[Federal Register Volume 69, Number 79 (Friday, April 23, 2004)]
[Rules and Regulations]
[Pages 22122-22274]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 04-9016]



[[Page 22121]]

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Part II





Department of Labor





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Wage and Hour Division



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29 CFR Part 541



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

Federal Register / Vol. 69, No. 79 / Friday, April 23, 2004 / Rules 
and Regulations

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DEPARTMENT OF LABOR

Wage and Hour Division

29 CFR Part 541

RIN 1215-AA14


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

AGENCY: Wage and Hour Division, Employment Standards Administration, 
Labor.

ACTION: Final rule.

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SUMMARY: This document provides the text of final regulations under the 
Fair Labor Standards Act implementing the exemption from minimum wage 
and overtime pay for executive, administrative, professional, outside 
sales and computer employees. These exemptions are often referred to as 
the ``white collar'' exemptions. To be considered exempt, employees 
must meet certain minimum tests related to their primary job duties 
and, in most cases, must be paid on a salary basis at not less than 
minimum amounts as specified in pertinent sections of these 
regulations.

EFFECTIVE DATE: These rules are effective on August 23, 2004.

FOR FURTHER INFORMATION CONTACT: Richard M. Brennan, Senior Regulatory 
Officer, Wage and Hour Division, Employment Standards Administration, 
U.S. Department of Labor, Room S-3506, 200 Constitution Avenue, NW., 
Washington, DC 20210. Telephone: (202) 693-0745 (this is not a toll-
free number). For an electronic copy of this rule, go to DOL/ESA's Web 
site (http://www.dol.gov/esa), select ``Federal Register'' under ``Laws 
and Regulations,'' and then ``Final Rules.'' Copies of this rule may be 
obtained in alternative formats (Large Print, Braille, Audio Tape or 
Disc), upon request, by calling (202) 693-0023 (not a toll-free 
number). TTY/TDD callers may dial toll-free 1-877-889-5627 to obtain 
information or request materials in alternative formats.
    Questions of interpretation and/or enforcement of regulations 
issued by this agency or referenced in this notice may be directed to 
the nearest Wage and Hour Division District Office. Locate the nearest 
office by calling our toll-free help line at 1-866-4USWAGE (1-866-487-
9243) between 8 a.m. and 5 p.m., in your local time zone, or log onto 
the Wage and Hour Division's Web site for a nationwide listing of Wage 
and Hour District and Area Offices at: http://www.dol.gov/esa/contacts/
whd/america2.htm.

SUPPLEMENTARY INFORMATION:

I. Summary of Major Changes and Economic Impact

    The minimum wage and overtime pay requirements of the Fair Labor 
Standards Act (FLSA) are among the nation's most important worker 
protections. These protections have been severely eroded, however, 
because the Department of Labor has not updated the regulations 
defining and delimiting the exemptions for ``white collar'' executive, 
administrative and professional employees. By way of this rulemaking, 
the Department seeks to restore the overtime protections intended by 
the FLSA.
    Under section 13(a)(1) of the FLSA and its implementing 
regulations, employees cannot be classified as exempt from the minimum 
wage and overtime requirements unless they are guaranteed a minimum 
weekly salary and perform certain required job duties. The minimum 
salary level was last updated in 1975, almost 30 years ago, and is only 
$155 per week. The job duty requirements in the regulations have not 
been changed since 1949--almost 55 years ago.
    Revisions to both the salary tests and the duties tests are 
necessary to restore the overtime protections intended by the FLSA 
which have eroded over the decades. In addition, workplace changes over 
the decades and federal case law developments are not reflected in the 
current regulations. Under the existing regulations, an employee 
earning only $8,060 per year may be classified as an ``executive'' and 
denied overtime pay. By comparison, a minimum wage employee earns about 
$10,700 per year. The existing duties tests are so confusing, complex 
and outdated that often employment lawyers, and even Wage and Hour 
Division investigators, have difficulty determining whether employees 
qualify for the exemption. The existing regulations are very difficult 
for the average worker or small business owner to understand. The 
regulations discuss jobs like key punch operators, legmen, straw bosses 
and gang leaders that no longer exist, while providing little guidance 
for jobs of the 21st Century.
    Confusing, complex and outdated regulations allow unscrupulous 
employers to avoid their overtime obligations and can serve as a trap 
for the unwary but well-intentioned employer. In addition, more and 
more, employees must resort to lengthy court battles to receive their 
overtime pay. In the Department's view, this situation cannot be 
allowed to continue. Allowing more time to pass without updating the 
regulations contravenes the Department's statutory duty to ``define and 
delimit'' the section 13(a)(1) exemptions ``from time to time.''
    Accordingly, on March 31, 2003, the Department published a Notice 
of Proposed Rulemaking (68 FR 15560) suggesting changes to the Part 541 
regulations, including the largest increase of the salary levels in the 
65-year history of the FLSA. The proposed changes to the duties tests 
were designed to ensure that employees could understand their rights, 
employers could understand their legal obligations, and the Department 
could vigorously enforce the law.
    During a 90-day comment period, the Department received 75,280 
comments from a wide variety of employees, employers, trade and 
professional associations, small business owners, labor unions, 
government entities, law firms and others. In addition, the 
Department's proposal prompted vigorous public policy debate in 
Congress and the media. The public commentary revealed significant 
misunderstandings regarding the scope of the ``white collar'' 
exemptions, but also provided many helpful suggestions for improving 
the proposed regulations.
    After carefully considering all of the relevant comments, and as 
detailed in this preamble, the Department has made numerous changes 
from the proposed rule to the final rule, including the following:

Scope of the Exemptions

     New section 541.3(a) states that exemptions do 
not apply to manual laborers or other ``blue collar'' workers who 
perform work involving repetitive operations with their hands, physical 
skill and energy. Thus, for example, non-management production-line 
employees and non-management employees in maintenance, construction and 
similar occupations such as carpenters, electricians, mechanics, 
plumbers, iron workers, craftsmen, operating engineers, longshoremen, 
construction workers and laborers have always been, and will continue 
to be, entitled to overtime pay.
     New section 541.3(b) states that the exemptions 
do not apply to police officers, fire fighters, paramedics, emergency 
medical technicians and similar public safety employees who perform 
work such as preventing, controlling or extinguishing fires of any 
type; rescuing fire, crime or accident victims; preventing or detecting 
crimes; conducting investigations or inspections

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for violations of law; performing surveillance; interviewing witnesses; 
interrogating and fingerprinting suspects; preparing investigative 
reports; and similar work.
     New section 541.4 clarifies that the FLSA 
provides minimum standards that may be exceeded, but cannot be waived 
or reduced. Employers must comply with State laws providing additional 
worker protections (a higher minimum wage, for example), and the Act 
does not preclude employers from entering into collective bargaining 
agreements providing wages higher than the statutory minimum, a shorter 
workweek than the statutory maximum, or a higher overtime premium 
(double time, for example).

Salary

     The final rule nearly triples the current $155 
per week minimum salary level required for exemption to $455 per week--
a $30 per week increase over the proposal and a $300 per week increase 
over the existing regulations.
     The ``highly compensated'' test in the final 
rule applies only to employees who earn at least $100,000 per year, a 
$35,000 increase over the proposal.
     The ``highly compensated'' test in the final 
rule applies only to employees who receive at least $455 per week on a 
salary basis.
     The final regulation adds a new requirement that 
exempt highly compensated employees also must ``customarily and 
regularly'' perform exempt duties.

Executive

     The final rule deletes the special rules for 
exemption applicable to ``sole charge'' executives.
     The final rule adds the requirement that 
employees who own at least a bona fide 20-percent equity interest in an 
enterprise are exempt only if they are ``actively engaged in its 
management.''
     The final rule retains the ``long'' duties test 
requirement that an exempt executive must have authority to ``hire or 
fire'' other employees or must make recommendations as to the ``hiring, 
firing, advancement, promotion or any other change of status'' which 
are ``given particular weight,'' but provides a new definition of 
``particular weight.''

Administrative

     The final rule eliminates the proposed 
``position of responsibility'' test for the administrative exemption.
     The final rule eliminates the proposed ``high 
level of skill or training'' standard under the administrative 
exemption.
     The final rule retains the existing requirement 
(deleted in the proposed regulations) that exempt administrative 
employees must exercise discretion and independent judgment.

Professional

     The final section 541.301(e)(2) states that 
licensed practical nurses and other similar health care employees do 
not qualify as exempt professionals. The final rule retains the 
provisions of the existing regulations regarding registered nurses.
     As intended in the proposal, the final rule does 
not make any changes to the educational requirements for the 
professional exemption. Further, the Department never intended to allow 
the professional exemption for any employee based on veterans' status. 
The final rule has been modified to avoid any such misinterpretations. 
The references to training in the armed forces, attending a technical 
school and attending a community college have been removed from final 
section 541.301(d).
     The final rule defines ``work requiring advanced 
knowledge,'' one of the three essential elements of the professional 
primary duties test, as ``work which is predominantly intellectual in 
character, and which includes work requiring the consistent exercise of 
discretion and judgment.''
    As a result of these changes, made in response to public 
commentary, the final Part 541 regulations strengthen overtime 
protections for millions of low-wage and middle-class workers, while 
reducing litigation costs for employers. Both employees and employers 
benefit from the final rules. Employees will be better able to 
understand their rights to overtime pay, and employees who know their 
rights are better able to complain if they are not being paid 
correctly. Employers will be able to more readily determine their legal 
obligations and comply with the law. The Department's Wage and Hour 
Division will be better able to vigorously enforce the law.
    The economic analysis found in section VI of this preamble 
concludes that the final rule guarantees overtime protection for all 
workers earning less than the $455 per week ($23,660 annually), the new 
minimum salary level required for exemption. Because of the increased 
salary level, overtime protection will be strengthened for more than 
6.7 million salaried workers who earn between the current minimum 
salary level of $155 per week ($8,060 annually) and the new minimum 
salary level of $455 per week ($23,660 annually). These 6.7 million 
salaried workers include:
     1.3 million currently exempt white-collar 
workers who will gain overtime protection;
     2.6 million nonexempt salaried white-collar 
workers who are at particular risk of being misclassified; and
     2.8 million nonexempt workers in blue-collar 
occupations whose overtime protection will be strengthened because 
their protection, which is based on the duties tests under the current 
rules, will be automatic under the final rules regardless of their job 
duties.
    The standard duties tests adopted in the final regulation are 
equally or more protective than the short duties tests currently 
applicable to workers who earn between $23,660 and $100,000 per year. 
The final ``highly compensated'' test might result in 107,000 employees 
who earn $100,000 or more per year losing overtime protection.
    Because the rules have not been adjusted in decades, the final rule 
does impose additional costs on employers, including up to $375 million 
in additional annual payroll and $739 million in one-time 
implementation costs. However, updating and clarifying the rule will 
reduce Part 541 violations and are likely to save businesses at least 
an additional $252.2 million every year that could be used to create 
new jobs. The final rule is not likely to have a substantial impact on 
small businesses, state and local governments, or any other geographic 
or industry sector.

II. Background

    The FLSA generally requires covered employers to pay employees at 
least the federal minimum wage for all hours worked, and overtime 
premium pay of time-and-one-half the regular rate of pay for all hours 
worked over 40 in a single workweek. However, the FLSA includes a 
number of exemptions from the minimum wage and overtime requirements. 
Section 13(a)(1) of the FLSA provides an exemption from both minimum 
wage and overtime pay for ``any employee employed in a bona fide 
executive, administrative, or professional capacity * * * or in the 
capacity of outside salesman (as such terms are defined and delimited 
from time to time by regulations of the Secretary, subject to the 
provisions of the Administrative Procedure Act * * *).'' 29 U.S.C. 
213(a)(1).
    Congress has never defined the terms ``executive,'' 
``administrative,'' ``professional,'' or ``outside salesman.'' Although 
section 13(a)(1) was included in the original FLSA enacted in 1938, 
specific references to the exemptions in the legislative history are 
scant. The legislative history indicates that the

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section 13(a)(1) exemptions were premised on the belief that the 
workers exempted typically earned salaries well above the minimum wage, 
and they were presumed to enjoy other compensatory privileges such as 
above average fringe benefits and better opportunities for advancement, 
setting them apart from the nonexempt workers entitled to overtime pay. 
Further, the type of work they performed was difficult to standardize 
to any time frame and could not be easily spread to other workers after 
40 hours in a week, making compliance with the overtime provisions 
difficult and generally precluding the potential job expansion intended 
by the FLSA's time-and-a-half overtime premium. See Report of the 
Minimum Wage Study Commission, Volume IV, pp. 236 and 240 (June 1981).
    Pursuant to Congress' specific grant of rulemaking authority, the 
Department of Labor has issued implementing regulations, at 29 CFR Part 
541, defining the scope of the section 13(a)(1) exemptions. Because the 
FLSA delegates to the Secretary of Labor the power to define and 
delimit the specific terms of these exemptions through notice-and-
comment rulemaking, the regulations so issued have the binding effect 
of law. See Batterton v. Francis, 432 U.S. 416, 425 n. 9 (1977).
    The existing Part 541 regulations generally require each of three 
tests to be met for the exemption to apply: (1) The employee must be 
paid a predetermined and fixed salary that is not subject to reductions 
because of variations in the quality or quantity of work performed (the 
``salary basis test''); (2) the amount of salary paid must meet minimum 
specified amounts (the ``salary level test''); and (3) the employee's 
job duties must primarily involve executive, administrative or 
professional duties as defined by the regulations (the ``duties 
tests'').\1\
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    \1\ A number of states arguably have more stringent exemption 
standards than those provided by Federal law. The FLSA does not 
preempt any such stricter State standards. If a State or local law 
establishes a higher standard than the provisions of the FLSA, the 
higher standard applies. See Section 18 of the FLSA, 29 U.S.C. Sec.  
218.
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    The major substantive provisions of the Part 541 regulations have 
remained virtually unchanged for 50 years. The FLSA became law on June 
25, 1938, and the first version of Part 541 was issued later that year 
in October. 3 FR 2518 (Oct. 20, 1938). After receiving many comments on 
the original regulations, the Wage and Hour Division issued revised 
regulations in 1940. 5 FR 4077 (Oct. 15, 1940). See also, ``Executive, 
Administrative, Professional * * * Outside Salesman'' Redefined, Wage 
and Hour Division, U.S. Department of Labor, Report and Recommendations 
of the Presiding Officer (Harold Stein) at Hearings Preliminary to 
Redefinition (Oct. 10, 1940) (``1940 Stein Report''). The Department 
issued the last major revision of the duties test regulatory provisions 
in 1949. 14 FR 7705 (Dec. 24, 1949). Also in 1949, an explanatory 
bulletin interpreting some of the terms in the regulatory provisions 
was published as Subpart B of Part 541. 14 FR 7730 (Dec. 28, 1949). See 
also, Report and Recommendations on Proposed Revisions of Regulations, 
Part 541, by Harry Weiss, Presiding Officer, Wage and Hour and Public 
Contracts Divisions, U.S. Department of Labor (June 30, 1949) (``1949 
Weiss Report''). In 1954, the Department issued the last major 
revisions to the regulatory interpretations of the ``salary basis'' 
test. 19 FR 4405 (July 17, 1954). After the initial minimum salary 
levels were set at $30 per week in 1938, the Department revised the 
Part 541 regulations to increase the salary levels in 1940, 1949, 1958, 
1963, 1970 and 1975. 5 FR 4077 (Oct. 15, 1940); 14 FR 7705 (Dec. 24, 
1949); 23 FR 8962 (Nov. 18, 1958); 28 FR 9505 (Aug. 30, 1963); 35 FR 
883 (Jan. 22, 1970); 40 FR 7092 (Feb. 15, 1975). See also, Report and 
Recommendations on Proposed Revisions of Regulations, Part 541, under 
the Fair Labor Standards Act, by Harry S. Kantor, Presiding Officer, 
Wage and Hour and Public Contracts Divisions, U.S. Department of Labor 
(March 3, 1958) (``1958 Kantor Report'').\2\
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    \2\ Revisions to increase the salary rates in January 1981 were 
stayed indefinitely. 46 FR 11972 (Feb. 12, 1981). The Department 
also revised the regulations to accommodate statutory amendments to 
the FLSA in 1961, 1967, 1973, and 1992. 26 FR 8635 (Sept. 15, 1961); 
32 FR 7823 (May 30, 1967); 38 FR 11390 (May 7, 1973); 57 FR 37677 
(Aug. 19, 1992); 57 FR 46744 (Oct. 9, 1992).
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    The framework of the existing Part 541 regulation is based upon the 
1940 Stein Report, the 1949 Weiss Report and the 1958 Kantor report, 
which reflect the best evidence of the American workplace a half-
century ago. The existing regulation, therefore, reflects the structure 
of the workplace, the type of jobs, the education level of the 
workforce, and the workplace dynamics of an industrial economy that has 
long been altered. As the workplace and structure of our economy has 
evolved, so, too, must Part 541 be modernized to remain current and 
relevant. This necessary adaptation forms the philosophical 
underpinnings of this update and reflects the Department's efforts to 
remain true to the intent of Congress, which mandated that the DOL 
``from time to time'' define and delimit these exemptions and the 
myriad terms contained therein.
    The Department notes, however, that much of the reasoning of the 
Stein, Weiss and Kantor reports remains as relevant as ever. This 
preamble notes such instances, and articulates why the reasoning is 
still sound. However, while the Department carefully has reviewed these 
reports in undertaking this update, it is not bound by the reports. The 
Department is responsible for updating regulations that, with each 
passing decade of inattention, have become increasingly out of step 
with the realities of the workplace. Indeed, under this rulemaking, the 
Department is charged with utilizing record evidence submitted in 2003 
* * * not in the 1940s or 1950s * * * in exercising its discretion to 
update the terms of this Part.
    Suggested changes to the Part 541 regulations have been the subject 
of extensive public commentary for two decades, including public 
comments responding to an Advance Notice of Proposed Rulemaking issued 
by the Department in November 1985,\3\ a March 1995 oversight hearing 
by the Subcommittee on Workforce Protections of the Committee on 
Economic and Educational Opportunities, U.S. House of Representatives, 
a report issued by the General Accounting Office (GAO) in September 
1999,\4\ and a May 2000 hearing before the Subcommittee on Workforce 
Protections of the Committee on Education and the Workforce, U.S. House 
of Representatives. In its 1999 report to Congress and at the May 2000 
hearing, the GAO chronicled the background and history of the 
exemptions, estimated the number of workers who might be included 
within the scope of the exemptions, identified the major concerns of 
employers and employees regarding the exemptions, and suggested 
possible solutions to the issues of concern raised by the affected 
interests. In general, the employers contacted by the GAO were 
concerned that the regulatory tests are too complicated, confusing, and 
outdated for the modern workplace, and create potential liability for 
violations when errors in classification occur. Employers were 
particularly concerned about potential liability for violations of the 
complex ``salary basis'' test, and complained that the ``discretion and 
independent judgment'' standard for administrative employees is 
confusing and applied inconsistently by the Wage

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and Hour Division. They also noted the traditional limits of the 
exemptions have blurred in the modern workplace. Employee 
representatives contacted by the GAO, in contrast, were most concerned 
that the use of the exemptions be limited to preserve existing overtime 
work hour limits and the 40-hour standard workweek for as many 
employees as possible. They believed the tests have become weakened as 
applied today by judicial rulings and do not adequately restrict 
employers' use of the exemptions. When combined with the low salary 
test levels, the employee representatives felt that few protections 
remain, particularly for low-income supervisory employees. The GAO 
Report noted that the conflicting interests affected by these rules 
have made consensus difficult and that, since the FLSA was enacted, the 
interests of employers to expand the white collar exemptions have 
competed with those of employees to limit use of the exemptions. To 
resolve the issues presented, the GAO suggested that employers' desires 
for clear and unambiguous regulatory standards must be balanced with 
employees' desires for fair and equitable treatment in the workplace. 
The GAO recommended that the Secretary of Labor comprehensively review 
the regulations and restructure the exemptions to better accommodate 
today's workplace and to anticipate future workplace trends.
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    \3\ 50 FR 47696 (Nov. 11, 1985).
    \4\ Fair Labor Standards Act: White Collar Exemptions in the 
Modern Work Place, GAO/HEHS-99-164, September 30, 1999 (GAO Report).
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    Responding to the extensive public commentary, on March 31, 2003, 
the Department published proposed revisions to these regulations in the 
Federal Register inviting public comments for 90 days (see 68 FR 15560; 
March 31, 2003). In response to the proposed rule, the Department 
received a total of 75,280 comments during the official comment period. 
The Department received comments from a wide variety of individuals, 
employees, employers, trade and professional associations, labor 
unions, governmental entities, Members of Congress, law firms, and 
others.
    Most of the comments received were form letters submitted by e-mail 
or facsimile. Form letters expressing general support of the proposal 
were received, for example, from members of the Society for Human 
Resource Management and from individuals who identified themselves as 
being in agreement with the HR Policy Association or the National 
Funeral Directors Association. More than 90 percent of the comments 
were form letters generated by organizations affiliated with the 
American Federation of Labor and Congress of Industrial Organizations 
(AFL-CIO) expressing general opposition to the proposal. These largely 
identical submissions raise concerns that the proposal would, for 
example, ``diminish the application of overtime pay and seriously erode 
the 40 hour workweek'' and lead to ``[c]utting overtime pay'' which 
``would really hurt America's working families.'' The form letters, 
however, do not address any particular aspect of the changes being 
proposed to the existing regulations. Indeed, some letters and emails 
appear to be from individuals who clearly perform non-exempt duties and 
are not covered by the Part 541 exemptions.
    Approximately 600 of the comments include substantive analysis of 
the proposed revisions. Virtually all of these 600 comments favor some 
change to the existing regulations. Among the commenters there are a 
wide variety of views on the merits of particular sections of the 
proposed regulations. Acknowledging that there are strong views on the 
issues presented in this rulemaking, the Department has carefully 
considered all of the comments and the arguments made for and against 
the proposed changes.
    The major comments received on the proposed regulatory changes are 
summarized below, together with a discussion of the changes that have 
been made in the final regulatory text in response to the comments 
received. In addition to the more substantive comments discussed below, 
the Department received some editorial suggestions, some of which have 
been adopted and some of which have not. A number of other minor 
editorial changes have been made to better organize or structure the 
regulatory text. Finally, a number of comments were received on issues 
that go beyond the scope or authority of these regulations (such as 
eliminating all exemptions from overtime, lowering the overtime 
threshold to fewer hours worked per week or per day, banning all 
mandatory overtime, and basing overtime on a two-week/80-hour limit), 
which the Department will not address in the discussion that follows.

