.9 million salaried workers 2. Reduction in Litigation effectiveness in preventing the who earn between the current salary misclassification by employers of Reducing the number of white collar level of $455 per week and the updated obviously nonexempt employees, thus employees for whom a duties analysis salary level of $913 per week. These tending to reduce litigation. They have must be performed in order to workers, who were previously simplified enforcement by providing a determine entitlement to overtime will vulnerable to misclassification through ready method of screening out the also reduce some types of litigation misapplication of the duties test, will obviously nonexempt employees, related to the EAP exemption. As now be automatically overtime making an analysis of duties in such protected because their salaries fall previously discussed, employer uncertainty about which workers should cases unnecessary.’’) below the new salary level and therefore The International Association of Fire be classified as EAP exempt has they will not be subject to the duties Fighters (IAFF) concurred, stating that contributed to a sharp increase in FLSA test. These 8.9 million workers include: ‘‘reducing the number of employees for • lawsuits over the past decade. Much of 5.7 million salaried white collar whom the duties test must be applied this litigation has involved whether workers who are at particular risk of will significantly reduce litigation employees who satisfy the salary level being misclassified because they related to the EAP exemption.’’ Other currently pass the salary level test but test also meet the duties test for exemption. See, e.g, Soehnle v. Hess commenters agreed that the proposed do not satisfy the duties test; and rule would make the exemption easier • 3.2 million salaried workers in blue Corp., 399 F. App’x 749 (3d Cir. 2010) (gas station manager earning to apply, resulting in savings as a result collar occupations whose overtime of reduced litigation. See Comment from protection will be strengthened because approximately $654 per week satisfied duties test for executive employee); 57 labor law professors; American their salary will fall below the new Federation of State, County and 221 Morgan v. Family Dollar Stores, Inc., salary threshold. (Identification of Municipal Employees; NELP. Another blue collar workers is explained in 551 F.3d 1233 (11th Cir. 2008) (store managers earning an average weekly attorney, commenting on his own, section VI.B.iv). similarly stated that the rule would Although these workers are currently salary of up to $706 did not satisfy duties test for executive exemption). reduce the potential for the entitled to minimum wage and overtime misclassification of employees that protection, their protection is better Setting an appropriate salary level for often leads to litigation.222 assured with the updated salary level. the standard duties test, and maintaining the salary level with The salary level test is considered a 222 Some commenters, including the National bright-line test because it is immediately automatic updates, will restore the test’s Association of Manufacturers and Jackson Lewis, clear to employers and employees alike effectiveness as a bright-line method for expressed concern that the rulemaking will increase whether or not a worker passes the separating overtime-protected workers rather than decrease litigation costs because there from those who may be bona fide EAP will be a ‘‘spike in employees who were unhappy salary threshold. The duties test (which about being reclassified’’ and disputes about issues workers, and in turn decrease the such as what is compensable time, the accuracy of 221 Some workers in this group may be overtime litigation risk created when employers time records, and compliance with rest/meal period exempt due to another non-EAP exemption. must apply the duties test to employees requirements. See also Wage and Hour Defense

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The size of the potential social collar nonhourly workers had earnings now entitled to an overtime premium, benefits from reducing litigation can be within these ranges. Applying these which could reduce their uncertainty illuminated with the following findings to the 12 percent of cases and improve their welfare if they do not estimation method. The Department associated with the EAP exemption desire to work overtime. Additionally, if estimated the share of FLSA cases that yields an estimated 4.3 percent of FLSA they are asked to work overtime, they could potentially be avoided due to the cases may be avoidable.224 The will be compensated for the revised salary levels. The Department assumption underlying this method is inconvenience with an overtime used data from the U.S. Court’s Public that workers who claim they are premium.228 Access to Court Electronic Records misclassified as EAP exempt have a Economic theory suggests that (PACER) system and the CPS to estimate similar earnings distribution as all white workers tend to assign monetary values the percent of FLSA cases that concern collar nonhourly workers.225 to risk or undesirable job characteristics, EAP exemptions and are likely to be After estimating the share of cases as evidenced by the presence of affected by the final rule and data from that might be avoidable, the Department compensating wage differentials for a published study of the cost of civil quantified the associated benefit undesirable jobs, relative to other jobs litigation to determine the potential regarding the cost of litigation. The the worker can perform in the benefits of reduced litigation arising Department drew on a recent study marketplace.229 To the extent a from the final rule. conducted by the Court Statistics compensating wage differential exists, In order to determine the potential Project.226 The study provides estimates compensation may decrease with the number of cases that would be affected of the costs of litigation related to reduction in uncertainty.230 For this by the Final Rule, the Department employment cases, based on time for the reason, overall compensation would be obtained a list of all FLSA cases closed various steps of the litigation process expected to decrease for workers whose in 2014 from PACER (8,256 cases). From (e.g., case initiation, discovery, uncertainty decreases. Employees who this list the Department selected a settlement, , etc.) and the costs of prefer the reduced uncertainty to the random sample of 500 cases. For each staff in providing these activities (e.g., wage premium would experience a net case in this sample, relevant paralegals, junior and senior attorneys, benefit of the rule, and employees who information was reviewed and the etc.). It then provides quartile estimates prefer the wage premium to the reduced Department identified the cases that (25th percentile, median, and 75th uncertainty would experience a net were associated with the EAP percentile) based on the survey data. detriment as a result of the rule. The exemption. The Department found that The study finds that the median cost for Department believes that attempting to 12.0 percent of FLSA cases (60 of 500) employment litigation is $88,000. model the net monetary value of were related to the EAP exemptions.223 Applying this figure, the Department changes in uncertainty is not feasible Next the Department determined what estimated avoided litigation costs due to its heavy reliance on data that are share of these cases could potentially be resulting from the rule may total not readily available, and the potentially 227 avoided by an increase in the standard approximately $31.2 million per year. questionable nature of the resulting salary level to $913 and an increase in 3. Uncertainty About Future Overtime estimates. the annual HCE compensation level to Hours and Pay 4. Work-Life Balance $134,004. Due to the increase in marginal cost The Department estimated the share This Final Rule may have an impact for overtime hours for newly overtime- of EAP cases that may be avoided due on newly overtime-protected employees eligible workers, employers will to the Final Rule by using data on the who are not currently working much or demand fewer hours from some of the salaried earnings distribution from the any overtime, but who will now be workers affected by this rule.231 The CPS to determine the share of entitled to minimum wage and overtime estimated transfer payment does not potentially avoidable EAP cases where pay protections. These workers may face take into account the benefit to some workers earn at least $455 but less than a lower risk of being asked to work workers of working fewer hours in $913 per week or at least $100,000 but overtime in the future, because they are exchange for more (or equal) pay. less than $134,004 annually. From CPS, Therefore, an additional potential 224 If we use the pool of all exempt workers as the Department selected white collar, the reference group, then 32.8 percent of salaried benefit of this Final Rule is the increase nonhourly workers as the appropriate workers earn within these income ranges and an in time off for some affected EAP reference group for defining the estimated 3.9 percent of FLSA cases may be workers. On average, affected EAP earnings distribution instead of exempt avoidable (32.8 percent × 12 percent). workers were estimated to work 4.7 workers because of the simple fact that 225 There are several reasons why this assumption minutes less per week after the Final may not hold. First, workers with lower earnings if a worker is litigating his or her are less likely to pass the duties test, and thus may exempt status, then we do not know if be more likely to be misclassified. This may result 228 Although this statement holds as a comparison that worker is exempt or not. Based on in an underestimate of the share of cases associated between work hours below and above 40 per week, this analysis, the Department with workers earning between $455 and $913. it is not universally valid as a comparison between Conversely, workers with higher earnings may be the state of the world with the rule and the state determined that 35.8 percent of white more likely to bring a because lawyers may of the world without the rule. be more likely to take the case. This may result in 229 For a discussion of compensating wage Institute. As a number of employee advocates an overestimate of the share of cases associated differentials, see Gronberg, T. J., & Reed, W. R. commented, and as the Department explained in with workers earning between $455 and $913. (1994). Estimating Workers’ Marginal Willingness to section IV.A.iv., we disagree with these employer 226 Hannaford-Agor, P. and Waters, N. L. (2013). Pay for Job Attributes using Duration Data. Journal commenters, and believe an increased salary level Estimating the Cost of Civil Litigation. Court of Human Resources, 29(3), 911–931. that will once again serve as a clear and efficient Statistics Project, 20(1), 1–8. Additional data on the 230 In this case, the size of the compensating wage line of demarcation will reduce litigation. distribution of litigation costs can be found at differential is a function of the likelihood of 223 It was not always clear whether the case www.ncsc.org/clcm. working overtime and the amount of overtime involved the EAP exemption; when uncertain the 227 The cost of litigation is estimated to be worked. If the probability of working overtime is Department classified the case as not being related $53,680 if the case does not go to trial; according small then the wage differential may not exist. to the EAP exemption to produce a conservative to Court Statistics Project, 39 percent of litigation 231 The Department recognizes that not all estimate. For example, in cases with multiple costs are associated with ($88,000×(1¥0.39)). workers would prefer to work fewer hours and thus allegations (including both EAP and non-EAP Conversely, litigation costs might be significantly some of these workers might experience an adverse issues) the Department classified the case as not higher than estimated here since 25 percent of trial impact. The Department has no basis for estimating being related to the EAP exemption. cases exceed costs of $210,800. this potential negative impact.

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Rule. The effect is much more the Department believes that the Final overtime-eligible employees may be pronounced when limited to just those Rule may result in increased time off for partially offset to the extent that hours workers whose hours are adjusted in a a group of workers who may prefer such worked by other employees, especially given week (the 50 percent of Type 2 an outcome. However, the empirical those who are overtime exempt, workers who work occasional overtime evidence does not allow us to estimate increase. These effects have not been and are identified in the CPS data and how many workers would prefer fewer quantified. all Type 3 workers); they would on hours or how much workers value this 6. Increased Productivity average work 24.0 minutes less per additional time off, so it is difficult to week after the Final Rule. The monetize the benefit they may receive. This Final Rule is expected to additional time off may potentially Furthermore, not all workers would increase the marginal cost of some make these workers better off. prefer to work fewer hours and thus workers’ labor, predominately due to However, employers may respond to some of these workers might experience the overtime pay requirement since the rule by increasing hours of work for an adverse impact. In addition, the almost all affected EAP workers already some other employees—especially those estimated work loss represents an earn the federal minimum wage. In light who pass the duties test and whose average over all affected workers, and of the increased marginal cost of labor salaries are either already over the some workers may experience a larger for newly overtime-eligible workers, proposed threshold or will be adjusted reduction in hours.235 employers may organize workers’ time to be so. For these employees, work-life 5. Health more efficiently, thus increasing balance may be harmed by the rule, in productivity. Other channels that may some cases without increased pay. For Working long hours is correlated with increase marginal productivity include: an increased risk of injury or health Worker health (which was addressed EAP employees whose work hours and 236 pay are both reduced, they may seek problems. Therefore, by reducing above), reduced turnover, and other second jobs in order to restore pay to its overtime hours, some affected EAP effects described by efficiency wage original level, thus similarly impacting workers’ health may improve. This theory. Any such net gains would work-life balance. The impact of this would benefit the workers’ welfare, benefit both employers and workers. possible effect is unquantified. their families’ welfare, and society since Efficiency wages: By increasing Several commenters stated that by fewer resources would need to be spent earnings this Final Rule may increase a reducing excessive overtime the rule on health. Health has also been shown worker’s productivity by incentivizing will improve work-life balance for to be highly correlated with the worker to work harder. Thus the productivity.237 Some affected employees. The Coalition on Human additional cost to firms may be partially employees who work large amounts of Needs asserted that one outcome of the offset by higher productivity. In overtime may see a significant health proposed rule would be that particular, the estimated managerial impact; for example, workers at the 75th ‘‘[e]mployers . . . will have to costs associated with greater monitoring and 90th percentiles of hours worked acknowledge the value of the 40-hour effort may be offset due to this effect. A report working 15 and 20 hours of workweek by . . . limiting workers[’] strand of economic research, commonly overtime hours per week, respectively. [hours], thus giving them more time referred to as ‘‘efficiency wages,’’ On average, 25 percent of currently with their families.’’ See also Center for considers how an increase in wages may exempt employees who work overtime American Progress; EPI. According to be met with greater productivity.238 work at least 10 hours of overtime per the Center for Effective Government However, this literature tends to focus week. EPI, NELP, and other commenters on firms voluntarily paying higher ‘‘[the] proposed rule would provide noted the poor health effects of working more time protections to the parents of wages, and thus distinguishing long hours. The beneficial health effects themselves from other firms. Because over an estimated 9 million of reduced hours for some newly children.’’ 232 employer response to this rulemaking will result in wage increases, Empirical evidence shows that Hamermesh, D.S. (2014). Not Enough Time? workers in the United States typically American Economist, 59(2). extrapolating from efficiency wage work more than workers in other 235 It is possible that some employers may choose theory may not be appropriate to comparatively wealthy countries.233 to eliminate all overtime for affected workers and estimate the likely effects of the rule. hire additional workers or spread the work to Some commenters discussed Although estimates of the actual level of existing employees to replace the lost hours. The overwork vary considerably, executive, potential for this adjustment is uncertain, and the increased productivity as a benefit of administrative, and professional Department has found no studies that estimate the the rulemaking, including the AFL–CIO, occupations have the highest percentage potential magnitude of this effect. In addition, an the American Federation of Teachers, employer may be limited in his or her ability to and the IAFF. Individual comments of workers who would prefer to work make such adjustments; many affected employees fewer hours compared to other work only a few hours of overtime each week; submitted by the National Women’s occupational categories.234 Therefore, affected employees’ tasks may not be easily Law Center asserted that paying workers divisible; and hiring new workers and/or managing well ‘‘will lead to increased different work flows will impose additional costs 232 Conversely, some commenters believe the rule productivity, employee loyalty and less on the employer that will offset the savings from will hurt work-life balance because workers who avoiding paying the overtime premium. worker turn-over’’ and stated that ‘‘the become nonexempt may lose flexibility in setting 236 Keller, S. M. (2009). Effects of Extended Work better you treat employees the better the their schedules (see section IV.A.iv.) Shifts and Shift Work on Patient Safety, 233 For more information, see OECD series, quality of the work they produced.’’ Productivity, and Employee Health. AAOHN Conversely, there are channels average annual hours actually worked per worker, Journal, 57(12), 497–502. Kivima¨ki, M. (2015). Long available at: http://stats.oecd.org/ Working Hours and Risk of Coronary Heart Disease through which increasing overtime pay index.aspx?DataSetCode=ANHRS. and Stroke: A Systematic Review and Meta- may reduce productivity. For example, 234 Hamermesh, D.S., Kawaguchi, D., Lee, J. Analysis of Published and Unpublished Data for some overtime hours may be spread to (2014). Does Labor Legislation Benefit Workers? 603,838 Individuals. The Lancet, 386(10005), 1739– other workers. If the work requires Well-Being after an Hours Reduction. IZA DP No. 1746. 8077. 237 Loeppke, R., Taitel, M., Richling, D., Parry, T., significant project-specific knowledge or Golden, L., & Gebreselassie, T. (2007). Kessler, R., Hymel, P., et al. (2007). Health and Overemployment Mismatches: The Preference for Productivity as a Business Strategy. Journal of 238 Akerlof, G. A. (1982). Labor Contracts as Fewer Work Hours. Monthly Labor Review, 130(4), Occupational and Environmental Medicine, 49(7), Partial Gift Exchange. The Quarterly Journal of 18–37. 712–721. Economics, 97(4), 543–569.

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skills, then the new worker receiving 7. Reduction in Social Assistance commented that the Department these transferred hours may be less Expenditures understated the benefits of the productive than the first worker, The transfer of income resulting from rulemaking ‘‘by failing to account for especially if there is a steep learning this Final Rule may result in reduced employers’ tendency to hire additional curve. However, having another worker need for social assistance (and by workers and to schedule non-overtime versed in the project may be beneficial extension reduced social assistance work in response to the rule change.’’ to the firm if the first worker leaves the expenditures by the government). A Two estimates of job creation were firm or is temporarily absent (e.g., sick) worker earning the current salary level referenced by commenters. The or by providing benefits of teamwork of $455 per week earns $23,660 Washington Center for Equitable Growth (e.g., facilitating information annually. If this worker resides in a referenced an analysis by Goldman 239 exchange). The relative magnitudes family of four and is the sole earner, Sachs estimating the impact of the of rule-induced increases and decreases then the family will be considered proposed change in the standard salary 244 in productivity have not been impoverished. This makes the family level on employment. Goldman quantified. eligible for many social assistance Sachs concluded that an increase in the Reduction in turnover: Research programs. Thus, transferring income to salary threshold from $455 to $970 demonstrates a correlation between these workers may reduce eligibility for would result in a total of 120,000 new 245 earnings and employee turnover—as government social assistance programs hires. Legal Aid Society-Employment earnings increase, employee turnover Law Center referenced a publication by 240 241 and government expenditures. Several decreases. Reducing turnover may commenters, including Court Appointed the NRF which, relying on data from increase productivity, at least partially Special Advocates and some individual Oxford Economics, estimated that a because new employees have less firm- commenters, agreed that the rulemaking salary threshold of $970 per week specific capital (i.e., skills and would reduce unemployment insurance would create 117,100 part-time jobs in knowledge that have productive value and social welfare costs. the retail industry alone.246 While the in only one particular company) and Benefits for which currently exempt Department has some concerns with thus are less productive and require EAP workers may qualify include Oxford Economics’ analysis, as 242 additional supervision and training. Medicaid, the Supplemental Nutrition discussed in section VI.D.iii., we agree In short, replacing experienced workers Assistance Program (SNAP), the that in some instances employers may with new workers decreases Temporary Assistance for Needy hire additional employees to work hours productivity, and avoiding that will Families (TANF) program, the Special previously worked by newly nonexempt increase productivity. Reduced turnover Supplemental Nutrition Program for employees. However, as noted earlier, to should also reduce firms’ hiring and Women, Infants, and Children (WIC), the extent the individuals hired for the training costs. As a result, even though and school breakfasts and lunches.243 new jobs are already employed marginal labor costs rise, they may rise Quantifying the impact of this Final elsewhere, the number of individuals by less than the amount of the wage Rule on government expenditures is who are employed may not increase by change because the higher wages may be complex and thus not estimated here. In as much as the number of jobs increases. offset by lower turnover rates, increased order to conduct such an analysis, the Further, to the extent that employers productivity, and reduced hiring costs Department would need estimates of the shift overtime hours of newly overtime- for firms. eligible employees to part-time or It is difficult to estimate the impact of transfer per worker, (as noted earlier in this analysis, these estimates average overtime exempt employees who are reduced turnover on worker already on staff, hiring will not increase. productivity and firm hiring costs. The $13.91 per week across affected workers potential reduction in turnover is a who work overtime and $5.48 across all 9. Macroeconomic Benefits function of several variables: the current affected workers), his or her current income level, other sources of family Several commenters asserted that the wage, hours worked, turnover rate, regulations will benefit the economy as industry, and occupation. Additionally, income, number of family members, state of residence, and receipt of aid. a whole. United Steel Workers stated estimates of the cost of replacing a that ‘‘[w]hen the workers have more worker who quits vary significantly. 8. Employment Spreading money to spend, businesses have more Therefore, the Department does not Because employers will have an customers and more incentive to hire quantify the potential benefit associated incentive to reallocate excessive and invest.’’ Democracy for America with a decrease in turnover attributed to overtime hours in some cases (for commented the proposed rule ‘‘would this Final Rule. instance, amongst employees who work go a long way in addressing [wage] so many hours that any increase would disparity, strengthening our economy by 239 Some commenters believe productivity would providing more income to households decline. See section VI.D.iii. lead to minimum wage violations), the 240 Howes, Candace. (2005). Living Wages and Final Rule may result in expanded that they can turn around and spend at Retention of Homecare Workers in San Francisco. employment opportunities. Several businesses, creating new jobs and Industrial Relations, 44(1), 139–163. Dube, A., commenters predicted such an growing our GDP.’’ There are potential Lester,T.W., & Reich, M.. (2014). Minimum Wage Shocks, Employment Flows and Labor Market expansion. The Society of St. Vincent de 244 Frictions. IRLE Working Paper #149–13. Paul stated that that there will be Goldman Sachs. (2015). US Daily: The New 241 Note that this literature tends to focus on positive spillover effects that will result Federal Overtime Rules: A Greater Effect on changes in earnings for a specific sector or subset Payrolls than Pay. in ‘‘opportunities for new employment 245 of the labor force. The impact on turnover when Goldman Sachs based its analysis on a earnings increase across sectors (as would be the for others to fill the hours previously difference-in-difference-in-difference (DDD) case with this regulation) may be smaller. treated as non-compensable but estimate of the impact of the 2004 regulation. This 242 Argote, L., Insko, C. A., Yovetich, N., & mandatory managerial duties.’’ The method assumes the 2004 salary level change is comparable to the proposed salary level change, the Romero, A. A. (1995). Group Learning Curves: The Washington Center for Equitable Growth Effects of Turnover and Task Complexity on Group short duties test is similar to the standard duties Performance. Journal of Applied Social Psychology, test, and all reduced hours will be transferred to 25(6), 512–529. Shaw, J. D. (2011). Turnover Rates 243 Earned Income Tax Credit (EITC) expenditures new hires. Accordingly, the Department did not and Organizational Performance: Review, Critique, could either increase or decrease depending on conduct a similar analysis in this Final Rule. and Research Agenda. Organizational Psychology whether workers are on the ‘‘phase-in’’ or the 246 National Retail Federation. (2015). The Review, 1(3), 187–213. ‘‘phase-out’’ portion of the EITC-eligibility profile. Hidden Cost Of Overtime Expansion.

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secondary effects (both costs and the 2004 Final Rule method (the 20th per week. At this salary level, 5.6 benefits) of the transfer due to the percentile of weekly earnings of full- million workers are affected, Year 1 potential difference in the marginal time salaried workers in the South and adjustment and managerial costs are utility of income and the marginal retail), resulting in a salary level of $596 $541.2 million; Year 1 transfers are $1.8 propensity to consume between workers per week. At this salary level 683,000 billion; and Year 1 DWL is $8.4 million. and business owners. The transfer may workers would be affected in Year 1, Alternative 6 inflates the 1975 short result in societal gain during periods imposing direct adjustment and duties test salary level using the CPI–U when the economy is operating below managerial costs of $61.3 million, to $1,100 per week in FY2015 dollars. potential to the extent that transferring transferring $145.4 million in earnings At this salary level, 6.7 million workers income to workers with a relatively high from employers to employees, and are affected; Year 1 adjustment and marginal propensity to consume results resulting in DWL of $0.5 million. managerial costs are $665.4 million; in a larger multiplier effect and impact Alternative 3 uses the salary level based Year 1 transfers are $2.4 billion; and on GDP. The Department did not on the Kantor method for the long Year 1 DWL is $11.7 million. attempt to quantify these potential duties test, resulting in a level of $684 impacts. The Department also examined per week. At this salary level 1.4 million alternatives to the HCE compensation viii. Regulatory Alternatives workers would be affected in Year 1, level. HCE alternative 1 left the current imposing direct adjustment and $100,000 annual compensation level The Department has chosen to update managerial costs of $133.7 million, the standard salary level to the 40th unchanged. Therefore, no employer transferring $318.1 million in earnings percentile of weekly earnings of all full- costs, transfers, or DWL are associated from employers to employees, and time salaried workers in the South. As with this alternative. HCE alternative 2 resulting in DWL of $1.6 million. previously discussed, the Department inflates the 2004 level using the CPI–U considered a range of alternatives before Alternative 4 uses the methodology and sets the HCE annual compensation selecting this methodology and data set. proposed in the NPRM, setting the level at $125,320 per year. This Table 32 presents the alternative salary standard salary level at the 40th compensation level would affect 56,000 and compensation levels, the number of percentile of weekly earnings of full- workers in Year 1 (compared to 65,000 affected workers, and the associated time salaried workers nationally. For the at the chosen compensation level), costs and transfers. Regulatory fourth quarter of 2015 this yields a impose adjustment and managerial costs familiarization costs are not included salary level of $972 per week. At this on employers of $6.7 million, transfer because they do not vary over the salary level 4.8 million workers would $72.2 million in earnings from alternatives. be affected; Year 1 adjustment and employers to employees, and generate Alternative 1 inflates the 2004 managerial costs would equal $470.1 $400,000 in DWL. HCE alternative 3 sets standard salary level ($455) to FY2015 million, with transfers of $1.5 billion, the HCE annual compensation level at dollars using the CPI–U. This is $570 while DWL would equal $7.3 million. $149,894 per year, based upon using the per week. At this salary level 538,000 Alternative 5 sets the salary level using same percentile of full-time salaried workers would be affected in Year 1, the Kantor long test method but workers as in the 2004 Final Rule. This imposing direct adjustment and generates a level more appropriate to the compensation level would affect 72,000 managerial costs of $47.9 million, short duties test by multiplying the workers in Year 1, impose adjustment transferring $111.4 million in earnings result times the average historical ratio and managerial costs on employers of from employers to employees, and between the short and long test salary $9.4 million, transfer $123.0 million in resulting in DWL of $0.4 million. levels (as explained in section VI.C.iii.). earnings from employers to employees, Alternative 2 sets the salary level using This results in a salary level of $1,019 and generate $800,000 in DWL.

TABLE 32—UPDATED STANDARD SALARY AND HCE COMPENSATION LEVELS AND ALTERNATIVES, AFFECTED EAP WORKERS, COSTS, AND TRANSFERS, FY2017

Year 1 impacts Affected EAP (millions) Alternative Salary level workers (1,000s) Adj. & mana- Transfers DWL b gerial costs a

Standard Salary Level (Weekly)

Alt. #1: Inflate 2004 level ...... $570 538 $47.9 $111.4 $0.4 Alt. #2: 2004 method ...... 596 683 61.3 145.4 0.5 Alt. #3: Kantor long test level ...... 684 1,444 133.7 318.1 1.6 Final ...... 913 4,163 397.0 1,186.6 5.8 Alt. #4: Proposed ...... 972 4,837 470.1 1,476.8 7.3 Alt. #5: Kantor short test ...... 1,019 5,636 541.2 1,779.3 8.4 Alt. #6: Inflate 1975 short test level ...... 1,100 6,684 665.4 2,418.8 11.7

HCE Compensation Level (Annually)

Alt. #1: No change ...... $100,000 0 ...... Alt. #2: Inflate 2004 level ...... 125,320 56 6.7 72.2 0.4 Final ...... 134,004 65 8.4 98.5 0.6 Alt. #3: 2004 percentile ...... 149,894 72 9.4 123.0 0.8 Note: Pooled data for FY2013–FY2015 projected to reflect FY2017. a Regulatory familiarization costs are excluded because they do not vary based on the selected values of the salary levels.

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b DWL was estimated based on the aggregate impact of both the minimum wage and overtime pay provisions. Since the transfer associated with the minimum wage is negligible compared to the transfer associated with overtime pay, the vast majority of this cost is attributed to the over- time pay provision.

ix. Automatic Updates 2. Updating Methods Considered may be bona fide EAP employees who are not entitled to overtime and 1. Background In the NPRM the Department sought continues to work effectively with the comments on whether to automatically Between periodic updates to the duties test. Accordingly, the Final Rule update the standard salary level and salary level, nominal wages typically provides for updating both the standard HCE total compensation level using the increase, resulting in an increase in the salary level and the HCE total Consumer Price Index for All Urban number of workers qualifying for the compensation requirement using a fixed Consumers (CPI–U), or using a fixed EAP exemption, even if there has been percentile of weekly earnings (40th percentile of earnings. The CPI–U is the no change in their duties or real percentile of full-time workers in the most commonly used price index in the earnings. Thus, workers whom Congress lowest-wage Census Region for the U.S. and is calculated monthly by BLS. intended to be covered by the minimum standard salary level; the annualized The CPI–U is the primary index used by wage and overtime pay provisions of the value of the 90th percentile of full-time the government to index benefit FLSA may lose those protections. salaried workers nationally for the HCE payments, program eligibility levels, Automatically updating the standard total compensation level). salary level allows this threshold to and tax payments. The CPI–U holds keep pace with changes in earnings, quantities constant at base levels while While the Department has decided allowing it to continue to serve as an allowing prices to change. The not to automatically update the salary effective dividing line between quantities are fixed to represent a level using the CPI–U, we note that in potentially exempt and nonexempt ‘‘basket of goods and services’’ bought recent years the CPI–U has grown at a workers. Furthermore, automatically by the average consumer. rate closely aligned with the 40th updating the standard salary level and Updating the salary levels based upon percentile of earnings of full-time the HCE compensation level will the growth rate of earnings at a specified salaried workers in the South. Between provide employers more certainty in percentile of the weekly earnings FY2006 and FY2015 the average annual knowing that these levels will change by distribution is consistent with the growth rates for the 40th percentile in a small amount on a regular basis, rather Department’s historical practice of using the South and the CPI–U have been 2.1 than the more disruptive increases salary level as a key criterion for the percent and 1.8 percent, respectively. caused by much larger changes after exemption. The growth rate of earnings The average growth rate at the 90th longer, uncertain increments of time. reflecting labor market conditions is an percentile of full-time salaried earnings This will allow firms to better predict appropriate measure of the relative nationwide during the same period was short- and long-term costs and status, responsibility, and independence 3.0 percent. employment needs. that characterize exempt workers. While The Department compared the In this Final Rule, the Department is earnings and prices generally mirror one standard salary levels that would have including in the regulations a another over time, they do not change resulted from 1995 to 2015 if (1) the mechanism for automatically updating in tandem. standard salary level was set each year the salary levels every three years. The to the 40th percentile of weekly 3. Comparison of Indices and Decision Department will reset the standard earnings of full-time salaried workers in To Use Earnings Percentiles salary level to keep it at the 40th the South, and (2) the standard salary percentile of weekly wages of full-time As previously discussed, see section level was set using the growth in the salaried workers in the lowest-wage IV.E.iii., the Department believes setting CPI–U (and setting the level in 2014 to Census Region (currently the South). and updating the salary level using the match the 40th percentile earnings level The HCE annual compensation level same methodology will best ensure that in the South, i.e., $913 per week) (Figure will be updated to keep it at the 90th the salary level test effectively 5). While not identical, the data show percentile of weekly wages of full-time differentiates between overtime-eligible that these two methods produced salaried workers nationally. white collar workers and workers who similar results.