III. Authority of the Secretary of Labor

    Section 13(a)(1) of the FLSA provides exemptions from the minimum 
wage and overtime requirements for employees ``employed in a bona fide 
executive, administrative, or professional capacity or in the capacity 
of outside salesman * * *.'' 29 U.S.C. 213(a)(1). Congress included 
these exemptions in the original enactment of the FLSA in 1938, but the 
statute contains no definitions, guidance or instructions as to their 
meaning.
    Rather than define the section 13(a)(1) exemptions in the statute, 
Congress granted the Secretary of Labor broad authority to ``define and 
delimit'' these terms ``from time to time by regulations.'' Id. A 
unanimous Supreme Court reaffirmed the broad nature of this delegation 
in Auer v. Robbins, 519 U.S. 452, 456 (1997), stating that the ``FLSA 
grants the Secretary broad authority to `defin[e] and delimi[t]' the 
scope of the exemption for executive, administrative and professionals 
employees.'' See also Addison v. Holly Hill Fruit Products, Inc., 322 
U.S. 607, 613 n.6 (1944) (authority given to define and delimit the 
terms ``bona fide executive, administrative, professional''); Spradling 
v. City of Tulsa, Oklahoma, 95 F.3d 1492, 1495 (10th Cir. 1996) (the 
Department ``is responsible for determining the operative definitions 
of these terms through interpretive regulations''), cert. denied, 519 
U.S. 1149 (1997); Dalheim v. KDFW-TV, 918 F.2d 1220, 1224 (5th Cir. 
1990) (the FLSA ``empowers the Secretary of Labor'' to define by 
regulation the terms executive, administrative, and professional).
    Several commenters, including the AFL-CIO, claim that the proposal 
exceeds the authority of the Secretary and will not be entitled to 
judicial deference. They assert that the proposal improperly broadens 
the exemptions, fails to safeguard employees from being misclassified, 
and is not consistent with Congressional intent. As an initial matter, 
the Supreme Court's decision in Auer confirmed the Secretary's ``broad 
authority'' to define and delimit these exemptions. 519 U.S. at 456. 
Moreover, as this preamble establishes, the final rule will simplify, 
clarify and better organize the regulations defining and delimiting the 
exemptions for administrative, executive and professional employees. 
Rather than broadening the exemptions, the final rule will enhance 
understanding of the boundaries and demarcations of the exemptions 
Congress created. The final rule will protect more employees from being 
misclassified and reduce the likelihood of litigation over employee 
classifications because both employees and employers will be better 
able to understand and follow the regulations.
    Other commenters contend that the proposal violates the rule of 
interpretation articulated in Arnold v. Ben Kanowsky, Inc., 361 U.S. 
388, 392 (1960), that FLSA exemptions are to be ``narrowly construed.'' 
However, in Auer v. Robbins, 519 U.S. at 462-63, the Supreme Court 
addressed the difference between the ``narrowly construed'' rule of 
judicial interpretation and the broad

[[Page 22126]]

authority possessed by the Secretary to promulgate these regulations:

Petitioners also suggest that the Secretary's approach contravenes 
the rule that FLSA exemptions are to be ``narrowly construed against 
* * * employers'' and are to be withheld except as to persons 
``plainly and unmistakably within their terms and spirit.'' Arnold 
v. Ben Kanowsky, Inc., 361 U.S. 388, 392, 80 S. Ct. 453, 456, 4 L. 
Ed. 2d 393 (1960). But that is a rule governing judicial 
interpretation of statutes and regulations, not a limitation on the 
Secretary's power to resolve ambiguities in his own regulations. A 
rule requiring the Secretary to construe his own regulations 
narrowly would make little sense, since he is free to write the 
regulations as broadly as he wishes, subject only to the limits 
imposed by the statute.

Thus, the commenters' contentions are unfounded because the ``narrowly 
construed'' standard does not govern or limit the Secretary's broad 
rulemaking authority.

IV. Summary of Major Comments

Effective Date

    There were very few comments concerning the effective date of the 
regulations. The National Association of Convenience Stores (NACS) 
recommends that the rules become effective 180 days after they are 
published, but in no event before the passage of 90 days. NACS asserts 
that ``employers will need considerable time to make and implement 
important business decisions about how to arrange their affairs in 
light of the revisions,'' and that a ``relatively long period is 
certainly justified.'' The Department has set an effective date that is 
120 days after the date of publication of these final regulations. The 
Department believes that a period of 120 days will provide employers 
ample time to make any changes necessary to ensure compliance with the 
final regulations. Moreover, a 120-day effective date exceeds the 30-
day minimum required under the Administrative Procedure Act, 5 U.S.C. 
553(d), and the 60 days mandated for a ``major rule'' under the 
Congressional Review Act, 5 U.S.C. 801(a)(3)(A).
    The law firm of Morgan Lewis & Bockius and the Information 
Technology Industry Council request that the Department establish a 
``short-term `amnesty' program'' that would exist for two years after 
the regulations'' effective date. The program, the commenters suggest, 
would either allow or require employees seeking unpaid overtime wages 
based on a misclassification occurring prior to the effective date of 
the final regulations to submit their claims to the Department for 
resolution. Under the program, the Department would request that the 
employer conduct a self-audit of past compliance concerning the 
positions at issue and would supervise payments of up to two years of 
back wages, excluding liquidated damages. The statute of limitations 
would be tolled during this administrative procedure. If the employer 
refused to perform a self-audit, or did not pay the back wages due, the 
employee could then bring a lawsuit. The commenters cite FLSA section 
16(b) as the source of the Department's authority to implement such a 
program. Section 16(b) provides aggrieved employees a private right of 
action that terminates upon the Department's filing a lawsuit for back 
wages for such employees under section 17. Nothing in section 16(b) or 
in any other section of the statute authorizes the Department to create 
the proposed amnesty program.

Structure and Organization

    The existing Part 541 contains two subparts. Current Subpart A 
provides the regulatory tests that define each category of the 
exemption (executive, administrative, professional, and outside sales). 
Current Subpart B provides interpretations of the terms used in the 
exemptions. Subpart B was first issued as an explanatory bulletin in 
1949 (effective in January 1950) to provide guidance to the public on 
how the Wage and Hour Division interpreted and applied the exemption 
criteria when enforcing the FLSA.
    The Department proposed to eliminate this distinction between the 
``regulations'' in Subpart A and the ``interpretations'' in Subpart B. 
The proposed rule also reorganized the subparts according to each 
category of exemption, eliminated outdated and uninformative examples, 
updated definitions of key terms and phrases, and consolidated 
provisions relevant to several or all of the exemption categories into 
unified, common sections to eliminate unnecessary repetition (e.g., a 
number of sections pertaining to salary issues were proposed to be 
consolidated into a new Subpart G, Salary Requirements, discussed 
below). The proposed rule also streamlined, reorganized, and updated 
the regulations in other ways. The proposed regulations utilized 
objective, plain language in an attempt to make the regulations more 
understandable to employees and employee representatives, small 
business owners and human resource professionals. This proposed 
restructuring of Part 541 was intended to consolidate and streamline 
the regulatory text, reduce unnecessary duplication and redundancies, 
make the regulations easier to understand and decipher when applying 
them to particular factual situations, and eliminate the confusion 
regarding the appropriate level of deference to be given to the 
provisions in each subpart.
    The proposed regulations also streamlined the existing regulations 
by adopting a single standard duties test for each exemption category, 
rather than the existing ``long'' and ``short'' duties tests structure. 
Because of the outdated salary levels, the ``long'' duties tests have, 
as a practical matter, become effectively dormant. As the American 
Payroll Association states, the ``long'' duties tests have ``become 
`inoperative' because of the extremely low minimum salary test ($155 
per week) and federal courts' refusal to apply the percentage 
restrictions on nonexempt work in the modern workplace.'' The U.S. 
Chamber of Commerce similarly notes that the ``elements unique to the 
long test have largely been dormant for some time due to the 
compensation levels.'' The U.S. House of Representatives' Committee on 
Education and the Workforce also comments that the ``long'' duties 
tests have ``become rarely, if ever, used.'' The Fisher & Phillips law 
firm notes that ``the `long' test has played little role in the 
executive exemption's application for many years.'' Similarly, the 
American Bakers Association notes that the ``long'' duties tests 
``lack[] current relevance.'' Finally, the National Association of 
Federal Wage Hour Consultants states that the ``long'' duties tests are 
``seldom used today in the business community.'' Faced with this 
reality, the Department decided that elimination of most of the 
``long'' duties tests requirements is warranted, especially since the 
relatively small number of employees currently earning from $155 to 
$250 per week, and thus tested for exemption under the ``long'' duties 
tests, will gain stronger protections under the increased minimum 
salary level which, under the final rule, guarantees overtime 
protection for all employees earning less than $455 per week ($23,660 
annually). Further, as explained in the preamble to the proposed rule, 
the former tests are complicated and require employers to time-test 
managers for the duties they perform, hour-by-hour in a typical 
workweek. Reintroducing these effectively dormant requirements now 
would add new complexity and burdens to the exemption tests that do not 
currently apply. For example, employers are not generally required to 
maintain any records of daily or weekly hours worked by exempt 
employees (see 29 CFR 516.3), nor are they required to

[[Page 22127]]

perform a moment-by-moment examination of an exempt employee's specific 
duties to establish that an exemption is available. Yet reactivating 
the former strict percentage limitations on nonexempt work in the 
existing ``long'' duties tests could impose significant new monitoring 
requirements (and, indirectly, new recordkeeping burdens) and require 
employers to conduct a detailed analysis of the substance of each 
particular employee's daily and weekly tasks in order to determine if 
an exemption applied. When employers, employees, as well as Wage and 
Hour Division investigators applied the ``long'' test exemption 
criteria in the past, distinguishing which specific activities were 
inherently a part of an employee's exempt work proved to be a 
subjective and difficult evaluative task that prompted contentious 
disputes. Moreover, making such finite determinations would become even 
more difficult in light of developments in case law that hold that an 
exempt employee's managerial duties can be carried out at the same time 
the employee performs nonexempt manual tasks. See, e.g., Jones v. 
Virginia Oil Co., 2003 WL 21699882, at *4 (4th Cir. 2003) (assistant 
manager who spent 75 to 80 percent of her time performing basic line-
worker tasks held exempt because she ``could simultaneously perform 
many of her management tasks''); Donovan v. Burger King Corp., 672 F.2d 
221, 226 (1st Cir. 1982) (``an employee can manage while performing 
other work,'' and ``this other work does not negate the conclusion that 
his primary duty is management''). Accordingly, given these 
developments, the Department believed that the percentage limitations 
on particular duties formerly applied under the ``long'' tests were not 
useful criteria that should be reintroduced for defining the ``white 
collar'' exemptions in today's workplace, and that employees who would 
have been tested under the ``long'' tests are better protected by the 
final rule's guarantee of overtime protection to all employees earning 
less than $455 per week.
    Most comments addressing the structure and organization of the 
proposed rule generally favor the proposed restructuring, indicating 
the consolidation of the former regulations and interpretations into a 
unified set of rules and other proposed changes provide needed 
simplification and more clarity to a complex regulation. The weight of 
comments support replacing the former ``long'' and ``short'' test 
structure with the proposed standard tests and deleting the former 
``long'' test percentage limits on performing nonexempt duties.\5\ For 
example, the U.S. Chamber of Commerce comments that it was their 
members' experience that the percentage limitations have been difficult 
to apply and have been of little utility. The Associated Prevailing 
Wage Contractors states that the percentage requirements created 
additional and needless recordkeeping requirements. The National Small 
Business Association comments that a move away from a percentage basis 
test will alleviate the burden on small business owners.
---------------------------------------------------------------------------

    \5\ See, e.g., Comments of American Bakers Association; American 
Corporate Counsel Association; American Hotel and Lodging 
Association; American Insurance Association; American Nursery and 
Landscape Association; American Payroll Association; American 
Network of Community Options and Resources (ANCOR); Associated 
Builders and Contractors; Associated Prevailing Wage Contractors; 
Colley & McCoy Company; Contract Services Association of America; 
Financial Services Roundtable; Grocery Manufacturers of America; 
National Association of Chain Drug Stores; National Association of 
Manufacturers; National Council of Agricultural Employers; National 
Grocers Association; National Newspaper Association; National 
Restaurant Association; National Small Business Association; New 
Jersey Restaurant Association; Pennsylvania Credit Union 
Association; Public Sector FLSA Coalition; Society for Human 
Resource Management; State of Oklahoma Office of Personnel 
Management; Tennessee Valley Authority; the U.S. Chamber of 
Commerce; and Virginia Department of Human Resource Management.
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    However, some commenters oppose these changes, asserting that they 
weakened the requirements for exemption, would allow manipulation of 
job titles to evade paying overtime to lower-level employees, would 
open the floodgates to misclassification of employees, and lead to more 
lawsuits. Some commenters state that the proposed language is too 
simple for this complex subject or that the proposed language continues 
to be vague in some areas, making it susceptible to differing 
interpretations and a continuation of an overly complex subject under 
the law. Other dissenting comments point to a loss of judicial and 
opinion letter interpretative precedent that would occur by changing 
the duties tests as the Department proposed.\6\
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    \6\ See, e.g., Comments of 9-5 National Association of Working 
Women; AFL-CIO; American Federation of State, County and Municipal 
Employees; American Federation of Teachers; Building and 
Construction Trades Department, AFL-CIO; Communication Workers of 
America; International Association of Fire Fighters; International 
Association of Machinists and Aerospace Workers; International 
Federation of Professional & Technical Engineers; National 
Employment Law Project; New York State Public Employees Federation; 
United Food and Commercial Workers Union; Weinberg, Roger and 
Rosenfeld; and World at Work.
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    The Department has carefully considered these arguments, and 
continues to believe that reducing the inherent complexity of the 
exemption criteria by replacing the subjective and effectively dormant 
``long'' test requirements is an essential goal to be pursued in this 
rulemaking. Streamlining and simplification of the applicable standards 
is critical to ensuring correct interpretations and proper application 
of the exemptions in the workplace today. It serves no productive 
interest if a complicated regulatory structure implementing a statutory 
directive means that few people can arrive at a correct conclusion, or 
that many people arrive at different conclusions, when trying to apply 
the standards to widely varying and diverse employment settings. The 
extensive public comments on the difficulties experienced under the 
existing regulatory standards amply demonstrate the need for change, in 
the Department's view. The comments suggesting there is no need to 
change the current regulatory ``long'' and ``short'' test structure are 
not persuasive when contrasted with the described difficulties under 
the existing regulatory standards, as confirmed by many other 
commenters. The Department also does not agree with the comments 
suggesting that elimination of the ``long'' test percentage limitations 
on nonexempt work, which are rarely applied today, and retention of the 
primary duty approach as currently interpreted by federal courts, will 
somehow increase litigation or decrease the protections currently 
afforded to employees. Rather, we believe that employees are more 
clearly protected by the final rule, which guarantees overtime 
protection to all employees earning less than $455 per week, than by 
the existing rule which contains confusing and differing requirements 
for employees earning between $155 and $455 per week. Moreover, as 
explained in more detail in Subpart B of the preamble, the Department's 
final ``standard'' duties test for the executive exemption incorporates 
the ``authority to hire or fire'' requirement from the existing long 
test.
    A number of commenters suggest that the 20-percent limitation on 
nonexempt work is mandated by the FLSA itself because, when amending 
the FLSA in 1961 to cover retail and service establishments, Congress 
added in section 13(a)(1) that ``an employee of a retail or service 
establishment shall not be excluded from the definition of employee 
employed in a bona fide executive or administrative capacity because of 
the number of hours in his workweek which he devotes to activities

[[Page 22128]]

not directly or closely related to the performance of executive or 
administrative activities, if less than 40 per centum of his hours 
worked in the workweek are devoted to such activities.''
    The Department does not believe that eliminating the 20-percent 
rule from the new standard test contravenes Congress' intent. By adding 
the 40-percent language in 1961, Congress intended that the 20-percent 
limitation in the ``long'' tests would not be used to prohibit 
employers from applying the exemption to retail and service employees, 
even if they spent more than 20 percent of their time in nonexempt 
work. Thus, this statutory language is a limitation on the Department's 
authority to define certain employees as nonexempt--not a Congressional 
declaration that the Department can never reconsider the 20-percent 
limitation. Congress could have imposed the 20-percent rule on all 
employees in 1961, but it did not. In fact, the primary duty approach 
of the final regulations was first adopted by the Department as part of 
the ``short'' tests in 1949. When Congress amended the FLSA in 1961, 
the primary duty tests were in effect and did not contain mandatory 
percentage limitations on nonexempt work. See 29 CFR 541.103 (50 
percent is ``rule of thumb''); Jones, 2003 WL 21699882, at *3 (the 50-
percent ``rule of thumb'' is not dispositive). Congress did not act to 
abrogate the primary duty tests, and the Department believes that the 
``short'' duties tests are in no way inconsistent with section 13(a)(1) 
of the Act.
    In reaching its regulatory decisions, the Department is mindful of 
its obligations under the delegated statutory authority applicable in 
this situation, and other laws and Executive Orders that apply to the 
regulatory process, to define and delimit the ``white collar'' 
exemption criteria in ways that reduce unnecessary burdens (e.g., the 
Paperwork Reduction Act, the Regulatory Flexibility Act, the Unfunded 
Mandates Reform Act, and Executive Orders 12866, 13272, and 13132). 
Under currently applicable guidelines, implementation of regulatory 
standards should, to the maximum extent possible within the limits of 
controlling statutory authority and intent, strike an appropriate 
balance and be compatible with existing recordkeeping and other prudent 
business practices, not unduly disruptive of them. Regulatory standards 
should also strive to apply plain, coherent, and unambiguous 
terminology that is easily understandable to everyone affected by the 
rules. Consequently, the Department has decided to adopt the proposed 
restructuring of the regulations into separate subparts containing 
standard tests under each category of the exemption, which do not 
include the former ``long'' test requirements that require calculating 
the 20-percent (or 40-percent in retail or service establishments) 
limits on the amount of time devoted to nonexempt tasks.