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4. Concerns With Use of Fixed Earnings because many affected EAP workers way other than salaried or hourly.247 Percentile as Automatic Updating who are reclassified as nonexempt are The available responses include Methodology likely to remain salaried as: (1) An piecework, commission, self-employed/ analysis of the 2004 salary level updates farmer/profits, and by the job/day/mile. As discussed in detail in section None of these options are ones to which IV.E.iii., some commenters expressed did not indicate significant numbers of workers were converted to hourly pay; employers are likely to change their concern that automatically updating the salaried workers. The share of workers salary level using a fixed percentile of and (2) an analysis of updates in California’s higher salary level did not who are not paid on either an hourly or earnings would result in the salary salaried basis is relatively small, about levels growing at too quick a rate. See, indicate significant numbers of workers were reclassified as hourly. In any 10 percent of workers in the PSID. e.g., American Bankers Association; Accordingly, grouping nonhourly event, the Department’s modeling of the AIA–PCI ; Chamber. Specifically, these workers with salaried workers does not commenters stated that if the standard impact of automatic updating shows negate the following comparisons and salary level is set at a fixed percentile that any potential ‘‘ratcheting’’ effect conclusions based on CPS data. of earnings of full-time salaried workers, that may occur would be small, largely and some or all of the newly nonexempt because newly nonexempt workers Workers May Remain Salaried Even if workers are converted to hourly status compose a small percentage of the pool Nonexempt and thus removed from the data set, of full-time nonhourly workers in the The Department disagrees with earnings at that 40th percentile of dataset used to establish the salary level. commenters that suggested that salaried workers will quickly rise solely The analyses below are based on CPS employers will likely (or automatically) due to the exclusion of these hourly MORG data. As acknowledged in the convert large numbers of newly workers (an effect many commenters nonexempt employees to hourly pay NPRM, salary status for CPS representing employers referred to as status. In some instances such respondents cannot definitively be ‘‘ratcheting’’). Commenters asserted that conversation may occur, for example, if this may cause growth in the 40th determined because workers who an employee regularly works overtime percentile of full-time salaried workers indicate they are paid on a salary basis and the employer is able to adjust his or to no longer reflect prevailing economic or on some basis other than hourly are her regular rate. However, for the conditions. all classified as ‘‘nonhourly.’’ To majority of affected employees, there consider the possibility this biases our Claims that automatic updating using will be no incentive for employers to the fixed percentile approach will lead results, we looked at the Panel Study of convert them to hourly pay because they to the rapid escalation of the salary level Income Dynamics (PSID). The PSID do not work overtime. Also, employers are based primarily on the assumption provides additional information may have other incentives to maintain that employers will respond to this concerning salaried versus other workers’ salary status; for example, they rulemaking by converting newly nonhourly workers. In the PSID, nonexempt workers to hourly pay respondents are asked how they are 247 This question is only asked of ‘‘heads’’ and paid on their main job and are asked for ‘‘wives’’ in the PSID (i.e., heads of households and status. However, the Department their spouses). However, in the 2013 PSID, ‘‘heads’’ believes these concerns are overstated more detail if their response is some and ‘‘wives’’ composed 88 percent of workers.

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may offer salaried positions to attract Difference #2 (workers exempt before, the salary level update on the share of talent. Commenters highlighted that but not after rule compared to workers white collar workers paid hourly, the employees value job characteristics exempt both before and after the rule): Department conducted difference-in- associated with salaried pay—such as Workers earning between $250 and $455 differences-in-differences (DDD) earnings predictability—and so per week versus those earning at least analyses of the revisions to the employers may pay nonexempt $455 but less than $600.250 California exempt salary level for which employees on a salary basis to preserve Using this DD analysis, the CPS data were available (2007–2008, employee morale. Using the CPS MORG Department found no evidence that and 2014).252 data pooled for FY2013–FY2015 and changes in the salary level for The Department modeled three types projected to FY2017, the Department exemption resulted in a statistically of differences to include in the analyses: estimated that 18.6 percent of white significant increase in the percent of Difference #1 (pre- versus post- collar workers earning below $455 per full-time white collar workers paid on rulemaking): week are nonhourly; based on findings an hourly basis following the 2004 Final 2007–2008: January–March 2006 from the PSID, the Department believes Rule.251 This can also be demonstrated versus January–March 2008, and 2014: most of these nonhourly workers are by looking directly at the share of January–March 2014 versus January– salaried. workers paid hourly; the Department March 2015.253 found that following the 2004 Final Difference #2 (workers exempt before, Previous Salary Level Updates Did Not Rule, the percent of full-time white but not after rule compared to workers Indicate Workers Being Converted to collar workers who were paid hourly exempt both before and after the rule): Hourly decreased from 74.6 percent to 73.6 2007–2008: Workers earning between The Department analyzed employer percent in the affected earnings range $540 and $640 versus those earning at responses to the 2004 Final Rule and to ($250–$455), while it increased from least $640 but less than $740, and a series of revisions to California’s 60.9 percent to 63.6 percent in the 2014: Workers earning between $640 salary level test for exemption under earnings range where there were no and $720 versus workers earning at least state law in order to better estimate changes to EAP exemption eligibility. In $720 but less than $800. whether workers who are reclassified as other words, between the first quarter of Difference #3: California workers nonexempt are more likely to be paid on 2004 and the first quarter of 2005, the versus workers in other states where the an hourly basis. These analyses allow share of full-time white-collar workers salary level was not increased.254 the identification of any potential who are paid hourly decreased Using this DDD analysis, the regulatory impact while controlling for marginally in the group of potentially Department found no evidence that time trends and a broad range of other affected workers (those earning $250 to changes in the salary level for relevant factors (education, occupation, $455), whereas in the group earning exemption resulted in a statistically industry, geographic location, etc.). The above the salary level (those earning significant increase in the percent of Department found no evidence that more than $455 but less than $600) it full-time white collar workers paid on changes in the salary level for increased by 2.6 percentage points. an hourly basis.255 This can also be exemption resulted in a statistically California. The exempt salary level in significant increase in the percent of California is set by statute as equal to 252 California raised the state minimum wage in full-time white collar workers paid on twice the state minimum wage for 40 January of both 2007 and 2008. These changes were an hourly basis following either the hours worked per week. The salary level announced jointly in September 2006. Because employers knew that a second increase in the 2004 Final Rule or the California salary has been updated four times in recent exempt salary level would occur one year after the level updates. See section VI.D.iii.5 for years when California raised the state 2007 increase, the Department expected that they discussion of the applicability of these minimum wage: In 2007 (from $540 to planned their adjustments accordingly rather than results to this Final Rule. $600), 2008 (from $600 to $640), 2014 treat the two increases as isolated independent 2004 Final Rule. In 2004, the salary events. Therefore the Department considered the (from $640 to $720), and 2016 (from combined effects of the 2007 and 2008 changes. level required to be eligible for $720 to $800). To estimate the effect of 253 The minimum wage update took place in July exemption increased from $250 per 2014. week (short salary level) to $455 (the 250 In order to isolate the potential effect on 254 We excluded Alaska, Connecticut and New standard salary level).248 To estimate earnings due to the 2004 salary changes, we York because the state EAP salary levels either: (1) the effect of this salary level update on excluded workers in states where the state EAP Were above the FLSA standard salary level; (2) the share of full-time, white collar salary level was higher than the FLSA short salary differed in the time periods considered; or (3) both level (i.e., Alaska, California, Connecticut, Maine (1) and (2). workers paid hourly, the Department and New York). 255 The shares provided in the text do not control conducted a difference-in-differences 251 The shares provided in the text do not control for other covariates. However, using a DDD (DD) analysis of the 2004 part 541 salary for other covariates. However, using a DD regression regression approach that includes a full level revisions. The Department approach that includes a full complement of complement of controls (age, education, gender, controls (age, education, gender, race, ethnicity, race, ethnicity, occupation, industry, state of modeled two types of differences to occupation, industry, state of residence, working residence, working overtime, multiple job holding), include in the analysis: overtime, multiple job holding), the relevant the relevant marginal effect for 2007–2008 is 0.018 Difference #1 (pre- versus post- marginal effect is ¥0.033 (i.e., the amount the and the p-value is 0.612. The marginal effect of the rulemaking): January–March 2004 likelihood of being paid hourly changes post triple difference for 2014 is ¥0.057 and the p-value versus January–March 2005,249 rulemaking for workers earning between $250 and is 0.103. Neither of these are statistically significant $455 per week relative to the change for workers at conventional thresholds for significance. The earning $455 or above) and the p-value is 0.118, difference-in-difference-in-differences model used 248 The 2004 Final Rule increased the salary level which is not statistically significant at conventional can be written as from the previous long test level of $155 per week thresholds for significance. The difference-in- where Hi is equal to 1 if worker i is paid by the (executive and administrative exemptions) or $170 differences model used can be written as where Hi hour and 0 otherwise, Ti is equal to 1 if worker i per week (professional exemption) to $455 per is equal to 1 if worker i is paid by the hour and earns between the old threshold and the new week. For purposes of this analysis, the Department 0 otherwise, Ti is equal to 1 if worker i earns at least threshold and 0 if she earns just above the new compared the increase from the short test salary $250 but less than $455 and 0 if she earns between threshold, Pi is equal to 1 for the post-change period level ($250 per week) since the long test was no $455 and $600, Pi is equal to 1 for the post-change and 0 for the pre-change period, Si is equal to 1 if longer operative due to increases in the minimum period (Jan.–Mar. 2005) and 0 for the pre-change worker i is in California and 0 if she is in other wage. period (Jan.–Mar. 2004), and Ci is the set of worker- states where the salary level was not increased, and 249 The 2004 Final Rule was published April 23, specific controls. The model was estimated using a Ci is the set of worker-specific controls. The model 2004 and went into effect August 23, 2004. probit regression. Continued

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demonstrated by looking directly at the exemption, and ignores that, at most, converted to hourly status to generate a share of workers paid hourly (using employers will only have an incentive realistic upper bound of the magnitude differences one and three). After the to convert affected workers (a small of any possible ratcheting effect. The 2007–2008 California update, among share of all full-time nonhourly Department estimated that the salary Californians earning between the old employees). level in 2026, after three updates, the and new salary levels, the share of full- Oxford Economics also considered salary level as set in the Final Rule time white collar workers being paid how converting salaried workers to (based on weekly earnings of full-time hourly decreased slightly from 73.4 hourly status could influence salaried workers in the South) could be percent to 73.1 percent. Among full- automatically updated salary levels. In approximately 2.5 percent higher than time white collar workers earning one analysis, they assumed that expected due to this effect. This figure comparable amounts in states where the employers will convert the lowest 40 is significantly smaller than the salary level did not change, the share of percent of full-time salaried workers to estimates provided by the commenters. workers being paid hourly increased hourly status in 2016, and that by Year Furthermore, we believe our estimate is from 66.2 percent to 67.5 percent. After 2 the 40th percentile of the new an overestimate because it assumes the 2014 California update, the values distribution of salaried workers would employers convert all Type 2 and Type increased from 72.0 percent to 74.0 be equivalent to the 64th percentile of 3 workers to hourly status, which, for percent in California, and increased the original distribution. The the reasons discussed above and in from 68.2 percent to 69.4 percent in Department believes this model is section IV.E.iii. of the preamble, the other states.256 Neither of these results clearly unrealistic. Like Edgeworth Department believes is a highly unlikely suggests that the salary updates resulted Economics, Oxford Economics outcome. in a significantly greater percent of erroneously assumes that workers who affected workers being converted to are not affected by the new salary would x. Projections hourly pay in California as compared to nonetheless be converted to hourly 1. Methodology the rest of the United States. status. In another analysis, Oxford The Department projected affected The Department’s Modeling of Possible Economics estimated employer response workers, costs, and transfers forward for ‘‘Ratcheting’’ Indicates Any Effect to updating the threshold to $970 in ten years. This involved several steps. Would Be Negligible 2016. According to their analysis, First, past growth in the earnings In a study submitted by the PPWO, approximately 695,000, or nearly one distribution was used to estimate future Edgeworth Economics estimated the third, of the 2,189,000 affected workers salary levels. Second, workers’ earnings, impact that automatic updating using will be converted from ‘‘salaried absent a change in the salary levels, the fixed percentile approach would exempt’’ to ‘‘hourly nonexempt.’’ were predicted. Third, predicted salary have on the salary level. They found Oxford Economics concluded that about levels and earnings were used to that ‘‘[i]f just one quarter of the full-time two-thirds of these converted employees estimate affected workers. Fourth, non-hourly workers earning less than will have their hourly rates decreased to employment adjustments were $49,400 per year ($950 per week) were leave their earnings unchanged, and one estimated and adjusted earnings were reclassified as hourly workers, the pay third will have their hours reduced to calculated. Lastly, costs and transfers distribution among the remaining non- 38 per week. However, neither analysis were calculated. hourly workers would shift so that the appears to account for the possibility First, in years when the salary level is 40th percentile of the 2016 pay that employers may continue to pay updated, the predicted salary levels are distribution would be $54,184 ($1,042 some newly nonexempt employees on a estimated using the historic geometric per week), about 9.6 percent higher than salary basis, and thus both predictions growth rate between FY2005 and it was in 2015.’’ Their estimate was likely overestimate the number of FY2015 in (1) the 40th earnings based on the key assumption that one workers converted to hourly status. percentile of full-time salaried workers quarter of all full-time nonhourly The Department conducted a similar in the South for the standard salary employees would be converted to analysis, using what the Department level and (2) the 90th earnings hourly pay each year. Accordingly, believes are more realistic assumptions, percentile of full-time salaried workers based on the Department’s reading of and found a significantly smaller nationally for the HCE compensation the Edgeworth Economics’ analysis, it potential impact. The Department level, projected to the second quarter of appears they converted one quarter of considered which affected workers are the respective years before the updated all full-time nonhourly employees most likely to be converted from levels go into effect. Second, the earning below the salary level to hourly salaried to hourly pay as a result of this Department calculated workers’ status. This modeling is inappropriate rulemaking. Type 4 workers, those projected earnings in future years by because it fails to account for whether whose salaries are increased to the new applying the annual projected wage the employees perform white collar standard salary level, remain exempt growth rate in the workers’ industry- work and are subject to the EAP and their method of pay will not occupation to current earnings, as change. Type 3 workers, who regularly described in section VI.B.ii. Third, we was estimated using a probit regression. The work overtime and become nonexempt, compared workers’ counter-factual Department also performed alternative analyses to and Type 2 workers, those who earnings (i.e., absent the rulemaking) to check whether these results hold, including (1) a comparison of California and other states looking occasionally work overtime and become the predicted salary levels. If the only at workers with earnings below the revised nonexempt, are the most likely to have counter-factual earnings are below the salary level (i.e., eliminating Difference #2 from the their pay status changed. Type 1 relevant salary level (i.e., standard or DDD model), and (2) running simplified models workers (who make up more than 60 HCE) then the worker is considered without individual controls. None of these checks found a significant increase in the percentage of percent of the affected workers) are affected. In other words, in each year workers paid on an hourly basis. assumed to not work overtime, and affected EAP workers were identified as 256 The increase in the proportion of workers paid employers thus have little incentive to those who would be exempt in FY2017 on an hourly basis in the relevant salary range in convert them to hourly pay. For this absent the rule change but have California is not statistically different from the increase in the proportion for workers in other analysis, the Department assumed all projected earnings in the future year states. Type 2 and Type 3 workers are that are less than the relevant salary

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level. Sampling weights were also have become exempt in the absence of when the salary and compensation adjusted to reflect employment growth this Final Rule in Years 2 through 10. levels are updated). as explained in section VI.B.ii. For example, a worker may earn less Adjustment costs and managerial Adjusted hours for workers affected in than $455 in FY2017 but between $455 costs are a function of the number of Year 1 were re-estimated in Year 2 using and $913 in subsequent years; such a affected EAP workers and thus will be a long-run elasticity of labor demand of worker would be counted as an affected higher with automatic updating. ¥0.4.257 For workers newly affected in worker. In the absence of this Final Rule Adjustment costs will occur in any year Year 2 through Year 10, employers’ he or she would likely have become in which workers are newly affected. wage and hour adjustments due to the exempt at some point during the 9 After Year 1, these costs are estimated rulemaking are estimated in that year, as projected years; however, as a result of to be relatively small since the majority described in section VI.D.iv., except the the Final Rule, this worker remains of workers affected by this rulemaking long-run elasticity of labor demand of nonexempt, and is thus affected by the are affected in Year 1, and the costs ¥0.4 is used. Employer adjustments are Final Rule. In the NPRM the Department occur almost exclusively in years when made in the first year the worker is considered these workers separately the salary is automatically updated. affected and then applied to all future from affected workers and did not Management costs recur each year for years in which the worker continues to estimate costs and transfers associated all affected EAP workers whose hours be affected (unless the worker switches with these workers.259 are adjusted. Therefore, managerial to a Type 4 worker). Workers’ earnings costs increase modestly over time as the The Department quantified three in predicted years are earnings post number of affected EAP workers types of direct employer costs in the employer adjustments, with overtime increases. The Department estimated ten-year projections: (1) Regulatory pay, and with ongoing wage growth that Year 1 managerial costs would be familiarization costs; (2) adjustment based on historical growth rates (as $214.0 million (section VI.D.iii.); by costs; and (3) managerial costs. described above). Year 10 these costs would grow slightly Regulatory familiarization costs only Very few commenters discussed the to $255.1 million. In years without occur in Year 1 and years when the Department’s projections for Year 2 automatic updates managerial costs fall salary levels are automatically updated. through Year 10 in the NPRM’s analysis. slightly since earnings growth will Thus, in addition to Year 1, some Dan Goldbeck 258 stated, in an article cause some workers to no longer be regulatory familiarization costs are cited by the Association of Energy affected in those years. In all years expected to occur in Year 4 (FY2020), Service Companies, that in the NPRM, between 94 and 98 percent of costs are Year 7 (FY2023), and Year 10 the Department reported only Year 2 attributable to the revised standard (FY2026).260 Specifically, the and Year 10 projected estimates, making salary level (Table 33). it ‘‘difficult to know the accuracy of this Department added 5 minutes per The Department projected two types calculation.’’ See also International establishment for regulatory of transfers from employers to Bancshares Corporation. In the Final familiarization time to access and read employees associated with workers Rule, the Department has included the published notice in the Federal affected by the regulation: (1) Transfers projected costs in each of the nine Register with the updated standard due to the minimum wage provision projected years. salary level and HCE compensation and (2) transfers due to the overtime pay level in years when the salary level is provision. Transfers to workers from 2. Estimated Projections updated. In each of these three years employers due to the minimum wage The Department estimated that in (FY2020, FY2023, and FY2026) provision, estimated to be $34.3 million Year 1, 4.2 million EAP workers will be regulatory familiarization costs are in Year 1, are projected to decline to affected, with about 65,000 of these approximately $23 million (see section $17.8 million in Year 10 as increased attributable to the revised HCE VI.D.iii. for details on the methodology earnings over time move workers’ compensation level. In Year 10, the for estimating costs). regular rate of pay above the minimum number of affected EAP workers was Although start-up firms must still wage.261 Transfers due to overtime pay estimated to equal 5.3 million with become familiar with the FLSA should grow slightly over time because 217,000 attributed to the HCE following Year 1, the difference between the number of affected workers will exemption. The projected number of the time necessary for familiarization increase, although transfers fall in years affected EAP workers accounts for with the current part 541 exemptions between automatic updates. Transfers to anticipated employment growth by and those exemptions as modified by workers from employers due to the increasing the number of workers the Final Rule is essentially zero. overtime pay provision increase from represented by the affected EAP workers Therefore, projected regulatory $1,250.8 million in Year 1 to $1,589.4 (i.e., increasing sampling weights). familiarization costs for new entrants million in Year 10. Workers affected by The projected number of affected over the next nine years are zero the revised standard salary level workers includes workers who were not (although these new entrants will incur account for between 80 and 92 percent EAP exempt in the base year but would regulatory familiarization costs in years of overtime transfers in all years.

257 This elasticity estimate is based on the become exempt (e.g., they may work more hours). the analysis is conducted by fiscal year and Department’s analysis of the following paper: However, because a significant number of modeling the update as going into effect a quarter Lichter, A., Peichl, A. & Siegloch, A. (2014). The additional workers are projected to remain before allows simplification of the analysis with Own-Wage Elasticity of Labor Demand: A Meta- nonexempt through this process, the Department only a negligible impact on estimates. chose to include them in the analysis for this Final Regression Analysis. IZA DP No. 7958. 261 Rule. To do so, we assume their exempt work State minimum wages above the federal level 258 Goldbeck, D. (2015). ‘‘White Collar’’ Overtime patterns will be similar to their nonexempt work as of January 1, 2016 were incorporated and used Expansion. Regulation Review. patterns. for projected years. Increases in minimum wages 259 These workers were not considered in the 260 The first update will go into effect January 1, were not projected. If state or federal minimum NPRM because their work patterns are known when 2020. However, for this economic analysis, the wages increase between January 1, 2016 and they are nonexempt (because they earn less than Department modeled the first automatic update to FY2026, then estimated projected minimum wage $455), but those patterns might change if they occur at the beginning of FY2020. This is because transfers may be underestimated.

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TABLE 33—PROJECTED COSTS AND TRANSFERS, STANDARD AND HCE SALARY LEVELS

Affected Costs Transfers Fiscal year EAP b (year #) workers DWL Reg. Fam. Adjustment a Managerial Total Due to MW Due to OT Total (millions)

(Millions FY2017$)

Year: 2017 (1)...... 4.2 272.5 191.4 214.0 677.9 34.3 1,250.8 1,285.2 6.4 2018 (2) ...... 4.0 0.0 1.5 206.6 208.0 28.5 907.9 936.5 8.7 2019 (3) ...... 3.9 0.0 1.9 200.6 202.6 27.7 883.9 911.6 8.5 2020 (4) ...... 4.6 22.8 10.4 232.5 265.7 25.8 1,221.2 1,247.0 9.8 2021 (5) ...... 4.4 0.0 2.8 223.7 226.5 24.6 1,134.7 1,159.2 9.6 2022 (6) ...... 4.3 0.0 2.8 217.6 220.5 20.5 1,017.3 1,037.8 9.4 2023 (7) ...... 5.0 23.0 7.3 243.4 273.7 18.0 1,404.6 1,422.6 10.2 2024 (8) ...... 4.8 0.0 2.5 236.1 238.6 15.2 1,290.0 1,305.3 10.0 2025 (9) ...... 4.6 0.0 2.2 230.9 233.1 14.4 1,193.2 1,207.6 10.1 2026 (10) ...... 5.3 23.1 5.9 255.1 284.2 17.8 1,589.4 1,607.2 11.1 Average Annualized: 3% real rate ...... 37.6 25.4 225.0 288.0 23.2 1,178.5 1,201.6 9.3 7% real rate ...... 42.4 29.0 223.6 295.1 23.8 1,165.3 1,189.1 9.2 a Adjustment costs occur in all years when there are newly affected workers, including years when the salary level is not updated. Adjustment costs may occur in years without updated salary levels because some workers’ projected earnings are estimated using negative earnings growth. b DWL was estimated based on the aggregate impact of both the minimum wage and overtime pay provisions. Since the transfer associated with the minimum wage is negligible compared to the transfer associated with overtime pay, the vast majority of this cost is attributed to the overtime pay provision.

Table 33 also summarizes average average annualized transfers due to the Therefore, the decrease in hours worked annualized costs and transfers over the minimum wage totaled $23.8 million is larger in Year 2 than Year 1, and the ten-year projection period, using 3 per year. DWL is also larger. Finally, the percent and 7 percent real discount The cost to society of fewer hours of Department estimated that average rates. The Department estimated that labor demanded, expressed as DWL, annualized DWL was $9.2 million per total direct employer costs have an was estimated to be $6.4 million in Year year. average annualized value of $295.1 1. DWL increases over time and in Year A summary of the estimates used in million per year over ten years when 10 it is projected to equal $11.1 million. using a 7 percent real discount rate. Of DWL increases sharply between Year 1 calculating DWL for years 1, 2 and 10 this total, average annualized regulatory and Year 2 because the Department is presented in Table 34. The size of the familiarization costs were estimated to assumes the market has had time to DWL depends on the change in average be $42.4 million. Average annualized fully adjust to the revised standard hourly wages, the change in average adjustment costs were estimated to be salary and HCE annual compensation hours, and the number of affected EAP $29.0 million. The remaining $223.6 levels by Year 2. In Year 1 employers workers with changes in their hours million in average annualized direct may not be able to fully adjust wages worked. While the change in average costs were accounted for by managerial and hours in response to the hourly wages generally tends to be fairly costs. The average annualized value of rulemaking, so the Department used a similar over time, the number of total transfers was estimated to equal short run wage elasticity of labor affected EAP workers increases in years $1,189.1 million. The largest component demand to reflect this constrained with updated salary levels and falls in of this was the transfer from employers response; in Year 2 employers have other years; together these lead to a to workers due to overtime pay, which sufficient time to fully adjust, and a slight increase in annual DWL over was $1,165.3 million per year, while long-run wage elasticity is used. time.

TABLE 34—SUMMARY OF PROJECTED DEADWEIGHT LOSS COMPONENT VALUES

Future years Component Year 1 Year 2 Year 10

Standard salary

Average hourly wages (holding hours constant) Pre ...... $14.86 $14.94 $17.59 Post a ...... $15.55 $15.45 $18.20 Change ...... $0.69 $0.51 $0.61 Change in average overtime hours ...... ¥0.40 ¥0.76 ¥0.79 Affected EAP workers (1,000s) ...... 803 778 903 DWL Per worker per week ...... $0.14 $0.20 $0.24 Nominal annual (millions) ...... $5.8 $7.9 $11.3 Real annual (millions of FY2017$) ...... $5.8 $7.9 $9.2

HCE

Average hourly wages (holding hours constant) Pre ...... $42.84 $42.51 $45.03 Post a ...... $44.85 $43.96 $46.56 Change ...... $2.01 $1.45 $1.53

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TABLE 34—SUMMARY OF PROJECTED DEADWEIGHT LOSS COMPONENT VALUES—Continued

Future years Component Year 1 Year 2 Year 10

Change in average overtime hours ...... ¥0.37 ¥0.69 ¥0.68 Affected EAP workers (1,000s) ...... 31 34 83 DWL Per worker per week ...... $0.38 $0.50 $0.52 Nominal annual (millions) ...... $0.61 $0.88 $2.25 Real annual (millions of FY2017$) ...... $0.61 $0.87 $1.85 Note: DWL analysis is limited to workers in Types 2 and 3 who experience hour adjustments. a Despite general growth in wages, the average wage may fall slightly from Year 1 to Year 2 because the population has changed.

3. Comparison to Projections With inflation based on the CPI–U was managerial costs are a function of the Alternative Methods projected to be 2.4 percent. number of affected EAP workers and so Table 35 shows projected numbers of will be higher with automatic updating. This section presents estimated affected workers, costs, and transfers Average annualized direct costs were projected impacts without automatic with these alternative methods. With projected to be very similar with the updating and using the CPI–U to triennial automatic updating as adopted fixed percentile method and the CPI–U automatically update salary levels. in this Final Rule, the number of method: $295.1 million and $294.7 Projections without automatic updating affected EAP workers would increase million, respectively. Average are shown so impacts of the initial from 4.2 million to 5.3 million over 10 annualized direct costs are lower increase and subsequent increases can years. With triennial automatic updating without automatic updating because be disaggregated. Projections using the using the CPI–U, the number of affected fewer workers will be affected ($249.8 CPI–U are included because this EAP workers would increase from 4.2 million). alternative was proposed as a potential million to 5.4 million over 10 years. Average annualized transfers and method in the NPRM. Conversely, in the absence of automatic DWL follow a similar pattern: estimates updating, the number of affected EAP are very similar for the fixed percentile For the CPI–U method, the workers is projected to decline from 4.2 method and the CPI–U method, but are Department used the predicted change to 3.0 million. lower without automatic updating. in annual CPI–U values for FY2017 The three costs to employers Average annualized transfers are through FY2026 from the Congressional previously considered are (1) regulatory $1,189.1 million with the fixed earnings 262 Budget Office. For example, inflation familiarization costs, (2) adjustment percentile, $1,172.6 million with the based on the CPI–U for FY2017, costs, and (3) managerial costs. CPI–U method, and $873.5 million FY2018, and FY2019 is predicted to be Regulatory familiarization costs do not without automatic updating. Average 2.2, 2.4, and 2.4 percent, respectively; vary depending on whether the fixed annualized DWL is $9.2 million with therefore, the projected salary level for percentile method or the CPI–U method the fixed earnings percentile, $9.2 Year 4 (the year of the first salary level is used for automatic updating, and are million with the CPI–U method, and update) is $978 ($913 × 1.022 × 1.024 × only slightly lower without automatic $7.7 million without automatic 1.024). In other years, predicted updating. Adjustment costs and updating.

262 Congressional Budget Office. (2016). The Budget and Economic Outlook: 2016 to 2026. Pub. No. 51129. Table E–2.

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Appendix A: Methodology for unknown. It is neither reported by establishment survey.263 The Estimating Exemption Status employers to any central agency nor asked in either an employee or 263 RAND recently released results from a survey The number of workers exempt under conducted to estimate EAP exempt workers. Rohwedder, S. and Wenger, J.B. (2015). The Fair the FLSA’s part 541 regulations is Labor Standards Act: Worker Misclassification and

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Department estimated the number of The occupations identified in this exemption category to workers with top- exempt workers using the following classification system represent an earlier coded weekly earnings. For all other methodology. This methodology is occupational classification scheme (the white collar salaried workers earning at based largely on the approach used 1990 Census Codes). Therefore, an least $455 per week in each exemption during the 2004 revisions.264 This occupational crosswalk was used to category,268 the Department estimated appendix expands on the methodology map the previous occupational codes to the probability of exemption for each description in the Final Rule. the 2002 Census occupational codes worker in the data based on both which are used in the CPS MORG 2002 occupation and earnings using a gamma A.1 The Duties Tests Probability Codes through 2010 data.266 267 When the new distribution.269 For the gamma The CPS MORG data do not include occupational category was comprised of distribution, the shape parameter alpha information about job duties. To more than one previous occupation, the was set to the squared quotient of the determine whether a worker meets the Department assigned a probability sample mean divided by the sample duties test the Department employs the category using the weighted average of standard deviation, and the scale methodology it used in the 2004 Final the previous occupations’ probabilities, parameter beta was set to the sample Rule. Each occupation is assigned a rounded to the closest category code. variance divided by the sample mean. probability representing the odds that a Next, the Department must determine These parameter calculations are based worker in that occupation would pass which workers to classify as exempt. on the method described in the 2004 the duties test. For the EAP duties test, For example, the probability codes rulemaking, except for the use of the the five probability intervals are: indicate that out of every ten public standard deviation instead of the • Category 0: Occupations not likely relation managers between five and nine standard error.270 Table A1 shows that to include any workers eligible for the are exempt; however, the Department the expected number of exempt workers EAP exemptions. does not know which five to nine is similar when using a gamma • Category 1: Occupations with workers are exempt. Exemption status distribution method and assigning the probabilities between 90 and 100 could be randomly assigned but this midpoint of each probability code range percent. would bias the earnings of exempt to all workers in that probability code. • Category 2: Occupations with workers downward, since higher paid After determining the probabilities of probabilities between 50 and 90 percent. workers are more likely to perform the exemption for each worker in the data • Category 3: Occupations with required duties. Therefore, the (dependent on both occupation and probabilities between 10 and 50 percent. probability of being classified as exempt earnings), the Department randomly • Category 4: Occupations with should increase with earnings. First, the assigns exemption status to each probabilities between 0 and 10 Department assigned the upper bound worker, conditional on the worker’s percent.265 of the probability range in each probability of exemption.

TABLE A1—COMPARISON OF EAP-EXEMPT WORKER ESTIMATES A

Gamma Probability code category Midpoint distribution probability model

High probability of exemption (1) ...... 23,134,055 23,165,165 Probably exempt (2) ...... 4,808,003 4,792,536 Probably not exempt (3) ...... 1,675,615 1,644,144 Low or no probability of exemption (4) ...... 277,473 287,310

Total ...... 29,895,146 29,889,154 a Numbers shown are the expected value of the number of workers exempt in each of the four probability code categories.

The 2004 Final Rule assigned • Category 2: Occupations with well with a linear earnings function. probabilities for whether workers in probabilities between 94 and 96 percent. Once individual probabilities are each occupation would pass the HCE • Category 3: Occupations with determined, workers are randomly abbreviated duties test if they earned probabilities between 58.4 and 60 assigned to exemption status. $100,000 or more in total annual percent. A.2 Other Exemptions compensation; these probabilities are: • Category 4: Occupations with a • Category 0: Occupations not likely probability of 15 percent. There are many other exemptions to to include any workers eligible for the Like under the standard test, there is the minimum wage and overtime pay HCE exemption. a positive relationship between earnings provisions of the FLSA. Accordingly, in and exemption status; however, unlike the 2004 Final Rule, the Department • Category 1: Occupations with a the standard test, the relationship for excluded workers in agriculture and probability of 100 percent. the HCE analysis can be represented certain transportation occupations from

the Hours and Earnings Effects of Expanded 267 Beginning January 2011, the MORG data use parameters, in this case alpha and beta. The gamma Coverage. RAND Labor and Population. the 2010 Census Codes. The Department translates distribution was chosen because during the 2004 264 69 FR 22196–22209 (Apr. 23, 2004). these codes into the equivalent 2002 Census Codes revision it fit the data the best of the non-linear 265 Table A2 lists the probability codes by to create continuity. The crosswalk is available at: distributions considered, which included normal, occupation used to estimate exemption status. http://www.census.gov/people/io/methodology/. lognormal, and gamma. 69 FR 22204–08. 266 To match 1990 Census Codes to the 268 Also included are all workers who are in 270 Since the sample standard deviation is much corresponding 2000 Census Codes see: http:// occupational categories associated with named larger than the standard error, using the sample www.census.gov/people/io/methodology/. To occupations. standard deviation to calculate the shape and translate the 2000 Census Codes into the 2002 269 A gamma distribution is a general type of location parameters resulted in probabilities that Census Codes each code is multiplied by 10. statistical distribution that is based on two vary more with earnings.

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the analysis. The Department now is, in include: ‘‘crop production’’ (0170), Although not technically the same as addition, estimating those workers who ‘‘animal production’’ (0180), and the FLSA definition of ‘‘seasonal,’’ this fall under one of the other exemptions ‘‘support activities for agriculture and is the best available approximation of in section 13(a) of the FLSA, because forestry’’ (0290). Occupational ‘‘seasonal’’ employees. The Department such workers are exempt from both categories include all blue collar estimated that 2.8 percent of amusement minimum wage and overtime pay under occupations (identified with the and recreational workers will be the relevant section and would remain probability codes), ‘‘farm, ranch, and exempt. exempt regardless of any changes to the other agricultural managers’’ (0200), The 1998 section 4(d) report EAP exemption. In fact, many of the ‘‘general and operations managers’’ estimated the number of exempt workers estimated below as falling (0020), and ‘‘first-line supervisors/ workers by applying an estimate within one of the section 13(a) managers of farming, fishing, and determined in 1987 by a detailed report exemptions will already have been forestry workers’’ (6000). from the Employment Standards excluded from the analysis because they Administration. The Department chose A.2.3 Other Section 13(a) Exemptions are paid on an hourly basis or are in a not to use this estimate because it is blue collar occupation. The The following methodology relies outdated. methodology for identifying the workers mainly on CPS MORG data but also Section 13(a)(3) also exempts who fall under the section 13(a) incorporates alternative data sources employees of seasonal religious or non- exemptions is explained here and is when necessary. profit educational centers, but many of based generally on the methodology the Section 13(a)(3): Seasonal amusement these workers have already been Department used in 1998 when it issued and recreational establishment excluded from the analysis either as its last report under section 4(d) of the Any employee of an amusement or religious workers (not covered by the FLSA. recreational establishment may be FLSA) or as teachers (professional A.2.1 Section 13(a)(1) Outside Sales exempt from minimum wage and exemption) and so are not estimated. Workers overtime pay if the establishment meets Section 13(a)(5): Fishermen Outside sales workers are a subset of either of the following tests: (a) It Any employee, such as a fisherman, the section 13(a)(1) exemptions, but operates for seven months or less during employed in the catching, harvesting, or since they are not affected by the salary any calendar year, or (b) its revenue for farming of fish or other aquatic life regulations they are not discussed in the six lowest months of the year is less forms, is exempt from minimum wage detail in the preamble. Outside sales than one-third of the other six months and overtime pay. Fishermen are workers are included in occupational of such year. Amusement and identified in occupational categories category ‘‘door-to-door sales workers, recreational establishments are defined ‘‘fishers and related fishing workers’’ news and street vendors, and related as ‘‘establishments frequented by the (6100) and ‘‘ship and boat captains and workers’’ (Census code 4950). This public for its amusement or recreation,’’ operators’’ (9310) and the industry category is composed of workers who and ‘‘typical examples of such are the category ‘‘fishing, hunting, and both would and would not qualify for concessionaires at amusement parks and trapping’’ (0280). Workers identified in the outside sales worker exemption; for beaches.’’ 271 In the CPS MORG data the both these occupational and industry example, street vendors would not Department identifies general categories are considered exempt. qualify. Therefore, the percentage of amusement and recreation in the Section 13(a)(8): Small, local these workers that qualify for the following industry categories: • newspapers exemption was estimated. The ‘‘independent artists, performing Department believes that, under the arts, spectator sports, and related This exemption from minimum wage 1990 Census Codes system, outside industries’’ (8560), and overtime pay applies to any sales workers were more or less • ‘‘museums, art galleries, historical employee employed by a newspaper uniquely identified with occupational sites, and similar institutions’’ (8570), with circulation of less than 4,000 and • category ‘‘street & door-to-door sales ‘‘bowling centers’’ (8580), circulated mainly within the county • workers’’ (277). Therefore, the ‘‘other amusement, gambling, and where published. Newspaper employees Department exempts the share of recreation industries’’ (8590), and are identified in the following • ‘‘recreational vehicle parks and occupational categories: workers in category 4950 who would • have been classified as code 277 (43 camps, and rooming and boarding ‘‘news analysts, reporters and houses’’ (8670).272 correspondents’’ (2810), percent) under the old classification • system. The CPS MORG data does not provide ‘‘editors’’ (2830), information on employers’ operating • ‘‘technical writers’’ (2840), A.2.2 Agricultural Workers information or revenue. Using Business • ‘‘writers and authors’’ (2850), and Similar to the 2004 analysis, the Employment Dynamics (BED) data, the • ‘‘miscellaneous media and Department excluded agricultural Department estimated the share of communication workers’’ (2860). workers from the universe of affected leisure and hospitality employees employees. In the 2004 Final Rule all working for establishments that are opening for the first time)—resulting in closed for at least one quarter a year.273 employment in only establishments reopening. workers in agricultural industries were Similarly, seasonal employment was estimated by excluded; however, here only workers taking the difference in employment between also in select occupations were 271 § 779.385. establishment closings and establishment deaths. excluded since not all workers in 272 The Department does not believe that all These two estimates were then averaged. The employees in this industry category would qualify analysis is limited to the leisure and hospitality agricultural industries qualify for the for this exemption. However, we had no way to industry. Since the exemption is limited to workers agricultural overtime pay exemptions. segregate in the data employees who would and in ‘‘establishments frequented by the public for its This method better approximates the would not qualify for exemption. amusement or recreation’’ the Department must true number of exempt agricultural 273 Seasonal employment was calculated by assume the rate of employment in seasonal taking the difference in employment between establishments, relative to all establishments, is workers and provides a more establishment openings (all establishments that are equivalent across these amusement or recreation conservative estimate of the number of either opening for the first time or reopening) and establishments and all leisure and hospitality affected workers. Industry categories establishment births (establishments that are establishments.

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The exemption is limited to the number of workers on foreign vessels.274 (110), ‘‘computer scientists and systems industry category ‘‘newspaper The 2001 Occupational Employment analysts’’ (1000), ‘‘computer publishers’’ (6470). To limit the Statistics estimates there were 13,290 programmers’’ (1010), ‘‘computer exemption to small, local papers, the workers in this occupation and thus that software engineers’’ (1020), ‘‘computer Department limits the exemption to number of seamen are assigned exempt support specialists’’ (1040), ‘‘database employees in rural areas. Although status on a random basis. administrators’’ (1060), ‘‘network and employment in a rural area is not Section 13(a)(15): Companions computer systems administrators’’ synonymous with employment at a Domestic service workers employed (1100), ‘‘network systems and data small newspaper, this is the best to provide ‘‘companionship services’’ communications analysts’’ (1110), approach currently available. for an elderly person or a person with ‘‘computer operators’’ (5800), and Alternatively, the Department could use an illness, injury, or disability are not ‘‘computer control programmers and data from Dun and Bradstreet (D&B) as required to be paid the minimum wage operators’’ (7900). was done in the 1998 section 4(d) or overtime pay. Companions are To identify computer workers exempt report. This data would provide classified under occupational categories: under section 13(a)(17), the Department information on which establishments • ‘‘nursing, psychiatric, and home restricts the population to workers who are in rural areas; from this the health aides’’ (3600) and are paid on an hourly basis and who Department could estimate the share of • ‘‘personal and home care aides’’ earn at least $27.63 per hour. To employment in rural areas. This (4610). determine which of these workers pass approach would be much more time the computer duties test, we use the And industry categories: intensive but would not necessarily probabilities of exemption assigned to • ‘‘home health care services’’ (8170), provide a better result. • these occupations by the Department ‘‘individual and family services’’ and assume a linear relationship Section 13(a)(10): Switchboard (8370), and operators • between earnings and exemption status. ‘‘private households’’ (9290). Note that none of these workers are An independently owned public All the workers who fall within these impacted by the rulemaking because telephone company that has not more occupational and industry categories they are paid on an hourly basis. than 750 stations may claim the were previously excluded from the minimum wage and overtime pay analysis because they are in occupations A.2.4 Section 13(b) Exemptions exemption for its switchboard operators. where workers have no likelihood of Section 13(b)(1): Motor carrier ‘‘Switchboard operators, including qualifying for the section 13(a)(1) employees answering service’’, are exempt under exemption. This exemption eliminated overtime occupation code 5010 and industry Section 13(a)(16): Criminal investigators classifications ‘‘wired pay for ‘‘any employee with respect to The criminal investigator must be telecommunications carriers’’ (6680) whom the Secretary of Transportation employed by the federal government and ‘‘other telecommunications has power to establish qualifications and paid ‘‘availability pay.’’ 275 Criminal carriers’’ (6690). Using the 2012 and maximum hours of service pursuant investigators are identified in Economic Census, the Department to the provisions of Section 31502 of occupational categories: 276 estimated that 1.6 percent of employees Title 49.’’ In essence, these are motor • ‘‘detectives and criminal in the telecommunication industry carrier workers, identified by industry investigators’’ (3820), (NAICS 517) are employed by firms category ‘‘truck transportation’’ (6170). • ‘‘fish and game wardens’’ (3830), To be exempt, these workers must with fewer than ten employees (the and estimated level of employment engage in ‘‘safety affecting activities.’’ • ‘‘private detectives and Examples of exempt occupations necessary to service seven hundred and investigators’’ (3910). fifty stations). According to the 1998 include: ‘‘driver, driver’s helper, loader, This exemption was not mentioned in or mechanic.’’ 277 The relevant section 4(d) report, fewer than 10,000 the 1998 section 4(d) report. The workers were exempt in 1987 and so at occupational categories are: Department exempts all workers in the • ‘‘electronic equipment installers that time the Department did not occupations identified above and develop a methodology for estimating and repairers, motor vehicles’’ (7110), employed by the federal government • ‘‘automotive service technicians the number exempt. (PEIO1COW value equal to one). and mechanics’’ (7200), Section 13(a)(12): Seamen on foreign Section 13(a)(17): Computer workers • ‘‘bus and truck mechanics and vessels Computer workers who meet the diesel engine specialists’’ (7210), • Any employee employed as a seaman duties test are exempt under two ‘‘heavy vehicle and mobile on a vessel other than an American sections of the FLSA. Salaried computer equipment service technicians and vessel is exempt from minimum wage workers who earn a weekly salary of not mechanics’’ (7220), and • and overtime pay. Seamen are identified less than $455 are exempt under section ‘‘driver/sales workers and truck by occupational categories: 13(a)(1) and computer workers who are drivers’’ (9130).278 • ‘‘sailors and marine oilers’’ (9300), paid hourly are exempt under section Section 13(b)(2): Rail carrier employees • ‘‘ship and boat captains and 13(a)(17) if they earn at least $27.63 an operators’’ (9310), and hour. Occupations that may be 276 49 U.S.C. 31502. The text of the law is • ‘‘ship engineers’’ (9570). considered exempt include: ‘‘Computer available at: http://www.gpo.gov/fdsys/pkg/ USCODE-2011-title49/html/USCODE-2011-title49- The CPS MORG data do not identify and information systems managers’’ subtitleVI-partB-chap315-sec31502.htm. whether the vessel is foreign or 277 Fact Sheet #19: The Motor Carrier Exemption domestic. The best approach the 274 The SIC classification system has been under the Fair Labor Standards Act (FLSA). Department has devised is to assume replaced with NAICS; thus, more recent data are not 278 The 2004 methodology used 1990 Census that the number of workers in the available. codes 505, 507, and 804 which crosswalk to these 275 Availability pay is compensation for hours occupations. However, occupations 605, 613, and occupation ‘‘deep sea foreign when the agent must be available to perform work 914 (included in the 1990 Census code 804) were transportation of freight’’ (SIC 441) in over and above the standard 40 hours per week. See excluded because under the new classification 2000 is roughly equivalent to the http://www.opm.gov/oca/pay/HTML/AP.HTM. system they were deemed irrelevant.

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Section 13(b)(2) exempts ‘‘any (9030) and ‘‘aircraft mechanics and however, the 2004 methodology limited employee of an employer engaged in the service technicians’’ (7140). the exemption to automobiles, trucks, or operation of a rail carrier subject to part Section 13(b)(6): Seamen farm implement sales workers and 279 A of subtitle IV of Title 49.’’ This Occupational categories include mechanics. includes industrial category ‘‘rail ‘‘sailors and marine oilers’’ (9300), Automobiles, trucks, or farm implement transportation’’ (6080). The 1998 ‘‘ship and boat captains and operators’’ sales workers include: methodology did not include 281 (9310), and ‘‘ship engineers’’ (9570). • ‘‘parts salespersons’’ (4750), and occupational requirements but the 2004 The exemption is limited to the ‘‘water methodology did, so this restriction was • ‘‘retail salespersons’’ (4760).282 transportation’’ industry (6090). included. Occupations are limited to: Mechanics include: • ‘‘locomotive engineers and Section 13(b)(10): Salesmen, partsmen, operators’’ (9200), or mechanics • ‘‘electronic equipment installers • ‘‘railroad brake, signal, and switch The Department limited this and repairers, motor vehicles’’ (7110), operators’’ (9230), exemption to workers employed in a • ‘‘automotive body and related • ‘‘railroad conductors and ‘‘nonmanufacturing establishment repairers’’ (7150), yardmasters’’ (9240), and primarily engaged in the business of • • ‘‘automotive glass installers and ‘‘subway, streetcar, and other rail selling such vehicles or implements to repairers’’ (7160), transportation workers’’ (9260). ultimate purchasers.’’ Industry • ‘‘automotive service technicians Section 13(b)(3): Air carrier employees classifications include: ‘‘automobile and mechanics’’ (7200), This section exempts employees dealers’’ (4670) and ‘‘other motor • ‘‘bus and truck mechanics and subject to the ‘‘provisions of title II of vehicle dealers’’ (4680). In the 2004 diesel engine specialists’’ (7210), 280 Final Rule, the industry was limited to the Railway Labor Act.’’ In essence, • this exempts air carrier employees, 1990 Census code 612 which became ‘‘heavy vehicle and mobile identified by industry category ‘‘air Census code ‘‘automobile dealers’’ equipment service technicians and transportation’’ (6070). The 1998 (4670). Category 4680 (‘‘other motor mechanics’’ (7220), methodology did not include vehicle dealers’’) is also included here • ‘‘small engine mechanics’’ (7240), occupational requirements but the 2004 in keeping with the 1998 section 4(d) and methodology did, so this restriction was report methodology. • ‘‘miscellaneous vehicle and mobile included. Occupations are limited to The 1998 methodology did not equipment mechanics, installers, and ‘‘aircraft pilots and flight engineers’’ include an occupational restriction; repairers’’ (7260).283

TABLE A2—PROBABILITY CODES BY OCCUPATION

2002 Census Occupation Probability code code

10 ...... Chief executives ...... 1 20 ...... General and operations managers ...... 1 40 ...... and promotions managers ...... 1 50 ...... Marketing and sales managers ...... 1 60 ...... Public relations managers ...... 2 100 ...... Administrative services managers ...... 1 110 ...... Computer and information systems managers ...... 1 120 ...... Financial managers ...... 1 130 ...... Human resources managers ...... 1 140 ...... Industrial production managers ...... 1 150 ...... Purchasing managers ...... 1 160 ...... Transportation, storage, and distribution managers ...... 1 200 ...... Farm, ranch, and other agricultural managers ...... 3 210 ...... Farmers and ranchers ...... 0 220 ...... Construction managers ...... 1 230 ...... Education administrators ...... 1 300 ...... Engineering managers ...... 1 310 ...... Food service managers ...... 3 320 ...... Funeral directors ...... 2 330 ...... Gaming managers ...... 2 340 ...... Lodging managers ...... 3 350 ...... Medical and health services managers ...... 1 360 ...... Natural sciences managers ...... 1 400 ...... Postmasters and mail superintendents ...... 0 410 ...... Property, real estate, and community association managers ...... 3 420 ...... Social and community service managers ...... 1 430 ...... Managers, all other ...... 1 500 ...... Agents and business managers of artists, performers, and athletes ...... 2

279 49 U.S.C. 10101–11908. Text of the law is 281 The 2004 methodology used 1990 Census others which have been deemed irrelevant and available at: http://www.gpo.gov/fdsys/pkg/ codes 828, 829, and 833 which crosswalk to these excluded (4700, 4740, and 4850). USCODE-2013-title49/pdf/USCODE-2013-title49- occupations. However, occupation 952 (dredge, 283 The 2004 methodology used codes 505, 506, excavating, and loading machine operators) was subtitleIV-partA.pdf. 507, and 514 which generally crosswalk to these excluded because under the new classification 280 45 U.S.C. 181 et seq. Available at: http:// system it was deemed irrelevant. codes. A few additional codes were added which www.gpo.gov/fdsys/pkg/USCODE-2013-title45/ 282 The 2004 methodology used codes 263 and were deemed relevant (7240 and 7260). html/USCODE-2013-title45-chap8-subchapII.htm. 269 which crosswalk to these codes plus a few

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TABLE A2—PROBABILITY CODES BY OCCUPATION—Continued

2002 Census Occupation Probability code code

510 ...... Purchasing agents and buyers, farm products ...... 2 520 ...... Wholesale and retail buyers, except farm products ...... 2 530 ...... Purchasing agents, except wholesale, retail, and farm products ...... 2 540 ...... Claims adjusters, appraisers, examiners, and investigators ...... 2 560 ...... Compliance officers, except agriculture, construction, health and safety, and transportation ...... 3 600 ...... Cost estimators ...... 1 620 ...... Human resources, training, and labor relations specialists ...... 2 700 ...... Logisticians ...... 1 710 ...... Management analysts ...... 2 720 ...... Meeting and convention planners ...... 2 730 ...... Other business operations specialists ...... 2 800 ...... Accountants and auditors ...... 1 810 ...... Appraisers and assessors of real estate ...... 3 820 ...... Budget analysts ...... 2 830 ...... Credit analysts ...... 2 840 ...... Financial analysts ...... 2 850 ...... Personal financial advisors ...... 2 860 ...... Insurance underwriters ...... 1 900 ...... Financial examiners ...... 3 910 ...... Loan counselors and officers ...... 2 930 ...... Tax examiners, collectors, and revenue agents ...... 1 940 ...... Tax preparers ...... 2 950 ...... Financial specialists, all other ...... 2 1000 ...... Computer scientists and systems analysts ...... 1 1010 ...... Computer programmers ...... 2 1020 ...... Computer software engineers ...... 1 1040 ...... Computer support specialists ...... 1 1060 ...... Database administrators ...... 1 1100 ...... Network and computer systems administrators ...... 1 1110 ...... Network systems and data communications analysts ...... 1 1200 ...... Actuaries ...... 1 1210 ...... Mathematicians ...... 1 1220 ...... Operations research analysts ...... 1 1230 ...... Statisticians ...... 1 1240 ...... Miscellaneous mathematical science occupations ...... 1 1300 ...... Architects, except naval ...... 1 1310 ...... Surveyors, cartographers, and photogrammetrists ...... 3 1320 ...... Aerospace engineers ...... 1 1330 ...... Agricultural engineers ...... 1 1340 ...... Biomedical engineers ...... 1 1350 ...... Chemical engineers ...... 1 1360 ...... Civil engineers ...... 1 1400 ...... Computer hardware engineers ...... 1 1410 ...... Electrical and electronic engineers ...... 1 1420 ...... Environmental engineers ...... 1 1430 ...... Industrial engineers, including health and safety ...... 1 1440 ...... Marine engineers and naval architects ...... 1 1450 ...... Materials engineers ...... 1 1460 ...... Mechanical engineers ...... 1 1500 ...... Mining and geological engineers, including mining safety engineers ...... 1 1510 ...... Nuclear engineers ...... 1 1520 ...... Petroleum engineers ...... 1 1530 ...... Engineers, all other ...... 1 1540 ...... Drafters ...... 4 1550 ...... Engineering technicians, except drafters ...... 4 1560 ...... Surveying and mapping technicians ...... 4 1600 ...... Agricultural and food scientists ...... 1 1610 ...... Biological scientists ...... 1 1640 ...... Conservation scientists and foresters ...... 1 1650 ...... Medical scientists ...... 1 1700 ...... Astronomers and physicists ...... 1 1710 ...... Atmospheric and space scientists ...... 1 1720 ...... Chemists and materials scientists ...... 1 1740 ...... Environmental scientists and geoscientists ...... 1 1760 ...... Physical scientists, all other ...... 3 1800 ...... Economists ...... 2 1810 ...... Market and survey researchers ...... 2 1820 ...... Psychologists ...... 1 1830 ...... Sociologists ...... 2 1840 ...... Urban and regional planners ...... 3

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TABLE A2—PROBABILITY CODES BY OCCUPATION—Continued

2002 Census Occupation Probability code code

1860 ...... Miscellaneous social scientists and related workers ...... 2 1900 ...... Agricultural and food science technicians ...... 4 1910 ...... Biological technicians ...... 4 1920 ...... Chemical technicians ...... 4 1930 ...... Geological and petroleum technicians ...... 4 1940 ...... Nuclear technicians ...... 4 1960 ...... Other life, physical, and social science technicians ...... 4 2000 ...... Counselors ...... 2 2010 ...... Social workers ...... 3 2020 ...... Miscellaneous community and social service specialists ...... 3 2040 ...... Clergy ...... 0 2050 ...... Directors, religious activities and education ...... 0 2060 ...... Religious workers, all other ...... 0 2100 ...... Lawyers ...... 1 2110 ...... Judges, , and other judicial workers ...... 1 2140 ...... Paralegals and legal assistants ...... 4 2150 ...... Miscellaneous legal support workers ...... 3 2200 ...... Postsecondary teachers ...... 1 2300 ...... Preschool and kindergarten teachers ...... 2 2310 ...... Elementary and middle school teachers ...... 1 2320 ...... Secondary school teachers ...... 1 2330 ...... Special education teachers ...... 1 2340 ...... Other teachers and instructors ...... 1 2400 ...... Archivists, curators, and museum technicians ...... 1 2430 ...... Librarians ...... 1 2440 ...... Library Technicians ...... 4 2540 ...... Teacher assistants ...... 4 2550 ...... Other education, training, and library workers ...... 1 2600 ...... Artists and related workers ...... 2 2630 ...... Designers ...... 1 2700 ...... Actors ...... 1 2710 ...... Producers and directors ...... 1 2720 ...... Athletes, coaches, umpires, and related workers ...... 2 2740 ...... Dancers and choreographers ...... 1 2750 ...... Musicians, singers, and related workers ...... 1 2760 ...... Entertainers and performers, sports and related workers, all other ...... 1 2800 ...... Announcers ...... 2 2810 ...... News analysts, reporters and correspondents ...... 3 2820 ...... Public relations specialists ...... 3 2830 ...... Editors ...... 3 2840 ...... Technical writers ...... 3 2850 ...... Writers and authors ...... 2 2860 ...... Miscellaneous media and communication workers ...... 2 2900 ...... Broadcast and sound engineering technicians and radio operators ...... 4 2910 ...... Photographers ...... 1 2920 ...... Television, video, and motion picture camera operators and editors ...... 2 2960 ...... Media and communication equipment workers, all other ...... 4 3000 ...... Chiropractors ...... 1 3010 ...... Dentists ...... 1 3030 ...... Dietitians and nutritionists ...... 3 3040 ...... Optometrists ...... 1 3050 ...... Pharmacists ...... 1 3060 ...... Physicians and surgeons ...... 1 3110 ...... Physician assistants ...... 2 3120 ...... Podiatrists ...... 1 3130 ...... Registered nurses ...... 1 3140 ...... Audiologists ...... 2 3150 ...... Occupational therapists ...... 3 3160 ...... Physical therapists ...... 2 3200 ...... Radiation therapists ...... 3 3210 ...... Recreational therapists ...... 2 3220 ...... Respiratory therapists ...... 3 3230 ...... Speech-language pathologists ...... 2 3240 ...... Therapists, all other ...... 2 3250 ...... Veterinarians ...... 1 3260 ...... Health diagnosing and treating practitioners, all other ...... 1 3300 ...... Clinical laboratory technologists and technicians ...... 3 3310 ...... Dental hygienists ...... 3 3320 ...... Diagnostic related technologists and technicians ...... 3 3400 ...... Emergency medical technicians and paramedics ...... 3

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TABLE A2—PROBABILITY CODES BY OCCUPATION—Continued

2002 Census Occupation Probability code code

3410 ...... Health diagnosing and treating practitioner support technicians ...... 4 3500 ...... Licensed practical and licensed vocational nurses ...... 4 3510 ...... Medical records and health information technicians ...... 4 3520 ...... Opticians, dispensing ...... 0 3530 ...... Miscellaneous health technologists and technicians ...... 2 3540 ...... Other healthcare practitioners and technical occupations ...... 3 3600 ...... Nursing, psychiatric, and home health aides ...... 0 3610 ...... Occupational therapist assistants and aides ...... 0 3620 ...... Physical therapist assistants and aides ...... 0 3630 ...... Massage therapists ...... 0 3640 ...... Dental assistants ...... 0 3650 ...... Medical assistants and other healthcare support occupations ...... 4 3700 ...... First-line supervisors/managers of correctional officers ...... 2 3710 ...... First-line supervisors/managers of and detectives ...... 3 3720 ...... First-line supervisors/managers of fire fighting and prevention workers ...... 3 3730 ...... Supervisors, protective service workers, all other ...... 3 3740 ...... Fire fighters ...... 0 3750 ...... Fire inspectors ...... 0 3800 ...... Bailiffs, correctional officers, and jailers ...... 0 3820 ...... Detectives and criminal investigators ...... 0 3830 ...... Fish and game wardens ...... 0 3840 ...... Parking enforcement workers ...... 0 3850 ...... Police and sheriff’s patrol officers ...... 0 3860 ...... Transit and railroad police ...... 0 3900 ...... Animal control workers ...... 0 3910 ...... Private detectives and investigators ...... 4 3920 ...... Security guards and gaming surveillance officers ...... 0 3940 ...... Crossing guards ...... 0 3950 ...... Lifeguards and other protective service workers ...... 0 4000 ...... Chefs and head cooks ...... 0 4010 ...... First-line supervisors/managers of food preparation and serving workers ...... 3 4020 ...... Cooks ...... 0 4030 ...... Food preparation workers ...... 0 4040 ...... Bartenders ...... 0 4050 ...... Combined food preparation and serving workers, including fast food ...... 0 4060 ...... Counter attendants, cafeteria, food concession, and coffee shop ...... 0 4110 ...... Waiters and waitresses ...... 0 4120 ...... Food servers, nonrestaurant ...... 0 4130 ...... Dining room and cafeteria attendants and bartender helpers ...... 0 4140 ...... Dishwashers ...... 0 4150 ...... Hosts and hostesses, restaurant, lounge, and coffee shop ...... 4 4160 ...... Food preparation and serving related workers, all other ...... 0 4200 ...... First-line supervisors/managers of housekeeping and janitorial workers ...... 4 4210 ...... First-line supervisors/managers of landscaping, lawn service, and groundskeeping workers ...... 3 4220 ...... Janitors and building cleaners ...... 0 4230 ...... Maids and housekeeping cleaners ...... 0 4240 ...... Pest control workers ...... 0 4250 ...... Grounds maintenance workers ...... 0 4300 ...... First-line supervisors/managers of gaming workers ...... 1 4320 ...... First-line supervisors/managers of personal service workers ...... 4 4340 ...... Animal trainers ...... 4 4350 ...... Nonfarm animal caretakers ...... 0 4400 ...... Gaming services workers ...... 0 4410 ...... Motion picture projectionists ...... 0 4420 ...... Ushers, lobby attendants, and ticket takers ...... 0 4430 ...... Miscellaneous entertainment attendants and related workers ...... 0 4460 ...... Funeral service workers ...... 0 4500 ...... Barbers ...... 0 4510 ...... Hairdressers, hairstylists, and cosmetologists ...... 0 4520 ...... Miscellaneous personal appearance workers ...... 0 4530 ...... Baggage porters, bellhops, and concierges ...... 0 4540 ...... Tour and travel guides ...... 0 4550 ...... Transportation attendants ...... 0 4600 ...... Child care workers ...... 0 4610 ...... Personal and home care aides ...... 0 4620 ...... Recreation and fitness workers ...... 2 4640 ...... Residential advisors ...... 0 4650 ...... Personal care and service workers, all other ...... 0 4700 ...... First-line supervisors/managers of retail sales workers ...... 2 4710 ...... First-line supervisors/managers of non-retail sales workers ...... 2

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TABLE A2—PROBABILITY CODES BY OCCUPATION—Continued