Subpart A, General Regulations

    Proposed Subpart A included several general, introductory 
provisions scattered throughout the existing regulations. Proposed 
section 541.0 combined an introductory statement from existing section 
541.99 and information currently located at section 541.5b regarding 
the application of the equal pay provisions in section 6(d) of the FLSA 
to employees exempt from the minimum wage and overtime provisions of 
the FLSA under section 13(a)(1). Proposed section 541.0 also provided 
new language to reflect legislative changes to the FLSA regarding 
computer employees and information regarding the new organizational 
structure of the proposed regulations. Proposed section 541.1 provided 
definitions of ``Act'' and ``Administrator'' from their current 
location in section 541.0. Finally, proposed section 541.2 provided a 
general statement that job titles alone are insufficient to establish 
the exempt status of an employee. This fundamental concept, equally 
applicable to all the exemption categories, currently appears in 
section 541.201(b) of the existing regulations regarding administrative 
employees.
    The Department received few comments on these general regulations. 
Thus, Subpart A is adopted as proposed, except for the addition of a 
new section 541.3 entitled ``Scope of the section 13(a)(1) exemptions'' 
and a new section 541.4 entitled ``Other laws and collective bargaining 
agreements.'' The Department adds these new sections in response to 
public commentary which evidenced general confusion, especially among 
employees, regarding the scope of the exemptions and the impact of 
these regulations on state laws and collective bargaining agreements.
    The subsection 541.3(a) clarifies that the section 13(a)(1) 
exemptions and the Part 541 regulations do not apply to manual laborers 
or other ``blue collar'' workers who ``perform work involving 
repetitive operations with their hands, physical skill and energy.'' 
Such employees ``gain the skills and knowledge required for performance 
of their routine manual and physical work through apprenticeships and 
on-the-job training, not through the prolonged course of specialized 
intellectual instruction required of exempt learned professional 
employees such as medical doctors, architects and archeologists. Thus, 
for example, non-management production-line employees and non-
management employees in maintenance, construction and similar 
occupations such as carpenters, electricians, mechanics, plumbers, iron 
workers, craftsmen, operating engineers, longshoremen, construction 
workers and laborers are entitled to minimum wage and overtime premium 
pay under the Fair Labor Standards Act, and are not exempt under the 
regulations in this part no matter how highly paid they might be.''
    The new Sec.  541.3(a) responds to comments revealing a fundamental 
misunderstanding of the scope and application of the Part 541 
regulations among employees and employee representatives. To ensure 
employees understand their rights, the new subsection 541.3(a) clearly 
states that manual laborers and other ``blue collar'' workers cannot 
qualify for exemption under section 13(a)(1) of the FLSA. The 
description of a ``blue collar'' worker as an employee performing 
``work involving repetitive operations with their hands, physical skill 
and energy'' was derived from a standard dictionary definition of the 
word ``manual.'' See, e.g., Adam v. United States, 26 Cl. Ct. 782, 792-
93 (1992) (``dictionary definition of `manual' is, `requiring or using 
physical skill and energy' ''). The illustrative list of such ``blue 
collar'' occupations included in this subsection is the same language 
included in the proposed and final section 541.601 on highly 
compensated employees.
    Section 541.3(b)(1) provides that the section 13(a)(1) exemptions 
and these regulations also do not apply to ``police officers, 
detectives, deputy sheriffs, state troopers, highway patrol officers, 
investigators, inspectors, correctional officers, parole or probation 
officers, park rangers, fire fighters, paramedics, emergency medical 
technicians, ambulance personnel, rescue workers, hazardous materials 
workers and similar employees, regardless of rank or pay level, who 
perform work such as preventing, controlling or extinguishing fires of 
any type; rescuing fire, crime or accident victims; preventing or 
detecting crimes; conducting investigations or inspections for 
violations of law; performing surveillance; pursuing, restraining and 
apprehending suspects; detaining or supervising suspected and convicted 
criminals, including those on probation

[[Page 22129]]

or parole; interviewing witnesses; interrogating and fingerprinting 
suspects; preparing investigative reports; or similar work.'' Final 
subsection 541.3(b)(2) provides that such employees do not qualify as 
exempt executive employees because their primary duty is not management 
of the enterprise in which the employee is employed or a customarily 
recognized department or subdivision thereof as required under section 
541.100. Thus, for example, ``a police officer or fire fighter whose 
primary duty is to investigate crimes or fight fires is not exempt 
under section 13(a)(1) of the Act merely because the police officer or 
fire fighter also directs the work of other employees in the conduct of 
an investigation or fighting a fire.'' Final subsection 541.3(b)(3) 
provides that such employees do not qualify as exempt administrative 
employees because their primary duty is not the performance of work 
directly related to the management or general business operations of 
the employer or the employer's customers as required under section 
541.200. Final subsection 541.3(b)(4) provides that such employees do 
not qualify as exempt learned professionals because their primary duty 
is not the performance of work requiring knowledge of an advanced type 
in a field of science or learning customarily acquired by a prolonged 
course of specialized intellectual instruction or the performance of 
work requiring invention, imagination, originality or talent in a 
recognized field of artistic or creative endeavor as required under 
section 541.300. Final subsection 541.3(b)(4) also states that 
``although some police officers, fire fighters, paramedics, emergency 
medical technicians and similar employees have college degrees, a 
specialized academic degree is not a standard prerequisite for 
employment in such occupations.''
    This new subsection 541.3(b) responds to commenters, most notably 
the Fraternal Order of Police, expressing concerns about the impact of 
the proposed regulations on police officers, fire fighters, paramedics, 
emergency medical technicians (EMTs) and other first responders. The 
current regulations do not explicitly address the exempt status of 
police officers, fire fighters, paramedics or EMTs. This silence in the 
current regulations has resulted in significant federal court 
litigation to determine whether such employees meet the requirements 
for exemption as executive, administrative or professional employees.
    Most of the courts facing this issue have held that police 
officers, fire fighters, paramedics and EMTs and similar employees are 
not exempt because they usually cannot meet the requirements for 
exemption as executive or administrative employees. In Department of 
Labor v. City of Sapulpa, Oklahoma, 30 F.3d 1285, 1288 (10th Cir. 
1994), for example, the court held that fire department captains were 
not exempt executives because they were not in charge of most fire 
scenes; had no authority to call additional personnel to a fire scene; 
did not set work schedules; participated in all the routine manual 
station duties such as sweeping and mopping floors, washing dishes and 
cleaning bathrooms; and did not earn much more than the employees they 
allegedly supervised. In Reich v. State of New York, 3 F.3d 581, 585-87 
(2nd Cir. 1993), cert. denied, 510 U.S. 1163 (1994), the court granted 
overtime pay to police investigators whose duties included 
investigating crime scenes, gathering evidence, interviewing witnesses, 
interrogating and fingerprinting suspects, making arrests, conducting 
surveillance, obtaining search warrants, and testifying in court. The 
court held that such police officers are not exempt administrative 
employees because their primary duty is conducting investigations, not 
administering the affairs of the department itself. See also Bratt v. 
County of Los Angeles, 912 F.2d 1066, 1068-70 (9th Cir. 1990) 
(probation officers who conduct investigations and make recommendations 
to the court regarding sentencing are not exempt administrative 
employees), cert. denied, 498 U.S. 1086 (1991); Mulverhill v. State of 
New York, 1994 WL 263594 (N.D.N.Y. 1994) (investigators of 
environmental crimes who carry firearms, patrol a sector of the state 
and conduct covert surveillance, and rangers who prevent and suppress 
forest fires, are not exempt administrative employees).
    Similarly, federal courts have held that police officers, 
paramedics, EMTs, and similar employees are not exempt professionals 
because they do not perform work in a ``field of science or learning'' 
requiring knowledge ``customarily acquired by a prolonged course of 
specialized intellectual instruction'' as required under the current 
and final section 541.301 of the regulations. The paramedic plaintiffs 
in Vela v. City of Houston, 276 F.3d 659, 674-676 (5th Cir. 2001), for 
example, were required to complete 880 hours of classroom training, 
clinical experience and a field internship. The EMT plaintiffs were 
required to complete 200 hours of classroom training, clinical 
experience and a field internship. The court held that the paramedics 
and EMTs were not exempt professionals because they were not required 
to have a college degree. See also Dybach v. State of Florida 
Department of Corrections, 942 F.2d 1562, 1564-65 (11th Cir. 1991) 
(probation officer held not exempt professional because the required 
college degree could be in any field--`` `nuclear physics, or * * * 
corrections, or * * * physical education or basket weaving'''--not in a 
specialized field); Fraternal Order of Police, Lodge 3 v. Baltimore 
City Police Department, 1996 WL 1187049 (D. Md. 1996) (police sergeants 
and lieutenants held not exempt professionals, even though some 
possessed college degrees, because college degrees were not required 
for the positions); Quirk v. Baltimore County, Maryland, 895 F. Supp. 
773, 784-86 (D. Md. 1995) (certified paramedics required to have a high 
school education and less than a year of specialized training are not 
exempt professionals).
    The Department has no intention of departing from this established 
case law. Rather, for the first time, the Department intends to make 
clear in these revisions to the Part 541 regulations that such police 
officers, fire fighters, paramedics, EMTs and other first responders 
are entitled to overtime pay. Police sergeants, for example, are 
entitled to overtime pay even if they direct the work of other police 
officers because their primary duty is not management or directly 
related to management or general business operations; neither do they 
work in a field of science or learning where a specialized academic 
degree is a standard prerequisite for employment.\7\
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    \7\ In addition to the case law and comments cited above, when 
drafting this new section, the Department also looked to the 
definitions of ``fire protection activities'' and ``law enforcement 
activities'' contained in Sections 3(y) and 7(k) of the FLSA, and 
their implementing regulations at 29 CFR 553.210 and 553.211, which 
allow public agencies to pay overtime to fire and law enforcement 
employees based on a 7 to 28 day period, rather than the 40-hour 
workweek. These sections do not govern exempt status under section 
13(a)(1) and, thus, are illustrative but not determinative of duties 
performed by nonexempt fire and law enforcement employees. See 29 
CFR 553.216.
---------------------------------------------------------------------------

    Finally, such police officers, fire fighters, paramedics, EMTs and 
other public safety employees also cannot qualify as exempt under the 
highly compensated test in final section 541.601. As discussed below, 
final section 541.601(b) provides that the highly compensated test 
``applies only to employees whose primary duty includes performing 
office or non-manual work.'' Federal courts have recognized that

[[Page 22130]]

such public safety employees do not perform ``office or non-manual'' 
work. Adam v. United States, 26 Cl. Ct. at 792-93, for example, 
involved border patrol agents who spent a significant amount of time in 
the field, wore ``uniforms and black work boots,'' and used ``a 
handgun, a baton, night-vision goggles, and binoculars.'' Their work 
required ``frequent and recurring walking and running over rough 
terrain, stooping, bending, crawling in restricted areas such as 
culverts, climbing fences and freight car ladders, and protecting one's 
self and others from physical attacks.'' Their work also involved 
``high speed pursuits, boarding moving trains and vessels, and physical 
threat while detaining and arresting illegal aliens, smugglers, and 
other criminal elements.'' The court held that these border patrol 
agents are not exempt from the FLSA overtime requirements, stating that 
the ``level of physical effort required in the environment described 
plainly cannot be characterized as `office or other predominately 
nonmanual work.' A dictionary definition of `manual' is, `requiring or 
using physical skill and energy.' * * * Non-manual work, therefore, 
would not call for significant use of physical skill or energy. 
Certainly, the agents' job duties do not fit that definition.'' See 
also, Roney v. United States, 790 F. Supp. 23, 25 (D.D.C. 1992) (Deputy 
U.S. Marshal entitled to overtime pay where position requires `` 
`physical strength and stamina to perform such activities as long 
periods of surveillance, pursuing and restraining suspects, carrying 
heavy equipment' '' and the employee `` `may be subject to physical 
attack, including the use of lethal weapons' '') (citation omitted).
    Federal courts have found high-level police and fire officials to 
be exempt executive or administrative employees only if, in addition to 
satisfying the other pertinent requirements, such as directing the work 
of two or more other full time employees as required for the executive 
exemption, their primary duty is performing managerial tasks such as 
evaluating personnel performance; enforcing and imposing penalties for 
violations of the rules and regulations; making recommendations as to 
hiring, promotion, discipline or termination; coordinating and 
implementing training programs; maintaining company payroll and 
personnel records; handling community complaints, including determining 
whether to refer such complaints to internal affairs for further 
investigation; preparing budgets and controlling expenditures; ensuring 
operational readiness through supervision and inspection of personnel, 
equipment and quarters; deciding how and where to allocate personnel; 
managing the distribution of equipment; maintaining inventory of 
property and supplies; and directing operations at crime, fire or 
accident scenes, including deciding whether additional personnel or 
equipment is needed. See, e.g., West v. Anne Arundel County, Maryland, 
137 F.3d 752 (4th Cir.) (EMT captains and lieutenants), cert. denied, 
525 U.S. 1048 (1998); Smith v. City of Jackson, Mississippi, 954 F.2d 
296 (5th Cir. 1992) (fire chiefs); Masters v. City of Huntington, 800 
F. Supp. 363 (S.D.W. Va. 1992) (fire deputy chiefs and captains); 
Simmons v. City of Fort Worth, Texas, 805 F. Supp. 419 (N.D. Tex. 1992) 
(fire deputy and district chiefs); Keller v. City of Columbus, Indiana, 
778 F. Supp. 1480 (S.D. Ind. 1991) (fire captains and lieutenants). 
Another important fact considered in at least one case is that exempt 
police and fire executives generally are not dispatched to calls, but 
rather have discretion to determine whether and where their assistance 
is needed. See, e.g., Anderson v. City of Cleveland, Tennessee, 90 F. 
Supp.2d 906, 909 (E.D. Tenn. 2000) (police lieutenants ``monitor the 
radio in order to keep tabs on their men and determine where their 
assistance is needed'').\8\
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    \8\ Some police officers, fire fighters, paramedics and EMTs 
treated as exempt executives under the current regulations may be 
entitled to overtime under the final rule because of the additional 
requirement in the standard duties test that an exempt executive 
must have the authority to ``hire or fire'' other employees or make 
recommendations given particular weight on hiring, firing, 
advancement, promotion or other change of status.
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    A new section 541.4 highlights that the FLSA establishes a minimum 
standard that may be exceeded, but cannot be waived or reduced. See 
Brooklyn Savings Bank v. O'Neil, 324 U.S. 697, 706 (1945). Section 18 
of the FLSA states that employers must comply ``with any Federal or 
State law or municipal ordinance establishing a minimum wage higher 
than the minimum * * * or a maximum workweek lower than the maximum 
workweek established under the Act.'' 29 U.S.C. 218. Similarly, 
employers, on their own initiative or in collective bargaining 
negotiations with a labor union, are not precluded by the FLSA from 
providing a wage higher than the statutory minimum, a shorter workweek 
than provided by the FLSA, or a higher overtime premium (double time, 
for example) than provided by the FLSA. See, e.g., Barrentine v. 
Arkansas-Best Freight System, Inc., 450 U.S. 728, 739 (1981) (``In 
contrast to the Labor Management Relations Act, which was designed to 
minimize industrial strife and to improve working conditions by 
encouraging employees to promote their interests collectively, the FLSA 
was designed to give specific minimum protections to individual workers 
and to ensure that each employee covered by the Act would receive `[a] 
fair day's pay for a fair day's work' and would be protected from `the 
evil of overwork as well as underpay.' '') (citation omitted); NLRB v. 
R & H Coal Co., 992 F.2d 46 (4th Cir. 1993) (purpose of FLSA is to 
guarantee minimum level of compensation to workers, regardless of 
outcome of bargaining process; by contrast, purpose of National Labor 
Relations Act is to facilitate collective bargaining process and ensure 
that its outcome is enforced). Thus, the new section 541.4 states: 
``The Fair Labor Standards Act provides minimum standards that may be 
exceeded, but cannot be waived or reduced. Employers must comply, for 
example, with any Federal, State or municipal laws, regulations or 
ordinances establishing a higher minimum wage or lower maximum workweek 
than those established under the Act. Similarly, employers, on their 
own initiative or under a collective bargaining agreement with a labor 
union, are not precluded by the Act from providing a wage higher than 
the statutory minimum, a shorter workweek than the statutory maximum, 
or a higher overtime premium (double time, for example) than provided 
by the Act. While collective bargaining agreements cannot waive or 
reduce the Act's protections, nothing in the Act or the regulations in 
this part relieves employers from their contractual obligations under 
collective bargaining agreements.''