2002 Census Occupation Probability code code

4720 ...... Cashiers ...... 4 4740 ...... Counter and rental clerks ...... 4 4750 ...... Parts salespersons ...... 4 4760 ...... Retail salespersons ...... 4 4800 ...... Advertising sales agents ...... 2 4810 ...... Insurance sales agents ...... 2 4820 ...... Securities, commodities, and financial services sales agents ...... 2 4830 ...... Travel agents ...... 4 4840 ...... Sales representatives, services, all other ...... 3 4850 ...... Sales representatives, wholesale and manufacturing ...... 3 4900 ...... Models, demonstrators, and product promoters ...... 4 4920 ...... Real estate brokers and sales agents ...... 3 4930 ...... Sales engineers ...... 3 4940 ...... Telemarketers ...... 4 4950 ...... Door-to-door sales workers, news and street vendors, and related workers ...... 4 4960 ...... Sales and related workers, all other ...... 3 5000 ...... First-line supervisors/managers of office and administrative support workers ...... 1 5010 ...... Switchboard operators, including answering service ...... 4 5020 ...... Telephone operators ...... 4 5030 ...... Communications equipment operators, all other ...... 4 5100 ...... Bill and account collectors ...... 4 5110 ...... Billing and posting clerks and machine operators ...... 4 5120 ...... Bookkeeping, accounting, and auditing clerks ...... 4 5130 ...... Gaming cage workers ...... 4 5140 ...... Payroll and timekeeping clerks ...... 4 5150 ...... Procurement clerks ...... 4 5160 ...... Tellers ...... 4 5200 ...... Brokerage clerks ...... 4 5210 ...... Correspondence clerks ...... 4 5220 ...... Court, municipal, and license clerks ...... 4 5230 ...... Credit authorizers, checkers, and clerks ...... 3 5240 ...... Customer service representatives ...... 3 5250 ...... Eligibility interviewers, government programs ...... 3 5260 ...... File Clerks ...... 4 5300 ...... Hotel, motel, and resort desk clerks ...... 4 5310 ...... Interviewers, except eligibility and loan ...... 4 5320 ...... Library assistants, clerical ...... 4 5330 ...... Loan interviewers and clerks ...... 3 5340 ...... New accounts clerks ...... 4 5350 ...... Order clerks ...... 4 5360 ...... Human resources assistants, except payroll and timekeeping ...... 4 5400 ...... Receptionists and information clerks ...... 4 5410 ...... Reservation and transportation ticket agents and travel clerks ...... 4 5420 ...... Information and record clerks, all other ...... 4 5500 ...... Cargo and freight agents ...... 4 5510 ...... Couriers and messengers ...... 4 5520 ...... Dispatchers ...... 4 5530 ...... Meter readers, utilities ...... 4 5540 ...... Postal service clerks ...... 4 5550 ...... Postal service mail carriers ...... 4 5560 ...... Postal service mail sorters, processors, and processing machine operators ...... 4 5600 ...... Production, planning, and expediting clerks ...... 4 5610 ...... Shipping, receiving, and traffic clerks ...... 4 5620 ...... Stock clerks and order fillers ...... 0 5630 ...... Weighers, measurers, checkers, and samplers, recordkeeping ...... 4 5700 ...... Secretaries and administrative assistants ...... 4 5800 ...... Computer operators ...... 4 5810 ...... Data entry keyers ...... 4 5820 ...... Word processors and typists ...... 4 5830 ...... Desktop publishers ...... 4 5840 ...... Insurance claims and policy processing clerks ...... 3 5850 ...... Mail clerks and mail machine operators, except postal service ...... 4 5860 ...... Office clerks, general ...... 4 5900 ...... Office machine operators, except computer ...... 4 5910 ...... Proofreaders and copy markers ...... 4 5920 ...... Statistical assistants ...... 4 5930 ...... Office and administrative support workers, all other ...... 4 6000 ...... First-line supervisors/managers of farming, fishing, and forestry workers ...... 4 6010 ...... Agricultural inspectors ...... 3 6020 ...... Animal breeders ...... 3

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TABLE A2—PROBABILITY CODES BY OCCUPATION—Continued

2002 Census Occupation Probability code code

6040 ...... Graders and sorters, agricultural products ...... 0 6050 ...... Miscellaneous agricultural workers ...... 0 6100 ...... Fishers and related fishing workers ...... 0 6110 ...... Hunters and trappers ...... 0 6120 ...... Forest and conservation workers ...... 0 6130 ...... Logging workers ...... 0 6200 ...... First-line supervisors/managers of construction trades and extraction workers ...... 4 6210 ...... Boilermakers ...... 0 6220 ...... Brickmasons, blockmasons, and stonemasons ...... 0 6230 ...... Carpenters ...... 0 6240 ...... Carpet, floor, and tile installers and finishers ...... 0 6250 ...... Cement masons, concrete finishers, and terrazzo workers ...... 0 6260 ...... Construction laborers ...... 0 6300 ...... Paving, surfacing, and tamping equipment operators ...... 0 6310 ...... Pile-driver operators ...... 0 6320 ...... Operating engineers and other construction equipment operators ...... 0 6330 ...... Drywall installers, ceiling tile installers, and tapers ...... 0 6350 ...... Electricians ...... 0 6360 ...... Glaziers ...... 0 6400 ...... Insulation workers ...... 0 6420 ...... Painters, construction and maintenance ...... 0 6430 ...... Paperhangers ...... 0 6440 ...... Pipelayers, plumbers, pipefitters, and steamfitters ...... 0 6460 ...... Plasterers and stucco masons ...... 0 6500 ...... Reinforcing iron and rebar workers ...... 0 6510 ...... Roofers ...... 0 6520 ...... Sheet metal workers ...... 0 6530 ...... Structural iron and steel workers ...... 0 6600 ...... Helpers, construction trades ...... 0 6660 ...... Construction and building inspectors ...... 3 6700 ...... Elevator installers and repairers ...... 0 6710 ...... Fence erectors ...... 0 6720 ...... Hazardous materials removal workers ...... 0 6730 ...... Highway maintenance workers ...... 0 6740 ...... Rail-track laying and maintenance equipment operators ...... 0 6750 ...... Septic tank servicers and sewer pipe cleaners ...... 0 6760 ...... Miscellaneous construction and related workers ...... 0 6800 ...... Derrick, rotary drill, and service unit operators, oil, gas, and mining ...... 0 6820 ...... Earth drillers, except oil and gas ...... 0 6830 ...... Explosives workers, ordnance handling experts, and blasters ...... 0 6840 ...... Mining machine operators ...... 0 6910 ...... Roof bolters, mining ...... 0 6920 ...... Roustabouts, oil and gas ...... 0 6930 ...... Helpers—extraction workers ...... 0 6940 ...... Other extraction workers ...... 0 7000 ...... First-line supervisors/managers of mechanics, installers, and repairers ...... 3 7010 ...... Computer, automated teller, and office machine repairers ...... 0 7020 ...... Radio and telecommunications equipment installers and repairers ...... 0 7030 ...... Avionics technicians ...... 0 7040 ...... Electric motor, power tool, and related repairers ...... 0 7050 ...... Electrical and electronics installers and repairers, transportation equipment ...... 0 7100 ...... Electrical and electronics repairers, industrial and utility ...... 0 7110 ...... Electronic equipment installers and repairers, motor vehicles ...... 0 7120 ...... Electronic home entertainment equipment installers and repairers ...... 0 7130 ...... Security and fire alarm systems installers ...... 0 7140 ...... Aircraft mechanics and service technicians ...... 0 7150 ...... Automotive body and related repairers ...... 0 7160 ...... Automotive glass installers and repairers ...... 0 7200 ...... Automotive service technicians and mechanics ...... 0 7210 ...... Bus and truck mechanics and diesel engine specialists ...... 0 7220 ...... Heavy vehicle and mobile equipment service technicians and mechanics ...... 0 7240 ...... Small engine mechanics ...... 0 7260 ...... Miscellaneous vehicle and mobile equipment mechanics, installers, and repairers ...... 0 7300 ...... Control and valve installers and repairers ...... 0 7310 ...... Heating, air conditioning, and refrigeration mechanics and installers ...... 0 7320 ...... Home appliance repairers ...... 0 7330 ...... Industrial and refractory machinery mechanics ...... 0 7340 ...... Maintenance and repair workers, general ...... 0 7350 ...... Maintenance workers, machinery ...... 0 7360 ...... Millwrights ...... 0

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TABLE A2—PROBABILITY CODES BY OCCUPATION—Continued

2002 Census Occupation Probability code code

7410 ...... Electrical power-line installers and repairers ...... 0 7420 ...... Telecommunications line installers and repairers ...... 0 7430 ...... Precision instrument and equipment repairers ...... 0 7510 ...... Coin, vending, and amusement machine servicers and repairers ...... 0 7520 ...... Commercial divers ...... 4 7540 ...... Locksmiths and safe repairers ...... 0 7550 ...... Manufactured building and mobile home installers ...... 0 7560 ...... Riggers ...... 0 7600 ...... Signal and track switch repairers ...... 0 7610 ...... Helpers—installation, maintenance, and repair workers ...... 0 7620 ...... Other installation, maintenance, and repair workers ...... 0 7700 ...... First-line supervisors/managers of production and operating workers ...... 3 7710 ...... Aircraft structure, surfaces, rigging, and systems assemblers ...... 0 7720 ...... Electrical, electronics, and electromechanical assemblers ...... 0 7730 ...... Engine and other machine assemblers ...... 0 7740 ...... Structural metal fabricators and fitters ...... 0 7750 ...... Miscellaneous assemblers and fabricators ...... 0 7800 ...... Bakers ...... 0 7810 ...... Butchers and other meat, poultry, and fish processing workers ...... 0 7830 ...... Food and tobacco roasting, baking, and drying machine operators and tenders ...... 0 7840 ...... Food batchmakers ...... 0 7850 ...... Food cooking machine operators and tenders ...... 0 7900 ...... Computer control programmers and operators ...... 4 7920 ...... Extruding and drawing machine setters, operators, and tenders, metal and plastic ...... 0 7930 ...... Forging machine setters, operators, and tenders, metal and plastic ...... 0 7940 ...... Rolling machine setters, operators, and tenders, metal and plastic ...... 0 7950 ...... Cutting, punching, and press machine setters, operators, and tenders, metal and plastic ...... 0 7960 ...... Drilling and boring machine tool setters, operators, and tenders, metal and plastic ...... 0 8000 ...... Grinding, lapping, polishing, and buffing machine tool setters, operators, and tenders, metal and plastic .... 0 8010 ...... Lathe and turning machine tool setters, operators, and tenders, metal and plastic ...... 0 8020 ...... Milling and planing machine setters, operators, and tenders, metal and plastic ...... 0 8030 ...... Machinists ...... 0 8040 ...... Metal furnace and kiln operators and tenders ...... 0 8060 ...... Model makers and patternmakers, metal and plastic ...... 0 8100 ...... Molders and molding machine setters, operators, and tenders, metal and plastic ...... 0 8120 ...... Multiple machine tool setters, operators, and tenders, metal and plastic ...... 0 8130 ...... Tool and die makers ...... 0 8140 ...... Welding, soldering, and brazing workers ...... 0 8150 ...... Heat treating equipment setters, operators, and tenders, metal and plastic ...... 0 8160 ...... Lay-out workers, metal and plastic ...... 0 8200 ...... Plating and coating machine setters, operators, and tenders, metal and plastic ...... 0 8210 ...... Tool grinders, filers, and sharpeners ...... 0 8220 ...... Metalworkers and plastic workers, all other ...... 0 8230 ...... Bookbinders and bindery workers ...... 0 8240 ...... Job printers ...... 0 8250 ...... Prepress technicians and workers ...... 0 8260 ...... Printing machine operators ...... 0 8300 ...... Laundry and dry-cleaning workers ...... 0 8310 ...... Pressers, textile, garment, and related materials ...... 0 8320 ...... Sewing machine operators ...... 0 8330 ...... Shoe and leather workers and repairers ...... 0 8340 ...... Shoe machine operators and tenders ...... 0 8350 ...... Tailors, dressmakers, and sewers ...... 0 8360 ...... Textile bleaching and dyeing machine operators and tenders ...... 0 8400 ...... Textile cutting machine setters, operators, and tenders ...... 0 8410 ...... Textile knitting and weaving machine setters, operators, and tenders ...... 0 8420 ...... Textile winding, twisting, and drawing out machine setters, operators, and tenders ...... 0 8430 ...... Extruding and forming machine setters, operators, and tenders, synthetic and glass fibers ...... 0 8440 ...... Fabric and apparel patternmakers ...... 0 8450 ...... Upholsterers ...... 0 8460 ...... Textile, apparel, and furnishings workers, all other ...... 0 8500 ...... Cabinetmakers and carpenters ...... 0 8510 ...... Furniture finishers ...... 0 8520 ...... Model makers and patternmakers, wood ...... 0 8530 ...... Sawing machine setters, operators, and tenders, wood ...... 0 8540 ...... Woodworking machine setters, operators, and tenders, except sawing ...... 0 8550 ...... Woodworkers, all other ...... 0 8600 ...... Power plant operators, distributors, and dispatchers ...... 0 8610 ...... Stationary engineers and boiler operators ...... 0 8620 ...... Water and liquid waste treatment plant and system operators ...... 0

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TABLE A2—PROBABILITY CODES BY OCCUPATION—Continued

2002 Census Occupation Probability code code

8630 ...... Miscellaneous plant and system operators ...... 0 8640 ...... Chemical processing machine setters, operators, and tenders ...... 0 8650 ...... Crushing, grinding, polishing, mixing, and blending workers ...... 0 8710 ...... Cutting workers ...... 0 8720 ...... Extruding, forming, pressing, and compacting machine setters, operators, and tenders ...... 0 8730 ...... Furnace, kiln, oven, drier, and kettle operators and tenders ...... 0 8740 ...... Inspectors, testers, sorters, samplers, and weighers ...... 0 8750 ...... Jewelers and precious stone and metal workers ...... 0 8760 ...... Medical, dental, and ophthalmic laboratory technicians ...... 0 8800 ...... Packaging and filling machine operators and tenders ...... 0 8810 ...... Painting workers ...... 0 8830 ...... Photographic process workers and processing machine operators ...... 0 8840 ...... Semiconductor processors ...... 0 8850 ...... Cementing and gluing machine operators and tenders ...... 0 8860 ...... Cleaning, washing, and metal pickling equipment operators and tenders ...... 0 8900 ...... Cooling and freezing equipment operators and tenders ...... 0 8910 ...... Etchers and engravers ...... 0 8920 ...... Molders, shapers, and casters, except metal and plastic ...... 0 8930 ...... Paper goods machine setters, operators, and tenders ...... 0 8940 ...... Tire builders ...... 0 8950 ...... Helpers—production workers ...... 0 8960 ...... Production workers, all other ...... 0 9000 ...... Supervisors, transportation and material moving workers ...... 3 9030 ...... Aircraft pilots and flight engineers ...... 4 9040 ...... Air traffic controllers and airfield operations specialists ...... 3 9110 ...... Ambulance drivers and attendants, except emergency medical technicians ...... 0 9120 ...... Bus drivers ...... 0 9130 ...... Driver/sales workers and truck drivers ...... 0 9140 ...... Taxi drivers and chauffeurs ...... 0 9150 ...... Motor vehicle operators, all other ...... 0 9200 ...... Locomotive engineers and operators ...... 0 9230 ...... Railroad brake, signal, and switch operators ...... 0 9240 ...... Railroad conductors and yardmasters ...... 0 9260 ...... Subway, streetcar, and other rail transportation workers ...... 0 9300 ...... Sailors and marine oilers ...... 0 9310 ...... Ship and boat captains and operators ...... 0 9570 ...... Ship engineers ...... 4 9340 ...... Bridge and lock tenders ...... 0 9350 ...... Parking lot attendants ...... 0 9360 ...... Service station attendants ...... 0 9410 ...... Transportation inspectors ...... 0 9420 ...... Other transportation workers ...... 0 9500 ...... Conveyor operators and tenders ...... 0 9510 ...... Crane and tower operators ...... 0 9520 ...... Dredge, excavating, and loading machine operators ...... 0 9560 ...... Hoist and winch operators ...... 0 9600 ...... Industrial truck and tractor operators ...... 0 9610 ...... Cleaners of vehicles and equipment ...... 0 9620 ...... Laborers and freight, stock, and material movers, hand ...... 0 9630 ...... Machine feeders and offbearers ...... 0 9640 ...... Packers and packagers, hand ...... 0 9650 ...... Pumping station operators ...... 0 9720 ...... Refuse and recyclable material collectors ...... 0 9730 ...... Shuttle car operators ...... 0 9740 ...... Tank car, truck, and ship loaders ...... 0 9750 ...... Material moving workers, all other ...... 0

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Appendix B. Additional Tables

TABLE B1—ESTIMATED NUMBER OF POTENTIALLY AFFECTED EAP WORKERS WITH THE CURRENT AND UPDATED SALARY LEVELS, BY DETAILED INDUSTRY, PROJECTED FOR FY2017

Affected as Potentially share of Not-affected Affected Industry affected EAP potentially workers (millions) b (millions) c a affected (millions) (percent)

Total d ...... 22.5 18.3 4.2 19 Agriculture ...... 0.0 0.0 0.0 19 Forestry, logging, fishing, hunting, and trapping ...... 0.0 0.0 0.0 6 Mining ...... 0.2 0.2 0.0 10 Construction ...... 0.8 0.7 0.1 16 Nonmetallic mineral product manufacturing ...... 0.1 0.1 0.0 11 Primary metals and fabricated metal products ...... 0.2 0.2 0.0 13 Machinery manufacturing ...... 0.3 0.3 0.0 10 Computer and electronic product manufacturing ...... 0.6 0.5 0.0 8 Electrical equipment, appliance manufacturing ...... 0.1 0.1 0.0 9 Transportation equipment manufacturing ...... 0.6 0.5 0.0 8 Wood products ...... 0.0 0.0 0.0 18 Furniture and fixtures manufacturing ...... 0.0 0.0 0.0 19 Miscellaneous and not specified manufacturing ...... 0.3 0.3 0.0 14 Food manufacturing ...... 0.2 0.1 0.0 17 Beverage and tobacco products ...... 0.1 0.1 0.0 9 Textile, apparel, and leather manufacturing ...... 0.1 0.1 0.0 19 Paper and printing ...... 0.1 0.1 0.0 20 Petroleum and coal products manufacturing ...... 0.1 0.1 0.0 9 Chemical manufacturing ...... 0.4 0.4 0.0 9 Plastics and rubber products ...... 0.1 0.1 0.0 15 Wholesale trade ...... 0.8 0.7 0.1 17 Retail trade ...... 1.6 1.2 0.4 26 Transportation and warehousing ...... 0.5 0.4 0.1 20 Utilities ...... 0.3 0.2 0.0 11 Publishing industries (except internet) ...... 0.2 0.2 0.0 15 Motion picture and sound recording ...... 0.0 0.0 0.0 54 Broadcasting (except internet) ...... 0.2 0.1 0.0 21 Internet publishing and broadcasting ...... 0.1 0.0 0.0 10 Telecommunications ...... 0.4 0.3 0.0 13 Internet service providers and data processing services ...... 0.0 0.0 0.0 20 Other information services ...... 0.1 0.0 0.0 31 Finance ...... 2.0 1.7 0.3 14 Insurance ...... 1.1 0.9 0.2 19 Real estate ...... 0.3 0.3 0.1 24 Rental and leasing services ...... 0.1 0.0 0.0 26 Professional and technical services ...... 4.0 3.5 0.5 13 Management of companies and enterprises ...... 0.1 0.1 0.0 24 Administrative and support services ...... 0.5 0.4 0.1 26 Waste management and remediation services ...... 0.1 0.0 0.0 23 Educational services ...... 0.9 0.7 0.2 26 Hospitals ...... 1.1 0.9 0.2 22 Health care services, except hospitals ...... 1.3 1.0 0.3 25 Social assistance ...... 0.4 0.2 0.2 38 Arts, entertainment, and recreation ...... 0.4 0.3 0.1 33 Accommodation ...... 0.1 0.1 0.0 21 Food services and drinking places ...... 0.3 0.2 0.1 30 Repair and maintenance ...... 0.1 0.1 0.0 35 Personal and laundry services ...... 0.1 0.0 0.0 37 Membership associations and organizations ...... 0.4 0.3 0.1 29 Private households ...... 0.0 0.0 0.0 21 Public administration ...... 0.8 0.6 0.2 24 Note: Pooled data for FY2013 through FY2015. a Workers who are white collar, salaried, not eligible for another (non-EAP) overtime exemption, and not in a named occupation. b Workers who continue to be exempt after the increases in the salary levels (assuming affected workers’ weekly earnings do not increase to the new salary level). c Estimated number of workers exempt under the EAP exemptions who would be entitled to overtime protection under the updated salary lev- els (if their weekly earnings do not increase to the new salary levels). d Columns may not sum to total due to rounding.

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VII. Final Regulatory Flexibility The agency is also required to respond Department’s analysis of costs and Analysis (FRFA) to public comment on the NPRM. See 5 payroll increases for small businesses, The Regulatory Flexibility Act of 1980 U.S.C. 604. If the rule is not expected to the Department reorganized and (RFA) as amended by the Small have a significant economic impact on expanded on our analysis from that Business Regulatory Enforcement a substantial number of small entities, included in the NPRM. Commenters Fairness Act of 1996 (SBREFA), the RFA allows an agency to certify also requested that the Department hereafter jointly referred to as the RFA, such, in lieu of preparing an analysis. include more detailed industry-specific requires that an agency prepare an See 5 U.S.C. 605. The Chief for information. In response, the initial regulatory flexibility analysis Advocacy of the Small Business Department has expanded the industry (IRFA) when proposing and a final Administration was notified of this breakdown to the Census’s 51 industries regulatory flexibility analysis (FRFA) Final Rule upon submission of the rule categorization. The Department was not when issuing regulations that will have to OMB under E.O. 12866. able to provide more granular data due a significant economic impact on a Based on commenters’ concerns that to small sample sizes causing imprecise substantial number of small entities. the IRFA did not clearly explain the estimates.

TABLE 36—OVERVIEW OF COSTS TO SMALL BUSINESSES, ALL EMPLOYEES AT ESTABLISHMENT AFFECTED METHODOLOGY

Small business costs Cost

Direct and Payroll Costs

Average total cost per affected entity a ...... $3,265. Range of total costs per affected entity a ...... $847–$75,059. Average percent of revenue per affected entity a ...... 0.17%. Average percent of payroll per affected entity a ...... 0.87%. Average percent of small business profit ...... 0.14%.

Direct Costs

Regulatory familiarization: Time (first year) ...... 1 hour per establishment. Time (update years) ...... 5 minutes per establishment. Hourly wage ...... $36.22. Adjustment: Time (first year affected) ...... 75 minutes per newly affected worker. Hourly wage ...... $36.22. Managerial: Time (weekly) ...... 5 minutes per affected worker. Hourly wage ...... $42.31.

Payroll Increases

Average payroll increase per affected entity a ...... $2,516. Range of payroll increases per affected entity a ...... $647–$54,430. a Using the methodology where all employees at an affected small firm are affected. This assumption generates upper-end estimates. Lower- end cost estimates are significantly smaller.

A. Objectives of, and Need for, the Final unemployment) by incentivizing implementing these ‘‘white collar’’ Rule employers to hire more employees exemptions are codified at 29 CFR part The Fair Labor Standards Act (FLSA) rather than requiring existing employees 541. requires covered employers to: (1) Pay to work longer hours. The second policy For an employer to exclude an employees who are covered and not objective is to reduce overwork and its employee from minimum wage and exempt from the Act’s requirements not detrimental effect on the health and overtime protection pursuant to the EAP less than the Federal minimum wage for well-being of workers. exemption, the employee generally must all hours worked and overtime premium The FLSA provides a number of meet three criteria: (1) The employee pay at a rate of not less than one and exemptions from the Act’s minimum must be paid a predetermined and fixed one-half times the employee’s regular wage and overtime pay provisions, salary that is not subject to reduction rate of pay for all hours worked over 40 including one for bona fide executive, because of variations in the quality or in a workweek, and (2) make, keep, and administrative, and professional (EAP) quantity of work performed (the ‘‘salary preserve records of the persons employees. Such employees typically basis test’’); (2) the amount of salary employed by the employer and of the receive more monetary and non- paid must meet a minimum specified wages, hours, and other conditions and monetary benefits than most blue collar amount (the ‘‘salary level test’’); and (3) practices of employment. It is widely and lower-level office workers. The the employee’s job duties must recognized that the general requirement exemption applies to employees primarily involve executive, that employers pay a premium rate of employed in a bona fide executive, administrative, or professional duties as pay for all hours worked over 40 in a administrative, or professional capacity defined by the regulations (the ‘‘duties workweek is a cornerstone of the Act, and for outside sales employees, as test’’). The salary level requirement was grounded in two policy objectives. The those terms are ‘‘defined and delimited’’ created to identify the dividing line first is to spread employment (or in by the Department. 29 U.S.C. 213(a)(1). distinguishing workers who may be other words, reduce involuntary The Department’s regulations performing exempt duties from the

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nonexempt workers whom Congress wage Census Region (currently the with the proposed rule as presently intended to be protected by the FLSA’s South, $913 a week) for the standard written.’’ The American Society of minimum wage and overtime test, and from $100,000 to the Association Executives and the provisions. Throughout the regulatory annualized value of the 90th percentile International Association of Lighting history of the FLSA, the Department has of weekly earnings of full-time salaried Designers stated that the Department considered the salary level test the ‘‘best workers nationally ($134,004 per year) ‘‘should either set a lower salary level single test’’ of exempt status. Stein for the HCE test. The Department applicable to all employers or set the Report at 19. This bright-line test is reached the final standard salary and minimum salary level at a lower easily observed, objective, and clear. Id. HCE total compensation levels after percentile of the national average for The Department has periodically considering available data on actual nonprofit and/or small employers.’’ See updated the regulations governing these salary levels currently being paid in the also American Osteopathic Association; tests since the FLSA’s enactment in economy, publishing a proposed rule, Kentucky Pharmacists Association. The 1938, most recently in 2004 when, reviewing more than 270,000 timely Greene Law Firm recommended among other revisions, the Department comments, and considering a range of excluding from the proposed salary created the standard duties test and alternatives. In order to ensure that level increase employers that qualify as paired it with a salary level test of $455 these levels continue to function ‘‘small businesses’’ for their industries per week. As a result of inflation, the appropriately in the future, the rule also according to the North American real value of the salary threshold has includes a provision to automatically Industry Classification System (NAICS) fallen significantly since its last update, update these salary levels every three codes. The Maine Department of Labor making it inconsistent with Congress’ years. ‘‘agree[d] that consideration should not intent to exempt only ‘‘bona fide’’ EAP focus on the size of the employer,’’ but, B. The Agency’s Response to the Public workers. citing the FLSA’s coverage principles, Comments The standard salary level and the total stated that ‘‘[b]usinesses with low compensation level required for highly Many of the issues raised by small annual dollar volumes should not be compensated employees (HCE) have not businesses in the public comments held to the same [salary] level as large been updated since 2004. As a result, received on the proposed rule are corporations.’’ Finally, the Association the standard salary level has declined described in the preamble and RIA for Enterprise Opportunity, the considerably in real terms relative to above, which we incorporate herein. California Association for Micro both its 2004 and 1975 values (see Nevertheless, the significant issues Enterprise Opportunity, and Women section VI.A.ii.). This is problematic raised by representatives of small Impacting Public Policy each requested because the exemption now covers businesses and the U.S. Small Business an exemption for small businesses that workers who were never intended to be Administration’s Office of Advocacy fall below the $500,000 per year within the exemption, removing them (Advocacy) are repeated here. threshold for enterprise coverage under from minimum wage and overtime Most of the comments received the FLSA. protection. Similarly, the HCE annual concerning small businesses centered Consistent with the history of the part compensation requirement is out of on the burden that the proposed salary 541 regulations, the Department date; by the Final Rule’s effective date level would impose on small entities. declines to create a lower salary level the share of workers earning above Some commenters expressed concern requirement for employees employed at $100,000 annually will have more than that the expected cost increase from the small entities, or to exclude such tripled since it was adopted in 2004. rule would disproportionately affect employees from the salary level test Therefore, the Department believes this small entities. For example, the entirely. As we noted in 2004, while rulemaking is necessary in order to Wisconsin Agri-Business Association ‘‘the FLSA itself does provide special restore the effectiveness of these levels. stated that the proposed rule’s increased treatment for small entities under some The Department’s primary objective labor costs ‘‘will be felt most by small of its exemptions . . . the FLSA’s in this rulemaking is to ensure that the businesses’’ because they do not have statutory exemption for white-collar revised salary levels will continue to the ability to adjust to increased costs employees in section 13(a)(1) contains provide a useful and effective test for ‘‘without detriment to their business or no special provision based on size of exemption. The salary levels were the people they employ.’’ Similarly, the business,’’ 69 FR 22238. In the 78-year designed to operate as a ready guide to Small Business Legislative Council history of the part 541 regulations assist employers in deciding which (SBLC) explained that small businesses defining the EAP exemption, the salary employees were more likely to meet the (and especially new business) tend to level requirements have never varied duties tests for the exemptions. If left operate on very narrow margins, and so according to the size or revenue of the unchanged, however, the effectiveness such businesses would be employer. Cf. Stein Report at 5–6 of the salary level test as a means of disproportionately affected by this rule. (rejecting proposals to set varying determining exempt status diminishes Other comments stated more generally regional salary levels); see also 69 FR as employees’ wages increase over time. that the proposed salary level would 22238 (stating that implementing In order to restore the ability of the impose significant burdens on small differing salary levels based on business standard salary level and the HCE businesses. See, e.g., Nebraska Chamber size industry-by-industry ‘‘would compensation requirements to serve as of Commerce and Industry, present the same insurmountable appropriate bright-line tests between Northeastern Retail Lumber Association. challenges’’ as adopting regional or overtime protected employees and those Accordingly, many commenters population-based salary levels). who may be bona fide EAP employees, suggested the Department adopt some Congress established the threshold for this rulemaking increases the minimum forms of differential treatment for small enterprise coverage under the FLSA (not salary level to come within the entities. The Greater Philadelphia less than $500,000 in annual gross exemption from the FLSA minimum Chamber of Commerce urged that ‘‘a volume of sales made or business wage and overtime requirements as an lower compensation threshold be done).284 All employees of an FLSA- EAP employee from $455 to the 40th extended to small businesses and percentile of weekly earnings of full- nonprofits, which can be expected to 284 The FLSA also applies to certain ‘‘named’’ time salaried workers in the lowest- bear the greatest burden of complying activities, regardless of the annual dollar volume of

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covered enterprise are entitled to the Region (as opposed to nationally) in part nonexempt, and expects that employers FLSA’s protection, unless the employee to account for low-wage employers, will modify their existing policies and meets the criteria for exemption from including small entities. This change systems to accommodate this change. the FLSA’s minimum wage and/or from the methodology contained in the NFIB asserted that ‘‘the IRFA overtime pay provisions. Employees of NPRM results in a lower standard salary underestimates compliance costs firms which are not covered enterprises level than proposed. The final standard because it does not take into account under the FLSA may still be subject to salary level represents the 20th business size when estimating the time the FLSA’s protections if they are percentile of likely exempt employees it takes to read, comprehend and individually engaged in interstate working in small establishments.285 implement the proposed changes.’’ The commerce or in the production of goods The National Small Business Louisiana Small Business Advisory for interstate commerce, or in any Association and several other small Council similarly commented that the closely-related process or occupation business commenters asserted that Department underestimated adjustment directly essential to such production. ‘‘[m]any small businesses have no, or costs, stating that small businesses ‘‘do Such employees include those who: very few, non-exempt employees with not have timekeeping and payroll work in communications or most workers being salaried systems in place that can accommodate transportation; regularly use the mails, professionals or administrative the addition of new, non-exempt telephones or interstate communication, employees. They do not have employees.’’ or keep records of interstate timekeeping and payroll systems in In the Final Rule, the Department has transactions; handle, ship, or receive place that can accommodate the clarified the explanation of our method goods moving in interstate commerce; addition of many more non-exempt for estimating the number of affected regularly cross state lines in the course employees. Thus, the burden of these workers employed by small firms, and of employment; or work for changes will fall much more heavily on the number of small firms affected. The independent employers who contract to small businesses than on their larger Department also reconsidered its do clerical, custodial, maintenance, or competitors.’’ Similarly, NFIB stated estimate of the number of affected other work for firms engaged in that ‘‘small companies typically lack workers who work some overtime and interstate commerce or in the product of specialized compliance personnel’’ to increased in this Final Rule its estimate goods for interstate commerce. The adjust to new regulations, forcing of affected workers who work overtime Department does not have the authority business owners to oversee compliance to 40 percent, up from 24 percent in the to create an exemption from the FLSA’s efforts themselves or pay for outside IRFA. Additionally, in response to individual coverage provision. consultation. The Louisiana Small comments, the Department has Several small business commenters Business Advisory Council similarly increased estimated regulatory raised concerns about the impact that stated: ‘‘The cost of compliance for familiarization and adjustment costs in the proposed salary level would have on small businesses will be much greater the Final Rule. small entities in low-wage regions and than estimated by the DOL. Lots of Because there was insufficient data to industries. See, e.g., Association for small businesses have a minimal estimate the number of affected workers Enterprise Opportunity; Credit Union number of non-exempt employees, with employed by a typical small entity, the National Association; National most workers being salaried Department presented in the IRFA a Federation of Independent Businesses professionals or administrative range of results based on the assumption (NFIB); Society of Independent Gasoline employees.’’ Identical or nearly that only one employee per small firm Marketers of America. Kinecta Federal identical ‘‘campaign’’ comments from was affected (the lower bound), and, Credit Union stated that ‘‘the small businesses also stated that alternatively, based on the assumption Department of Labor has clearly failed ‘‘[s]mall businesses are often not that all employees in a small firm were to adequately consider the potential equipped to monitor the activities of affected (the upper bound estimate of impact of this rule on small businesses.’’ their employees in order to regulate impacts per small establishment). The Department recognizes that many their time. Companies with fewer than Assuming the upper bound scenario, small employers operate in low-paying 20 employees rarely have a dedicated that all employees in a firm were regions or industries, and we have HR department, so the creation of new affected, the IRFA showed that on historically accounted for small hourly reporting and tracking average, costs and payroll increases for employers when setting the salary level. requirements are likely to be a much small affected firms were less than 0.9 See Weiss Report at 14–15 (setting the greater burden on these companies that percent of payroll and less than 0.2 long test salary level for executive do not currently face them. The result percent of revenues. The largest impacts were found in the food services and employees ‘‘slightly lower than might be will be confusion and excess cost for drinking places industry, where costs indicated by the data’’ in part to avoid individual business owners.’’ excluding ‘‘large numbers of the The Department believes that most, if and payroll increases composed 0.84 executives of small establishments from not all, small businesses, like larger percent of revenues. Due to the mix of the exemption’’). This Final Rule is no businesses, employ a mix of exempt and exempt and overtime-protected workers exception, as the Department is setting overtime-protected workers. As such, employed by small businesses, the the salary level at the 40th percentile of employers already have policies and actual impact in this industry would weekly earnings of full-time salaried systems in place for scheduling workers almost certainly be smaller than shown employees in the lowest-wage Census and monitoring overtime hours worked in this upper bound scenario analysis. The Department’s adjustment cost and the corresponding overtime those enterprises. Named enterprises include the estimate in the IRFA of one hour per premium pay. The Department operation of a hospital, an institution primarily newly affected worker was meant to be recognizes that the Final Rule will result engaged in the care of the sick, the aged, or the an average across all establishments. mentally ill who reside on the premises; a school in the reclassification of some workers The Department acknowledges that for mentally or physically disabled or gifted of small businesses from exempt to children; a preschool, an elementary or secondary some small businesses may face higher school, or an institution of higher education costs because of this rulemaking; (whether operated for profit or not for profit); or an 285 The Department does not know which activity of a public agency. 29 U.S.C. 203(s)(1)(B)– employees work for small businesses and therefore however, since there is no data (C). randomly assigns workers to small businesses. indicating the magnitude of this cost

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(compared to other businesses), the standard salary level would create standard salary and HCE compensation Department has not distinguished perpetual budgeting uncertainty for thresholds will take place every three between establishment sizes in the cost small entities, and objected that, under years, rather than annually. Finally, the estimates. However, in response to our proposal, small employers would Department will publish the updated comments, the Department has only know the updated salary level 60 standard salary and HCE compensation increased the average adjustment time days before it takes effect. The Maine thresholds at least 150 days before they from one hour to 75 minutes per Department of Labor asserted that small take effect, instead of just 60 days. We affected worker and we have added businesses ‘‘lack the budget flexibility to believe that these three significant additional time for regulatory provide annual raises to all exempt changes appropriately address the familiarization. workers,’’ while the National Grocers concerns raised by small business The Department received many Association and Pizza Properties commenters, while ensuring that the comments in response to our proposal commented that annual automatic earnings thresholds for the EAP in the NPRM to automatically update updates might reduce the prevalence or exemption will remain effective and up the standard salary and HCE total effectiveness of performance-based to date over time. The triennial annual compensation requirements. As incentive pay. Several small business automatic updating mechanism discussed in section IV.E.i., some commenters, including Alpha Graphics introduced in this Final Rule should commenters asserted that the automatic and many individual employers who benefit employers of all sizes going updating mechanism introduced in this did not name their organizations, forward by avoiding the uncertainty and rulemaking may violate the RFA. For worried that automatic updating would disruptiveness of larger increases that example, Seyfarth Shaw urged the likely ‘‘escalate the salary threshold would likely occur as a result of Department to not proceed with level to an inappropriately high level in irregular updates. automatic updating in part because this a matter of a few years.’’ mechanism would ‘‘effectively bypass’’ Some small business commenters C. Comment by the Chief Counsel for this authority. The Partnership to supported the idea of automatic Advocacy of the Small Business Protect Workplace Opportunity (PPWO) updating, provided the Department Administration raised similar RFA concerns and make other salary level changes. See, SBA’s Office of Advocacy (Advocacy) characterized the Department’s e.g., Board Game Barrister (favoring expressed similar concerns as those rulemaking as a ‘‘‘super-proposal,’ annual updating using the CPI–U after expressed by other small business deciding once and for all what (in the the new salary level is phased in); commenters, based upon its listening Department’s belief) is best without Corporate Payroll Services (agreeing that sessions and roundtables regarding the consideration of its impact now or in salary level ‘‘should be indexed to NPRM. Advocacy stated that it was the future.’’ PPWO further stated that ‘‘it inflation,’’ but favoring a lower initial concerned that the IRFA did not would not be possible for the salary level); Think Patented (favoring properly analyze the numbers of small Department to accurately estimate the updating using ‘‘the Current Population businesses affected by this regulation impact of the automatic increases in Survey Weekly Earnings Index, not the and underestimated their compliance future years as the workforce and the CPI–U’’)(emphasis in comment). The costs, and stated that the Department economy are always changing.’’ Society of Independent Gasoline should publish a supplemental IRFA to The RFA requires a regulatory Marketers of America, which favored a reanalyze small business impacts. The flexibility analysis to accompany any lower salary level in part to protect comment stated that the IRFA ‘‘analyzes agency final rule promulgated under 5 small business fuel retailers, supported small entities very broadly, not fully U.S.C. 553. See 5 U.S.C. 603–604. In automatically updating the standard considering how the economic impact accordance with this requirement, this salary threshold every three to five years affects various categories of small section estimates the future costs of ‘‘using a fixed percentile of wages based entities differently.’’ The comment automatic updating using the fixed on data sets that take into account emphasized that the Department should percentile method. The RFA only regional and industry wage disparities.’’ not have analyzed industries by general requires that such analyses accompany See also Wisconsin Bankers Association 2- or 3-digit NAICS codes when ‘‘more rulemaking, and commenters have not (supporting automatic updates to specific data are readily available,’’ and cited any RFA provision that would regionally-adjusted salary level every should have evaluated the impact on require the Department to conduct a five years). ANCOR and several non- small non-profits and small new regulatory flexibility analysis profit care providers stated that governmental . As before each automatic salary level ‘‘steadier, more predictable’’ salary level presented below, the Department update. In response to PPWO’s concern changes ‘‘will likely benefit providers revised its analysis in this FRFA to about this rulemaking setting the salary who will be able to adjust to smaller, display the impact on industries using level updating process ‘‘once and for more frequent changes better than to 6-digit NAICS codes, rather than the 2- all,’’ we reiterate that this Final Rule larger, less frequent ones.’’ and 3-digit codes, in order to present a does not preclude further rulemaking As explained earlier, this Final Rule more detailed assessment of specific should the Department determine that introduces a mechanism to impacts.286 future conditions indicate that revisions automatically update the standard to the salary level updating salary and HCE total annual 286 The Department estimates the number of small methodology may be warranted. compensation thresholds, but with a businesses and their employees using SUSB data Several commenters addressed the number of important adjustments from and the SBA size standards at the 6-digit NAICS potential effects that an annual the options considered in the NPRM. level. The most detailed industry level in the CPS is the 3-digit Census code level (262 industries automatic updating mechanism could First, the Department will update the total), which is considerably less granular than 6- have on small entities. Advocacy standard salary level by using regional digit NAICS. Moreover, there is not always a clear commented that the Department should data—specifically, the 40th percentile of one-to-one correspondence between the Census and analyze the impact of updates on small weekly earnings of full-time salaried NAICS codes; 3-digit Census industry codes correspond to a mix of 4-digit, 5-digit, and even businesses. The NFIB and the Small workers in the lowest wage Census occasionally partial 6-digit industries. See https:// Business Legislative Council asserted Region—rather than national data. usa.ipums.org/usa/volii/indcross03.shtml for a that annual automatic updates to the Second, future automatic updates to the crosswalk between Census industry codes and

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Advocacy also stated that the level set in the Final Rule is appropriate managerial time cost, as employers will Department should have analyzed and for small businesses. rely on policies such as a prohibition considered the impact of the proposed Advocacy also stated that the IRFA against working overtime without standard salary level in light of regional underestimated the regulatory express approval or a standard weekly and industry differences. As explained familiarization, adjustment, managerial schedule of assigned hours. The in the preamble and in the economic costs, and payroll costs, of the proposed Department notes that most affected impact analysis, the Final Rule differs rule on small entities, especially employees who work overtime do not from the proposed rule in that it bases because small entities often have work large amounts of overtime hours the standard salary level on earnings in limited or no human resources and we therefore do not believe that the lowest-wage Census Region, which personnel on staff. As discussed employers will spend hours managing is currently the South. This change will elsewhere in the preamble and the the time of these employees. Seventy- provide relief not only to small economic impact analysis, the FRFA five percent of currently exempt businesses and others in low-wage increases the number of affected employees average less than 10 hours of industries and regions, but also to small workers who work overtime, accounts overtime per week. The Department non-profit entities and small for additional regulatory familiarization believes that an average of 5 additional governmental jurisdictions. As time each year that salary levels are minutes per week managing the hours of previously explained, the Department adjusted and accounts for additional each newly exempt worker who works believes that the standard salary level adjustment costs by increasing the overtime is appropriate. set in this Final Rule effectively adjustment time to 75 minutes per As shown in Table 41, the Department distinguishes between employees who affected worker.287 Moreover, the estimates that there will be a range of are overtime eligible and those who may Department expects that small entities costs for small entities from this rule, be bona fide executive, administrative, will rely upon compliance assistance ranging from $847 to $75,059. Advocacy or professional employees, without materials provided by the Department, commented that small businesses were necessitating a return to a duties test including the small entity compliance concerned that the Department’s that sets specific limits on the guide we will publish, or industry estimates of compliance costs were performance of nonexempt work, like associations to become familiar with the neither transparent nor accurate; and the more detailed ‘‘long’’ duties test that Final Rule. Additionally, we note that that small businesses have told existed before 2004. The new salary the Final Rule is quite limited in scope Advocacy that their payroll costs would level not only accounts for the growth as it primarily makes changes to the be significantly more costly than in salaries that has taken place since the salary component of the part 541 estimated by the Department. The salary level was updated in 2004, but regulation, even though the NPRM had Department does not believe there was also addresses the Department’s raised questions about whether we also sufficient information from small conclusion that the 2004 salary should make changes to the duties tests business commenters to determine the threshold was set too low in light of that for exemption, which would have accuracy of those higher estimates. rulemaking’s switch to a single duties required more time to understand. With Advocacy also suggested that the test that no longer set any specific limits regard to adjustment costs, as noted Department consider non-financial on the performance of nonexempt work. above, the Department has increased the impacts that it asserted would accrue to Setting a salary level in this Final Rule number of affected workers who work small entities, such as the potential for significantly below the level proposed overtime and increased adjustment lower employee morale or the loss of by the Department would have required costs. The estimated 75 minutes per scheduling flexibility if employees are a more rigorous duties test than the employee for adjustment costs is an converted from salaried to hourly. The current standard duties test in order to average –allotting the full 75 minutes for Department addresses these and other effectively distinguish between white the approximately 60 percent of the possible impacts that cannot be collar employees who are overtime employees who do not work overtime quantified in the preamble and protected and those who may be bona (Type 1 employees) and those whose economic impact analysis. As explained fide EAP employees. Commenters salaries are well below the new standard above, even if an employee is representing employers overwhelmingly salary level or only occasionally work reclassified as nonexempt, there is no opposed DOL making changes to the overtime—even though employers requirement that the employer convert duties test and stated that changes to the actually will need to spend little to no the employee’s pay status from salaried duties test are more burdensome for time considering those workers. This to hourly. Employers may choose to businesses. Further, by adjusting the leaves several hours for employers to continue to pay these formerly exempt Final Rule salary level to focus on the consider how to respond with regard to workers a salary (with the overtime lowest-wage Census Region instead of a other employees. Finally, as previously premium for hours in excess of 40 in national level, we have removed the mentioned, the Department believes that those weeks when the employee works effect of the three higher earnings most entities have at least some overtime). In addition, as we noted in Census Regions on the salary level, nonexempt employees and, therefore, the preamble, based on the available ensuring the salary level is not driven already have policies and systems in research the Department does not by earnings in high- or even middle- place for monitoring and recording their believe that workers will experience the wage regions of the country. We note hours. We believe that applying those significant change in flexibility that that the South Census Region—the same same policies and systems to the some employers envisioned if the region on which the Department relied workers whose exemption status employer reclassifies them as in setting the salary level in 2004—is changes will, on average, not require nonexempt. See section IV.A.iv. The comprised of the three lowest-wage more than five minutes per week per Department believes that while Census divisions. The Department worker who works overtime in individual experiences vary, the rule believes that the lower standard salary would benefit employees in a variety of 287 The estimates of regulatory familiarization and ways (e.g., through an increased salary, NAICS. While results can be tabulated at the 3-digit adjustment costs are averages and some small overtime earnings when the employee Census level, small sample sizes render statistical entities may take more or less time to comply with inference unreliable. this rule. has to work extra hours, time off).

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Further, a study by Lonnie Golden,288 number of employees, or the average all establishments or employees in referenced by the National Employment annual receipts. For example, small categories below the SBA cutoff as in Law Project (NELP), found using data businesses are generally defined as ‘‘small entity’’ employment.295 If a from the General Social Survey (GSS) having fewer than 500, 1,000, or 1,250 cutoff fell in the middle of a defined that ‘‘[i]n general, salaried workers at employees in manufacturing industries category, a uniform distribution of the lower (less than $50,000) income and less than $7.5 million in average employees across that bracket was levels don’t have noticeably greater annual receipts for many assumed in order to determine what levels of work flexibility that they nonmanufacturing industries. However, proportion should be classified as in would ‘lose’ if they became more like some exceptions do exist, the most small entity employment. The their hourly counterparts.’’ notable being that depository Department assumed that the small Advocacy also expressed concern institutions (including credit unions, entity distribution across revenue ‘‘that the proposed rule does not count commercial banks, and non-commercial categories for other depository worker bonuses or commissions as part banks) are classified by total assets. institutions, which was not separately of the salary computation.’’ The Small governmental jurisdictions are represented in FDIC asset data, was Department notes that the Final Rule, another noteworthy exception. They are similar to that of credit unions. The for the first time, does modify the salary defined as the governments of cities, share of employment estimated as small basis rule to permit employers to count counties, towns, townships, villages, was applied to the CPS data. This is nondiscretionary bonuses and other school districts, or special districts with necessary for estimating affected nondiscretionary incentive payments populations of less than 50,000 workers in small entities. such as commissions toward up to ten people.289 The Department also estimated the percent of the standard salary level number of small establishments by requirement (see section IV.C.). ii. Number of Small Entities and employer type (non-profit, for profit, Finally, Advocacy suggested that the Employees government). The calculation of number Department gradually phase in any The Department obtained data from of establishments by employer type is changes to the salary level, and provide several different sources to determine similar to the calculation of number of longer than the four months provided in the number of small entities and establishments by industry. However, 2004 for the implementation of the rule, employment in these entities for each instead of using SUSB data by industry, suggesting we provide small businesses industry. However, the Statistics of U.S. the Department used SUSB data by up to 12–18 months. As discussed in the Businesses (SUSB, 2012) was used for Legal Form of Organization for non- preamble, the Department does not most industries. Industries for which profit and for profits establishments and believe a phase-in is necessary given the Department used data from data from the 2012 Census of that this Final Rule adopts a alternative sources include credit Governments for small governments. methodology resulting in a lower salary unions,290 commercial and non- The 2012 Census of Governments report level than the proposed methodology, commercial banks,291 agriculture,292 includes a breakdown of state and local and the Department will automatically and public administration.293 The governments by population of their update the salary level every three years Department used the latest available underlying , allowing us to rather than annually as proposed. data in each case, so data years differ estimate the number of governments Further, even though this Final Rule between sources.294 that are small. The Department changes only salary-related In the SUSB data, for each industry, calculated the number of affected small requirements, unlike the 2004 rule the total number of small establishments employees from CPS data by tabulating which completely updated part 541 and employees is organized into observations where the respondent is including the duties requirements, the categories defined using employment, both employed by a non-profit/for Department is providing more than 180 annual revenue, and assets. The profit/government entity and is flagged days of notice to all employers before Department combined these categories as being employed in a small the Final Rule’s effective date of with the corresponding SBA standards establishment. However, it should be December 1, 2016, and we will provide to estimate the proportion of noted that CPS respondents are flagged at least 150 days of notice of future establishments and workers in each as employed in a small business based automatic updates to the salary industry who are considered small or on their industry and the industry requirement. employed by a small entity. The general distribution of employment in small C. Description of the Number of Small methodological approach was to classify firms. Therefore, this methodology Entities and Employees to Which the assumes the propensity of a business to Final Rule Will Apply 289 See http://www.sba.gov/advocacy/regulatory- be small is not correlated with employer flexibility-act for details. type. i. Definition of Small Entity 290 National Credit Union Association. (2010). 2010 Year End Statistics for Federally Insured iii. Number of Small Entities Impacted The RFA defines a ‘‘small entity’’ as Credit Unions. by the Final Rule a (1) small not-for-profit organization, 291 Federal Depository Insurance Corporation. Table 37 presents the estimated (2) small governmental jurisdiction, or (2015). Statistics on Depository Institutions— (3) small business. The Department used Compare Banks. Available at: https:// number of establishments and small the entity size standards defined by SBA www5.fdic.gov/SDI/index.asp. establishments in the U.S. (Hereafter, 292 to classify entities as small in effect as United States Department of Agriculture. the terms ‘‘establishment’’ and ‘‘entity’’ (2014). 2012 Census of Agriculture: United States are used interchangeably and are of February 26, 2016 for the purpose of Summary and State Data: Volume 1, Geographic Area Series, Part 51. Available at: http:// considered equivalent for the purposes this analysis. SBA establishes separate 296 www.agcensus.usda.gov/Publications/2012/Full_ of this FRFA.) Based on the standards for individual 6-digit NAICS _ _ _ _ industry codes, and standard cutoffs are Report/Volume 1, Chapter 1 US/usv1.pdf. 293 Hogue, C. (2012). Government Organization 295 The SUSB defines employment as of March typically based on either the average Summary Report: 2012. Available at: http:// 12th. www2.census.gov/govs/cog/g12_org.pdf. 296 SUSB reports data by size designations where 288 Golden, L. (2014). Flexibility and Overtime 294 Industry data are not displayed if the sample the size designations are based on ‘‘enterprises’’ (a Among Hourly and Salaried Workers. Economic size of affected workers in small establishments is business organization consisting of one or more Policy Institute. less than 10. domestic establishments that were specified under

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methodology described above, the establishments employ almost 50 forces), and account for roughly a third Department found that of the 7.5 million million workers, about 37 percent of of total payroll ($2.3 trillion of $6.5 establishments relevant to this analysis, workers employed by all establishments trillion).297 more than 80 percent (6.0 million) are (excluding self-employed, unpaid small by SBA standards. These small workers, and members of the armed

TABLE 37—NUMBER OF ESTABLISHMENTS AND EMPLOYEES BY SBA SIZE STANDARDS, BY INDUSTRY AND EMPLOYER TYPE

Workers (1,000s) a Annual payroll (billions) Industry/Employer type Establish- Small ments (1,000s) Total Small Total business employed Total

Total ...... 7,514.8 6,049.5 136,307.0 49,768.7 $6,465.8 $2,275.5

Industry

Agriculture ...... 9.1 8.4 c c c c Forest., log., fish., hunt., and trap ...... 12.9 12.6 c c c c Mining ...... 28.9 23.3 1,041.1 420.3 $74.2 $29.6 Construction ...... 652.9 634.3 7,458.5 4,704.7 364.3 229.3 Nonmetallic mineral prod. manuf ...... 15.2 11.7 400.6 192.3 20.1 9.5 Prim. metals and fab. metal prod ...... 60.1 56.4 1,623.1 999.0 80.3 48.7 Machinery manufacturing ...... 24.2 22.1 1,312.5 715.2 73.7 39.1 Computer and elect. prod. manuf ...... 13.2 11.8 1,283.3 598.8 95.4 44.8 Electrical equip., appliance manuf ...... 5.8 5.0 c c c c Transportation equip. manuf ...... 11.8 10.2 2,340.0 600.1 141.6 34.0 Wood products ...... 13.7 12.6 386.7 260.6 15.6 10.6 Furniture and fixtures manuf ...... 16.3 15.9 380.8 274.7 14.7 10.6 Misc. and not spec. manuf ...... 29.6 28.5 1,355.5 801.2 71.0 41.4 Food manufacturing ...... 25.8 22.7 1,676.7 769.2 65.9 28.3 Beverage and tobacco products ...... 5.1 4.5 279.4 138.3 15.1 7.1 Textile, app., and leather manuf ...... 16.2 15.7 532.8 365.5 21.2 14.1 Paper and printing ...... 32.0 29.8 880.4 491.1 42.0 22.6 Petroleum and coal prod. manuf ...... 2.2 1.2 c c c c Chemical manufacturing ...... 13.3 10.6 1,316.6 538.3 87.2 34.3 Plastics and rubber products ...... 12.7 10.6 502.0 235.9 23.3 10.6 Wholesale trade ...... 420.5 334.7 3,474.1 1,572.2 184.6 82.5 Retail trade ...... 1,063.8 685.4 15,618.2 5,224.8 520.6 191.1 Transport. and warehousing ...... 214.5 170.7 5,780.1 1,481.6 274.7 65.6 Utilities ...... 17.8 7.6 1,264.6 260.0 81.1 15.8 Publishing ind. (ex. internet) ...... 27.1 20.9 562.0 242.9 33.2 14.0 Motion picture and sound recording ...... 24.9 21.7 332.6 119.4 17.2 6.5 Broadcasting (except internet) ...... 9.6 5.3 580.2 129.1 34.3 7.3 Internet publishing and broadcasting ...... 6.9 5.8 c c c c Telecommunications ...... 49.2 11.1 961.6 189.1 64.9 12.4 Internet serv. providers and data ...... 14.0 9.2 c c c c Other information services ...... 3.6 3.1 258.4 75.9 11.5 3.1 Finance ...... 298.2 115.0 4,440.6 689.2 295.9 46.7 Insurance ...... 176.3 137.6 2,613.4 670.4 159.2 40.6 Real estate ...... 295.7 251.5 1,886.0 1,150.2 91.8 55.5 Rental and leasing services ...... 54.0 26.9 374.0 109.7 16.5 4.4 Professional and technical services ...... 859.2 778.9 8,793.5 4,164.1 626.8 288.4 Management of companies and enter- prises ...... 52.2 32.2 181.9 55.1 10.0 3.2 Admin. and support services ...... 363.7 310.7 4,905.9 2,186.4 174.7 73.5 Waste manag. and remed. services ...... 23.8 17.8 524.3 209.9 23.7 9.4 Educational services ...... 95.9 84.0 13,615.2 3,008.1 675.4 142.1 Hospitals ...... 6.7 1.6 6,979.2 336.9 384.5 18.9 Health care services, except hospitals .... 663.8 545.6 10,000.5 4,754.6 424.1 200.8 Social assistance ...... 163.3 133.1 2,829.2 1,567.8 94.9 49.7 Arts, entertainment, and recreation ...... 125.1 115.1 2,591.0 1,255.8 89.0 43.5 Accommodation ...... 64.2 53.7 1,511.1 557.6 50.7 18.7 Food services and drinking places ...... 598.5 470.6 8,534.3 2,315.2 197.2 53.6 Repair and maintenance ...... 211.2 196.4 1,572.6 1,167.9 63.5 45.9 Personal and laundry services ...... 212.7 186.2 1,586.7 1,185.9 46.1 34.4

common ownership or control). However, the categories. Therefore, numbers in this analysis are 297 Since information is not available about number of enterprises is not reported for the size for the number of establishments associated with employer size in the CPS MORG, respondents were designations. Instead, SUSB reports the number of small enterprises, which may exceed the number of randomly assigned as working in a small business ‘‘establishments’’ (individual plants, regardless of small enterprises. We chose to base the analysis on based on the SUSB probability of employment in ownership) and ‘‘firms’’ (a collection of the number of establishments rather than firms for a small business by detailed Census industry. establishments with a single owner within a given a more conservative estimate (potential Annual payroll was estimated based on the CPS state and industry) associated with enterprises size overestimate) of the number of small businesses. weekly earnings of workers by industry size.

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TABLE 37—NUMBER OF ESTABLISHMENTS AND EMPLOYEES BY SBA SIZE STANDARDS, BY INDUSTRY AND EMPLOYER TYPE—Continued

Workers (1,000s) a Annual payroll (billions) Industry/Employer type Establish- Small ments (1,000s) Total Small Total business employed Total

Membership associations & organiza- tions ...... 307.1 296.3 1,991.2 1,458.7 90.1 65.1 Private households ...... b b c c c c Public administration d ...... 90.1 72.8 7,076.8 689.9 419.4 35.6

Employer Type

Non-profit, private e ...... 566.7 489 9,658.10 3,997.00 472.70 176.10 For profit, private ...... 6,865.10 5,491.30 105,094.30 43,310.80 4,849.50 1,979.40 Government (state and local) ...... 90.1 72.8 17,819.60 2,460.90 896.60 120.00 Note: Establishment data are from the Survey of U.S. Businesses 2012; worker and payroll data from CPS MORG using pooled data for FY2013–FY2015 projected to reflect FY2017. a Excludes the self-employed and unpaid workers. b SUSB does not provide information on private households. c Data not displayed because sample size of affected workers in small establishments is less than 10. d Establishment number represents the total number of governments, including state and local. Data from Government Organization Summary Report: 2012. e As discussed in section VI.B.iii, estimates of workers subject to the FLSA do not exclude workers employed by enterprises that do not meet the enterprise coverage requirements because there is no reliable way of estimating this population. The estimates also do not exclude workers at non-covered enterprises who are not individually covered (because the estimates assume all workers are employed by covered entities). Al- though not excluding workers who work for non-covered enterprises would only impact a small percentage of workers generally, it may have a larger impact (and result in a larger overestimate) for workers in non-profits because when determining enterprise coverage only revenue derived from business operations, not charitable activities, are included.

iv. Number of Affected Small Entities applied these probabilities to the workers (37.1 percent) are employed by and Employees population of exempt EAP workers in small entities (Table 38). This composes For this Final Rule analysis, to order to find the number of workers about 3.1 percent of the 49.8 million estimate the probability that an exempt (total exempt EAP workers and total workers employed by small entities. The EAP worker is employed by a small affected by the rule) employed by small sectors with the highest total number of establishment, the Department assumed entities. No data are available to affected workers employed by small this probability is equal to the determine whether small businesses (or establishments are: professional and proportion of all workers employed by small businesses in specific industries) technical services (256,800); health care small establishments in the are more or less likely than non-small services, except hospitals (148,900); and corresponding industry. That is, if 50 businesses to employ exempt EAP retail trade (147,000). The sectors with percent of workers in an industry are workers or affected EAP workers. the largest percent of small business employed in small entities, then on Therefore, the best assumption available workers who are affected include: average 1 out of every 2 exempt EAP is to assign the same rates to all small management of companies and workers in this industry is expected to and non-small businesses.299 enterprises (8.9 percent); motion picture be employed by a small The Department estimated that 1.6 and sound recording (7.6 percent); and establishment.298 The Department million of the 4.2 million affected insurance (7.2 percent).