Subpart B, Executive Employees

Section 541.100 General Rule for Executive Employees
    The Department's proposal streamlined the existing regulations by 
adopting a single standard duties test in proposed section 541.100. The 
proposed standard duties test provided that an exempt executive 
employee must: have a primary duty of managing the enterprise in which 
the employee is employed or of a customarily recognized department or 
subdivision thereof; customarily and regularly direct the work of two 
or more other employees; and have the authority to hire or fire other 
employees or have particular weight given to suggestions and 
recommendations as to the hiring, firing, advancement, promotion or any 
other change of status of other

[[Page 22131]]

employees. This standard test, consisting of the current short test 
requirements plus a third objective requirement taken from the long 
test, was more protective than the existing ``short'' duties test 
applied to employees earning $250 or more per week ($13,000 annually).
    The Department has retained this standard test for the final rule 
but has made minor changes to section 541.100(a)(2). Subsection 
541.100(a)(2) has been modified now to read ``whose primary duty is 
management of the enterprise in which the employee is employed or of a 
customarily recognized department or subdivision thereof.'' This change 
was made in response to several commenters, such as the AFL-CIO, who 
felt that the change from ``whose'' primary duty as written in the 
existing regulations to ``a'' primary duty as written in the proposal 
weakened this prong of the test by allowing for more than one primary 
duty and not requiring that the most important duty be management. As 
the Department did not intend any substantive change to the concept 
that an employee can only have one primary duty, the final rule uses 
the introductory phrasing from the existing regulations.
    Several commenters state that the phrases ``change in status'' and 
``particular weight'' contained in both the existing regulations and 
proposed 541.100(a)(4) are vague and should be defined. The Department 
has added a definition of ``particular weight'' based on case law, 
which now appears in section 541.105, as discussed below. Although the 
Department has not added a definition of ``change of status'' to the 
final regulation, the Department intends that this phrase be given the 
same meaning as that given by the Supreme Court in defining the term 
``tangible employment action'' for purposes of Title VII liability. In 
Burlington Industries, Inc. v. Ellerth, 524 U.S. 742, 761-62 (1998), 
the Supreme Court defined ``tangible employment action'' as ``a 
significant change in employment status, such as hiring, firing, 
failing to promote, reassignment with significantly different 
responsibilities, or a decision causing a significant change in 
benefits.'' The Department believes that this discussion provides the 
necessary guidance to reflect the types of employment actions a 
supervisor would have to make recommendations regarding, other than 
hiring, firing or promoting, to meet this prong of the executive test. 
Because the Department intends to follow the Supreme Court's 
disjunctive definition of ``tangible employment action'' in Ellerth, we 
also reject comments from the AFL-CIO and others requesting that 
proposed subsection 541.100(a)(4) be changed to requiring ``hiring or 
firing and advancement, promotion or any other change of status.'' An 
employee who provides guidance on any one of the specified changes in 
employment status may meet the section 541.100(a)(4) requirement.
    The New York State Public Employees Federation suggests that the 
Department should provide a definition of the phrase ``authority to 
hire or fire'' which would require that a significant part of the 
employee's responsibility must involve either hiring or firing. The 
Department believes that these terms are straightforward and should be 
interpreted in accordance with their customary definition, i.e., to 
engage or disengage an individual for employment. Therefore, the 
Department has determined that such a definition need not be 
incorporated into the final regulation.
    Several commenters from the public sector, such as the Metropolitan 
Transportation Authority, the New York State Police, and the Public 
Sector FLSA Coalition, indicate that the requirement in the proposal 
that an employee have the authority to hire or fire will cause many 
exempt employees to lose exempt status since employees in the public 
sector do not have authority to make such decisions. According to the 
Metropolitan Transportation Authority, ``the authority to hire or fire 
(or to have his recommendation to change an employee's employment 
status given strong consideration) only exists at the highest levels in 
public employment'' because of such factors as ``unionization within 
the state and local public sector and statutory constraints, such as 
civil service laws, which have been developed to protect employees in 
the public sector from various factors, including the political 
process, favoritism or for other reasons.'' The Society for Human 
Resource Management (SHRM) similarly states that this requirement would 
be ``particularly troublesome'' for public entities governed by civil 
service rules that dictate the use of a board to make hiring or firing 
decisions. SHRM recommends that this requirement be deleted or that the 
Department define the term ``particular weight'' in the regulations. 
The Johnson County Government also asks for clarification of the term 
``particular weight.'' The Department has evaluated these comments and, 
as noted above, has included a definition of the term ``particular 
weight'' in section 541.105. That definition clarifies that an 
executive does not have to possess full authority to make the ultimate 
decision regarding an employee's status, such as where a higher level 
manager or a personnel board makes the final hiring, promotion or 
termination decision. With this clarification, and with the 
clarification that this rule encompasses other tangible employment 
actions, we have determined that this requirement should not pose a 
hardship since public sector supervisory employees provide 
recommendations as to hiring, firing or other personnel decisions that 
are given ``particular weight'' to the extent allowed under civil 
service laws and thus may meet this requirement for exemption. As the 
National School Board Association comments, although state law may vest 
the school board with the exclusive authority to discharge an employee, 
such an action is precipitated by a department supervisor who evaluates 
the employee's performance and recommends the action, and the 
superintendent's recommendation to the board is based on the department 
supervisor's recommendations. In addition, such employees may also 
qualify for exemption as administrative or professional employees.
    A number of employer groups urge the Department to eliminate 
proposed 541.100(a)(4) entirely. These commenters argue that this 
requirement will cause many employees to lose their exempt executive 
status because the ``hire or fire'' requirement is not contained in the 
current short test and therefore has been effectively dormant for 
practical purposes as a measure of exempt executive status. The 
Department carefully reviewed these comments and believes that this 
requirement may result in some currently exempt employees becoming 
nonexempt; however, the number is too small to estimate quantitatively. 
Subsection 541.100(a)(4) is an important and objective measure of 
executive exempt status which is simple to understand and easy to 
administer. As the 1940 Stein Report stated at page 12: ``[i]t is 
difficult to see how anyone, whether high or low in the hierarchy of 
management, can be considered as employed in a bona fide executive 
capacity unless he is directly concerned either with the hiring or the 
firing and other change of status of the employees under his 
supervision, whether by direct action or by recommendation to those to 
whom the hiring and firing functions are delegated.'' Although this new 
requirement may exclude a few employees from the executive exemption, 
the Department has determined that it will have a minimal impact on 
employers. Most supervisors

[[Page 22132]]

and managers should at least have their suggestions and recommendations 
as to the hiring, firing, advancement, promotion or any other change of 
status of other employees be given particular weight. Further, 
employees who cannot meet the ``hire or fire'' requirement in section 
541.100(a)(4) may nonetheless qualify for exemption as administrative 
or professional employees.
Section 541.101 Business Owner
    Section 541.101 of the proposed rule provided that an employee 
``who owns at least a 20-percent equity interest in the enterprise in 
which the employee is employed, regardless of whether the business is a 
corporate or other type of organization,'' is exempt as an executive 
employee.
    The Department made two modifications to the provision in the final 
rule. First, we inserted the term ``bona fide'' before the phrase ``20-
percent equity interest.'' Second, we added a duties requirement that 
the 20-percent business owner must be ``actively engaged in its 
management.''
    These changes were made to address commenter concerns that this 
section could be subject to abuse. For example, the McInroy & Rigby law 
firm argues that the exemption would be subject to ``great abuse.'' The 
firm speculates that ``[s]mall business employers could grant employees 
an illusory ownership interest and avoid having to even pay the minimum 
wage to such employees. One would anticipate many sham transactions 
conveying illusory ownership interests if the provision is adopted.'' 
Adding the modifier ``bona fide'' before the phrase ``20-percent equity 
interest'' serves to emphasize that the employee's ownership stake in 
the business must be genuine. The AFL-CIO argues that this section 
``cannot stand'' because it would allow the exemption for employees who 
perform no management duties: ``an individual may have a 20 percent 
interest in an independent gas station, or a small food mart. In order 
to break even, the business stays open through the night, and as the 
minority owner that person keeps the operations going during those 
hours. He makes no management decisions, supervises no one, and has no 
authority over personnel, and could make less than the minimum wage. 
Under the Department's proposal, this employee meets the test for the 
bona fide executive.'' The Department agrees that such an employee 
should not qualify for the exemption. Thus, we have added the duties 
requirement that the 20-percent owner be actively engaged in 
management. See 1949 Weiss Report at 42 (section is ``intended to 
recognize the special status of an owner, or partial owner, of an 
enterprise who is actively engaged in its management'') (emphasis 
added).
    The proposed rule contained no salary level or salary basis 
requirements for the business owner. The Department requested comments 
on whether the salary level and/or salary basis tests should be 
included in the provision. 65 FR 15560, 15565 (March 31, 2003). 
Commenters typically favor the exemption and agree with the Department 
that the salary requirements are not necessary, given the likelihood 
that an employee who owns a bona fide 20-percent equity interest in the 
enterprise will share in its profits. Thus, this ownership interest is 
an adequate substitute for the salary requirements. Additionally, 
several commenters, for example, the Workplace Practices Group, note 
that business owners at this level are able to receive compensation in 
other ways and have sufficient control over the business to prevent 
abuse. Thus, in the final rule, as in the proposal, the salary 
requirements do not apply to a 20-percent equity owner. However, 
requiring a ``bona fide'' ownership interest and that the 20-percent 
owner be actively engaged in management will prevent abuses such as 
that described by commenters and in Lavian v. Haghnazari, 884 F. Supp. 
670, 678 (E.D.N.Y. 1995). In Lavian, an uncle invested more than 
$70,000 in his nephew's pharmacy business in exchange for a promise of 
49 percent stock ownership interest in the closely-held corporation. 
After working at the pharmacy for two years without compensation, and 
never receiving share certificates, the uncle sued. The court denied a 
motion to dismiss an FLSA claim, noting that the court must accept as 
true the uncle's allegations that his duties were ``clerical, and 
lacking in actual supervisory and discretionary authority in relation 
to the enterprise.'' Id., at 680. The final rule ensures that employees 
with such limited job duties in a company would not meet the definition 
of ``actively engaged in its management.''
Section 541.102 Management (Proposed Sec.  541.103, ``Management of the 
Enterprise'' and Proposed Sec.  541.102, ``Sole Charge Executive'')
    The proposed regulations at section 541.102 provided a modified 
test for the executive exemption for an employee who is in sole charge 
of an independent establishment or a physically separated branch 
establishment. Proposed section 541.103 defined the term ``management 
of the enterprise.'' For the reasons discussed below, the final rule 
deletes the ``sole charge'' provision and renumbers the remaining 
sections of Subpart B.
    Under proposed section 541.102, an employee in sole charge of an 
independent or branch establishment would qualify for the executive 
exemption if the employee (1) is compensated on a salary basis at a 
rate of not less than $425 per week (or $360 per week, if employed in 
American Samoa by employers other than the Federal Government), 
exclusive of board, lodging or other facilities; (2) is the top and 
only person in charge of the company activities at the location where 
employed; and (3) has authority to make decisions regarding the day-to-
day operations of the establishment and to direct the work of any other 
employees at the establishment or branch. Under the proposal, an 
``independent establishment or physically separated branch 
establishment'' was defined as ``an establishment that has a fixed 
location and is geographically separated from other company property.'' 
The proposal permitted a leased department to qualify as a physically 
separated branch establishment when the lessee operated under a 
separate trade name, with its own separate employees and records, and 
in other respects conducted its business independent of the lessor's 
with regard to such matters as hiring and firing of employees, other 
personnel policies, advertising, purchasing, pricing, credit 
operations, insurance and taxes.
    The final rule deletes this section in its entirety.
    Commenters such as the AFL-CIO, the National Employment Law 
Project, the National Employment Lawyers Association and the Goldstein, 
Demchak, Baller, Borgen & Dardarian law firm object to this provision 
as allowing the exemption for employees who perform mostly nonexempt 
tasks (such as opening and closing up the location, ringing up cash 
register sales, stocking shelves, answering phones, serving customers, 
etc.) and few, if any, management functions. These commenters also 
believe that, when no other employees worked at the establishment, the 
provision would allow an employee to qualify for the exemption without 
having supervisory responsibility for any other employees. The 
International Association of Fire Fighters expresses strong concerns 
that the sole charge provision would exempt a low-ranking officer in 
charge of a fire station during a particular shift, even though a 
higher ranking officer is in charge of the overall management of the 
station. The Department agrees with these commenter concerns. In 
addition,

[[Page 22133]]

the Department recognizes that, although not intended, section 541.102 
as proposed could be construed as allowing the exemption for fairly 
low-level employees with fewer management duties than those required 
for ``highly compensated'' employees in final section 541.601.
    Before deciding to eliminate this section entirely, the Department 
considered comments of groups such as the U.S. Chamber of Commerce, the 
National Retail Federation, the National Association of Convenience 
Stores, the Fisher & Phillips law firm, the National Association of 
Chain Drug Stores, the FLSA Reform Coalition, the Illinois Credit Union 
League, the Food Marketing Institute, the National Grocers Association, 
the International Mass Retail Association, the League of Minnesota 
Cities and others that request changes to expand the ``sole charge'' 
provision. For example, these commenters suggest eliminating the salary 
level and salary basis requirements; including in the exemption all 
employees who are in charge of an establishment at any time during the 
day or week; allowing more than occasional visits by the sole charge 
executive's superior; eliminating the requirement that the independent 
establishment must be geographically separate from other company 
property; and eliminating the requirements that a leased department 
must operate under a separate trade name and be responsible for its own 
insurance, advertising, taxes, purchasing, pricing and credit 
operations. In the existing regulations, the ``sole charge'' rule is an 
exception from the 20-percent restriction on nonexempt work in the 
``long'' duties test. After considering all comments, and for the 
reasons stated above, the Department concludes that this rule is not 
appropriate as a stand-alone test for the executive exemption.
    Proposed section 541.103, defining the term ``management of the 
enterprise'' as used in subsection 541.100(a)(2), has been renumbered 
as final section 541.102. The proposed definition of ``management'' 
included the following list of activities that would generally meet 
this definition: ``interviewing, selecting, and training of employees; 
setting and adjusting their rates of pay and hours of work; directing 
the work of employees; maintaining production or sales records for use 
in supervision or control; appraising employees' productivity and 
efficiency; handling employee complaints and grievances; disciplining 
employees; planning the work; determining the techniques to be used; 
apportioning the work among the employees; determining the type of 
materials, supplies, machinery or tools to be used or merchandise to be 
bought, stocked and sold; controlling the flow and distribution of 
materials or merchandise and supplies; and providing for the safety of 
the employees or the property.''
    In response to comments, the Department has amended section 541.102 
to rename the section as ``management,'' add language to make clear 
that the list is not exhaustive, and add the management functions of 
``planning and controlling the budget'' and ``monitoring or 
implementing legal compliance measures.''
    Comments from the Fisher & Phillips law firm and the National 
Association of Convenience Stores ask the Department to change the 
phrase ``management of the enterprise'' to ``management,'' pointing out 
that the current regulatory section is simply entitled ``management'' 
and the name ``management of the enterprise'' suggests that these 
management duties apply to an entity broader than that required by 
section 541.100. Because section 541.100(a)(2) requires that the 
primary duty of the employee involve management of the ``enterprise or 
of a customarily recognized department or subdivision thereof,'' the 
Department has renamed the section ``management'' to avoid any 
confusion.
    The Department also received a number of comments, including from 
the Fisher & Phillips law firm, the National Retail Federation, the 
National Association of Federal Wage Hour Consultants, the National 
Council of Chain Restaurants and the National Association of Chain Drug 
Stores, asking the Department to make clear that the list was not 
exhaustive and other types of functions could constitute ``management'' 
activities. The Department believes that such a change is consistent 
with the current interpretive guidelines which make clear the factors 
listed are just examples, and the final rule has been revised 
accordingly.
    Several commenters did ask that specific functions be added to the 
list. The Morgan Lewis & Bockius law firm comments that the examples 
used in this section were too focused on supervision and suggested that 
this section should recognize management of processes, projects and 
contracts in addition to employees. The Department agrees that 
management activities are not limited to supervisory functions. 
Accordingly, the final rule adds the management functions of ``planning 
and controlling the budget'' and ``monitoring or implementing legal 
compliance measures.'' Further, the Department notes that management of 
processes, projects or contracts are also appropriately considered 
exempt administrative duties. The National Retail Federation asks that 
the list be ``augmented to confirm that additional duties are exempt 
when performed by retail employees in the course of managing: such as 
walking the floor, interacting with customers to determine satisfaction 
* * *, team building, conducting inspections, evaluating efficiency, 
monitoring or implementing legal compliance measures, training * * *, 
attending management meetings, planning meetings and developing meeting 
materials, planning and conducting marketing activities * * *, and 
investigating or otherwise addressing matters regarding personnel, 
proficiency, productivity, staffing or management issues.'' The 
National Council of Chain Restaurants suggests that ``handling customer 
complaints'' is just as much a management function as handling employee 
complaints and therefore should be added to the list of examples, along 
with ``coaching employees in proper job performance techniques and 
procedures.'' The Department believes that it is not appropriate to 
further augment the list. Although many of these suggestions are 
appropriate examples of ``management'' functions, some appear 
duplicative of functions already included in the section and others, 
such as ``handling customer complaints'' and ``conducting 
inspections,'' are functions that could qualify as either management or 
production type functions depending on the specific facts involved. A 
case-by-case analysis would be more appropriate to determine whether 
such functions meet the definition of ``management.'' Moreover, because 
the Department has added language to make clear that the list is not 
exhaustive, such functions could be considered management functions in 
appropriate circumstances. For example, a customer service 
representative may routinely handle customer complaints but not be 
acting in a management capacity. In contrast, a manager in a restaurant 
may be the person responsible for handling such complaints as the 
individual responsible for the functioning of the operation and 
therefore would be operating in a management capacity.
    Finally, the management function listed as ``appraising their 
productivity and efficiency'' has been augmented with the phrase from 
the current regulations, ``for the purpose of recommending promotions 
or other changes in their status.'' The AFL-CIO argues that the 
elimination of this

[[Page 22134]]

phrase would allow the definition of management to include low-level 
personnel functions. As the Department did not intend to change the 
meaning of this phrase, this language has been added to the final rule.
Section 541.103 Department or Subdivision (Proposed Sec.  541.104)
    Proposed section 541.104 stated that the phrase ``department or 
subdivision'' is ``intended to distinguish between a mere collection of 
employees assigned from time to time to a specific job or series of 
jobs and a unit with permanent status and function.'' The section 
defined ``department or subdivision'' as requiring ``a permanent status 
and a continuing function.'' Proposed subsection 541.104(b) recognized 
that ``when an enterprise has more than one establishment, the employee 
in charge of each establishment may be considered in charge of a 
recognized subdivision of the enterprise.'' Proposed subsection 
541.104(c) stated that ``a recognized department or subdivision need 
not be physically within the employer's establishment and may move from 
place to place'' and provided that the ``mere fact that the employee 
works in more than one location does not invalidate the exemption if 
other factors show that the employee is actually in charge of a 
recognized unit.'' Finally, proposed subsection 541.104(d) stated that 
``continuity of the same subordinate personnel is not essential to the 
existence of a recognized unit with a continuing function. An otherwise 
exempt employee will not lose the exemption merely because the employee 
draws and supervises workers from a pool or supervises a team of 
workers drawn from other recognized units, if other factors are present 
that indicate that the employee is in charge of a recognized unit with 
a continuing function.''
    The only changes to proposed section 541.104 are to renumber the 
section as 541.103 in the final rule, and to delete the sentence in 
subsection (b) that ``[t]he employee also may qualify for the sole 
charge exemption, if all of the requirements of Sec.  541.102 are 
satisfied.'' This sentence is no longer necessary because of the 
deletion of the ``sole charge'' exemption in proposed section 541.102. 
No other changes have been made.
    Several commenters request that the Department expand or clarify 
the phrase ``department or subdivision.'' The Morgan Lewis & Bockius 
law firm asks the Department to expand the phrase ``department or 
subdivision'' to include ``grouping.'' The Public Sector FLSA Coalition 
suggests that the phrase be broadened to account for a functional unit 
which would provide for a more flexible or fluid organizational 
philosophy. The National Council of Chain Restaurants asks for 
confirmation of the Department's historic enforcement position that 
``front of the house'' and ``back of the house'' are recognized 
subdivisions. The U.S. Chamber of Commerce states that the phrase 
``department or subdivision'' is outdated and the applicable units 
should provide for project teams. Finally, the League of Minnesota 
Cities questions whether a subdivision would include supervision of a 
day shift.
    The Department has decided not to expand the term ``department or 
subdivision'' because the phrase has not caused confusion or excessive 
litigation. Expanding the definition would unduly complicate this 
requirement and likely lead to unnecessary litigation. Indeed, the 
courts already have provided clarification of the phrase on a number of 
occasions. For example, several courts have stated that a shift can 
constitute a department or subdivision, which responds to the question 
raised by the League of Minnesota Cities. See West v. Anne Arundel 
County, Maryland, 137 F.3d 752, 763 (4th Cir. 1998); Joiner v. City of 
Macon, 647 F. Supp. 718, 721-22 (M.D. Ga. 1986); Molina v. Sea Land 
Services, Inc., 2 F. Supp. 2d 185, 188 (D.P.R. 1998). The Department 
notes that the issue identified by the National Retail Federation as to 
whether ``front of the house'' in a store constitutes a department or 
subdivision was answered by at least one court in the affirmative. See 
Debartolo v. Butera Finer Foods, 1995 WL 516990, at *4 (N.D. Ill. 
1995). Finally, the Department observes that ``groupings'' or ``teams'' 
may constitute a department or subdivision under the existing 
definition, but a case-by-case analysis is required. See Gorman v. 
Continental Can Co., 1985 WL 5208, at *6 (N.D. Ill. 1985) (department 
or subdivision can ``include small groups of employees working on a 
related project within a larger department, such as a group leader of 
four draftsmen in the gauge section of a much larger department''). The 
Department believes these cases correctly define and delimit the term 
``department or subdivision.''
Section 541.104 Two or More Other Employees (Proposed Sec.  541.105)
    Proposed section 541.105 defined the term ``two or more other 
employees'' to mean ``two full-time employees or their equivalent. One 
full-time and two half-time employees, for example, are equivalent to 
two full-time employees. Four half-time employees are also 
equivalent.'' Proposed section 541.105(b) stated that the ``supervision 
can be distributed among two, three or more employees, but each such 
employee must customarily and regularly direct the work of two or more 
other full-time employees or the equivalent. Thus, for example, a 
department with five full-time nonexempt workers may have up to two 
exempt supervisors if each such supervisor customarily and regularly 
directs the work of two of those workers.'' However, under proposed 
subsections (c) and (d), an ``employee who merely assists the manager 
of a particular department and supervises two or more employees only in 
the actual manager's absence does not meet this requirement,'' and 
``[h]ours worked by an employee cannot be credited more than once for 
different executives.'' Thus, ``a shared responsibility for the 
supervision of the same two employees in the same department does not 
satisfy this requirement.''
    Except for renumbering the section as 541.104, no other changes 
were made.
    In its proposal, the Department invited comments on whether the 
supervision of ``two or more employees'' required for exemption should 
be modified to include ``the customary or regular leadership, alone or 
in combination with others, of two or more other employees.'' See 61 FR 
15565 (March 31, 2003). In response to this request, the Department 
received a large number of comments both in support of and against the 
modification. Commenters such as the U.S. Chamber of Commerce, the 
National Association of Manufacturers, the League of Minnesota Cities, 
the Financial Services Roundtable, the National Automobile Dealers 
Association, the State of Oklahoma, the State of Kansas Department of 
Administration Division of Personnel Services, the Tennessee Valley 
Authority, the Public Sector FLSA Coalition, and the FLSA Reform 
Coalition support the modified language as more applicable to the 
realities of the modern workforce. In contrast, other commenters 
believe this language would compromise the executive exemption or 
create confusion. For example, the National Employment Lawyers 
Association ``disputes that there is any need for modification changing 
the long-established requirement that an exempt executive must 
supervise two or more employees'' because those ``who supervise fewer 
than two employees are, as [a] practical matter, clearly not performing 
exempt activity at a level that could conceivably justify their 
characterization as bona

[[Page 22135]]

fide executives.'' The Contract Services Association of America states 
that the ``word `leadership' has too many connotations to be practical 
in the work environment.''
    After full consideration of these comments, the Department has 
decided to retain the existing and proposed language that the employee 
direct the work of ``two or more other employees'' to qualify as an 
executive under the final rule. The Department agrees with the comments 
opposing this change, and has rejected the ``leadership'' modification 
because the present requirement provides a well established, easily 
applied, bright-line test for exemption, and the ambiguity attached to 
the term ``lead,'' the Department believes, could spark needless 
litigation. Also, an employee whose primary duty is management and who 
customarily and regularly leads other employees, alone or with another, 
may qualify for exemption under the administrative exemption.
    The Department also received a number of other comments and 
requests for clarification on this section. The FLSA Reform Coalition 
asks that the Department clarify what the term ``full-time'' means, and 
requests that the clarification include a statement that the term 
should be defined by the employer's practices. The Department does not 
believe additional clarification is necessary, and stands by its 
current interpretation that an exempt supervisor generally must direct 
a total of 80 employee-hours of work each week. As the Wage and Hour 
Division's Field Operations Handbook (FOH) states, however, 
circumstances might justify lower standards. For example, firms in some 
industries have standard workweeks of 37\1/2\ hours or 35 hours for 
their full-time employees. In such cases, supervision of employees 
working a total of 70 or 75 hours in a workweek will constitute the 
equivalent of two full-time employees. FOH 22c00.
    Several commenters, such as the Financial Services Roundtable and 
the Mortgage Bankers Association of America, urge the Department to 
clarify the phrase ``in the manager's actual absence'' in subsection 
(c). The Department continues to believe that the phrase provides 
useful guidance in defining the exempt executive, and intends that this 
phrase be interpreted to mean that an employee who simply supervises on 
a short-term basis, such as during a lunch break or while a manager is 
on vacation, is not meeting the requirement of customarily and 
regularly supervising two or more employees.
    Several commenters ask that the requirement of directing two or 
more employees be eliminated. Other commenters state that the 
requirement should be lowered to directing only one other employee. Yet 
others argue that the number of employees supervised should be raised. 
For example, the National Association of Federal Wage Hour Consultants 
states that the requirement should be five employees while the Labor 
Board, Inc. suggests the number should be four employees. The 
Department continues to believe that the current requirement of 
directing two or more employees is an appropriate measure of exempt 
status and to raise the threshold would disproportionately harm small 
businesses that may not have a large number of employees. See 1940 
Weiss Report at 45-46.
    Several commenters question whether the requirement that an 
employee direct two or more other ``employees'' includes employees of a 
contractor. Several commenters also urge the Department to expand this 
requirement to two or more ``individuals'' so as to count the 
supervision of volunteers, contractors, and other non-employees. The 
Department has evaluated these comments and determined that no changes 
should be made. The FLSA itself defines the term ``employee'' as an 
``individual employed by an employer,'' and this definition has been 
subject to extensive judicial interpretation. See 29 U.S.C. Sec.  
203(e)(1). The Department also observes, however, that the 
administrative exemption may apply to the employee who supervises 
contractors, volunteers or other non-employees if the other 
requirements for that exemption are met.
Section 541.105 Particular Weight
    Section 541.105 of the final rule contains a new definition of the 
phrase ``particular weight'' as follows:

To determine whether an employee's suggestions and recommendations 
are given ``particular weight,'' factors to be considered include, 
but are not limited to, whether it is part of the employee's job 
duties to make such suggestions and recommendations; the frequency 
with which such suggestions and recommendations are made or 
requested; and the frequency with which the employee's suggestions 
and recommendations are relied upon. Generally, an executive's 
suggestions and recommendations must pertain to employees whom the 
executive customarily and regularly directs. It does not include an 
occasional suggestion with regard to the change in status of a co-
worker. An employee's suggestions and recommendations may still be 
deemed to have ``particular weight'' even if a higher level 
manager's recommendation has more importance and even if the 
employee does not have authority to make the ultimate decision as to 
the employee's change in status.

    This definition has been added in response to comments received 
from groups such as the Society for Human Resource Management, Leggett 
& Platt, the Food Marketing Institute, the League of Minnesota Cities 
and the American Council of Engineering Companies, who indicate that 
this phrase is extremely vague and needs clarification. As one of the 
Department's goals is to provide clarity to the terms contained in the 
regulations, we have defined ``particular weight'' by incorporating 
factors relied on by the courts to define this term under the current 
regulations. See, e.g., Baldwin v. Trailer Inns, Inc., 266 F.3d 1104, 
1116 (9th Cir. 2001); Molina v. Sea Land Services, Inc., 2 F. Supp. 2d 
185, 188 (D.P.R. 1998); Wendt v. New York Life Insurance Co., 1998 WL 
118168, at *6 (S.D.N.Y. 1998); Passer v. American Chemical Society, 749 
F. Supp. 277, 280 (D.D.C. 1990); Wright v. Zenner & Ritter, Inc., 1986 
WL 6152, at *2 (W.D.N.Y. 1986); Kuhlmann v. American College of 
Cardiology, 1974 WL 1344, at *1 (D.D.C. 1974); Marchant v. Sands Taylor 
& Woods Co., 75 F. Supp. 783, 786 (D. Mass. 1948); Anderson v. Federal 
Cartridge Corp., 62 F. Supp. 775, 781 (D. Minn. 1945).
    As illustrated by these cases, factors such as the frequency of 
making recommendations, frequency of an employer's relying on an 
employee's recommendations, as well as evidence that the employee's job 
duties explicitly include the responsibility to make such 
recommendations, are important considerations in determining whether 
``particular weight'' is given to the employee's recommendations. Thus, 
for example, an employee who provides few recommendations which are 
never followed would not meet the ``hire or fire'' requirement in final 
section 541.100(a)(4). Evidence that an employee's recommendation are 
given ``particular weight'' could include witness testimony that 
recommendations were made and considered; the exempt employee's job 
description listing responsibilities in this area; the exempt 
employee's performance reviews documenting the employee's activities in 
this area; and other documents regarding promotions, demotions or other 
change of status that reveal the employee's role in this area.
Section 541.106 Concurrent Duties (Proposed Sec. Sec.  541.106 and 
541.107)
    Proposed section 541.106 entitled ``Working supervisors'' stated: 
``Employees, sometimes called `working foremen' or `working 
supervisors,' who

[[Page 22136]]

have some supervisory functions, such as directing the work of other 
employees, but also perform work unrelated or only remotely related to 
the supervisory activities are not exempt executives if, instead of 
having management as their primary duty as required in Sec.  541.100, 
their primary duty consists of either the same kind of work as that 
performed by their subordinates; work that, although not performed by 
their own subordinates, consists of ordinary production or sales work; 
or routine, recurrent or repetitive tasks.'' Proposed section 541.107 
entitled ``Supervisors in retail establishments'' stated: ``Supervisors 
in retail establishments often perform work such as serving customers, 
cooking food, stocking shelves, cleaning the establishment or other 
nonexempt work. Performance of such nonexempt work by a supervisor in a 
retail establishment does not disqualify the employee from the 
exemption if the requirements of Sec.  541.100 are otherwise met. Thus, 
an assistant manager whose primary duty includes such activities as 
scheduling employees, assigning work, overseeing product quality, 
ordering merchandise, managing inventory, handling customer complaints, 
authorizing payment of bills or performing other management functions 
may be an exempt executive even though the assistant manager spends the 
majority of the time on nonexempt work.''
    As the Department explained in the preamble to the proposed rule, 
both proposed section 541.106 and proposed section 541.107 were meant 
to address the difficult issue of classifying employees who have both 
exempt supervisory duties and nonexempt duties. The Department invited 
comments on whether these sections have appropriately distinguished 
exempt and nonexempt employees. 61 FR 15565.
    Based on the comments received, the Department has decided to 
combine these two proposed sections into one section entitled 
``concurrent duties.'' The Department believes that a unified section 
on this topic will better illustrate when an employee satisfies the 
requirements of the executive exemption. The final section 541.106 
incorporates the general principles and examples from both proposed 
section 541.106 and proposed section 541.107. The final section 
541.106(a) thus provides: ``Concurrent performance of exempt and 
nonexempt work does not disqualify an employee from the executive 
exemption if the requirements of Sec.  541.100 are otherwise met.'' To 
further distinguish exempt executives from nonexempt workers, the final 
subsection 541.106(a) also states: ``Generally, exempt executives make 
the decision regarding when to perform nonexempt duties and remain 
responsible for the success or failure of business operations under 
their management while performing the nonexempt work. In contrast, the 
nonexempt employee generally is directed by a supervisor to perform the 
exempt work or performs the exempt work for defined time periods. An 
employee whose primary duty is ordinary production work or routine, 
recurrent or repetitive tasks cannot qualify for exemption as an 
executive.'' Final subsections 541.106(b) and (c) contain examples to 
further illustrate these general principles.
    The final section provides, as in the current regulations, that an 
employee with a primary duty of ordinary production work is not exempt 
even if the employee also has some supervisory responsibilities. As 
explained in the preamble to the proposed rule, this situation often 
occurs in a factory setting where an employee who works on a production 
line also has some responsibility to direct the work of other 
production line workers. Another example is an employee whose primary 
duty is to work as an electrician, but who also directs the work of 
other employees on the job site, orders parts and materials for the 
job, and handles requests from the prime contractor. Nonexempt 
employees do not become exempt executives simply because they direct 
the work of other employees upon occasion or provide input on 
performance issues from time to time because such employees typically 
do not meet the other requirements of section 541.100, such as having a 
primary duty of management.
    The Department decided to combine proposed sections 541.106 and 
541.107 into one section on ``concurrent duties'' in response to a 
number of comments indicating that the proposed separate sections were 
duplicative and not helpful in understanding the distinction between 
exempt and nonexempt employees. The National Council of Chain 
Restaurants argues that proposed section 541.106 should be eliminated 
because of confusion created by having two separate sections. The 
Fisher & Phillips law firm and the National Association of Convenience 
Stores argue that proposed section 541.106 should be eliminated as no 
longer necessary because that section has always related to the 
percentage limitations on nonexempt work from the existing long test. 
Similar comments were received from the U.S. Chamber of Commerce. The 
Workplace Practices Group argues for the elimination of proposed 
section 541.106 and suggests that proposed section 541.107 apply to all 
supervisors, as both working supervisors and retail supervisors have 
the same or very similar responsibilities such as scheduling employees, 
assigning work and overseeing product quality. The County of Culpeper, 
Virginia, argues that proposed section 541.106 ignored the realities of 
small governments where department heads have to perform both exempt 
management duties and nonexempt work.
    Some commenters, including the New Jersey Business & Industry 
Association, the National Retail Federation and the HR Policy 
Association, commend the Department for recognizing the special 
circumstances of retail supervisors. In contrast, the Society for Human 
Resource Management, Senator Orrin G. Hatch and others argue that a 
distinction between retail and non-retail supervisors does not exist. 
The American Hotel & Lodging Association, the International Franchise 
Association, the FLSA Reform Coalition, the National Association of 
Chain Drug Stores and the International Mass Retail Association argue 
that proposed section 541.107 should be modified to cover both retail 
and service establishments.
    Other commenters state that the description of ``working 
supervisors'' was too broad. Such commenters argue that fast-food 
managers who spend the majority of their time on nonexempt work should 
not be exempt. The National Employment Law Project states that the 
proposed language would make it possible to exempt all line employees, 
provided they met the requirements of proposed section 541.100. The 
McInroy & Rigby law firm argues that proposed section 541.107 should be 
eliminated since there was no policy justification for assistant 
managers in fast-food establishments to be exempt from FLSA 
requirements. The Communications Workers of America similarly opposes 
any diminution of the existing regulatory standards for exempt 
executives.
    The Department believes that the proposed and final regulations are 
consistent with current case law which makes clear that the performance 
of both exempt and nonexempt duties concurrently or simultaneously does 
not preclude an employee from qualifying for the executive exemption. 
Numerous courts have determined that an employee can have a primary 
duty of management while concurrently performing nonexempt duties. See, 
e.g., Jones v. Virginia Oil Co., 2003 WL 21699882, at *4 (4th Cir. 
2003) (assistant manager who spent 75 to 80 percent of

[[Page 22137]]

her time performing basic line-worker tasks held exempt because she 
``could simultaneously perform many of her management tasks''); Murray 
v. Stuckey's, Inc., 939 F.2d 614, 617-20 (8th Cir. 1991) (store 
managers who spend 65 to 90 percent of their time on ``routine non-
management jobs such as pumping gas, mowing the grass, waiting on 
customers and stocking shelves'' were exempt executives); Donovan v. 
Burger King Corp., 672 F.2d 221, 226 (1st Cir. 1982) (``an employee can 
manage while performing other work,'' and ``this other work does not 
negate the conclusion that his primary duty is management''); Horne v. 
Crown Central Petroleum, Inc., 775 F. Supp. 189, 190 (D.S.C. 1991) 
(convenience store manager held exempt even though she performed 
management duties ``simultaneously with assisting the store clerks in 
waiting on customers''). Moreover, courts have noted that exempt 
executives generally remain responsible for the success or failure of 
business operations under their management while performing the 
nonexempt work. See Jones v. Virginia Oil Co., 2003 WL 21699882, at *4 
(``Jones'' managerial functions were critical to the success' of the 
business); Donovan v. Burger King Corp., 675 F.2d 516, 521 (2nd Cir. 
1982) (the employees' managerial responsibilities were ``most important 
or critical to the success of the restaurant''); Horne v. Crown Central 
Petroleum, Inc., 775 F. Supp. at 191 (nonexempt tasks were ``not nearly 
as crucial to the store's success as were the management functions'').
    The Department continues to believe that this case law accurately 
reflects the appropriate test of exempt executive status and is a 
practical approach that can be realistically applied in the modern 
workforce, particularly in restaurant and retail settings. Since all of 
the prongs of the executive test need to be met to classify an employee 
as an exempt executive, the Department believes the final rule has 
sufficient safeguards to protect nonexempt workers.
    The Department also received more specific comments on the language 
contained in proposed sections 541.106 and 541.107. The National Retail 
Federation argues that the time spent ``multi-tasking'' should also be 
considered exempt work. A comment from the Food Marketing Institute 
argues that it is critically important that proposed section 541.107 
state unequivocally that managers shall not be subject to arbitrary 
percentage time limits on nonexempt work. The Department believes that 
sufficient language already is included in this section to make clear 
that, as stated in current case law, an otherwise exempt supervisory 
employee does not lose the exemption simply because the employee is 
simultaneously performing exempt and nonexempt work. The Department 
also believes that the final section 541.700, defining ``primary 
duty,'' states clearly that there is no strict percentage limitation on 
the performance of nonexempt work.
    One commenter suggests that the Department include in the final 
rule language from the current interpretive guidelines at 541.119(c) 
stating that the short test for highly compensated executives cannot be 
applied to the trades. The final rule, however, includes even stronger 
language in new section 541.3, which states that none of the section 
13(a)(1) exemptions apply to the skilled trades, no matter how highly 
compensated they are. Thus, the Department believes that no further 
clarification is needed.
    The State of Kansas Department of Administration, Division of 
Personnel Services, argues that proposed section 541.107 conflicts with 
language under the administrative exemption regarding project leaders. 
The Department does not believe that there is any conflict because the 
executive and administrative exemptions are independently defined and 
applied, and whether one or both of the exemptions apply will depend on 
the specific job duties the employee performs.
    The Information Technology Industry Council, the U.S. Chamber of 
Commerce and the Morgan Lewis & Bockius law firm argue that language 
regarding performance of production or sales work should be eliminated 
from proposed section 541.106, as it continues to emphasize the 
production versus staff dichotomy. This language has been removed from 
the final rule. The Department has combined and streamlined proposed 
sections 541.106 and 541.107, and we do not believe that this phrase 
was instructive in clarifying the concept of concurrent duties.