TABLE 38—NUMBER OF AFFECTED WORKERS EMPLOYED BY SMALL ESTABLISHMENTS, BY INDUSTRY AND EMPLOYER TYPE

Workers (1,000s) Affected workers (1,000s) a Industry Small Small Total business Total business employed employed

Total ...... 136,307.0 49,768.7 4,227.6 1,567.5

Industry

Agriculture ...... c c c c Forest., log., fish., hunt., and trap ...... c c c c

298 The Department used CPS microdata to to the 262 3-digit Census codes is certainly possible, than larger establishments. This may imply that estimate the number of affected workers. This was over half of these industry codes contain 7 or fewer workers in small businesses are more likely to be done individually for each observation in the observations, including one fifth that have one or affected than workers in large businesses; however, relevant sample by randomly assigning them a zero observations. The Department does not the literature does not make clear what the consider any breakdowns based on these numbers small business status based on the best available appropriate alternative rate for small businesses estimate of the probability of a worker to be reliable. should be. employed in a small business in their respective 299 There is a strand of literature that indicates industry (3-digit Census codes). While aggregation that small establishments tend to pay lower wages

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TABLE 38—NUMBER OF AFFECTED WORKERS EMPLOYED BY SMALL ESTABLISHMENTS, BY INDUSTRY AND EMPLOYER TYPE—Continued

Workers (1,000s) Affected workers (1,000s) a Industry Small Small Total business Total business employed employed

Mining ...... 1,041.1 420.3 21.8 11.8 Construction ...... 7,458.5 4,704.7 127.3 83.1 Nonmetallic mineral prod. manuf ...... 400.6 192.3 7.1 3.9 Prim. metals and fab. metal prod ...... 1,623.1 999.0 29.5 18.1 Machinery manufacturing ...... 1,312.5 715.2 32.1 17.4 Computer and elect. prod. manuf ...... 1,283.3 598.8 47.9 22.1 Electrical equip., appliance manuf ...... c c c c Transportation equip. manuf ...... 2,340.0 600.1 47.9 14.0 Wood products ...... 386.7 260.6 7.0 4.8 Furniture and fixtures manuf ...... 380.8 274.7 7.9 5.6 Misc. and not spec. manuf ...... 1,355.5 801.2 44.4 26.9 Food manufacturing ...... 1,676.7 769.2 27.5 13.1 Beverage and tobacco products ...... 279.4 138.3 5.9 2.8 Textile, app., and leather manuf ...... 532.8 365.5 16.1 10.4 Paper and printing ...... 880.4 491.1 25.8 14.3 Petroleum and coal prod. manuf ...... c c c c Chemical manufacturing ...... 1,316.6 538.3 37.7 12.7 Plastics and rubber products ...... 502.0 235.9 12.1 6.5 Wholesale trade ...... 3,474.1 1,572.2 144.5 62.1 Retail trade ...... 15,618.2 5,224.8 417.9 147.0 Transport. and warehousing ...... 5,780.1 1,481.6 101.8 23.3 Utilities ...... 1,264.6 260.0 31.1 6.9 Publishing ind. (ex. internet) ...... 562.0 242.9 32.3 14.7 Motion picture and sound recording ...... 332.6 119.4 22.6 9.1 Broadcasting (except internet) ...... 580.2 129.1 38.5 8.2 Internet publishing and broadcasting ...... c c c c Telecommunications ...... 961.6 189.1 44.7 7.7 Internet serv. providers and data ...... c c c c Other information services ...... 258.4 75.9 21.4 4.0 Finance ...... 4,440.6 689.2 277.0 46.3 Insurance ...... 2,613.4 670.4 199.3 48.3 Real estate ...... 1,886.0 1,150.2 78.4 44.9 Rental and leasing services ...... 374.0 109.7 15.9 5.1 Professional and technical services ...... 8,793.5 4,164.1 538.1 256.8 Management of companies and enterprises ...... 181.9 55.1 16.3 4.9 Admin. and support services ...... 4,905.9 2,186.4 136.9 49.7 Waste manag. and remed. services ...... 524.3 209.9 12.8 5.9 Educational services ...... 13,615.2 3,008.1 230.2 44.0 Hospitals ...... 6,979.2 336.9 241.5 13.2 Health care services, except hospitals ...... 10,000.5 4,754.6 329.3 148.9 Social assistance ...... 2,829.2 1,567.8 155.2 91.5 Arts, entertainment, and recreation ...... 2,591.0 1,255.8 124.4 66.9 Accommodation ...... 1,511.1 557.6 26.6 11.5 Food services and drinking places ...... 8,534.3 2,315.2 84.0 26.1 Repair and maintenance ...... 1,572.6 1,167.9 36.0 27.3 Personal and laundry services ...... 1,586.7 1,185.9 23.0 16.3 Membership associations & organizations ...... 1,991.2 1,458.7 115.8 84.5 Private households ...... c c c c Public administration (d) ...... 7,076.8 689.9 201.4 16.5

Employer Type

Non-profit, private (e) ...... 9,658.10 3,997.00 456.2 216.2 For profit, private ...... 105,094.30 43,310.80 3,308.80 1,306.80 Government (state and local) ...... 17,819.60 2,460.90 451.7 44.5 Note: Establishment data are from the Survey of U.S. Businesses 2012; worker data are from CPS MORG using pooled data for FY2013– FY2015 projected to reflect FY2017. a Estimation of affected workers employed by small establishments was done at the Census 4-digit occupational code and industry level. Therefore, at the more aggregated 51 industry level shown in this table, the ratio of small business employed to total employed does not equal to the ratio of affected small business employed to total affected for each industry, nor does it equal the ratio for the national total because relative industry size, employment, and small business employment differs from industry to industry. b Establishment number represents the total number of governments, including state and local. c Data not displayed because sample size of affected workers in small establishments is less than 10.

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e As discussed in section VI.B.iii, estimates of workers subject to the FLSA do not exclude workers employed by enterprises that do not meet the enterprise coverage requirements because there is no reliable way of estimating this population. The estimates also do not exclude workers at non-covered enterprises who are not individually covered (because the estimates assume all workers are employed by covered entities). Al- though not excluding workers who work for non-covered enterprises would only impact a small percentage of workers generally, it may have a larger impact (and result in a larger overestimate) for workers in non-profits because when determining enterprise coverage only revenue derived from business operations, not charitable activities, are included.

The Department estimated a range of Department assumes that all workers Table 38 summarizes the estimated impacts for small entities. To estimate employed by an affected establishment number of affected workers employed the number of small establishments that are affected. by small establishments and the will be affected because they employ For the purposes of estimating this expected range for the number of affected workers the Department lower-range number of affected small affected small establishments by assumed that each small establishment establishments, the Department used the industry. The Department estimated that employs no more than one affected the rule will affect 1.6 million workers average size of a small establishment as worker, meaning that at most 1.6 who are employed by somewhere the typical size of an affected small million of the 6.0 million small between 210,800 and 1.6 million small establishment.303 The average number establishments will employ an affected establishments; this composes from 3.5 worker.300 Thus, these assumptions of employees in a small establishment is percent to 25.9 percent of all small provide an upper bound estimate of the the number of workers employed by establishments. It also means that from number of affected small establishments small establishments divided by the 4.5 million to 5.9 million small (although it provides a lower bound total number of small establishments in establishments incur no more than estimate of the impact per small that industry (SUSB 2012). Thus, the minimal regulatory familiarization costs establishment because costs are spread number of affected small establishments (i.e., 6.0 million minus 1.6 million over a larger number of in an industry, if all employees of an equals 4.5 million; 6.0 million minus establishments).301 affected establishment are affected, 210,000 equals 5.9 million, using The impacts experienced by an equals the number of affected small rounded values). The table also presents establishment, measured by regulatory establishment employees divided by the the average number of affected costs and payroll increases incurred average number of employees per small employees per establishment using the relative to its financial resources (e.g., establishment. Since SUSB data method where all employees at the payroll or revenues), will increase as the provides no information on how establishment are affected. For the other share of its workers that are affected affected workers are distributed between method, by definition, there is always increases.302 The most severe impacts these entities, the Department one affected employee per are most likely to be incurred by calculated an upper and a lower bound establishment. Also displayed is the establishments in which all employees of affected employees per small entity average payroll per small establishment are affected workers, regardless of (which, in turn, is associated with an by industry (based on both affected and establishment size. Therefore, to lower and upper bound of the number non-affected small establishments), estimate a lower-end estimate for the of affected small entities—and an upper calculated by dividing total payroll of number of affected establishments and lower bound of impact per entity; small businesses (Table 37) by the (which generates an upper-end estimate the fewer affected employees, the lower number of small businesses (Table 37) for impacts per establishment) the the cost per entity). (applicable to both methods).

TABLE 39—NUMBER OF SMALL AFFECTED ESTABLISHMENTS AND EMPLOYEES BY INDUSTRY AND EMPLOYER TYPE

Number of Per establishment establishments (1,000s) a Affected Average Industry workers One All Affected annual (1,000s) affected employees at employees a payroll employee per estab. ($1,000s) estab. b affected c

Total ...... 1,567.5 1,567.5 210.8 7.4 376.1

Industry

Agriculture ...... d d d d d Forest., log., fish., hunt., and trap ...... d d d d d Mining ...... 11.8 11.8 0.7 18.0 1,268.4 Construction ...... 83.1 83.1 11.2 7.4 361.5

300 This assumes 1.6 million of the 4.2 million pay greater costs and transfers than one employing calculated by assuming all employees in the largest affected workers are employed in small businesses 10 affected workers. However, when measured as a small establishments are affected. For example, if (see Table 3). percent of payroll and revenues, an establishment the SBA standard is that establishments with 500 301 Note that if we underestimated the number of with 10 affected employees out of 20 total employees are ‘‘small,’’ and 1,350 affected workers affected workers employed by small businesses, employees should experience fairly similar impacts are employed by small establishments in that then we underestimated the upper bound of the as those experienced by an establishment industry, then the smallest number of number of affected small businesses. employing 50 affected workers out of 100 establishments that could be affected in that 302 Larger establishments are likely to have larger employees. industry (the true lower bound) would be three. costs than smaller firms since impacts (measured by 303 This is not the true lower bound estimate of However, because such an outcome appears the absolute dollar value of costs and transfers) will the number of affected establishments. Strictly implausible, the Department determined a more increase as establishment size increases; an speaking, a true lower bound estimate of the reasonable lower estimate would be based on establishment employing 50 affected workers will number of affected small establishments would be average establishment size.

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TABLE 39—NUMBER OF SMALL AFFECTED ESTABLISHMENTS AND EMPLOYEES BY INDUSTRY AND EMPLOYER TYPE— Continued

Number of Per establishment establishments (1,000s) a Affected Average Industry workers One All Affected annual (1,000s) affected employees at employees a payroll employee per estab. ($1,000s) estab. b affected c

Nonmetallic mineral prod. manuf ...... 3.9 3.9 0.2 16.4 808.4 Prim. metals and fab. metal prod ...... 18.1 18.1 1.0 17.7 863.7 Machinery manufacturing ...... 17.4 17.4 0.5 32.4 1,771.8 Computer and elect. prod. manuf ...... 22.1 22.1 0.4 50.8 3,800.1 Electrical equip., appliance manuf ...... d d d d d Transportation equip. manuf ...... 14.0 14.0 0.2 58.9 3,337.6 Wood products ...... 4.8 4.8 0.2 20.7 841.2 Furniture and fixtures manuf ...... 5.6 5.6 0.3 17.3 669.8 Misc. and not spec. manuf ...... 26.9 26.9 1.0 28.1 1,454.3 Food manufacturing ...... 13.1 13.1 0.4 33.9 1,245.8 Beverage and tobacco products ...... 2.8 2.8 0.1 30.5 1,570.2 Textile, app., and leather manuf ...... 10.4 10.4 0.4 23.2 896.8 Paper and printing ...... 14.3 14.3 0.9 16.5 758.7 Petroleum and coal prod. manuf ...... d d d d d Chemical manufacturing ...... 12.7 12.7 0.3 51.0 3,244.6 Plastics and rubber products ...... 6.5 6.5 0.3 22.2 1,000.2 Wholesale trade ...... 62.1 62.1 13.2 4.7 246.5 Retail trade ...... 147.0 147.0 19.3 7.6 278.8 Transport. and warehousing ...... 23.3 23.3 2.7 8.7 384.2 Utilities ...... 6.9 6.9 0.2 34.1 2,075.4 Publishing ind. (ex. internet) ...... 14.7 14.7 1.3 11.6 671.5 Motion picture and sound recording ...... 9.1 9.1 1.7 5.5 299.1 Broadcasting (except internet) ...... 8.2 8.2 0.3 24.2 1,363.6 Internet publishing and broadcasting ...... d d d d d Telecommunications ...... 7.7 7.7 0.4 17.1 1,118.1 Internet serv. providers and data ...... d d d d d Other information services ...... 4.0 4.0 0.2 24.3 979.4 Finance ...... 46.3 46.3 7.7 6.0 406.3 Insurance ...... 48.3 48.3 9.9 4.9 295.1 Real estate ...... 44.9 44.9 9.8 4.6 220.7 Rental and leasing services ...... 5.1 5.1 1.3 4.1 162.2 Professional and technical services ...... 256.8 256.8 48.0 5.3 370.2 Management of companies and enterprises ...... 4.9 4.9 2.9 1.7 100.1 Admin. and support services ...... 49.7 49.7 7.1 7.0 236.5 Waste manag. and remed. services ...... 5.9 5.9 0.5 11.8 529.8 Educational services ...... 44.0 44.0 1.2 35.8 1,691.5 Hospitals ...... 13.2 13.2 0.1 214.7 12,069.1 Health care services, except hospitals ...... 148.9 148.9 17.1 8.7 368.0 Social assistance ...... 91.5 91.5 7.8 11.8 373.2 Arts, entertainment, and recreation ...... 66.9 66.9 6.1 10.9 377.9 Accommodation ...... 11.5 11.5 1.1 10.4 348.2 Food services and drinking places ...... 26.1 26.1 5.3 4.9 113.9 Repair and maintenance ...... 27.3 27.3 4.6 5.9 233.5 Personal and laundry services ...... 16.3 16.3 2.6 6.4 184.6 Membership associations & organizations ...... 84.5 84.5 17.2 4.9 219.8 Private households ...... d d d d d Public administration e ...... 16.5 16.5 1.7 9.5 489.0

Employer Type

Non-profit, private f ...... 216.2 216.2 26.4 8.2 $360.20 For profit, private ...... 1,306.80 1,306.80 165.7 7.9 $360.50 Government (state and local) ...... 44.5 44.5 1.3 33.8 $1,646.70 Note: Establishment data are from the Survey of U.S. Businesses 2012; worker and payroll data from CPS MORG using pooled data for FY2013–FY2015 projected to reflect FY2017. a Estimation of both affected small establishment employees and affected small establishments was done at the most detailed industry level available. Therefore, the ratio of affected small establishment employees to total small establishment employees for each industry may not match the ratio of small affected establishments to total small establishments at more aggregated industry level presented in the table, nor will it equal the ratio at the national level because relative industry size, employment, and small business employment differs from industry to industry. b This method may overestimate the number of affected establishments and therefore the ratio of affected workers to affected establishments may be greater than 1-to-1. However, we addressed this issue by also calculating impacts based on the assumption that 100 percent of workers at an establishment are affected. c For example, on average, a small establishment in the construction industry employs 7.42 workers (4.70 million employees divided by 634,330 small establishments). This method assumes if an establishment is affected then all 7.42 workers are affected. Therefore, in the con- struction industry this method estimates there are 11,200 small affected establishments (83,100 affected small workers divided by 7.42).

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d Data not displayed because sample size of affected workers in small establishments is less than 10. e Establishment number represents the total number of state and local governments. f As discussed in section VI.B.iii, estimates of workers subject to the FLSA do not exclude workers employed by enterprises that do not meet the enterprise coverage requirements because there is no reliable way of estimating this population. The estimates also do not exclude workers at non-covered enterprises who are not individually covered (because the estimates assume all workers are employed by covered entities). Al- though not excluding workers who work for non-covered enterprises would only impact a small percentage of workers generally, it may have a larger impact (and result in a larger overestimate) for workers in non-profits because when determining enterprise coverage only revenue derived from business operations, not charitable activities, are included.

v. Projected Impacts to Affected Small that this range of costs and payroll million to $211.5 million in regulatory Entities increases provides the most accurate familiarization costs will be incurred by characterization of the impacts of the small establishments that do not employ For small entities, the Department rule on small employers.304 affected workers. The three industries projected annual per-entity costs and Furthermore, the smaller estimate of the with the highest total number of affected payroll increases, including: Regulatory number of affected establishments (i.e., workers in small establishments familiarization costs, adjustment costs, where all employees are assumed to be (professional and technical services; managerial costs, and payroll increases affected) will result in the largest costs healthcare services, except hospitals; to employees. The Department estimates and payroll increases per entity as a and retail trade) account for about 35 a range for the number of small affected percent of establishment payroll and percent of the costs. The largest cost per establishments and the impacts they revenue, and the Department expects establishment is expected to be incurred incur. However, few establishments are that many, if not most, entities will likely to incur the costs, payroll incur smaller costs, payroll increases, in the hospitals industry ($20,629 using increases, and impacts at the upper end and impacts relative to establishment the method where all employees are of this range because it seems unlikely size. affected), although the costs are not that all employees at a small firm are As a result of this rule, the expected to exceed 0.17 percent of workers affected by this Final Rule. Department expects total direct payroll. The largest impact as a share of While the upper and lower bounds are employer costs will range from $157.9 payroll is projected to be incurred in the likely over- and under-estimates, million to $206.8 million for affected food services and drinking places respectively, of regulatory costs and small establishments (Table 40) in the industry, where estimated direct costs increased payroll per small first year after the promulgation of the compose 0.45 percent of average entity establishment, the Department believes Final Rule. An additional $162.3 payroll.

TABLE 40—YEAR 1 SMALL ESTABLISHMENT DIRECT COSTS, TOTAL AND PER ESTABLISHMENT, BY INDUSTRY AND EMPLOYER TYPE

Cost to small entities in year 1 a One affected employee All employees affected Industry Total Cost per Percent of Total Cost per Percent of b affected annual b affected annual (millions) entity payroll (millions) entity payroll

Total ...... $206.8 $132 0.04 $157.9 $749 0.20

Industry

Agriculture ...... c c c c c c Forest., log., fish., hunt., and trap ...... c c c c c c Mining ...... $1.6 $132 0.01 $1.2 $1,765 0.14 Construction ...... 11.0 132 0.04 8.4 748 0.21 Nonmetallic mineral prod. manuf ...... 0.5 132 0.02 0.4 1,613 0.20 Prim. metals and fab. metal prod ...... 2.4 132 0.02 1.8 1,734 0.20 Machinery manufacturing ...... 2.3 132 0.01 1.7 3,145 0.18 Computer and elect. prod. manuf ...... 2.9 132 0.00 2.1 4,905 0.13 Electrical equip., appliance manuf ...... c c c c c c Transportation equip. manuf ...... 1.8 132 0.00 1.3 5,690 0.17 Wood products ...... 0.6 132 0.02 0.5 2,023 0.24 Furniture and fixtures manuf ...... 0.7 132 0.02 0.5 1,696 0.25 Misc. and not spec. manuf ...... 3.6 132 0.01 2.6 2,734 0.19 Food manufacturing ...... 1.7 132 0.01 1.3 3,287 0.26 Beverage and tobacco products ...... 0.4 132 0.01 0.3 2,963 0.19 Textile, app., and leather manuf ...... 1.4 132 0.01 1.0 2,265 0.25 Paper and printing ...... 1.9 132 0.02 1.4 1,618 0.21 Petroleum and coal prod. manuf ...... c c c c c c Chemical manufacturing ...... 1.7 132 0.00 1.2 4,923 0.15 Plastics and rubber products ...... 0.9 132 0.01 0.6 2,168 0.22 Wholesale trade...... 8.2 132 0.05 6.4 487 0.20 Retail trade...... 19.4 132 0.05 14.8 767 0.28 Transport. and warehousing ...... 3.1 132 0.03 2.3 869 0.23 Utilities ...... 0.9 132 0.01 0.7 3,308 0.16

304 As noted previously, these are not the true the highest and lowest estimates the Department lower and upper bounds. The values presented are believes are plausible.

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TABLE 40—YEAR 1 SMALL ESTABLISHMENT DIRECT COSTS, TOTAL AND PER ESTABLISHMENT, BY INDUSTRY AND EMPLOYER TYPE—Continued

Cost to small entities in year 1 a One affected employee All employees affected Industry Cost per Percent of Cost per Percent of Total affected annual Total affected annual b b (millions) entity payroll (millions) entity payroll

Publishing ind. (ex. internet) ...... 1.9 132 0.02 1.5 1,152 0.17 Motion picture and sound recording ...... 1.2 132 0.04 0.9 564 0.19 Broadcasting (except internet) ...... 1.1 132 0.01 0.8 2,352 0.17 Internet publishing and broadcasting ...... c c c c c c Telecommunications ...... 1.0 132 0.01 0.7 1,673 0.15 Internet serv. providers and data ...... c c c c c c Other information services ...... 0.5 132 0.01 0.4 2,363 0.24 Finance ...... 6.1 132 0.03 4.7 611 0.15 Insurance ...... 6.4 132 0.04 5.0 503 0.17 Real estate ...... 5.9 132 0.06 4.7 475 0.22 Rental and leasing services ...... 0.7 132 0.08 0.5 428 0.26 Professional and technical services ...... 33.9 132 0.04 26.4 549 0.15 Management of companies and enterprises ...... 0.6 132 0.13 0.6 200 0.20 Admin. and support services ...... 6.6 132 0.06 5.0 711 0.30 Waste manag. and remed. services ...... 0.8 132 0.02 0.6 1,167 0.22 Educational services ...... 5.8 132 0.01 4.3 3,471 0.21 Hospitals ...... 1.8 132 0.00 1.3 20,629 0.17 Health care services, except hospitals ...... 19.7 132 0.04 14.9 872 0.24 Social assistance ...... 12.1 132 0.04 9.1 1,166 0.31 Arts, entertainment, and recreation ...... 8.8 132 0.03 6.6 1,082 0.29 Accommodation ...... 1.5 132 0.04 1.1 1,032 0.30 Food services and drinking places ...... 3.4 132 0.12 2.7 508 0.45 Repair and maintenance ...... 3.6 132 0.06 2.8 607 0.26 Personal and laundry services ...... 2.2 132 0.07 1.7 647 0.35 Membership associations & organizations ...... 11.2 132 0.06 8.7 508 0.23 Private households ...... c c c c c c Public administration...... 2.2 132 0.03 1.6 945 0.19

Employer Type

Non-profit, private d ...... 28.70 133 0.04 21.80 824 0.23 For profit, private ...... 177.40 136 0.04 136.10 821 0.23 Government (state and local) ...... 5.20 116 0.01 3.60 2,723 0.17 Note: Pooled data for FY2013–FY2015 projected to reflect FY2017. a Direct costs include regulatory familiarization, adjustment, and managerial costs. b The range of costs per establishment depends on the number of affected establishments. The minimum assumes that each affected estab- lishment has one affected worker (therefore, the number of affected establishments is equal to the number of affected workers). The maximum assumes the share of workers in small entities who are affected is also the share of small entity establishments that are affected. c Data not displayed because sample size of affected workers in small establishments is less than 10. d As discussed in section VI.B.iii, estimates of workers subject to the FLSA do not exclude workers employed by enterprises that do not meet the enterprise coverage requirements because there is no reliable way of estimating this population. The estimates also do not exclude workers at non-covered enterprises who are not individually covered (because the estimates assume all workers are employed by covered entities). Al- though not excluding workers who work for non-covered enterprises would only impact a small percentage of workers generally, it may have a larger impact (and result in a larger overestimate) for workers in non-profits because when determining enterprise coverage only revenue derived from business operations, not charitable activities, are included.

Average weekly earnings for affected employees in small entities (less than equipment manufacturing (up to EAP workers in small establishments 0.7 percent of aggregate affected $20,666 per entity). However, average are expected to increase by about $6.51 establishment payroll; Table 40). The payroll increases per establishment per week per affected worker, using the largest payroll increases per exceed 2 percent of average payroll in partial employment contract model 305 establishment are expected in the only two sectors: food services and described in section VI.D.iv.306 This sectors of hospitals (up to $54,430 per drinking places (3.53 percent) and food would lead to $530.4 million in entity); food manufacturing (up to manufacturing (2.10 percent). additional annual wage payments to $26,158 per entity); and transportation

305 As explained in section VI.D.iv., the partial Barkume’s two estimates of partial employment adjustment assuming an initial 28 percent overtime employment contract model reflects the contract model adjustments: a wage change that is pay premium. Department’s determination that an appropriate 40 percent of the adjustment toward the amount 306 This is an average increase for all affected estimate of the impact on the implicit hourly rate predicted by the employment contract model, workers (both EAP and HCE), and reconciles to the of pay for regular overtime workers after the Final assuming an initial zero overtime pay premium, weighted average of individual salary changes Rule should be determined using the average of and a wage change that is 80 percent of the discussed in the Transfers section.

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TABLE 41—YEAR 1 SMALL ESTABLISHMENT PAYROLL INCREASES, TOTAL AND PER ESTABLISHMENT, BY INDUSTRY AND EMPLOYER TYPE

Increased payroll for small entities in year 1 a One affected All employees employee affected Industry Total (millions) Percent of Percent of Per annual Per annual establishment payroll establishment payroll

Total ...... $530.4 $338 0.09 $2,516 0.67 Industry Agriculture ...... b b b b b Forest., log., fish., hunt., and trap ...... b b b b b Mining ...... 6.0 509 0.04 9,184 0.72 Construction ...... 35.9 433 0.12 3,209 0.89 Nonmetallic mineral prod. manuf ...... 0.8 193 0.02 3,176 0.39 Prim. metals and fab. metal prod ...... 3.0 163 0.02 2,893 0.33 Machinery manufacturing ...... 4.1 238 0.01 7,704 0.43 Computer and elect. prod. manuf ...... 8.6 390 0.01 19,810 0.52 Electrical equip., appliance manuf ...... b b b b b Transportation equip. manuf ...... 4.9 351 0.01 20,666 0.62 Wood products ...... 3.0 639 0.08 13,238 1.57 Furniture and fixtures manuf ...... 0.5 95 0.01 1,638 0.24 Misc. and not spec. manuf ...... 12.8 477 0.03 13,420 0.92 Food manufacturing ...... 10.1 772 0.06 26,158 2.10 Beverage and tobacco products ...... 0.7 238 0.02 7,263 0.46 Textile, app., and leather manuf ...... 2.9 283 0.03 6,565 0.73 Paper and printing ...... 6.9 478 0.06 7,883 1.04 Petroleum and coal prod. manuf ...... b b b b b Chemical manufacturing ...... 2.7 208 0.01 10,599 0.33 Plastics and rubber products ...... 2.2 338 0.03 7,518 0.75 Wholesale trade ...... 22.2 357 0.14 1,677 0.68 Retail trade ...... 67.4 458 0.16 3,492 1.25 Transport. and warehousing ...... 8.9 382 0.10 3,314 0.86 Utilities ...... 0.4 62 0.00 2,103 0.10 Publishing ind. (ex. internet) ...... 3.1 212 0.03 2,466 0.37 Motion picture and sound recording ...... 6.6 724 0.24 3,979 1.33 Broadcasting (except internet) ...... 2.6 312 0.02 7,540 0.55 Internet publishing and broadcasting ...... b b b b b Telecommunications ...... 0.9 112 0.01 1,917 0.17 Internet serv. providers and data ...... b b b b b Other information services ...... 1.1 270 0.03 6,541 0.67 Finance ...... 22.6 488 0.12 2,922 0.72 Insurance ...... 7.0 145 0.05 708 0.24 Real estate ...... 17.1 382 0.17 1,746 0.79 Rental and leasing services ...... 1.0 197 0.12 806 0.50 Professional and technical services ...... 62.7 244 0.07 1,304 0.35 Management of companies and enterprises ...... 1.9 378 0.38 647 0.65 Admin. and support services ...... 15.9 319 0.13 2,246 0.95 Waste manag. and remed. services ...... 1.5 252 0.05 2,970 0.56 Educational services ...... 7.4 168 0.01 6,019 0.36 Hospitals ...... 3.4 253 0.00 54,430 0.45 Health care services, except hospitals ...... 26.3 176 0.05 1,536 0.42 Social assistance ...... 19.2 210 0.06 2,473 0.66 Arts, entertainment, and recreation ...... 35.0 522 0.14 5,697 1.51 Accommodation ...... 5.7 492 0.14 5,115 1.47 Food services and drinking places ...... 21.3 817 0.72 4,019 3.53 Repair and maintenance ...... 21.2 776 0.33 4,612 1.98 Personal and laundry services ...... 6.6 404 0.22 2,571 1.39 Membership associations & organizations ...... 30.2 357 0.16 1,757 0.80 Private households ...... b b b b b Public administration ...... 5.1 310 0.06 2,936 0.60 Employer Type Non-profit, private c ...... 72.60 336 0.19 2,745 0.76 For profit, private ...... 449.20 344 0.02 2,711 0.75 Government (state and local) ...... 8.60 194 0.16 6,541 0.40 Note: Pooled data for FY2013–FY2015 projected to reflect FY2017. a Aggregate change in total annual payroll experienced by small entities under the updated salary levels after labor market adjustments. This amount represents the total amount of (wage) transfers from employers to employees. b Data not displayed because sample size of affected workers in small establishments is less than 10. c As discussed in section VI.B.iii, estimates of workers subject to the FLSA do not exclude workers employed by enterprises that do not meet the enterprise coverage requirements because there is no reliable way of estimating this population. The estimates also do not exclude workers at non-covered enterprises who are not individually covered (because the estimates assume all workers are employed by covered entities). Al- though not excluding workers who work for non-covered enterprises would only impact a small percentage of workers generally, it may have a larger impact (and result in a larger overestimate) for workers in non-profits because when determining enterprise coverage only revenue derived from business operations, not charitable activities, are included.

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Table 42 presents estimated first year Combined costs and payroll increases payroll represents only a fraction of the direct costs and payroll increases per establishment range from $847 in financial resources available to an combined per establishment and those management of companies and establishment. The Department costs and payroll increases as a percent enterprises to $75,059 in the hospitals approximated revenue per small of average establishment payroll. The sector (Table 41).307 Combined costs affected establishment by calculating Department presents only the results for and payroll increases compose more the ratio of small business revenues to the upper bound scenario where all than 2 percent of average establishment payroll by industry from the 2012 SUSB workers employed by the establishment payroll in three sectors: Food services data then multiplying that ratio by are affected. Under this scenario, an and drinking places (3.97 percent), food average small entity payroll.308 Using manufacturing (2.36 percent), and repair affected small establishment is expected this approximation of annual revenues and maintenance (2.24 percent). In all to incur between $200 and $20,629 in as a benchmark, only one sector has other sectors, they range from 0.3 direct costs (Table 40) and between percent to 1.8 percent of payroll. costs and payroll increases amounting $647 and $54,430 in additional payroll However, comparing costs and payroll to more than one percent of revenues, to employees (Table 41) in the first year increases to payrolls overstates the food services and drinking places (1.08 after the promulgation of the Final Rule. impact to establishments because percent).