Subpart C, Administrative Employees

Section 541.200 General Rule for Administrative Employees
    As in the executive exemption, the proposed regulations streamlined 
the current regulations by adopting a single standard duties test in 
proposed section 541.200. The proposed standard duties test provided 
that an exempt administrative employee must have ``a primary duty of 
the performance of office or non-manual work related to the management 
or general business operations of the employer or the employer's 
customers,'' and hold ``a position of responsibility with the 
employer.''
    The final rule modifies both of the proposed requirements for the 
administrative exemption. First, the final rule provides that an exempt 
administrative employee is one ``whose primary duty is the performance 
of office or non-manual work directly related to the management or 
general business operations of the employer or the employer's 
customers.'' Second, the final rule deletes the proposed ``position of 
responsibility'' requirement and instead reinserts the current 
requirement that an exempt administrative employee's primary duty 
include ``the exercise of discretion and independent judgment with 
respect to matters of significance.''
    In addition to the ``discretion and independent judgment'' 
requirement discussed more fully below, the final rule makes two 
changes to the proposed primary duty test. First, as under the 
executive exemption, the AFL-CIO and other commenters state that 
changing from ``whose'' primary duty as written in the current 
regulations to the proposed language of ``a'' primary duty was a major 
weakening of the test because it allows for more than one primary duty. 
As the Department did not intend any substantive change, the final rule 
uses the existing language ``whose primary duty.'' Second, the final 
rule reinserts language from the current regulation that the work must 
be ``directly'' related to management or general business operations. 
Commenters such as the National Treasury Employees Union, the National 
Employment Lawyers Association, the American Federation of Television 
and Radio Artists, the Stoll, Stoll, Berne, Lokting & Shlachter law 
firm, and the Rudy, Exelrod & Zieff law firm oppose the deletion of the 
word ``directly,'' stating that an employee whose duties relate only 
indirectly or tangentially to administrative functions should not 
qualify for exemption. As the Department did not intend any substantive 
change by deletion of the word ``directly,'' we have reinserted this 
term to ensure that the administrative primary duty test is not 
interpreted as allowing the exemption to apply to employees whose 
primary duty is only remotely or tangentially related to exempt work. 
The same change has been made in other sections where the term is used.
    The final rule, however, retains the proposed primary duty language 
that the exempt employee's work must be related to ``management or 
general business operations,'' rather than the

[[Page 22138]]

``management policies'' language of the existing regulations. Although 
some commenters object to this change, other commenters, such as the 
FLSA Reform Coalition, the HR Policy Association, and the Fisher & 
Phillips law firm, approve of the proposed deletion of the word 
``policies'' as recognizing that while management policies are one 
component of management, there are many other administrative functions 
that support managing a business. The Department agrees and has 
retained the proposed language in the final regulation. As explained in 
the 1949 Weiss Report, the administrative operations of the business 
include the work of employees ``servicing'' the business, such as, for 
example, ``advising the management, planning, negotiating, representing 
the company, purchasing, promoting sales, and business research and 
control.'' 1949 Weiss Report at 63. Much of this work, but not all, 
will relate directly to management policies. As the current regulations 
state at section 541.205(c), exempt administrative work includes not 
only those who participate in the formulation of management policies or 
in the operation of the business as a whole, but it ``also includes a 
wide variety of persons who either carry out major assignments in 
conducting the operations of the business, or whose work affects 
business operations to a substantial degree, even though their 
assignments are tasks related to the operation of a particular segment 
of the business.'' Therefore, the Department considers the primary duty 
test for the administrative exemption to be as protective as the 
existing regulations.
    In addition to the primary duty test, the proposed general rule for 
the administrative exemption also required that an employee hold a 
``position of responsibility.'' The proposal at section 541.202 further 
defined ``position of responsibility'' as performing ``work of 
substantial importance'' or ``work requiring a high level of skill or 
training.'' The proposal also eliminated the current requirement that 
an exempt administrative employee perform work ``requiring the exercise 
of discretion and independent judgment.'' The Department specifically 
invited comments on these changes, including whether the ``discretion 
and independent judgment'' requirement should be deleted entirely; 
retained as a third alternative for meeting the ``position of 
responsibility'' requirement; or retained in place of the ``position of 
responsibility requirement,'' but modified to provide better guidance 
on distinguishing exempt administrative employees.
    The Department received numerous, widely divergent comments on 
these proposed changes. Commenters such as the FLSA Reform Coalition, 
the U.S. Chamber of Commerce, the HR Policy Association, the National 
Retail Federation, the Morgan, Lewis & Bockius law firm, and the 
National Association of Federal Wage Hour Consultants generally approve 
of the ``position of responsibility'' requirement, preferring it to the 
mandatory ``discretion and independent judgment'' requirement of the 
existing regulations. They support, in particular, the proposal that 
employees with a ``high level of skill or training'' can qualify as 
exempt administrative employees, even if they use reference manuals to 
provide guidance in addressing difficult or novel circumstances. For 
example, the Morgan, Lewis & Bockius law firm states that, ``in today's 
regulatory climate, few employers can leave highly complex issues 
totally to the discretion of even high level employees.'' The HR Policy 
Association states that this ``new requirement that an employee have a 
`high level of skill or training' distinguishes employees who are 
merely looking up information from those who use the information in an 
analytical way.''
    However, even commenters who generally support the ``position of 
responsibility'' structure also express concerns about the vagueness 
and subjectivity of the new terms. For example, the National 
Association of Manufacturers (NAM) states that it ``is not sure what 
`position of responsibility' means and fears that the Department is 
substituting one vague term for another.'' NAM also notes that, ``using 
the term `skill' in the administrative employee definition can be 
problematic. The term is often associated with nonexempt trade 
occupations--i.e., people who perform work and are not exempt from the 
FLSA's wage and overtime rules.'' NAM states that ``care should be used 
when introducing into the white-collar exemption definitions a term 
that has been historically associated with nonexempt workers.'' 
Similarly, the American Bakers Association states that the position of 
responsibility standard ``is somewhat vague and subjective'' and that 
it ``appears to invite another generation of court litigation to 
clarify the meaning of its key terms.'' The FLSA Reform Coalition 
expresses concern that the standard would be applied to the 
disadvantage of large companies, stating that ``small fish in big 
ponds'' might not be found exempt even if they had the same degree of 
responsibility as employees working for small companies. Other 
commenters object to the implication that some employees do not have 
responsibility at work. For example, the Society for Human Resource 
Management states that, ``each and every position in an organization is 
one of responsibility * * *.'' Similarly, the Workplace Practices Group 
recommends eliminating the term ``position of responsibility'' because 
a ``basic tenet of modern management philosophy is empowering employees 
to see their position in an organization, whatever it might be, as one 
of responsibility. This is true whether the position held is 
receptionist or customer service agent.'' Finally, the American 
Corporate Counsel Association, while approving of the abandonment of 
the ``discretion and independent judgment'' requirement, suggests that 
the ``position of responsibility'' test has ``the potential to result 
in significant uncertainty and continued litigation. Employers often 
seek to foster an atmosphere and develop workplace programs emphasizing 
that the work of every employee involves a degree of responsibility and 
contributes something substantially important to the success of the 
enterprise. Thus, it appears to us that both `white collar' and `blue 
collar' positions may be positions of responsibility for which work of 
substantial importance is being performed.''
    Other commenters strongly oppose the new ``position of 
responsibility'' requirement as inappropriately weakening the 
requirements for exemption. For example, the AFL-CIO states that 
neither ``work of substantial importance'' nor ``work requiring a high 
level of skill or training'' was an adequate substitute for the 
``discretion and independent judgment'' test. Similarly, the Rudy, 
Exelrod & Zieff law firm states that the FLSA does not exempt highly 
skilled or trained employees, and such a regulatory change would allow 
employers to misclassify employees with duties related to the 
production of the company's goods and services. In addition, the firm 
argues that such a provision effectively and unreasonably broadens the 
professional exemption, by eliminating the advanced degree requirement. 
Professor David Walsh similarly comments that the proposed language is 
not more easily applied than the existing standard and ``seems to 
conflate the administrative and professional exemptions.'' Commenters 
such as the American Federation of

[[Page 22139]]

State, County and Municipal Employees, the Communications Workers of 
America, the National Treasury Employees Union, the American Federation 
of Television and Radio Artists, the National Employment Lawyers 
Association, and the Goldstein, Demchak, Baller, Borgen & Dardarian law 
firm express similar views, stating that the ``position of 
responsibility'' test is not an equivalent substitute for the 
``discretion and independent judgment requirement.'' These commenters 
also state that all workers possess skills and training in one form or 
another.
    Many commenters view the ``discretion and independent judgment'' 
standard of the existing regulations as vague, ambiguous and 
unworkable. Commenters such as the FLSA Reform Coalition, the Society 
for Human Resource Management, the HR Policy Association, the Fisher & 
Phillips law firm, the National Retail Federation, the National 
Association of Chain Drug Stores, and the National Council of Chain 
Restaurants state that the ``discretion and independent judgment'' 
requirement is the cause of confusion and unnecessary litigation. Such 
commenters commend the Department for eliminating ``discretion and 
independent judgment'' as a required element of the test for exemption. 
The Fisher & Phillips law firm, for example, states that this standard 
``has been an unending source of confusion, ambiguity, and dispute.''
    Nevertheless, many of these same commenters support inclusion of 
the ``discretion and independent judgment'' standard as a third 
alternative to satisfy the ``position of responsibility'' test. For 
example, the National Association of Manufacturers suggests that the 
Department retain ``discretion and independent judgment'' as an 
optional independent alternative to the ``position of responsibility'' 
requirement. These commenters state that decades of court decisions and 
opinion letters provide guidance on its interpretation. Retaining the 
standard as an alternative would thus provide a level of continuity 
between the existing regulations and the new regulations, and avoid re-
litigation of jobs already held to be exempt under the current 
``discretion and independent judgment'' test.
    Other commenters such as the AFL-CIO, the American Federation of 
State, County and Municipal Employees, the Communications Workers of 
American, the National Treasury Employees Union, the New York Public 
Employees Federation, the National Employment Lawyers Association, the 
Rudy, Exelrod & Zieff law firm and Women Employed oppose the deletion 
of the ``discretion and independent judgment'' standard as a required 
element for exemption. Such commenters view deletion of this test as a 
substantial expansion of the exemption. They cite the 1940 Stein Report 
and 1949 Weiss Report as stating that the ``discretion and independent 
judgment'' requirement was necessary to minimize the opportunity for 
employer abuse in categorizing the diverse group of employees who might 
be labeled as administrative. Moreover, such commenters generally view 
the requirement as considerably more precise than the proposed 
``position of responsibility'' replacement, and note that the 
``discretion and independent judgment'' concept is also used under the 
National Labor Relations Act. Such commenters often state that the need 
to address developing case law prohibiting the use of manuals by exempt 
employees does not necessitate the entire abandonment of the 
``discretion and independent judgment'' standard. Finally, these 
commenters also state that decades of jurisprudence would be lost if 
the ``discretion and independent judgment'' requirement is eliminated. 
Accordingly, the commenters recommend retention of the ``discretion and 
independent judgment'' standard as an independent requirement for 
exemption.
    The commenters' widely divergent views demonstrate the difficult 
task of clearly defining and delimiting the administrative exemption. 
The GAO Report documented the difficulty of applying the ``discretion 
and independent judgment'' standard consistently, causing uncertainty 
for good faith employers attempting to classify employees correctly. 
Even the 1949 Weiss Report noted that this standard ``is not as precise 
and objective as some other terms in the regulations.'' 1949 Weiss 
Report at 65. Numerous commenters concur with our observation in the 
proposal that this requirement has generated significant confusion and 
litigation. However, most commenters generally view both the ``position 
of responsibility'' and the ``high level of skill or training'' 
standards as similarly vague, ambiguous and subjective. Most of the 
commenters state that the ``discretion and independent judgment'' 
standard should be retained in some form, although there was sharp 
disagreement on whether the standard should be a mandatory requirement. 
Despite sharp criticism of both the current ``discretion and 
independent judgment'' requirement and the proposed ``position of 
responsibility'' standard, the comments contain very few suggestions 
for clear and objective alternative language.
    After careful consideration of the public comments submitted, the 
Department agrees that the ``position of responsibility'' standard does 
little to bring clarity and certainty to the administrative exemption. 
In the proposal, the Department attempted to articulate a clear, 
simple, common sense test for exemption, but most commenters believe 
that we were not fully successful. Further, many commenters believe 
that the term ``position of responsibility'' greatly expanded the scope 
of the exemption--a result which the Department did not intend. In 
addition, the Department agrees with the concerns of the National 
Association of Manufacturers and other commenters that the ``high level 
of skill or training'' standard is problematic because it is too 
closely associated with nonexempt ``blue collar'' skilled trade 
occupations.
    Accordingly, the final rule deletes the proposed ``position of 
responsibility'' requirement and its definition at proposed section 
541.202 as ``work of substantial importance'' or ``work requiring a 
high level of skill or training.'' Instead, as the second requirement 
for the administrative exemption, the final rule requires that exempt 
administrative employees exercise ``discretion and independent judgment 
with respect to matters of significance.'' Thus, consistent with the 
current short test, the final rule contains two independent, yet 
related, requirements for the administrative exemption. First, the 
employee must have a primary duty of performing office or non-manual 
work ``directly related to management or general business operations.'' 
This first requirement refers to the type of work performed by the 
employee, and is further defined at section 541.201. Second, the 
employee's primary duty must include ``the exercise of discretion and 
independent judgment with respect to matters of significance.'' As 
discussed below, the exercise of discretion and independent judgment 
``involves the comparison and the evaluation of possible courses of 
conduct and acting or making a decision after the various possibilities 
have been considered.'' The term ``matters of significance'' refers to 
the level of importance or consequence of the work performed. These 
terms are further defined at final section 541.202. See, e.g., Bothell 
v. Phase Metrics, Inc., 299 F.3d 1120, 1125-26 (9th Cir. 2002) (looking 
to both the ``types of activities'' and the importance of the work).

[[Page 22140]]

Section 541.201 Directly Related to Management or General Business 
Operations
    The proposed section 541.201 defined the phrase ``related to the 
management or general business operations'' as referring ``to the type 
of work performed by the employee'' and requiring that the exempt 
administrative employee ``perform work related to assisting with the 
running or servicing of the business, as distinguished, for example, 
from working on a manufacturing production line or selling a product.'' 
The proposal also provided examples of the types of work that generally 
relate to management or general business operations, including work in 
areas such as tax, finance, accounting, auditing, quality control, 
advertising, marketing, research, safety and health, personnel 
management, human resources, labor relations, and others. Finally, the 
proposal stated that an employee also may qualify for the 
administrative exemption if the ``employee performs work related to the 
management or general business operations of the employer's 
customers,'' such as employees acting as advisers and consultants to 
their employer's clients or customers.
    The Department made two changes in the final subsection 541.201(a). 
First, for the reasons discussed above, the final rule reinserts the 
word ``directly'' throughout this section. Some commenters argue that 
the deletion of the word ``directly'' from the existing regulations 
would allow the exemption for an employee whose duties relate only 
indirectly or tangentially to administrative functions. The Department 
did not intend any substantive change by deletion of the word 
``directly'' in the proposal, and thus has reinserted this term to 
ensure that the administrative duties test is not interpreted as 
allowing the exemption to apply to employees whose primary duty is only 
remotely or tangentially related to exempt work. Second, the words 
``retail or service establishment'' have been reinserted from the 
current rule in the phrase: ``as distinguished, for example, from 
working on a manufacturing production line or selling a product in a 
retail or service establishment.'' This addition returns the regulatory 
text more closely to the current section 541.205(a): ``as distinguished 
from `production' or, in a retail or service establishment, `sales' 
work.'' Commenters state that deletion of the words ``retail or service 
establishment'' could be interpreted as denying the administrative 
exemption to any employee engaged in any sales, advertising, marketing 
or promotional activities. Because no such categorical change was 
intended, or is supported by current case law, the Department has 
restored the language from the current regulations. See, e.g., Reich v. 
John Alden Life Insurance Co., 126 F.3d 1, 9-10 (1st Cir. 1997) 
(promoting sales in the insurance industry is exempt administrative 
work). The Department also notes that this phrase begins with the words 
``for example.'' This final phrase in section 541.201(a) provides non-
exclusive examples. Thus, the concern of commenters such as the Rudy, 
Exelrod & Zieff law firm that the reference to ``working on a 
manufacturing production line'' suggests that ``working on what might 
be termed a `white collar production line' is different from working on 
a manufacturing production line for purposes of the exemption'' is 
unfounded.
    The primary focus of most comments on subsection 541.201(a) dealt 
with the so-called `production versus staff' dichotomy. The preamble to 
the proposal stated that the Department intended ``to reduce the 
emphasis on the so-called ``production versus staff'' dichotomy in 
distinguishing between exempt and nonexempt workers, while retaining 
the concept that an exempt administrative employee must be engaged in 
work related to the management or general business operations of the 
employer or of the employer's customers.''
    Many commenters, including the Society for Human Resource 
Management (SHRM), the FLSA Reform Coalition, the National Association 
of Manufacturers (NAM), the U.S. Chamber of Commerce (Chamber), the HR 
Policy Association, the Morgan, Lewis & Bockius law firm and the Fisher 
& Phillips law firm, strongly support the proposal's intended 
diminution of the production versus staff dichotomy, which they believe 
has little value in today's service-oriented economy. For example, the 
Chamber states that the dichotomy ``does not fit in today's workplace'' 
because the ``decline in manufacturing and the rise in the service and 
information industries has rendered the production dichotomy an 
artifact of a different age.'' SHRM ``applauds the Department's 
elimination of much of the `production v. staff' language'' but also 
``recognizes that the production versus staff in some circumstances can 
be a helpful aid in determining whether an employee fits under the 
administrative exemptions and, therefore, supports the proposed 
language. * * * This language strikes a proper balance between 
retaining this concept and ensuring that it is not so strictly 
construed so as to deny the exemption to an employee who should be 
exempt.'' Similarly, NAM supports the proposed rule's attempt to 
``reduce the emphasis on the production versus staff dichotomy.''
    However, many of these commenters believe that the proposal did not 
go far enough, and that the final rule should strive to eliminate the 
dichotomy entirely. For example, the FLSA Reform Coalition states that 
the dichotomy should be eliminated by allowing an employee to qualify 
for the exemption either by performing work related to management or 
general business operations, or by doing any work that includes the 
exercise of discretion and independent judgment: ``Thus, even if the 
employee's work could arguably be characterized as ``production,'' he 
or she would nonetheless be an exempt administrative employee if his or 
her job is a responsible, non-manual one that includes the exercise of 
`discretion and independent judgment.' '' Similarly, the HR Policy 
Association recommends that the Department ``eliminate the production 
dichotomy from the administrative exemption'' because the confusion it 
causes is too great and it is difficult to apply with uniformity. The 
Fisher & Phillips law firm also states that the Department should 
``eliminate the `dichotomy' altogether.''
    The primary focus of these comments was the last sentence in 
proposed subsection (a), which states that the administrative exemption 
does not apply if an employee is ``working on manufacturing production 
line or selling a product.'' Numerous commenters ask for clarification 
about the scope and meaning of the statement. For example, the Morgan, 
Lewis & Bockius law firm requests clarification that not all sales work 
is excluded from exemption, such as advertising, marketing and 
promotional activities, and for confirmation that some individuals who 
work on a production line, such as a safety and health administrator or 
quality control specialist, may still be exempt. The U.S. Chamber of 
Commerce also states that the Department should ``revisit its approach, 
especially with regard to treatment of employees who may be involved in 
some aspect of sales,'' and should clarify that sales work is not 
inherently inconsistent with exempt work. The HR Policy Association 
recommends that the Department delete the ``working on a manufacturing 
production line or selling a product'' phrase, or else clarify its 
meaning either in the regulations or this preamble.

[[Page 22141]]

    A large number of commenters have the opposite view about the 
``production versus staff'' dichotomy, stating that minimizing or 
deleting the dichotomy would deprive the administrative exemption of 
its meaning. Such commenters, including the AFL-CIO, the National 
Treasury Employees Union, the American Federation of State, County and 
Municipal Employees, the Rudy, Exelrod & Zieff law firm, the National 
Employment Lawyers Association, the American Federation of Television 
and Radio Artists, the National Partnership for Women and Families and 
the Stoll, Stoll, Berne Lokting & Shlachter law firm, believe that the 
courts have found the dichotomy to be a useful and appropriate tool in 
analyzing workers in a broad variety of non-manufacturing contexts. 
They oppose any indication that the Department is minimizing the 
dichotomy.
    For example, the AFL-CIO notes that the 1949 Weiss report explained 
that the phrase ``directly related to management policies or general 
business operations'' describes those activities ``relating to the 
administrative as distinguished from the `production' operations of a 
business.'' Similarly, the 1940 Stein Report described administrative 
exempt employees as ``those who can be described as staff rather than 
line employees, or functional rather than departmental heads.'' The 
AFL-CIO quotes Reich v. New York, 3 F.3d 581, 588 (2nd Cir. 1993), 
cert. denied, 510 U.S. 1163 (1994), stating that the dichotomy ``has 
repeatedly proven useful to courts in a variety of non-manufacturing 
settings,'' and cites a number of court decisions applying the 
dichotomy in a variety of government and service sector contexts. The 
National Treasury Employees Union states that the ``distinction which 
the Department would so casually discard is a key tool to help identify 
the specific class of office workers that Congress intended to exempt: 
support staff contributing to business operations and management. It is 
imperative to keep this narrow focus rather than blur the distinction 
between support staff and line workers * * *.'' The Rudy, Exelrod & 
Zieff law firm notes that, prior to 1940, the Department did not 
separately define the administrative exemption from the executive 
exemption, because the Department recognized that the administrative 
exemption ``was intended to cover no more than a small subclass of 
`executive' employees.'' The firm states that the 1940 Stein Report 
concluded that the employees whom the administrative exemption was 
intended to cover had ``functional rather than departmental 
authority,'' meaning they did not ``give orders to individuals.'' The 
firm argues that nothing in the modern workplace, involving production 
of services instead of manufactured goods, makes it improper to 
continue to draw the line between employees who help to administer an 
employer's general business operations and those employees whose duties 
are related to the day-to-day production of the goods or services the 
employer sells.
    Commenters, thus, have very different perspectives about how the 
Department should approach the ``production versus staff'' dichotomy 
and apply it to the modern workplace. Except as stated above, we have 
not adopted any of the commenters' suggestions for substantial changes 
to the primary duty standard in section 541.201(a). The Department 
believes that our proposal struck the proper balance on the 
``production versus staff'' dichotomy. We do not believe that it is 
appropriate to eliminate the concept entirely from the administrative 
exemption, but neither do we believe that the dichotomy has ever been 
or should be a dispositive test for exemption. The Department believes 
that the dichotomy is still a relevant and useful tool in appropriate 
cases to identify employees who should be excluded from the exemption. 
As the Department recognized in the 1949 Weiss Report at 63, this 
exemption is intended to be limited to those employees whose duties 
relate ``to the administrative as distinguished from the `production' 
operations of a business.'' Thus, it relates to employees whose work 
involves servicing the business itself--employees who ``can be 
described as staff rather than line employees, or as functional rather 
than departmental heads.'' 1940 Stein Report at 27. The 1940 Stein 
Report further described the exemption as being limited to employees 
who have ``miscellaneous policy-making or policy-executing 
responsibilities'' but who do not give orders to other employees. 1940 
Stein Report at 4. Based on these principles, the Department provided 
in proposed section 541.201(a) that the administrative exemption covers 
only employees performing a particular type of work--work related to 
assisting with the running or servicing of the business. The examples 
the Department provided in proposed section 541.201(b) were intended to 
identify departments or subdivisions that generally fit this rule.
    The Department's view that the ``production versus staff'' 
dichotomy has always been illustrative--but not dispositive--of exempt 
status is supported by federal case law. In Bothell v. Phase Metrics, 
Inc., 299 F.3d 1120 (9th Cir. 2002), for example, the Ninth Circuit 
found the dichotomy ``useful only to the extent that it helps clarify 
the phrase `work directly related to the management policies or general 
business operations.' '' Id. at 1126 (citation omitted). The court 
further stated:

    The other pertinent cases from our sister circuits similarly 
regard the administration/production dichotomy as but one piece of 
the larger inquiry, recognizing that a court must `construe the 
statutes and applicable regulations as a whole.' Indeed, some cases 
analyze the primary duty test without referencing the Sec.  
541.205(a) dichotomy at all. This approach is sometimes appropriate 
because, as we have said, the dichotomy is but one analytical tool, 
to be used only to the extent that it clarifies the analysis. Only 
when work falls `squarely on the production side of the line,' has 
the administration/production dichotomy been determinative.
* * * * *
    Moreover, the distinction should only be employed as a tool 
toward answering the ultimate question, whether work is `directly 
related to management policies or general business operations,' not 
as an end in itself.