TABLE 42—YEAR 1 SMALL ESTABLISHMENT DIRECT COSTS AND PAYROLL INCREASES, TOTAL AND PER ESTABLISHMENT, BY INDUSTRY AND EMPLOYER TYPE, USING ALL EMPLOYEES IN ESTABLISHMENT AFFECTED METHOD

Costs and payroll increases for small affected establishments, all employees affected Industry Percent of Percent of Total a annual estimated (millions) Per estab. payroll revenues b

Total ...... $688.3 $3,265 0.87 0.17

Industry

Agriculture ...... c c c c Forest., log., fish., hunt., and trap ...... c c c c Mining ...... $7.2 $10,950 0.86 0.13 Construction ...... 44.3 3,956 1.09 0.24 Nonmetallic mineral prod. manuf ...... 1.1 4,790 0.59 0.11 Prim. metals and fab. metal prod ...... 4.7 4,627 0.54 0.12 Machinery manufacturing ...... 5.8 10,849 0.61 0.13 Computer and elect. prod. manuf ...... 10.8 24,715 0.65 0.15 Electrical equip., appliance manuf ...... c c c c Transportation equip. manuf ...... 6.3 26,356 0.79 0.13 Wood products ...... 3.5 15,261 1.81 0.31 Furniture and fixtures manuf ...... 1.1 3,334 0.50 0.12 Misc. and not spec. manuf ...... 15.5 16,154 1.11 0.28 Food manufacturing ...... 11.4 29,445 2.36 0.22 Beverage and tobacco products ...... 1.0 10,227 0.65 0.08 Textile, app., and leather manuf ...... 4.0 8,829 0.98 0.16 Paper and printing ...... 8.3 9,501 1.25 0.28 Petroleum and coal prod. manuf ...... c c c c Chemical manufacturing ...... 3.9 15,522 0.48 0.04 Plastics and rubber products ...... 2.8 9,685 0.97 0.15 Wholesale trade ...... 28.6 2,163 0.88 0.06 Retail trade ...... 82.2 4,260 1.53 0.15 Transport. and warehousing ...... 11.2 4,183 1.09 0.25 Utilities ...... 1.1 5,411 0.26 0.02 Publishing ind. (ex. internet) ...... 4.6 3,618 0.54 0.19 Motion picture and sound recording ...... 7.5 4,543 1.52 0.40 Broadcasting (except internet) ...... 3.4 9,892 0.73 0.26 Internet publishing and broadcasting ...... c c c c Telecommunications ...... 1.6 3,591 0.32 0.05 Internet serv. providers and data ...... c c c c Other information services ...... 1.5 8,905 0.91 0.36 Finance ...... 27.3 3,533 0.87 0.31 Insurance ...... 12.0 1,211 0.41 0.09 Real estate ...... 21.8 2,220 1.01 0.22 Rental and leasing services ...... 1.6 1,234 0.76 0.19 Professional and technical services ...... 89.0 1,853 0.50 0.20 Management of companies and enterprises ...... 2.4 847 0.85 0.17 Admin. and support services ...... 20.9 2,957 1.25 0.56

307 When a single affected worker is employed, 308 The ratio of revenues to payroll for small of small business revenue reported directly from the combined costs and transfers by industry are businesses ranged from 2.14 (social assistance) to 2012 SUSB so revenue aligned with projected projected to range from $194 (in utilities) to $949 43.69 (petroleum and coal products manufacturing), payrolls in FY2017. (in food services and drinking places) per with an average over all sectors of 5.15. The establishment. Department used this estimate of revenue, instead

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TABLE 42—YEAR 1 SMALL ESTABLISHMENT DIRECT COSTS AND PAYROLL INCREASES, TOTAL AND PER ESTABLISHMENT, BY INDUSTRY AND EMPLOYER TYPE, USING ALL EMPLOYEES IN ESTABLISHMENT AFFECTED METHOD—Continued

Costs and payroll increases for small affected establishments, all employees affected Industry Percent of Percent of Total a annual estimated (millions) Per estab. payroll revenues b

Waste manag. and remed. services ...... 2.1 4,137 0.78 0.20 Educational services ...... 11.6 9,489 0.56 0.22 Hospitals ...... 4.6 75,059 0.62 0.27 Health care services, except hospitals ...... 41.2 2,408 0.65 0.28 Social assistance ...... 28.3 3,639 0.98 0.45 Arts, entertainment, and recreation ...... 41.6 6,779 1.79 0.59 Accommodation ...... 6.8 6,148 1.77 0.44 Food services and drinking places ...... 24.0 4,527 3.97 1.08 Repair and maintenance ...... 23.9 5,219 2.24 0.63 Personal and laundry services ...... 8.2 3,218 1.74 0.60 Membership associations & organizations ...... 38.9 2,266 1.03 0.26 Private households ...... c c c c Public administration ...... 6.8 3,881 0.79 0.22

Employer Type

Non-profit, private d ...... 94.40 3,570 1.00 0.30 For profit, private ...... 585.30 3,532 1.00 0.20 Government (state and local) ...... 12.20 9,264 0.60 0.20 Note: Pooled data for FY2013–FY2015 projected to reflect FY2017. a Total direct costs and transfers for small establishments in which all employees are affected. Impacts to small establishments in which one employee is affected will be a fraction of the impacts presented in this table. b Revenues estimated by calculating the ratio of estimated small business revenues to payroll from the 2012 SUSB, and multiplying by payroll per small entity. For the public administration sector, the ratio was calculated using revenues and payroll from the 2012 Census of Governments. c Data not displayed because sample size of affected workers in small establishments is less than 10. d As discussed in section VI.B.iii, estimates of workers subject to the FLSA do not exclude workers employed by enterprises that do not meet the enterprise coverage requirements because there is no reliable way of estimating this population. The estimates also do not exclude workers at non-covered enterprises who are not individually covered (because the estimates assume all workers are employed by covered entities). Al- though not excluding workers who work for non-covered enterprises would only impact a small percentage of workers generally, it may have a larger impact (and result in a larger overestimate) for workers in non-profits because when determining enterprise coverage only revenue derived from business operations, not charitable activities, are included.

The Department also considered costs to non-affected small establishments. reflect differences in the firm-level and payroll increases relative to profits Additionally, this table differs from adjustment to profit impacts reflecting (Table 43). The denominator is all Table 42 because it is conducted at the cross-industry variation in market profits in an industry, rather than profits more aggregated 13 major industry level. structure. Costs and payroll increases as per affected establishment. In Table 42 This is due to data limitations in the a percent of profits are highest in leisure we compared costs and payroll profit data.309 310 and hospitality industry (although the increases to payroll and revenue per Benchmarking against profit is information industry may be more establishment; therefore, the numbers in potentially helpful in the sense that it affected because profits are negative). Table 42 and Table 43 are not directly provides a measure of the Final Rule’s However, the magnitude of the relative comparable. The broader denominator effect against returns to investment and shares is small, representing less than was used for the profit analysis to be possible adjustments arising from 0.8 percent of profits in each industry consistent with the profit analysis changes in that outcome. However, this and 0.14 percent in aggregate. Similarly, conducted for the 2004 Final Rule. Due metric must be interpreted carefully as to the broader denominator, total costs it does not account for differences costs and payroll increases as a percent and payroll increases in this table across industries in terms of risk- of either payroll or revenue are highest include regulatory familiarization costs adjusted rates of return, nor does it in the leisure and hospitality industry.

309 Internal Revenue Service. (2012). Corporation size of business receipts, but is only available at a of the profit ratio from the IRS data. The Income Tax Returns. Available at: https:// 2-digit NAICS level. The Department used the small Department calculated the profit ratio as net income www.irs.gov/pub/irs-soi/12coccr.pdf. business share of total revenues by industry from (less deficits) to receipts for small businesses in 310 Table 5 of the IRS report provides information the 2012 SUSB data to approximate the appropriate each industry. This ratio was then applied to on total receipts and net income (less deficits) by business receipt sizes to include in the calculation revenue data to estimate profits.

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TABLE 43—YEAR 1 SMALL ESTABLISHMENT DIRECT COSTS AND PAYROLL INCREASES, BY INDUSTRY

Costs and payroll increases for all small establishments

Industry Percent of Percent of Total Percent of estimated (millions) a annual payroll profits c revenues b

Total ...... 899.9 0.04 0.01 0.14

Industry

Agriculture, forestry, fishing, & hunting ...... $1.4 0.01 0.00 0.02 Mining ...... 8.0 0.03 0.00 0.17 Construction ...... 66.9 0.03 0.01 0.19 Manufacturing ...... 89.7 0.02 0.00 0.09 Wholesale & retail trade ...... 146.5 0.05 0.00 0.20 Transportation & utilities ...... 18.7 0.02 0.00 0.16 Information ...... 22.6 0.05 0.01 d Financial activities ...... 80.8 0.05 0.01 0.06 Professional & business services ...... 153.6 0.04 0.02 0.25 Education & health services ...... 112.5 0.03 0.01 0.11 Leisure & hospitality ...... 95.1 0.08 0.02 0.75 Other services ...... 94.8 0.07 0.02 0.48 Public administration ...... 9.4 0.03 0.01 e Note: Pooled data for FY2013–FY2015 projected to reflect FY2017. a Total costs and payroll increases include regulatory familiarization costs to non-affected small establishments. b Revenues estimated by calculating the ratio of estimated small business revenues to payroll from the 2012 SUSB, and multiplying by payroll per small entity. For the public administration sector, the ratio was calculated using revenues and payroll from the 2012 Census of Governments. c Profit data based on corporations only. IRS data disaggregates net income data by business receipt size. Because the SBA standards for small businesses in some industries are based on number of employees, the Department had to estimate which receipt size categories to con- sider as small businesses. d Profits in this industry were negative in the 2012 Corporation Income Tax Returns, Statistics of Income, IRS. e Profit is not applicable for public administration.

vi. Projected Impacts to Affected Small earnings were calculated using the same updates offset this fall and result in a Entities in Year 2 Through Year 10 methodology described in Section net growth over time. There are 1.6 VI.B.ii. Affected employees in small million affected workers in small To determine how small businesses firms follow a similar pattern to affected establishments in Year 1 and 2.0 million will be affected in future years, the workers in all establishments. The in Year 10. Table 44 reports affected Department projected costs to small number decreases gradually in years workers only in years when the salary business for nine years after Year 1 of without automatic updates, but the level increases. the rule. Projected employment and increases in years with automatic

TABLE 44—PROJECTED NUMBER OF AFFECTED WORKERS IN SMALL ESTABLISHMENTS, BY INDUSTRY

Affected workers in small establishments Industry (1,000s) Year 1 Year 4 Year 7 Year 10

Total ...... 1,567.5 1,711.1 1,838.2 1,955.3 Agriculture ...... a a a 2.4 Forest., log., fish., hunt., and trap ...... a a a a Mining ...... 11.8 14.0 14.8 16.2 Construction ...... 83.1 90.2 98.3 106.1 Nonmetallic mineral prod. manuf ...... 3.9 4.8 4.7 5.5 Prim. metals and fab. metal prod ...... 18.1 18.9 18.6 19.4 Machinery manufacturing ...... 17.4 17.7 17.8 17.1 Computer and elect. prod. manuf ...... 22.1 21.7 22.2 22.3 Electrical equip., appliance manuf ...... a a a a Transportation equip. manuf ...... 14.0 14.2 14.1 13.7 Wood products ...... 4.8 4.8 4.7 4.8 Furniture and fixtures manuf ...... 5.6 5.4 5.4 5.2 Misc. and not spec. manuf ...... 26.9 27.7 28.8 28.5 Food manufacturing ...... 13.1 16.0 17.6 17.5 Beverage and tobacco products ...... 2.8 2.8 3.5 3.4 Textile, app., and leather manuf ...... 10.4 11.6 11.6 11.8 Paper and printing ...... 14.3 15.5 16.6 17.1 Petroleum and coal prod. manuf ...... a a a a Chemical manufacturing ...... 12.7 13.8 14.9 16.7 Plastics and rubber products ...... 6.5 6.6 6.1 6.0 Wholesale trade ...... 62.1 69.5 72.5 77.0 Retail trade ...... 147.0 161.3 174.9 186.5 Transport. and warehousing ...... 23.3 24.9 28.9 32.2

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TABLE 44—PROJECTED NUMBER OF AFFECTED WORKERS IN SMALL ESTABLISHMENTS, BY INDUSTRY—Continued

Affected workers in small establishments Industry (1,000s) Year 1 Year 4 Year 7 Year 10

Utilities ...... 6.9 6.7 7.4 7.3 Publishing ind. (ex. internet) ...... 14.7 15.2 17.4 17.7 Motion picture and sound recording ...... 9.1 9.5 10.4 10.5 Broadcasting (except internet) ...... 8.2 8.8 10.1 11.0 Internet publishing and broadcasting ...... a a a a Telecommunications ...... 7.7 8.1 8.7 8.8 Internet serv. providers and data ...... a a 3.1 3.2 Other information services ...... 4.0 4.0 4.4 4.4 Finance ...... 46.3 49.2 51.5 53.9 Insurance ...... 48.3 50.9 56.4 59.5 Real estate ...... 44.9 50.1 56.2 61.4 Rental and leasing services ...... 5.1 5.6 5.7 5.8 Professional and technical services ...... 256.8 278.6 296.8 314.0 Management of companies and enterprises ...... 4.9 5.4 6.9 7.5 Admin. and support services ...... 49.7 56.0 60.5 65.1 Waste manag. and remed. services ...... 5.9 7.6 9.5 10.1 Educational services ...... 44.0 46.9 51.2 56.0 Hospitals ...... 13.2 15.4 15.8 17.2 Health care services, except hospitals ...... 148.9 165.9 182.4 199.0 Social assistance ...... 91.5 105.8 115.4 123.3 Arts, entertainment, and recreation ...... 66.9 71.4 75.6 82.8 Accommodation ...... 11.5 12.5 12.9 14.6 Food services and drinking places ...... 26.1 29.1 31.5 33.1 Repair and maintenance ...... 27.3 29.9 31.1 33.4 Personal and laundry services ...... 16.3 17.4 19.4 20.2 Membership associations and organizations ...... 84.5 93.2 96.6 101.8 Private households ...... a a a a Public administration ...... 16.5 17.8 18.4 19.4 Note: Worker data are from CPS MORG using pooled data for FY2013–FY2015 projected to reflect FY2017 in Year 1. a Data not displayed because sample size of affected workers in small establishments is less than 10.

Costs to small establishments leading to higher managerial costs and share of payroll and revenue decrease in the years following Year 1 earnings for affected workers. Therefore, respectively, assuming no growth in real because regulatory familiarization costs by Year 10 additional costs and payroll firm payroll or revenues. The are zero in years without automatic to small businesses have increased from Department notes that due to relatively updates, and adjustment costs are $688.3 in Year 1 to $901.8 in Year 10 small sample sizes the estimates by significantly smaller in years without (Table 45). Despite this increase over the detailed industry are not precise. This automatic updating. However, both 10-year period, even in Year 10 costs can cause some numbers in the data to direct costs and payroll increase over and payroll increases are a relatively vary across years by a greater amount time as more workers become affected, negligible 0.04 percent and 0.01 percent than they will in the future.

TABLE 45—PROJECTED SMALL ESTABLISHMENT DIRECT COSTS AND PAYROLL INCREASES, BY INDUSTRY, USING ALL EMPLOYEES IN ESTABLISHMENT AFFECTED METHOD

Costs and payroll increases for all small affected establishments, all employees affected Industry (millions) Year 1 Year 4 Year 7 Year 10

Total ...... 688.3 629.3 749.3 901.8 Agriculture ...... a a a 3.9 Forest., log., fish., hunt., and trap ...... a a a a Mining ...... 7.2 12.8 15.0 17.6 Construction ...... 44.3 34.5 44.3 51.9 Nonmetallic mineral prod. manuf ...... 1.1 1.5 1.7 2.8 Prim. metals and fab. metal prod ...... 4.7 4.3 4.3 5.1 Machinery manufacturing ...... 5.8 4.3 4.4 4.4 Computer and elect. prod. manuf ...... 10.8 14.8 18.0 21.1 Electrical equip., appliance manuf ...... a a a a Transportation equip. manuf ...... 6.3 6.3 6.2 6.1 Wood products ...... 3.5 5.7 5.9 6.4 Furniture and fixtures manuf ...... 1.1 0.7 0.7 0.7 Misc. and not spec. manuf ...... 15.5 13.0 15.1 16.1 Food manufacturing ...... 11.4 10.2 12.1 13.5 Beverage and tobacco products ...... 1.0 0.6 1.6 1.6

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TABLE 45—PROJECTED SMALL ESTABLISHMENT DIRECT COSTS AND PAYROLL INCREASES, BY INDUSTRY, USING ALL EMPLOYEES IN ESTABLISHMENT AFFECTED METHOD—Continued

Costs and payroll increases for all small affected establishments, all employees affected Industry (millions) Year 1 Year 4 Year 7 Year 10

Textile, app., and leather manuf ...... 4.0 3.3 4.8 5.0 Paper and printing ...... 8.3 7.4 9.1 14.7 Petroleum and coal prod. manuf ...... a a a a Chemical manufacturing ...... 3.9 3.8 3.9 5.3 Plastics and rubber products ...... 2.8 2.5 3.0 3.3 Wholesale trade ...... 28.6 28.1 34.1 43.8 Retail trade ...... 82.2 76.7 99.1 125.1 Transport. and warehousing ...... 11.2 8.7 10.5 14.5 Utilities ...... 1.1 0.7 0.7 0.9 Publishing ind. (ex. internet) ...... 4.6 5.4 5.8 6.4 Motion picture and sound recording ...... 7.5 6.9 7.4 7.8 Broadcasting (except internet) ...... 3.4 3.4 4.0 4.3 Internet publishing and broadcasting ...... a a a a Telecommunications ...... 1.6 1.1 1.2 1.4 Internet serv. providers and data ...... a a 0.9 1.0 Other information services ...... 1.5 1.0 1.9 1.1 Finance ...... 27.3 28.5 31.8 34.9 Insurance ...... 12.0 9.4 10.6 11.4 Real estate ...... 21.8 16.0 20.0 21.9 Rental and leasing services ...... 1.6 1.9 1.9 1.9 Professional and technical services ...... 89.0 81.7 92.2 114.0 Management of companies and enterprises ...... 2.4 1.9 2.0 2.2 Admin. and support services ...... 20.9 20.1 27.8 35.3 Waste manag. and remed. services ...... 2.1 5.9 5.8 9.1 Educational services ...... 11.6 9.1 10.6 13.1 Hospitals ...... 4.6 4.3 5.2 5.8 Health care services, except hospitals ...... 41.2 34.0 38.9 46.8 Social assistance ...... 28.3 22.6 24.9 28.3 Arts, entertainment, and recreation ...... 41.6 36.9 41.5 47.6 Accommodation ...... 6.8 8.3 11.8 17.4 Food services and drinking places ...... 24.0 21.4 27.6 33.0 Repair and maintenance ...... 23.9 21.3 24.3 28.6 Personal and laundry services ...... 8.2 7.1 8.3 8.8 Membership associations and organizations ...... 38.9 33.3 39.9 46.7 Private households ...... a a a a Public administration ...... 6.8 6.1 6.4 8.6 Note: Pooled data for FY2013–FY2015 projected to reflect FY2017 in Year 1. a Data not displayed because sample size of affected workers in small establishments is less than 10.

The Department projected costs and industries with the highest costs and affected. Using the scenario where one payroll increases per affected small payroll increases in Year 1. Affected worker per establishment is affected, the establishment using the range for the small establishments in the hospitals costs and payroll increases per estimated number of affected small industry have the largest costs and establishment are highest in Year 1 in establishments. Table 46 shows payroll increases per establishment the food services and drinking places projected costs and payroll increases in using the scenario where all workers industry. Years 1, 4, 7, and 10 for the ten employed by the establishment are

TABLE 46—PROJECTED DIRECT COSTS AND PAYROLL INCREASES PER SMALL ESTABLISHMENT

Costs and payroll increases per affected small establishments for a Industry ten industries with highest costs Year 1 Year 4 Year 7 Year 10

All Employees Affected at Small Establishment Affected

Hospitals ...... $75,059 $69,034 $85,024 $93,262 Food manufacturing ...... 29,445 26,410 31,303 34,962 Transportation equip. manuf ...... 26,356 26,656 26,229 25,653 Computer and elect. prod. manuf ...... 24,715 33,947 41,226 48,334 Misc. and not spec. manuf ...... 16,154 13,550 15,740 16,794 Chemical manufacturing ...... 15,522 15,271 15,543 21,268 Wood products ...... 15,261 24,826 25,695 27,934 Mining ...... 10,950 19,532 22,967 26,945 Machinery manufacturing...... 10,849 7,921 8,162 8,231

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TABLE 46—PROJECTED DIRECT COSTS AND PAYROLL INCREASES PER SMALL ESTABLISHMENT—Continued

Costs and payroll increases per affected small establishments for a Industry ten industries with highest costs Year 1 Year 4 Year 7 Year 10

Beverage and tobacco products ...... 10,227 6,770 17,102 17,514

One Employee Affected at Each Small Establishment Affected

Food services and drinking places ...... 949 822 1,059 1,267 Repair and maintenance ...... 908 783 894 1,051 Food manufacturing ...... 904 782 927 1,035 Motion picture and sound recording ...... 856 758 814 858 Wood products ...... 771 1,201 1,243 1,351 Arts, entertainment, and recreation ...... 654 553 623 714 Mining ...... 642 1,086 1,277 1,497 Accommodation ...... 625 721 1,028 1,517 Finance ...... 620 619 690 757 Paper and printing ...... 610 519 638 1,025 Note: Pooled data for FY2013–FY2015 projected to reflect FY2017 in Year 1. a Assuming no growth in number of establishments. Highest cost is based on cost in Year 1.

E. Description of the Compliance the stated objectives of the FLSA. It annually based on the fourth quarter of Requirements for Small Entities includes a statement of the factual, 2015), as we proposed. This increase policy, and legal reasons for selecting will bring the annual compensation The FLSA sets minimum wage, the alternative adopted in the Final Rule requirement in line with the level overtime pay, and recordkeeping and why other alternatives were established in 2004. The Department requirements for employment subject to rejected. believes that this will avoid the its provisions. Unless exempt, covered After considering the comments, the unintended exemption of large numbers employees must be paid at least the Department has made several changes of employees in high-wage areas—such minimum wage for all hours worked from the proposed rule to the Final as secretaries in New York City or Los and not less than one and one-half times Rule. In particular, the Department has Angeles—who are clearly not their regular rates of pay for overtime modified the standard salary level to performing EAP duties. hours worked. Every employer with more fully account for the salaries paid In order to prevent the salary and covered employees must keep certain in low wage regions. In this Final Rule, compensation levels from becoming records for each nonexempt worker. The the Department sets the standard salary outdated, the Department is including regulations at part 516 require level equal to the 40th percentile of in the regulations a mechanism to employers to maintain records for earnings of full-time salaried workers in automatically update the salary and employees subject to the minimum the lowest-wage Census Region compensation thresholds by wage and overtime pay provisions of the (currently the South). This results in a maintaining the fixed percentiles of FLSA. Thus, the recordkeeping salary level of $913 per week, or weekly earnings set in this Final Rule. requirements are not new requirements; $47,476 annually for a full-year worker, In response to comments, however, the however, employers would need to keep based on data from the fourth quarter of Final Rule provides for updates every some additional records for additional 2015.311 The Department believes that a three years rather than for annual affected employees (i.e., newly standard salary level set at the 40th updates as proposed. The first update nonexempt workers). As indicated in percentile of full-time salaried will take effect on January 1, 2020. The this analysis, the Final Rule would employees in the lowest-wage Census Department believes that regularly expand minimum wage and overtime Region will accomplish the goal of updating the salary and compensation pay coverage to approximately 4.1 setting a salary threshold that levels is the best method to ensure that million affected EAP workers (excluding adequately distinguishes between these tests continue to provide an Type 4 workers who remain exempt) employees who may meet the duties effective means of distinguishing (section VI.D.vii.). This would result in requirements of the EAP exemption and between overtime-eligible white collar an increase in employer burden and was those who likely do not, without employees and those who may be bona estimated in the PRA portion (section V) necessitating the reintroduction of a fide EAP employees. Based on historical of this Final Rule. Note that the burdens limit on nonexempt work, as existed wage growth in the South, at the time reported for the PRA section of this under the long duties test. The of the first update on January 1, 2020, Final Rule include the entire Department sets the HCE total annual the standard salary level is likely to be information collection and not merely compensation level equal to the 90th approximately $984 per week ($51,168 the additional burden estimated as a percentile of earnings of full-time annually for a full-year worker) and the result of this Final Rule. salaried workers nationally ($134,004 HCE total annual compensation F. Steps the Agency Has Taken To requirement is likely to be Minimize the Significant Economic 311 The Bureau of Labor Statistics (BLS) estimated approximately $147,524. The Department also revises the Impact on Small Entities this value using Current Population Survey (CPS) data for earnings of full-time (defined as at least 35 regulations to permit employers for the This section discusses the description hours per week) non-hourly paid employees. For first time to count nondiscretionary the purpose of this rulemaking, the Department of the steps the agency has taken to considers data representing compensation paid to bonuses, incentives, and commissions minimize the significant economic non-hourly workers to be an appropriate proxy for toward up to 10 percent of the required impact on small entities, consistent with compensation paid to salaried workers. salary level for the standard exemption,

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so long as employers pay those amounts turn, increase the risk that employees F. Identification, to the Extent on a quarterly or more frequent basis. who should receive overtime and Practicable, of all Relevant Federal In setting the effective date of the rule, minimum wage protections under the Rules That May Duplicate, Overlap, or the Department responded to concerns FLSA are denied those protections. The Conflict With the Final Rule raised about the amount of time Department found the most restrictive required to evaluate and adjust to the option to be overly burdensome on The Department is not aware of any new salary level. While the 2004 rule business in general, and specifically on federal rules that duplicate, overlap, or provided for 120 days, the final rule small businesses. It was also conflict with this Final Rule. provides 180 days prior to the effective inappropriately high given the fact that VIII. Unfunded Mandates Reform Act date. the long duties test (which was Analysis Finally, the Department sought associated with a lower salary level) no comments on modifications to the longer exists. The Unfunded Mandates Reform Act duties test in the proposed rule as a of 1995 (UMRA), 2 U.S.C. 1501, requires means to modernize overtime Pursuant to section 603(c) of the RFA, the following alternatives are to be agencies to prepare a written statement protections. In reviewing those for rules for which a general notice of comments including numerous addressed: • proposed rulemaking was published responses from small entities, the Differing compliance or reporting and that include any federal mandate Department decided to not make any requirements that take into account the that may result in increased changes to the duties tests in this Final resources available to small entities. The expenditures by state, local, and tribal Rule. FLSA creates a level playing field for governments, in the aggregate, or by the businesses by setting a floor below private sector, of $156 million ($100 i. Differing Compliance and Reporting which employers may not pay their Requirements for Small Entities million in 1995 dollars adjusted for employees. To establish differing inflation) or more in at least one year. This Final Rule provides no differing compliance or reporting requirements This statement must: (1) Identify the compliance requirements and reporting for small businesses would undermine authorizing legislation; (2) present the requirements for small entities. The this important purpose of the FLSA, and estimated costs and benefits of the rule Final Rule imposes no new reporting or appears to be unnecessary given the and, to the extent that such estimates recordkeeping requirements, although small annualized cost of the rule. The are feasible and relevant, its estimated employers will be required to record Year 1 cost of the Final Rule was effects on the national economy; (3) and maintain records, as required by estimated to be around $3,265 for a summarize and evaluate state, local, and part 516, for additional workers if typical employer that qualifies as small, tribal government input; and (4) identify employees are reclassified from exempt which is 0.87 percent of average annual reasonable alternatives and select, or to overtime-protected status. The payroll and 0.17 percent of average explain the non-selection, of the least Department has strived to minimize annual revenues. The Department costly, most cost-effective, or least respondent recordkeeping burden by makes available a variety of resources to burdensome alternative. requiring no specific form or order of employers for understanding their records under the FLSA and its obligations and achieving compliance. A. Authorizing Legislation corresponding regulations. Moreover, Therefore the Final Rule does not employers would normally maintain the provide differing compliance or This Final Rule is issued pursuant to records under usual or customary reporting requirements for small section 13(a)(1) of the Fair Labor business practices. businesses. Standards Act (FLSA), 29 U.S.C. 213(a)(1). The section exempts from the • ii. Least Burdensome Option or The use of performance rather than FLSA’s minimum wage and overtime Explanation Required design standards. Under the Final Rule, pay requirements ‘‘any employee The Department believes it has the employer may achieve compliance employed in a bona fide executive, chosen the most effective option that through a variety of means. The administrative, or professional capacity updates and clarifies the rule and which employer may elect to continue to claim (including any employee employed in results in the least burden. Among the the EAP exemption for affected the capacity of academic administrative options considered by the Department, employees by adjusting their salary personnel or teacher in elementary or the least restrictive option was inflating level, hire additional workers or spread secondary schools), or in the capacity of the 2004 standard salary level to overtime hours to other employees, or outside salesman (as such terms are FY2015 dollars using CPI–U (which compensate employees for overtime defined and delimited from time to time would result in a standard salary level hours worked. The Department makes by regulations of the Secretary, subject of $570 per week) and the most available to employers a variety of to the provisions of [the Administrative restrictive was updating the 1975 short resources for understanding their Procedure Act] . . . ).’’ 29 U.S.C. test salary level for inflation based upon obligations and achieving compliance. 213(a)(1). The requirements of the the CPI–U (which would result in a • An exemption from coverage of the exemption provided by this section of standard salary level of $1,100 per rule, or any part thereof, for such small the Act are contained in part 541 of the week). A lower salary level—or a entities. Creating an exemption from Department’s regulations. Section 3(e) of degraded stagnant level over time— coverage of this rule for businesses with the FLSA, 29 U.S.C. 203(e), defines would result in a less effective bright- as many as 1,500 employees (those ‘‘employee’’ to include most individuals line test for separating potentially defined as small businesses under employed by a state, political exempt workers from those nonexempt SBA’s size standards) is inconsistent subdivision of a state, or interstate workers intended to be within the Act’s with Congressional intent in the governmental agency. Section 3(x) of the protection. A low salary level will also enactment of the FLSA, which applies FLSA, 29 U.S.C. 203(x), also defines increase the role of the duties test in to all employers that satisfy the public agencies to include the determining whether an employee is enterprise coverage threshold or employ government of a state or political exempt, which would increase the individually covered employees. See 29 subdivision thereof, or any interstate likelihood of misclassification and, in U.S.C. 203(s). governmental agency.

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B. Assessment of Costs and Benefits determined that the Final Rule will Costs to the private sector: The For purposes of UMRA, this rule result in Year 1 costs for state and local Department determined that the Final includes a federal mandate that is governments totaling $115.1 million, of Rule will result in Year 1 costs to the expected to result in increased which $38.8 million are direct employer private sector of approximately $1.8 expenditures by the private sector of costs and $76.3 million are payroll billion, of which $637.7 million are more than $156 million in at least one increases (5). Additionally, the Final direct employer costs and $1.2 billion year, but the rule will not result in Rule will lead to $0.3 million in dead are payroll increases. Additionally, the increased expenditures by state, local weight loss (DWL). In subsequent years, Final Rule will result in $6.0 million in and tribal governments, in the aggregate, the Department estimated that state and DWL. In subsequent years, the of $156 million or more in any one year. local governments may experience Department estimated that the private Costs to state and local governments: payroll increases of as much as $85.4 sector may experience a payroll increase Based on the economic impact analysis million in a year when the salary level of as much as $1.5 billion per year. of this Final Rule, the Department is automatically updated.

TABLE 47—SUMMARY OF YEAR 1 AFFECTED EAP WORKERS, REGULATORY COSTS, AND TRANSFERS BY TYPE OF EMPLOYER

Total Private Government a

Affected EAP Workers (1,000s)

Number ...... 4,228 3,765 452

Direct Employer Costs (Millions)

Regulatory familiarization ...... $272.5 $268.9 $3.3 Adjustment ...... 191.4 170.5 20.5 Managerial ...... 214.0 198.3 15.1 Total direct costs ...... 677.9 637.7 38.8

Payroll Increases (Millions)

From employers to workers ...... $1,285.2 $1,206.4 $76.3

Direct Employer Costs & Transfers (Millions)

From employers ...... $1,963.1 $1,844.1 $115.1

DWL (Millions)

DWL b ...... $6.4 $6.0 $0.3 a Includes only state, local, and tribal governments. b DWL was estimated based on the aggregate impact of both the minimum wage and overtime pay provisions.