Id. at 1127 (citations omitted). See, e.g., Piscione v. Ernst & Young, 
L.L.P., 171 F.3d 527, 538-39 (7th Cir. 1999) (even though the employee 
``produced'' some reports and filings, and such work might be viewed as 
production work, the work was directly related to the management or 
general business operations); Spinden v. GS Roofing Products Co., 94 
F.3d 421, 428 (8th Cir. 1996) (employee held administratively exempt 
despite the fact that he ``produced'' certain specific outputs), cert. 
denied, 520 U.S. 1120 (1997).
    The final regulation is consistent with the Ninth Circuit's 
approach in Phase Metrics: the ``production versus staff'' dichotomy is 
``one analytical tool'' that should be used ``toward answering the 
ultimate question,'' and is only determinative if the work ``falls 
squarely on the production side of the line.''
    As noted above, proposed section 541.201(b) provided an 
illustrative list of the types of functional areas or departments, 
including accounting, auditing, marketing, human resources and public 
relations, typically administrative in nature. The commenters generally 
found this illustrative list to be accurate and helpful. For example, 
the FLSA Reform Coalition states that it supported the Department's 
efforts to clarify the administrative exemption by ``focusing on the 
function performed by the employee and providing examples of exempt, 
administrative functions.'' The AFL-CIO comments that the list includes 
areas ``which are clearly

[[Page 22142]]

encompassed within the servicing functions of a business, and which 
substantially overlap with the servicing examples set forth in current 
section 541.205(b).'' The U.S. Chamber of Commerce also notes that the 
list is similar to the examples in the existing regulations and agrees 
that all of the areas listed in the proposed regulation ``are proper 
illustrations of exempt administrative work.'' Some commenters suggest 
a variety of additional areas of work that should be added to the 
illustrative list. However, the National Treasury Employees Union 
cautions against exempting workers based upon their job area or title. 
Other commenters similarly suggest that the Department should include 
fewer categories in the list, because employees doing routine work may 
be misperceived as exempt simply because they work in an area like 
marketing, human resources, or research.
    In light of these comments, we have added the language, ``but is 
not limited to,'' to emphasize that the list is intended only to be 
illustrative. It is not intended as a complete listing of exempt areas. 
Nor is it intended as a listing of specific jobs; rather, it is a list 
of functional areas or departments that generally relate to management 
and general business operations of an employer or an employer's 
customers, although each case must be examined individually. Within 
such areas or departments, it is still necessary to analyze the level 
or nature of the work (i.e., does the employee exercise discretion and 
independent judgment as to matters of significance) in order to assess 
whether the administrative exemption applies. Commenters recommend the 
inclusion of several areas that we think are appropriate as additional 
examples of areas that generally relate to management and general 
business operations. Therefore, we are adding computer network, 
internet and database administration; legal and regulatory compliance; 
and budgeting to the illustrative list.
    Finally, proposed section 541.201(c) provided that employees who 
perform work related to the management or general business operations 
of the employer's customers, such as advisers and consultants, also may 
qualify for the administrative exemption. The proposed rule included 
language from existing sections 541.2(a)(2) and 541.205(d), and no 
substantive changes were intended. The commenters express few 
substantive concerns with this provision. A small number of commenters 
suggest that the regulation should provide that the employer's customer 
could be an individual, while commenter Karen Dulaney Smith urges the 
Department to insert the word `business' to clarify that the exemption 
does not apply to ``individuals, whose ``business'' is purely 
personal.'' The Department has not made either change. Nothing in the 
existing or final regulations precludes the exemption because the 
customer is an individual, rather than a business, as long as the work 
relates to management or general business operations. As stated by 
commenter Smith, the exemption does not apply when the individual's 
`business' is purely personal, but providing expert advice to a small 
business owner or a sole proprietor regarding management and general 
business operations, for example, is an administrative function. The 
1949 Weiss Report stated that the administrative exemption should not 
be read to exclude ``employees whose duties relate directly to the 
management policies or to the general business operations of their 
employers' customers. For example, many bona fide administrative 
employees perform important functions as advisors and consultants but 
are employed by a concern engaged in furnishing such services for a fee 
* * *. Such employees, if they meet the other requirements of the 
regulations, should qualify for exemption regardless of whether the 
management policies or general business operations to which their work 
is directly related are those of the employers' clients or customers, 
or those of their employer.'' 1949 Weiss Report at 65. Weiss also noted 
that a consultant employed by a firm of consultants is exempt if the 
employee's ``work consists primarily of analyzing, and recommending 
changes in, the business operations of his employer's client.'' 1949 
Weiss Report at 56. This provision is meant to place work done for a 
client or customer on the same footing as work done for the employer 
directly, regardless of whether the client is a sole proprietor or a 
Fortune 500 company, as long as the work relates to ``management or 
general business operations.''
Section 541.202 Discretion and Independent Judgment (Proposed 
``Position of Responsibility'')
    As discussed above, the Department has decided to eliminate the 
proposed ``position of responsibility'' requirement. Thus, the final 
rule deletes proposed section 541.202 defining ``position of 
responsibility,'' proposed section 541.203 defining ``substantial 
importance,'' and proposed section 541.204 defining ``high level of 
skill or training.'' Instead, the final rule reinserts the ``discretion 
and independent judgment'' requirement, and defines that term at final 
section 541.202. Some of the language in proposed sections 541.203 and 
541.204 was retained from the existing regulations and also appears in 
the final regulations as described below. The language from proposed 
section 541.204 regarding the use of manuals has been moved to a new 
section in Subpart H, Definitions and Miscellaneous Provisions, and is 
discussed under that subpart.
    The Department continues to believe, as most commenters confirm, 
that the current discretion and independent judgment standard has 
caused confusion and unnecessary litigation. Even in the 1949 Weiss 
Report, the Department recognized that the ``discretion and independent 
judgment'' standard was somewhat subjective, and the difficulty of 
applying the standard consistently has increased with the passing 
decades. As evidenced by the increasing court litigation, it has become 
progressively more difficult to apply the standard with the creation of 
many new jobs that did not exist 50 years ago. Nonetheless, the vast 
majority of commenters express concern that abandoning the ``discretion 
and independent judgment'' standard entirely would create even more 
uncertainty and litigation. We also recognize the benefit of retaining 
the standard in some form so as not to jettison completely decades of 
federal court decisions and agency opinion letters.
    Accordingly, while retaining this standard from the existing 
regulations, final section 541.202 clarifies the definition of 
discretion and independent judgment to reflect existing federal case 
law and to eliminate outdated and confusing language in the existing 
interpretive guidelines. The Department intends the final rule to 
clarify the existing standard and to make the standard easier to 
understand and apply to the 21st Century workplace.
    Final section 541.202(a) thus restates the requirement that the 
exempt administrative employee's primary duty must ``include'' the 
exercise of discretion and independent judgment and includes the 
general definition of this term, taken word-for-word from the existing 
interpretive guideline at subsection 541.207(a): ``In general, the 
exercise of discretion and independent judgment involves the comparison 
and the evaluation of possible courses of conduct and acting or making 
a decision after the various possibilities have been considered.'' The 
requirement that the primary duty must ``include'' the

[[Page 22143]]

exercise of discretion and independent judgment--rather than 
``customarily and regularly'' exercise discretion and independent 
judgment--is not a change from current law. Although the Department is 
aware that there has been some confusion regarding the appropriate 
standard under the existing ``short'' duties test, federal court 
decisions have recognized that the current ``short'' duties test does 
not require that the exempt employee ``customarily and regularly'' 
exercise discretion and independent judgment, as does the effectively 
dormant ``long'' test. See, e.g., O'Dell v. Alyeska Pipeline Service 
Co., 856 F.2d 1452, 1454 (9th Cir. 1988) (district court erred in not 
applying more lenient ``includes'' standard under short test which made 
a difference in determining whether employee was exempt); Dymond v. 
United States Postal Service, 670 F.2d 93, 95 (8th Cir. 1982) (while 
the ``long'' duties test for the administrative exemption requires that 
the employee ``customarily and regularly'' exercise discretion and 
independent judgment, when an employee makes more than $250 a week, 
``that requirement is reduced to requiring that the employee's primary 
duty simply `includes work requiring the exercise of discretion and 
independent judgment''').
    Also retained from existing subsection 541.207(a), the final 
subsection 541.202(a) provides that discretion and independent judgment 
must be exercised ``with respect to matters of significance.'' Final 
subsection 541.202(a) states that the term ``matters of significance'' 
refers to ``the level of importance or consequence of the work 
performed.'' This concept of the importance or high level of work 
performed does not appear as a regulatory requirement in existing 
section 541.2, but is included twice in the existing interpretive 
guidance. Existing section 541.205(a), defining the primary duty 
requirement, states that the administrative exemption is limited ``to 
persons who perform work of substantial importance to the management or 
operation of the business.'' This language was the basis of the ``work 
of substantial importance'' option in the proposed definition of 
``position of responsibility.'' Existing section 541.207(a), defining 
the term ``discretion and independent judgment'' provides that an 
exempt administrative employee ``has the authority or power to make an 
independent choice, free from immediate direction or supervision and 
with respect to matters of significance.''
    The existing regulations use these two different phrases found in 
two different sections to describe the same general concept--that the 
work performed by an exempt administrative employee must be 
significant, substantial, important, or of consequence. See, e.g., 
Piscione v. Ernst & Young, L.L.P., 171 F.3d 527, 535-43 (7th Cir. 
1999). The words ``substantial'' and ``significant'' are synonyms. 
Existing section 541.207(d) describes the ``matters of significance'' 
concept as requiring that ``the discretion and independent judgment 
exercised must be real and substantial, that is, they must be exercised 
with respect to matters of consequence.'' Further, existing section 
541.205 and existing section 541.207 use some of the same examples 
(i.e., personnel clerks, inspectors, buyers) to illustrate the meaning 
of ``substantial importance'' and the meaning of ``matters of 
significance.''
    Describing the same concept using two different phrases in two 
different sections of the existing interpretive guidelines is 
duplicative and confusing. Accordingly, the final rule chooses one 
phrase--``matters of significance''--and makes that phrase part of the 
regulatory test for the administrative exemption, rather than merely 
interpretive guidance. As described below, final subsections 541.202(b) 
through (f) combine language from existing section 541.205, existing 
section 541.207, and current case law to more clearly define and 
delimit this concept.
    Final subsection 541.202(b) begins with language from existing 
section 541.207(b) stating that the phrase `discretion and independent 
judgment' must be applied in the light of all the facts involved in the 
particular employment situation in which the question arises.'' Final 
subsection 541.202(b) then contains the following non-exclusive list of 
factors to consider when determining whether an employee exercises 
discretion and independent judgment with respect to matters of 
significance:

    [W]hether the employee has authority to formulate, affect, 
interpret, or implement management policies or operating practices; 
whether the employee carries out major assignments in conducting the 
operations of the business; whether the employee performs work that 
affects business operations to a substantial degree, even if the 
employee's assignments are related to operation of a particular 
segment of the business; whether the employee has authority to 
commit the employer in matters that have significant financial 
impact; whether the employee has authority to waive or deviate from 
established policies and procedures without prior approval; whether 
the employee has authority to negotiate and bind the company on 
significant matters; whether the employee provides consultation or 
expert advice to management; whether the employee is involved in 
planning long- or short-term business objectives; whether the 
employee investigates and resolves matters of significance on behalf 
of management; and whether the employee represents the company in 
handling complaints, arbitrating disputes or resolving grievances.

These factors were taken from the existing regulations, see 541.205(b), 
541.205(c) and 541.207(d), or developed from facts which federal courts 
have found relevant when determining whether an employee exercises 
discretion and independent judgment. Federal courts generally find that 
employees who meet at least two or three of these factors are 
exercising discretion and independent judgment, although a case-by-case 
analysis is required. See, e.g., Bondy v. City of Dallas, 2003 WL 
22316855, at *1 (5th Cir. 2003) (making recommendations to management 
on policies and procedures); McAllister v. Transamerica Occidental Life 
Insurance Co., 325 F.3d 997, 1000-02 (8th Cir. 2003) (independent 
investigation and resolution of issues without prior approval; 
authority to waive or deviate from established policies and procedures 
without prior approval); Cowart v. Ingalls Shipbuilding, Inc., 213 F.3d 
261, 267 (5th Cir. 2000) (developing guidebooks, manuals, and other 
policies and procedures for employer or the employer's customers); 
Piscione, 171 F.3d at 535-43 (making recommendations to management on 
policies and procedures); Haywood v. North American Van Lines, Inc., 
121 F.3d 1066, 1071-73 (7th Cir. 1997) (negotiating on behalf of the 
employer with some degree of settlement authority; independent 
investigation and resolution of issues without prior approval; 
authority to waive or deviate from established policies and procedures 
without prior approval); O'Neill-Marino v. Omni Hotels Management 
Corp., 2001 WL 210360, at *8-9 (S.D.N.Y. 2001) (negotiating on behalf 
of the employer with some degree of settlement authority; developing 
guidebooks, manuals, and other policies and procedures for employer or 
the employer's customers); Stricker v. Eastern Off-Road Equipment, 
Inc., 935 F. Supp. 650, 656-59 (D. Md. 1996) (authority to commit 
employer in matters that have financial impact); Reich v. Haemonetics 
Corp., 907 F. Supp. 512, 517-18 (D. Mass. 1995) (negotiating on behalf 
of the employer with some degree of settlement authority; authority to 
commit employer in matters that have financial impact); Hippen v. First 
National Bank, 1992 WL 73554, at *6 (D. Kan. 1992) (authority to commit 
employer in matters that have

[[Page 22144]]

financial impact). Other factors which federal courts have found 
relevant in assessing whether an employee exercises discretion and 
independent judgment include the employee's freedom from direct 
supervision, personnel responsibilities, troubleshooting or problem-
solving activities on behalf of management, use of personalized 
communication techniques, authority to handle atypical or unusual 
situations, authority to set budgets, responsibility for assessing 
customer needs, primary contact to public or customers on behalf of the 
employer, the duty to anticipate competitive products or services and 
distinguish them from competitor's products or services, advertising or 
promotion work, and coordination of departments, requirements, or other 
activities for or on behalf of employer or employer's clients or 
customers. See, e.g., Hogan v. Allstate Insurance Co., 2004 WL 362378 
(11th Cir. 2004); Demos v. City of Indianapolis, 302 F.3d 698 (7th Cir. 
2002); Lutz v. Ameritech Corp., 2000 WL 245485 (6th Cir. 2000); Lott v. 
Howard Wilson Chrysler-Plymouth, Inc., 203 F.3d 326 (5th Cir. 2001); 
Heidtman v. County of El Paso, 171 F.3d 1038 (5th Cir. 1999); Piscione 
v. Ernst & Young, L.L.P., 171 F.3d 527 (7th Cir. 1999); Shockley v. 
City of Newport News, 997 F.2d 18 (4th Cir. 1993); West v. Anne Arundel 
County, Maryland, 137 F.3d 752 (4th Cir.), cert. denied, 525 U.S. 1048 
(1998); Reich v. John Alden Life Insurance Co., 126 F.3d 1 (1st Cir. 
1997); Wilshin v. Allstate Insurance Co., 212 F. Supp. 2d 1360 (M.D. 
Ga. 2002); Roberts v. National Autotech, Inc., 192 F. Supp. 2d 672 
(N.D. Tex. 2002); Orphanos v. Charles Industries, Ltd., 1996 WL 437380 
(N.D. Ill. 1996).
    Most of the remaining subsections in final 541.202 contain language 
from the existing regulations. Final subsection 541.202(c) contains 
language from existing section 541.207(a) and existing section 
541.207(e) providing that ``discretion and independent judgment implies 
that the employee has authority to make an independent choice, free 
from immediate direction or supervision.'' However, ``employees can 
exercise discretion and independent judgment even if their decisions or 
recommendations are reviewed at a higher level.'' Final subsection (c) 
also retains the credit manager and management consultant examples from 
existing section 541.207(e)(2). Final subsection 541.202(d) contains 
language from existing section 541.205(c)(6) providing that the ``fact 
that many employees perform identical work or work of the same relative 
importance does not mean that the work of each such employee does not 
involve the exercise of discretion and independent judgment with 
respect to matters of significance.'' Final subsection 541.202(e) 
contains language from existing sections 541.207(c)(1) and 
541.207(c)(2) stating that the exercise of discretion and independent 
judgment ``must be more than the use of skill in applying well-
established techniques, procedures or specific standards described in 
manuals or other sources.'' As in existing section 541.205(c), final 
subsection 541.202(e) provides that the exercise of discretion and 
independent judgment ``does not include clerical or secretarial work, 
recording or tabulating data, or performing other mechanical, 
repetitive, recurrent or routine work.'' Final subsection 541.202(f) 
includes language from existing section 541.205(c)(2) that an employee 
``does not exercise discretion and independent judgment with respect to 
matters of significance merely because the employer will experience 
financial losses if the employee fails to perform the job properly.''
    In sum, as in the existing regulations, the final administrative 
exemption regulations establish a two-part inquiry for determining 
whether an employee performs exempt administrative duties. First, what 
type of work is performed by the employee? Is the employee's primary 
duty the performance of work directly related to management or general 
business operations? Second, what is the level or nature of the work 
performed? Does the employee's primary duty include the exercise of 
discretion and independent judgment with respect to matters of 
significance? See, e.g., Bothell v. Phase Metrics, Inc., 299 F.3d 1120, 
1125-26 (9th Cir. 2002) (looking to both the type of work and the 
importance of the work). By retaining the ``discretion and independent 
judgment'' standard from the existing regulations, as clarified to 
reflect current case law, and combining the existing concepts of 
``substantial importance'' and ``matters of significance,'' the final 
rule provides clarity while at the same time maintaining continuity 
with the existing regulations.
Section 541.203 Administrative Exemption Examples
    The final regulations include a new section 541.203 which includes 
illustrations of the application of the administrative duties test to 
particular occupations. Many of the examples are from sections 541.201, 
541.205 and 541.207 of the existing regulations. Other examples reflect 
existing case law.
    Final subsection 541.203(a) provides that insurance claims 
adjusters ``generally meet the duties requirements for the 
administrative exemption, whether they work for an insurance company or 
other type of company, if their duties include activities such as 
interviewing insureds, witnesses and physicians; inspecting property 
damage; reviewing factual information to prepare damage estimates; 
evaluating and making recommendations regarding coverage of claims; 
determining liability and total value of a claim; negotiating 
settlements; and making recommendations regarding litigation.'' This 
section was moved from proposed section 541.203(b)(2). Commenters, such 
as National Employment Lawyers Association (NELA), the Rudy, Exelrod & 
Zieff law firm and the Stoll, Stoll, Berne, Lokting & Shlachter law 
firm, state that the Department should not single out insurance claims 
adjusters in the regulations. NELA states that this example ``flies in 
the face of the basic rule that titles are not dispositive in 
determining whether employees are exempt. Many insurance claims 
adjusters perform routine production work.'' Such commenters state that 
the work of many adjusters involves the day-to-day work of the company, 
such as whether to repair or replace a dented fender, rather than work 
related to the management or general business operations of the firm 
such as the overall methods used to process claims generally. However, 
this provision of the proposed rule is consistent with existing section 
541.205(c)(5) and an Administrator's opinion letter issued on November 
19, 2002, to which the court in Jastremski v. Safeco Insurance Cos., 
243 F. Supp. 2d 743, 753 (N.D. Ohio 2003), deferred because it was a 
``thorough, well reasoned, and accurate interpretation of the 
regulations.'' See also Palacio v. Progressive Insurance Co., 244 F. 
Supp. 2d 1040 (C.D. Cal. 2002). The final subsection 541.203(a)--like 
the opinion letter and the case law--does not rely on the ``claims 
adjuster'' job title alone. Rather, there must be a case-by-case 
assessment to determine whether the employee's duties meet the 
requirement for exemption. Thus, the final subsection (a) identifies 
the typical duties of an exempt claims adjuster as, among others, 
preparing damage estimates, evaluating and making recommendations 
regarding coverage of the claim, determining liability and total value 
of the claim, negotiating settlements, and making