The largest estimated impact to wage). Additionally, because of the $89.7 billion (using 2015 GDP). A workers is likely the transfer of income increased salary level, overtime regulation with smaller aggregate effect to workers from some combination of protection will be strengthened for 5.7 is not likely to have a measurable employers, end consumers, and other million salaried white collar workers impact in macro-economic terms unless workers); but, to the extent that the and 3.2 million salaried blue collar it is highly focused on a particular utility derived by workers outweighs the workers who do not meet the duties geographic region or economic sector, disutility experienced by employers and requirements for the EAP exemption, which is not the case with this Final other entities experiencing the negative but who earn between the current Rule. side of transfers, there may be a societal minimum salary level of $455 per week The Department’s RIA estimates that welfare increase due to this transfer. and the updated salary level, because the total first-year costs (direct employer their right to minimum wage and The channels through which societal costs, payroll increases from employers overtime protection will be clear rather welfare may change, and other to workers, and deadweight loss) of the than depend upon an analysis of their secondary benefits, transfers and costs Final Rule will be approximately $1.8 duties. may occur, include: Decreased litigation billion for private employers and $115.1 costs due to fewer workers subject to the UMRA requires agencies to estimate million for state and local governments. duties test, the multiplier effect of the the effect of a regulation on the national Given OMB’s guidance, the Department transfer, changes in productivity, economy if, at its discretion, such has determined that a full macro- potentially reduced dependence on estimates are reasonably feasible and the economic analysis is not likely to show social assistance, and a potential effect is relevant and material. 5 U.S.C. any measurable impact on the economy. increase in time off and its associated 1532(a)(4). However, OMB guidance on Therefore, these costs are compared to benefits to the social welfare of some this requirement notes that such macro- payroll costs and revenue to workers (for instance, those who work economic effects tend to be measurable demonstrate the feasibility of adapting so many hours that the overtime in nationwide econometric models only to these new rules. requirement renders their current if the economic impact of the regulation combination of pay and hours worked reaches 0.25 percent to 0.5 percent of Total first-year private sector costs non-compliant with the minimum GDP, or in the range of $44.9 billion to compose 0.03 percent of private sector

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payrolls nationwide.312 Total private stakeholders to address, among other concern about the Department’s sector first-year costs compose 0.005 issues, three questions: (1) What is the proposal to update the salary level percent of national private sector appropriate salary level for exemption; annually, and some requested that the revenues (revenues in FY2015 are (2) what, if any, changes should be Department not make any changes to the projected to be $40.7 trillion).313 The made to the duties tests; and (3) how duties test. Department concludes that impacts of can the regulations be simplified. The As discussed in this Final Rule, the this magnitude are affordable and will discussions in the listening sessions Department has modified the proposed not result in significant disruptions to informed the development of the NPRM. rule by setting the salary level equal to typical firms in any of the major the 40th percentile weekly earnings of ii. Comments Received in Response to industry categories. full-time salaried workers in the lowest- Total first-year state and local the NPRM wage Census Region (currently the government costs compose In the NPRM, the Department South). We believe that this adjustment approximately 0.01 percent of state and specifically sought comments from will provide relief for state, local, and local government payrolls.314 First-year state, local, and tribal governments tribal government employers, as it does state and local government costs concerning the ability of these entities for employers in low-wage areas and compose 0.004 percent of state and local to absorb the costs related to the industries. Furthermore, the Department government revenues (projected FY2015 proposed revisions. The Department has decided to automatically update the revenues were estimated to be $3.1 received multiple comments on this and salary level every three years rather than trillion).315 Impacts of this magnitude other issues from state, local, and tribal annually, and the Final Rule does not will not result in significant disruptions governments. Many of these make any changes to the duties test. The to typical state and local governments. commenters raised concerns about the Department notes that we expect The $115.1 million in state and local Department’s proposal to increase the employers to respond in a variety of government costs constitutes an average salary level. Several commenters writing ways to changes in salary level, and the of approximately $1,277 for each of the on behalf of state or local governments manner in which an employer responds approximately 90,106 state and local asserted that public employers would will affect how the employer (and its entities. The Department considers respond to the proposed salary level employees) is impacted. In response to impacts of this magnitude to be quite increase by cutting vital services or comments suggesting the small both in absolute terms and in increasing taxes. See, e.g., Charlotte implementation of a special salary relation to payrolls and revenue. County, Florida; Pennsylvania State threshold or an exemption for state, Association of Township Supervisors; local, or tribal government employers, C. Response to Comments Rockingham County, Virginia. Several the Department did not propose any i. Consultation Prior to the Issuance of commenters writing on behalf of tribal different treatment for employees of the NPRM governments similarly asserted that state, local, or tribal government Prior to issuing the NPRM, the tribes would be forced to respond to the employers or ask any questions in the Department embarked on an extensive proposed salary level increase by NPRM about such a change; therefore, outreach program, conducting listening reducing services to tribal communities. we believe the special provisions sought sessions in Washington, DC, and several See, e.g., Ho-Chunk, Inc. (a company are beyond the scope of this rulemaking. other locations, as well as by conference wholly owned by the Winnebago Tribe Some state, local, and tribal call. As part of this outreach program, of Nebraska); Native American Finance governments expressed concern with the Department conducted stakeholder Officers Association. The Jamestown our automatic updating proposal. listening sessions with representatives S’Kallam Tribe stated that ‘‘requiring Several commenters stressed the of state, local, and tribal governments. Tribal business to ‘transfer income’ to burdens this change would impose on In these sessions the Department asked employees takes money not only out of public sector employers. For example, tribal governments, but to the economy the California State Association of 312 Private sector payroll costs nationwide are of the surrounding communities as Counties stated that the ‘‘volatility of projected to be $5.7 trillion in FY2015. This tribes provide enormous employment the [salary level] changes’’ resulting projection is based on private sector payroll costs opportunities to the non-native from annual automatic updating would in 2012, which were $5.6 trillion using the 2012 communities.’’ Given these concerns, ‘‘make planning and budgeting very Economic Census of the United States. This was inflated to FY2015 dollars using the CPI–U. Table some commenters writing on behalf of challenging,’’ while the Charlotte EC0700A1: All sectors: Geographic Area Series: state, local, or tribal governments County Board of County Commissioners Economy-Wide Key Statistics: 2007. requested that the Department adopt a asked the Department to ‘‘strongly 313 Private sector revenues in 2012 were $39.4 lower standard salary threshold than we consider the increased administrative trillion using the 2012 Economic Census of the proposed and/or a phase-in period for and financial burdens’’ that annual United States. This was inflated to FY2015 dollars using the CPI–U. Table EC0700A1: All sectors: raising the salary, while other updating ‘‘would place on county Geographic Area Series: Economy-Wide Key commenters requested a special salary governments.’’ See also City of Galax. Statistics: 2007. level or an exemption from the salary Similarly, the New Mexico State 314 Projected FY2015 payroll costs are estimated level or the FLSA’s requirements for Personnel Board stated that ‘‘in the to be $878.5 billion. This projection is based on state, local, and tribal governments. See, public sector, an automatic annual state and local payroll costs in 2012, which were reported in the Census of Governments data as $852 e.g., Georgia Department of increase would become an unbudgeted billion. This was inflated to FY2015 dollars using Administrative Services; Isle of Wight mandate placed on the Executive and the CPI–U. 2012 Census of Governments: County, Virginia; Mississippi State the , which would require Employment Summary Report. Available at: http:// Personnel Board; Pennsylvania State the State to respond both fiscally and www2.census.gov/govs/apes/2012_summary_ report.pdf. Association of Township Supervisors; administratively,’’ and that this change 315 State and local revenues in 2012 were reported New Mexico State Personnel Board. In could negatively impact employee by the Census as $3.0 trillion. This was inflated to addition to their concerns about the morale and productively, the State’s FY2015 dollars using the CPI–U. U.S. Department salary level, some commenters, for budgeting process, and ‘‘may cause of Commerce. (2014). 2012 Census of Governments: Finance— State and Local Government Summary example the New Mexico State budgets to be diverted from other areas Report. Available at: http://www2.census.gov/govs/ Personnel Board and the Mississippi such as health, safety, and security, local/summary_report.pdf. State Personnel Board, also expressed possibly impacting services to citizens.’’

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While most tribal government automatic updating may pose for outreach program, including several commenters did not specifically address government employers are adequately listening sessions that were specific to this aspect of the Department’s mitigated by the Department’s decision state, local, and tribal governments. proposal, the Chitimacha Tribe of to automatically update the salary level Representatives from multiple states, Louisiana stated that annual automatic every three years (instead of annually) local governments, and tribal updating could negatively impact and to increase from 60 to 150 days the governments participated in these employee morale, increase burdens on notice before automatically updated listening sessions. In addition, the tribal businesses (including its casino salary levels take effect. Additionally, Department engaged associations hotel), make it harder to estimate year- between updates all employers can representing governmental to-year costs, and ‘‘would be tantamount access BLS data to estimate the likely organizations such as: Interstate Labor to Chitimacha being required to give its size of the next updated salary level. Standards Association, National government and business enterprise These changes should provide Association of Counties, National salaried employees a raise every year or government employers sufficient time Association of Latino Elected and be forced to reclassify the worker as an and predictability to allow adaptation Appointed Officials, National hourly employee.’’ to, and compliance with, new salary Association of State Workforce Some state and local government levels. We also reiterate, as discussed in Agencies, National Black Caucus of commenters specifically addressed the sections IV.E.ii.–iii, that nothing in this State Legislators, National Conference of automatic updating alternatives rulemaking requires employers to State , National Congress of discussed in the Department’s proposal. convert newly nonexempt employees to American Indians, National Governors The New Mexico State Personnel Board hourly status or reward Association, National League of Cities, opposed both updating methods, stating underperforming employees with a Progressive States Network, and the U.S. that ‘‘the CPI–U measures purchasing raise. As to what method the Conference of Mayors. power . . . [and not] the supply and Department should use to automatically demand of labor,’’ and that the fixed D. Least Burdensome Option or update the salary level, commenters Explanation Required percentile approach would ‘‘result in an from State, local, and tribal governments accelerated upward movement of the generally raised the same points as non- The Department’s consideration of [salary] threshold, as previously salaried government commenters. For the various options has been described workers are reclassified to hourly, or as reasons already discussed at length, we throughout the preamble and economic impact analysis (section VI). The they have their incomes increased to be conclude that automatic updating using Department believes that it has chosen over the new’’ threshold. the fixed percentile method will best the least burdensome but still cost- Other commenters appeared more ensure that the salary level continues to effective mechanism to update the receptive to automatic updating, serve, in tandem with the duties test, as provided the Department make certain salary level and index future levels that an effective dividing line between changes from our proposal. The Georgia is also consistent with the Department’s potentially exempt and nonexempt Department of Administrative Services statutory obligation. Although some workers. and the Mississippi State Personnel alternative options considered, such as Board stated that a wage index (rather Some of commenters suggested that inflating the 2004 standard salary level than a price index) provided a more the Department failed to adequately to FY2015 dollars resulting in a salary appropriate basis for automatic updates, consult with state, local, and tribal level of $570 per week, would have set although both commenters favored other governments in developing the rule. For the standard salary level at a rate lower changes including updating only every example, the State of Maine Department than the updated salary level, which five years and, rather than a nationwide of Labor asserted that ‘‘USDOL did not might impose lower direct payroll costs effective date, permitting employers to reach out to all states to discuss the on employers, that outcome would not determine when updated salary levels impacts this proposed rule change necessarily be the most cost-effective or would apply to their organizations. The would have on the states.’’ The Elk least burdensome alternative for Commonwealth of Virginia’s Valley Rancheria Indian Tribe asserted employers. A lower salary level—or a Department of Human Resource that ‘‘there has been no tribal degraded stagnant level over time— Management (which supported a lower consultation on this rule-making,’’ and would result in a less effective bright- salary level) favored updating using ‘‘a the Ute Mountain Ute Tribe stated that line test for separating workers who may measure such as the Employment Cost ‘‘the proposed rule will have a be exempt from those nonexempt Index,’’ while some state, local, and substantial and direct effect on the Tribe workers intended to be within the Act’s tribal governments that opposed aspects and is subject to consultation under protection. A low salary level will also of the Department’s rulemaking did not Executive Order 13175.’’ See also, e.g., increase the role of the duties test in specifically address our automatic Gila River Indian Community; determining whether an employee is updating proposal. See, e.g., City of Confederated Tribes of the Umatilla exempt, which would increase the Seward, Alaska; Elk Valley Rancheria Indian Reservation; Poarch Band of likelihood of misclassification and, in Indian Tribe; Indiana Association of Creek Indians. Finally, some turn, increase the risk that employees Cities and Towns; National League of commenters, such as the Isle of Wight who should receive overtime and Cities. County, Virginia, urged the Department minimum wage protections under the The Department concludes that the ‘‘to delay implementation’’ of the rule FLSA are denied those protections. concerns raised by state, local, and ‘‘until further analysis is done on the Selecting a standard salary level tribal governments do not provide a increased financial and administrative inevitably impacts both the risk and cost basis for declining to institute automatic burdens it would place on county of misclassification of overtime-eligible updating. We recognize that in some governments.’’ The Department employees earning above the salary instances public sector employers may disagrees that there has been little or no level as well as the risk and cost of face different employment tribal consultation or consultation with providing overtime protection to environments than their private sector state and local governments on this employees performing bona fide EAP counterparts. However, the Department rulemaking. As discussed above, the duties who are paid below the salary believes that any unique burdens that Department conducted an extensive level. An unduly low level risks

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increasing employer liability from or safety risks that may ■ 2. In § 541.100, revise paragraph (a)(1) unintentionally misclassifying workers disproportionately affect children. to read as follows: as exempt; but an unduly high standard XIII. Environmental Impact Assessment salary level increases labor costs to § 541.100 General rule for executive employees. employers precluded from claiming the A review of this Final Rule in exemption for employees performing accordance with the requirements of the (a) * * * bona fide EAP duties. Thus the ultimate National Act of (1) Compensated on a salary basis cost of the regulation is increased if the 1969 (NEPA), 42 U.S.C. 4321 et seq.; the pursuant to § 541.600 at a rate per week standard salary level is set either too regulations of the Council on of not less than the 40th percentile of low or too high. The Department has Environmental Quality, 40 CFR 1500 et weekly earnings of full-time nonhourly determined that setting the standard seq.; and the Departmental NEPA workers in the lowest-wage Census salary level at the 40th percentile of procedures, 29 CFR part 11, indicates Region (or 84 percent of that amount per earnings of full-time salaried workers in that the Final Rule will not have a week, if employed in American Samoa the lowest-wage Census Region significant impact on the quality of the by employers other than the Federal (currently the South) and automatically human environment. As a result, there government), exclusive of board, updating this level every three years is no corresponding environmental lodging or other facilities. Beginning best balances the risks and costs of assessment or an environmental impact January 1, 2020, and every three years misclassification of exempt status. statement. thereafter, the Secretary shall update the required salary amount pursuant to IX. Executive Order 13132 (Federalism) XIV. Executive Order 13211, Energy § 541.607; Supply The Department has reviewed this * * * * * Final Rule in accordance with Executive This Final Rule is not subject to ■ 3. In § 541.200, revise paragraph (a)(1) Order 13132 regarding federalism, and Executive Order 13211. It will not have to read as follows: determined that it does not have a significant adverse effect on the federalism implications. The Final Rule supply, distribution, or use of energy. § 541.200 General rule for administrative employees. will not have substantial direct effects XV. Executive Order 12630, on the States, on the relationship (a) * * * Constitutionally Protected Property (1) Compensated on a salary or fee between the national government and Rights the States, or on the distribution of basis pursuant to § 541.600 at a rate per power and responsibilities among the This Final Rule is not subject to week of not less than the 40th percentile various levels of government. Executive Order 12630, because it does of weekly earnings of full-time not involve implementation of a policy nonhourly workers in the lowest-wage X. Executive Order 13175, Indian ‘‘that has takings implications’’ or that Census Region (or 84 percent of that Tribal Governments could impose limitations on private amount per week, if employed in The Department has reviewed this property use. American Samoa by employers other Final Rule under the terms of Executive than the Federal government), exclusive XVI. Executive Order 12988, Civil of board, lodging or other facilities. Order 13175 and determined that it does Justice Reform Analysis not have ‘‘tribal implications.’’ The Beginning January 1, 2020, and every Final Rule does not have ‘‘substantial This Final Rule was drafted and three years thereafter, the Secretary direct effects on one or more Indian reviewed in accordance with Executive shall update the required salary amount tribes, on the relationship between the Order 12988 and will not unduly pursuant to § 541.607; federal government and Indian tribes, or burden the federal court system. The * * * * * on the distribution of power and Final Rule was: (1) Reviewed to ■ 4. In § 541.204, revise paragraph (a)(1) responsibilities between the federal eliminate drafting errors and to read as follows: government and Indian tribes.’’ As a ambiguities; (2) written to minimize result, no tribal summary impact litigation; and (3) written to provide a § 541.204 Educational establishments. statement has been prepared. clear legal standard for affected conduct (a) * * * and to promote burden reduction. (1) Compensated on a salary or fee XI. Effects on Families basis pursuant to § 541.600 at a rate per List of Subjects in 29 CFR part 541 The undersigned hereby certifies that week of not less than the 40th percentile this Final Rule will not adversely affect Labor, Minimum wages, Overtime of weekly earnings of full-time the well-being of families, as discussed pay, Salaries, Teachers, Wages. nonhourly workers in the lowest-wage Census Region (or 84 percent of that under section 654 of the Treasury and David Weil, General Government Appropriations amount per week, if employed in Administrator, Wage and Hour Division. Act, 1999. American Samoa by employers other than the Federal government), exclusive PART 541—DEFINING AND XII. Executive Order 13045, Protection of board, lodging or other facilities; or DELIMITING THE EXEMPTIONS FOR of Children on a salary basis which is at least equal EXECUTIVE, ADMINISTRATIVE, to the entrance salary for teachers in the Executive Order 13045 applies to any PROFESSIONAL, COMPUTER AND educational establishment by which rule that (1) is determined to be OUTSIDE SALES EMPLOYEES ‘‘economically significant’’ as defined in employed. Beginning January 1, 2020, and every three years thereafter, the Executive Order 12866, and (2) concerns ■ 1. The authority citation for part 541 Secretary shall update the required an environmental health or safety risk is revised to read as follows: that the promulgating agency has reason salary amount pursuant to § 541.607; Authority: 29 U.S.C. 213; Pub. L. 101–583, and to believe may have a disproportionate 104 Stat. 2871; Reorganization Plan No. 6 of effect on children. This Final Rule is not 1950 (3 CFR, 1945–53 Comp., p. 1004); * * * * * subject to Executive Order 13045 Secretary’s Order 01–2014 (Dec. 19, 2014), 79 ■ 5. In § 541.300, revise paragraph (a)(1) because it has no environmental health FR 77527 (Dec. 24, 2014). to read as follows:

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§ 541.300 General rule for professional $767 per week, if employed in (2) If an employee’s total annual employees. American Samoa by employers other compensation does not total at least the (a) * * * than the Federal government), exclusive minimum amount established in (1) Compensated on a salary or fee of board, lodging or other facilities. paragraph (a) of this section by the last basis pursuant to § 541.600 at a rate per Beginning January 1, 2020, and every pay period of the 52-week period, the week of not less than the 40th percentile three years thereafter, the Secretary employer may, during the last pay of weekly earnings of full-time shall update the required salary amount period or within one month after the nonhourly workers in the lowest-wage pursuant to § 541.607. * * * end of the 52-week period, make one Census Region (or 84 percent of that (b) The required amount of final payment sufficient to achieve the amount per week, if employed in compensation per week may be required level. For example, if the American Samoa by employers other translated into equivalent amounts for current annual salary level for a highly than the Federal government), exclusive periods longer than one week. The compensated employee is $134,004, an of board, lodging or other facilities. requirement will be met if the employee employee may earn $100,000 in base Beginning January 1, 2020, and every is compensated biweekly on a salary salary, and the employer may anticipate three years thereafter, the Secretary basis of $1,826, semimonthly on a salary based upon past sales that the employee shall update the required salary amount basis of $1,978, or monthly on a salary also will earn $35,000 in commissions. pursuant to § 541.607; and basis of $3,956. However, the shortest However, due to poor sales in the final * * * * * period of payment that will meet this quarter of the year, the employee ■ 6. In § 541.400, remove the first compensation requirement is one week. actually only earns $10,000 in sentence in paragraph (b) introductory Beginning January 1, 2020, and every commissions. In this situation, the text and add three sentences in its place. three years thereafter, the Secretary employer may within one month after The additions read as follows: shall update the required salary amount the end of the year make a payment of pursuant to § 541.607 and the updated at least $24,004 to the employee. Any § 541.400 General rule for computer salary amount may be paid weekly, such final payment made after the end employees. biweekly, semimonthly, or monthly on of the 52-week period may count only * * * * * a salaried basis. toward the prior year’s total annual (b) The section 13(a)(1) exemption * * * * * compensation and not toward the total applies to any computer employee who ■ 8. Amend § 541.601 by: annual compensation in the year it was is compensated on a salary or fee basis ■ a. Revising paragraph (a); paid. If the employer fails to make such pursuant to § 541.600 at a rate per week ■ b. Adding introductory text to a payment, the employee does not of not less than the 40th percentile of paragraph (b); qualify as a highly compensated weekly earnings of full-time nonhourly ■ c. Revising the first sentence of employee, but may still qualify as workers in the lowest-wage Census paragraph (b)(1); and exempt under subparts B, C, or D of this Region (or 84 percent of that amount per ■ d. Revising paragraph (b)(2). part. week, if employed in American Samoa The revisions and additions read as * * * * * by employers other than the Federal follows: ■ 9. In § 541.602, revise paragraph (a) to government), exclusive of board, § 541.601 Highly compensated employees. lodging or other facilities. Beginning read as follows: (a) An employee shall be exempt January 1, 2020, and every three years (a) General rule. An employee will be under section 13(a)(1) of the Act if: considered to be paid on a ‘‘salary thereafter, the Secretary shall update the (1) The employee receives total required salary amount pursuant to basis’’ within the meaning of this part annual compensation of at least the if the employee regularly receives each § 541.607. The section 13(a)(17) annualized earnings amount of the 90th exemption applies to any computer pay period on a weekly, or less frequent percentile of full-time nonhourly basis, a predetermined amount employee compensated on an hourly workers nationally; and basis at a rate of not less than $27.63 an constituting all or part of the employee’s (2) The employee customarily and compensation, which amount is not hour. * * * regularly performs any one or more of * * * * * subject to reduction because of the exempt duties or responsibilities of variations in the quality or quantity of ■ 7. Amend § 541.600 by removing the an executive, administrative or the work performed. first sentence of paragraph (a) and professional employee identified in adding three sentences in its place and subpart B, C, or D of this part. (1) Subject to the exceptions provided revising paragraph (b). (b) As of December 1, 2016, and until in paragraph (b) of this section, an The revisions and additions read as a new amount is published in the exempt employee must receive the full follows: Federal Register by the Secretary and salary for any week in which the becomes effective, such an employee employee performs any work without § 541.600 Amount of salary required. must receive total annual compensation regard to the number of days or hours (a) To qualify as an exempt executive, of at least $134,004. Beginning January worked. Exempt employees need not be administrative or professional employee 1, 2020, and every three years thereafter, paid for any workweek in which they under section 13(a)(1) of the Act, an the Secretary shall update the required perform no work. employee must be compensated on a total annual compensation amount (2) An employee is not paid on a salary basis at a rate per week of not less pursuant to § 541.607. salary basis if deductions from the than the 40th percentile of weekly (1) ‘‘Total annual compensation’’ employee’s predetermined earnings of full-time nonhourly workers must include at least a weekly amount compensation are made for absences in the lowest-wage Census Region. As of equal to the required salary amount occasioned by the employer or by the December 1, 2016, and until a new rate required by § 541.600(a) paid on a salary operating requirements of the business. is published in the Federal Register by or fee basis as set forth in §§ 541.602 If the employee is ready, willing and the Secretary, such an employee must and 541.605, except that § 541.602(a)(3) able to work, deductions may not be be compensated on a salary basis at a shall not apply to highly compensated made for time when work is not rate per week of not less than $913 (or employees. * * * available.

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(3) Up to ten percent of the salary exists between the guaranteed amount second quarter of the year preceding the amount required by § 541.600(a) may be and the amount actually earned. The update as published by the Bureau of satisfied by the payment of reasonable relationship test will be met Labor Statistics. nondiscretionary bonuses, incentives, if the weekly guarantee is roughly (b) American Samoa. The amount and commissions, that are paid equivalent to the employee’s usual required to be paid to an exempt quarterly or more frequently. If by the earnings at the assigned hourly, daily or employee employed in American last pay period of the quarter the sum shift rate for the employee’s normal Samoa, on a salary or fee basis, pursuant of the employee’s weekly salary plus scheduled workweek. Thus, for to §§ 541.100(a)(1), 541.200(a)(1), nondiscretionary bonus, incentive, and example, if the weekly salary level is 541.204(a)(1), 541.300(a)(1), 541.400(b), commission payments received does not $913, an exempt employee guaranteed and 541.600(a), is: equal 13 times the weekly salary compensation of at least $1,000 for any (1) $767 per week as of December 1, amount required by § 541.600(a), the week in which the employee performs 2016; and employer may make one final payment any work, and who normally works four (2) Beginning on January 1, 2020, and sufficient to achieve the required level or five shifts each week, may be paid every three years thereafter: no later than the next pay period after $300 per shift without violating the (i) Updated to correspond to 84 the end of the quarter. Any such final salary basis requirement. The reasonable percent of the updated salary set in payment made after the end of the 13- relationship requirement applies only if paragraph (a)(2) of this section; and week period may count only toward the the employee’s pay is computed on an (ii) Rounded to the nearest multiple of prior quarter’s salary amount and not hourly, daily or shift basis. It does not $1.00; toward the salary amount in the quarter apply, for example, to an exempt store (3) Provided that when the highest it was paid. This provision does not manager paid a guaranteed salary per industry minimum wage for American apply to highly compensated employees week that exceeds the current salary Samoa equals the minimum wage under under § 541.601. level who also receives a commission of 29 U.S.C. 206(a)(1), exempt employees employed in all industries in American * * * * * one-half percent of all sales in the store Samoa shall be paid the rate specified ■ or five percent of the store’s profits, 10. Revise § 541.604 to read as which in some weeks may total as much in paragraph (a) of this section. follows: as, or even more than, the guaranteed (c) Motion picture producing industry. § 541.604 Minimum guarantee plus extras. salary. The amount required to be paid to an exempt motion picture producing (a) An employer may provide an ■ 11. In § 541.605, revise paragraph (b) to read as follows: employee pursuant to § 541.709 is: exempt employee with additional (1) $1,397 per week as of December 1, compensation without losing the § 541.605 Fee basis. 2016; and exemption or violating the salary basis * * * * * (2) Beginning on January 1, 2020, and requirement, if the employment (b) To determine whether the fee every three years thereafter: arrangement also includes a guarantee payment meets the minimum amount of (i) Updated from the previously of at least the minimum weekly- salary required for exemption under applicable base rate, adjusted by the required amount paid on a salary basis. these regulations, the amount paid to same percentage as the updated salary Thus, for example, if the current weekly the employee will be tested by set in paragraph (a)(2) of this section; salary level is $913, an exempt determining the time worked on the job and employee guaranteed at least $913 each and whether the fee payment is at a rate (ii) Rounded to the nearest multiple of week paid on a salary basis may also that would amount to at least the $1.00. receive additional compensation of a minimum salary per week, as required (d) The amount required in total one percent commission on sales. An by §§ 541.600(a) and 541.602(a), if the annual compensation for an exempt exempt employee also may receive a employee worked 40 hours. Thus, if the highly compensated employee pursuant percentage of the sales or profits of the salary level were $913, an artist paid to § 541.601, is: employer if the employment $500 for a picture that took 20 hours to (1) $134,004 per year as of December arrangement also includes a guarantee complete meets the minimum salary 1, 2016; and of at least $913 each week paid on a requirement for exemption since (2) Beginning on January 1, 2020, and salary basis. Similarly, the exemption is earnings at this rate would yield the every three years thereafter, updated to not lost if an exempt employee who is artist $1000 if 40 hours were worked. correspond to the annualized earnings guaranteed at least $913 each week paid amount of the 90th percentile of full- ■ 12. Add § 541.607 to read as follows: on a salary basis also receives additional time nonhourly workers nationally in compensation based on hours worked § 541.607 Automatic updates to amounts the second quarter of the year preceding for work beyond the normal workweek. of salary and compensation required. the update as published by the Bureau Such additional compensation may be (a) Standard salary level. The amount of Labor Statistics. paid on any basis (e.g., flat sum, bonus required to be paid to an exempt (e) The Secretary will determine the payment, straight-time hourly amount, employee on a salary or fee basis, as lowest-wage Census Region for time and one-half or any other basis), applicable, pursuant to §§ 541.100(a)(1), paragraphs (a) and (b) of this section and may include paid time off. 541.200(a)(1), 541.204(a)(1), using the 40th percentile of weekly (b) An exempt employee’s earnings 541.300(a)(1), 541.400(b), 541.600(a)– earnings of full-time nonhourly workers may be computed on an hourly, a daily (b), 541.601(b)(1), 541.604(a), and in the Census Regions based on data or a shift basis, without losing the 541.605(b), is: from the Current Population Survey as exemption or violating the salary basis (1) $913 per week as of December 1, published by the Bureau of Labor requirement, if the employment 2016; and Statistics. arrangement also includes a guarantee (2) Beginning on January 1, 2020, and (f) The Secretary will use the 90th of at least the minimum weekly required every three years thereafter, updated to percentile of weekly earnings data of amount paid on a salary basis regardless equal the 40th percentile of weekly full-time nonhourly workers nationally of the number of hours, days or shifts earnings of full-time nonhourly workers based on data from the Current worked, and a reasonable relationship in the lowest-wage Census Region in the Population Survey as published by the

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Bureau of Labor Statistics for paragraph to an employee in the motion picture than 6 days) for any week in which the (d) of this section. producing industry who is employee does not work a full (g) Not less than 150 days before the compensated, as of December 1, 2016, at workweek for any reason. Moreover, an January 1st effective date of the updated a base rate of at least $1,397 per week otherwise exempt employee in this earnings requirements for this section, (exclusive of board, lodging, or other industry qualifies for exemption if the the Secretary will publish a notice in facilities); and beginning on January 1, employee is employed at a daily rate the Federal Register stating the updated 2020, and every three years thereafter, is under the following circumstances: amounts for paragraphs (a) through (d) compensated at a base rate of at least the (a) The employee is in a job category of this section. previously applicable base rate adjusted (h) The Wage and Hour Division will for which a weekly base rate is not by the same ratio as the preceding publish and maintain on its Web site the provided and the daily base rate would standard salary level is increased applicable earnings requirements for yield at least the minimum weekly (exclusive of board, lodging, or other employees paid pursuant to this part. amount if 6 days were worked; or facilities). Thus, an employee in this ■ 13. Revise § 541.709 to read as industry who is otherwise exempt under (b) The employee is in a job category follows: subparts B, C, or D of this part, and who having the minimum weekly base rate § 541.709 Motion picture producing is employed at a base rate of at least the and the daily base rate is at least one- industry. applicable current minimum amount a sixth of such weekly base rate. The requirement that the employee be week is exempt if paid a proportionate [FR Doc. 2016–11754 Filed 5–18–16; 8:45 am] paid ‘‘on a salary basis’’ does not apply amount (based on a week of not more BILLING CODE 4510–27–P

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