[[Page 22145]]

recommendations regarding litigation. The courts have evaluated such 
factors to assess whether the employee is engaged in servicing the 
business itself. Moreover, as the court in Palacio emphasized, claims 
adjusters are not production employees because the insurance company is 
``in the business of writing and selling automobile insurance,'' rather 
than in the business of producing claims. Id. at 1046. Because the vast 
majority of customers never make a claim against the policy they 
purchase, the court concluded that claims adjusters do ``not produce 
the very goods and services'' that the employer offered to the public. 
Id. at 1047. Similarly, federal courts have evaluated such factors to 
assess whether the employee's exercises discretion and independent 
judgment. See, e.g., Palacio, 244 F. Supp. 2d at 1048 (claims agent who 
spent half her time negotiating with claimants and attorneys, who had 
independent authority to settle claims between $5,000 and $7,500, and 
whose recommendations regarding offers for larger claims often were 
accepted exercised discretion and independent judgment); Jastremski, 
243 F. Supp. 2d at 757 (claims adjuster who planned and carried out 
investigations, determined whether the loss was covered by the policy, 
negotiated settlements, had independent settlement authority up to 
$15,000 and could recommend settlements, which were usually accepted, 
above his authority level exercised discretion and independent 
judgment).
    Consistent with existing case law, final subsection 541.203(b) 
provides that employees in the financial services industry ``generally 
meet the duties requirements for the administrative exemption if their 
duties include work such as collecting and analyzing information 
regarding the customer's income, assets, investments or debts; 
determining which financial products best meet the customer's needs and 
financial circumstances; advising the customer regarding the advantages 
and disadvantages of different financial products; and marketing, 
servicing or promoting the employer's financial products. However, an 
employee whose primary duty is selling financial products does not 
qualify for the administrative exemption.'' Several commenters request 
a section regarding various occupations in the financial services 
industry because of growing litigation in this area.
    In cases such as Reich v. John Alden Life Insurance Co., 126 F.3d 1 
(1st Cir. 1997), Hogan v. Allstate Insurance Co., 2004 WL 362378 (11th 
Cir. 2004), and Wilshin v. Allstate Insurance Co., 212 F. Supp. 2d 1360 
(M.D. Ga. 2002), federal courts have found employees who represent the 
employer with the public, negotiate on behalf of the company, and 
engage in sales promotion to be exempt administrative employees, even 
though the employees also engaged in some inside sales activities. In 
contrast, the court in Casas v. Conseco Finance Corp., 2002 WL 507059, 
at *9 (D. Minn. 2002), held that the administrative exemption was not 
available for employees who had a ``primary duty to sell [the 
company's] lending products on a day-to-day basis'' directly to 
consumers and failed to exercise discretion and independent judgment.
    The John Alden case involved the exempt status of marketing 
representatives working for a company that designed, created and sold 
insurance products, primarily for businesses that were purchasing group 
coverage for their employees. The marketing representatives did not 
sell through direct contacts with the ultimate customers, but instead 
relied upon licensed independent insurance agents to make sales of the 
employer's financial products. The marketing representatives were 
responsible for maintaining contact with hundreds of such independent 
sales agents to keep them apprised of the employer's financial 
products, to inform them of changes in prices, and to discuss how the 
products might fit their customers' needs. The marketing 
representatives also would inform the employer of anything they learned 
from the independent sales agents, such as information about a 
competitor's products or pricing. The First Circuit ruled that these 
activities were directly related to management policies or general 
business operations and that the marketing representatives were exempt. 
Their activities involved ``servicing'' of the business because their 
work was ``in the nature of `representing the company' and `promoting 
sales' of John Alden products, two examples of exempt administrative 
work provided by Sec.  541.205(b) of the interpretations.'' 126 F.3d at 
10. Thus, the court concluded that the marketing representatives' 
contact with the independent sales agents involved `something more than 
routine selling efforts focused simply on particular sales 
transactions.' Rather, their agent contacts are `aimed at promoting 
(i.e., increasing, developing, facilitating, and/or maintaining) 
customer sales generally,' activity which is deemed administrative 
sales promotion work under section 541.205(b).'' Id. (citations 
omitted, emphasis in original), quoting Martin v. Cooper Electric 
Supply Co., 940 F.2d 896, 905 (3rd Cir. 1991), cert. denied, 503 U.S. 
936 (1992).
    In Hogan v. Allstate Insurance Co., 2004 WL 362378, at *4 (11th 
Cir. 2004), the Eleventh Circuit held that insurance agents who ``spent 
the majority of their time servicing existing customers'' and performed 
duties including ``promoting sales, advising customers, adapting 
policies to customer's needs, deciding on advertising budget and 
techniques, hiring and training staff, determining staff's pay, and 
delegating routine matters and sales to said staff '' were exempt 
administrative employees. The court held the insurance agents exempt 
even though they also sold insurance products directly to existing and 
new customers.
    The court in Wilshin v. Allstate Insurance Co., 212 F. Supp. 2d 
1360, 1377-79 (M.D. Ga. 2002), held that a neighborhood insurance agent 
met the requirements for the administrative exemption when his 
responsibilities included such activities as recommending products and 
providing claims help to different customers, as well as using his own 
personal sales techniques to promote and close transactions. He also 
was required to represent his employer in the market, and be 
knowledgeable about the market and the needs of actual and potential 
customers. The Wilshin court found that selling financial products to 
an individual, ultimate consumer--as opposed to an agent, broker or 
company--was not enough of a distinction to negate his exempt status.
    In contrast, the district court in Casas v. Conseco Finance Corp., 
2002 WL 507059 (D. Minn. 2002), held that loan originators were not 
exempt because they had a ``primary duty to sell [the company's] 
lending products on a day-to-day basis'' directly to consumers. 2002 WL 
507059, at *9. The employees called potential customers from a list 
provided to them by the employer and, using the employer's guidelines 
and standard operating procedures, obtained information such as income 
level, home ownership history, credit history and property value; ran 
credit reports; forwarded the application to an underwriter; and 
attempted to match the customer's needs with one of Conseco's loan 
products. If the underwriter approved the loan, the originator gathered 
documents for the closing, verified the information, and ordered the 
title work and appraisals. The court concluded that this was the 
ordinary production work of Conseco, which has the business purpose of 
designing, creating, and selling home lending

[[Page 22146]]

products, making them nonexempt production employees. The court also 
found that the plaintiffs lacked discretion and independent judgment 
necessary to qualify for the exemption since they followed strict 
guidelines and operating procedures, and had no authority to approve 
loans.
    The Department agrees that employees whose primary duty is inside 
sales cannot qualify as exempt administrative employees. However, as 
found by the John Alden, Hogan and Wilshin courts, many financial 
services employees qualify as exempt administrative employees, even if 
they are involved in some selling to consumers. Servicing existing 
customers, promoting the employer's financial products, and advising 
customers on the appropriate financial product to fit their financial 
needs are duties directly related to the management or general business 
operations of their employer or their employer's customers, and which 
require the exercise of discretion and independent judgment.
    Accordingly, consistent with this case law, the final rule 
distinguishes between exempt and nonexempt financial services employees 
based on the primary duty they perform. Final section 541.203(b) thus 
provides:

    Employees in the financial services industry generally meet the 
duties requirements for the administrative exemption if their duties 
include work such as collecting and analyzing information regarding 
the customer's income, assets, investments or debts; determining 
which financial products best meet the customer's needs and 
financial circumstances; advising the customer regarding the 
advantages and disadvantages of different financial products; and 
marketing, servicing or promoting the employer's financial products. 
However, an employee whose primary duty is selling financial 
products does not qualify for the administrative exemption.

    The Department believes this approach also is consistent with the 
case law and the final rule regarding insurance claims adjusters, which 
emphasizes that employees performing duties related to servicing the 
company, such as representing the company in evaluating the merits of 
claims against it and in negotiating settlements, generally qualify for 
exemption. We also believe that this approach is consistent with the 
existing and final regulations providing that advisory specialists and 
consultants to management, such as tax experts, insurance experts, or 
financial consultants, who are employed by a firm that furnishes such 
services for a fee, should be treated the same as an in-house adviser 
regardless of whether the management policies or general business 
operations to which their work is directly related are those of their 
employer's clients or customers or those of their employer. See final 
rule section 541.201(c); existing sections 541.201(a)(2), 541.205(c)(5) 
and 541.205(d); and Piscione v. Ernst & Young, L.L.P., 171 F.3d 527 
(7th Cir. 1999). Finally, our approach is consistent with existing 
section 541.207(d)(2), which provides that ``a customer's man in a 
brokerage house'' exercises discretion and independent judgment ``in 
deciding what recommendations to make to customers for the purchase of 
securities,'' but reflects the modernization of this existing 
subsection for the 21st Century workforce.
    Consistent with Hogan, the final rule rejects the view that selling 
financial products directly to a consumer automatically precludes a 
finding of exempt administrative status. Application of the exemption 
should not change based only on whether the employees' activities are 
aimed at an end user or an intermediary. The final rule distinguishes 
the exempt and nonexempt financial services employees based on the 
duties they perform, not the identity of the customer they serve. For 
example, a financial services employee whose primary duty is gathering 
and analyzing facts and providing consulting advice to assist customers 
in choosing among many complex financial products may be an exempt 
administrative employee. An employee whose primary duty is inside sales 
is not exempt.
    Final subsection 541.203(c) provides that an employee ``who leads a 
team of other employees assigned to complete major projects for the 
employer (such as purchasing, selling or closing all or part of the 
business, negotiating a real estate transaction or a collective 
bargaining agreement, or designing and implementing productivity 
improvements) generally meets the duties requirements for the 
administrative exemption, even if the employee does not have direct 
supervisory responsibility over the other employees on the team.'' This 
modification of proposed section 541.203(b)(3) responds to commenters 
who express concern that the executive exemption fails to reflect the 
modern practice of a company forming cross-functional or multi-
department teams to complete major projects. Several commenters suggest 
that the manager or leader of such teams should be treated as exempt 
even if the leader did not have traditional supervisory authority over 
the other members of the team. Although, as stated above, the 
Department does not believe that the executive exemption applies, an 
employee who leads teams to complete major projects may qualify for 
exemption under the existing administrative regulations. See current 29 
CFR 541.205(c) (exemption applies to employees who ``carry out major 
assignments in conducting the operations of the business''). The final 
subsection (c) merely updates this concept with a more modern example.
    Final subsection 541.203(d) includes the example regarding 
executive assistants and administrative assistants derived from 
existing sections 541.201(a)(1), 541.207(d)(2) and 541.207(e), and 
proposed at section 541.203(b)(4). Final subsection 541.203(e) 
distinguishes exempt human resources managers from nonexempt personnel 
clerks. The language in this subsection appears in existing sections 
541.205(c)(3) and 541.207(c)(5), and was proposed at sections 
541.203(b)(4) and 541.203(c). Final subsection 541.203(f) includes the 
purchasing agent example from proposed section 541.203(b)(4), which was 
derived from existing sections 541.205(c)(4), 541.207(d)(2) and 
541.207(e)(2). Final subsection 541.203(g) contains the inspection work 
example from existing section 541.207(c)(2) and proposed section 
541.204(c). Final section 541.203(h) contains the examples regarding 
examiners and graders from existing sections 541.207(c)(3) and (4) and 
proposed section 541.204(c). Final subsection 541.203(i) includes the 
comparison shopping example from existing section 541.207(c)(6). No 
substantive changes from current law are intended in these examples.
    The Department received no substantive comments with respect to the 
examples of nonexempt work. With respect to administrative or executive 
assistants, a number of commenters assert that these employees should 
be exempt if they assist a senior executive in a corporation below the 
level of proprietor or chief executive of a business. Other commenters 
express a countervailing concern that these terms could be applied too 
broadly to employees with nonexempt duties, such as secretarial 
employees. The final rule makes no changes to current law, and thus 
this example should not expand the exemption to include secretaries or 
other clerical employees. We do not believe expansion of this example 
beyond current law is warranted on the record evidence.
    Final subsection 541.203(j) contains a new example providing that 
``[p]ublic sector inspectors or investigators of

[[Page 22147]]

various types, such as fire prevention or safety, building or 
construction, health or sanitation, environmental or soils specialists 
and similar employees, generally do not meet the duties requirements 
for the administrative exemption because their work typically does not 
involve work directly related to the management or general business 
operations of the employer. Such employees also do not qualify for the 
administrative exemption because their work involves the use of skills 
and technical abilities in gathering factual information, applying 
known standards or prescribed procedures, determining which procedure 
to follow, or determining whether prescribed standards or criteria are 
met.'' This new example responds to comments from public sector 
employees and employer groups. The Public Sector FLSA Coalition, for 
example, comments that because the existing rules were written with 
only the private sector in mind, the proposed revisions offer an 
opportunity for the Department to include language addressing issues 
unique to public sector concerns. The Public Sector FLSA Coalition 
states that, although the discretion and independent judgment 
requirement is vague and unworkable, this standard retains the benefit 
of being the subject of several court decisions and opinion letters. 
These interpretations have provided some guidance for Public Sector 
FLSA Coalition members in assessing the exempt status of certain 
positions in the public sector. Similarly, the Wisconsin Department of 
Employment Relations suggests that the final regulations include 
specific examples from the public sector relating to the discretion and 
independent judgment standard. Various public sector unions and 
employees express concern that employees such as investigators, 
inspectors and parole officers would newly qualify for the 
administrative exemption under the proposed regulations. Thus, the 
final rule has been modified to add examples of various types of 
inspection work found in the public sector that typically fail the 
requirement for exercising discretion and independent judgment. The 
examples are straightforward and drawn from previous Wage and Hour 
opinion letters in which, based on the facts presented, the work 
involved was considered to be based on the employee's use of skills and 
technical abilities, rather than exercising the requisite discretion 
and independent judgment specified in the regulations. See, e.g., Wage 
and Hour Opinion Letter of 4/17/98, 1998 WL 852783 (investigators); 
Wage and Hour Opinion Letter of 3/11/98, 1998 WL 852755 (inspectors); 
and Wage and Hour Opinion Letter of 12/21/94, 1994 WL 1004897 
(probation officers).
Section 541.204 Educational Establishments (Proposed Sec.  541.205)
    The proposed rule established a separate exemption test for 
employees whose primary duty is ``performing administrative functions 
directly related to academic instruction or training in an educational 
establishment or department or subdivision thereof.'' Such employees 
are separately identified in section 13(a)(1) of the FLSA and are 
separately addressed in the existing regulation. The proposed rule 
defined the terms used and gave examples of employees who are engaged 
in academic administrative functions and employees who are not so 
engaged. Under the proposed rule, the term ``educational institution'' 
was defined as an ``elementary or secondary school system, an 
institution of higher education or other educational institution.''
    As discussed below, the Department has added a list of relevant 
factors for determining whether post-secondary career programs qualify 
as ``other educational institutions'' to final subsection 541.204(b), 
and added ``academic counselors'' to the list of examples of exempt 
academic administrative employees in final subsection 541.204(c). 
Except for adjustment of the salary levels, the Department has made no 
other substantive changes to this section.
    As the preamble to the proposed rule stated, this provision simply 
consolidated into a single section of the regulations a few provisions 
in the existing regulation pertaining to the administration of 
educational institutions, with no substantive changes intended. The 
Department received very few comments on this section.
    A few commenters, including the Morgan, Lewis & Bockius law firm, 
the Air Force Labor Advisors and the Career College Association, 
suggest that the regulations contain some additional guidance regarding 
``other educational institutions'' such as schools that provide adult 
continuing education or post-secondary technical and vocational 
training programs such as aircraft flight schools. Opinion letters 
currently provide guidance about such institutions. For example, the 
Department has stated that a flight instruction installation approved 
by the Federal Aviation Administration under that agency's regulations 
would constitute an educational establishment. Wage and Hour Opinion 
Letter of April 2, 1970 (1970 WL 26390). See also 2000 WL 33126562. 
Factors that are relevant in assessing whether such post-secondary 
career programs are educational institutions include whether the school 
is licensed by a state agency responsible for the state's educational 
system or accredited by a nationally recognized accrediting 
organization for career schools. Gonzales v. New England Tractor 
Trailer Training School, 932 F. Supp. 697 (D. Md. 1996). Because such 
questions must be answered on a case-by-case basis, it would not be 
prudent for the Department to list just a few types of schools that 
could qualify as educational institutions. However, we have included 
the above factors in final subsection 541.204(b).
    The American Council of Education suggests that we include 
admissions counselors and academic counselors on the list of examples 
of exempt academic administrative employees. The Department has 
provided guidance on these positions in opinion letters dated February 
19, 1998 (1998 WL 852683), and April 20, 1999 (1999 WL 1002391). In 
those letters, the Department addressed the exempt status of academic 
counselors and enrollment or admissions counselors. Those letters 
elaborate on the regulatory requirement that the academic 
administrative exemption is limited to employees engaged in work 
relating to the academic operations and functions of a school rather 
than work relating to the general business operations of the school. 
Thus, academic counselors performing the job duties listed in the 1998 
opinion letter were found to qualify for the academic administrative 
exemption because their primary duty involved work such as 
administering the school's testing programs, assisting students with 
academic problems, advising students concerning degree requirements, 
and performing other functions directly related to the school's 
educational functions. In contrast, enrollment counselors who engage in 
general outreach and recruitment efforts to encourage students to apply 
to the school did not qualify for the academic administrative exemption 
because their work was not sufficiently related to the school's 
academic operations. However, the 1999 letter noted that, depending 
upon the employees' duties, they might qualify for the general 
administrative exemption because their work related to the school's 
general business operations and involved work in the nature of general 
sales promotion work.

[[Page 22148]]

Consistent with these opinion letters, we have added academic 
counselors as an example of exempt academic administrative employees in 
final subsection 541.204(c), but not admissions counselors.

Subpart D, Professional Employees

Section 541.300 General Rule for Professional Employees
    The proposed general rule for the professional exemption also 
streamlined the current regulations by adopting a single standard 
duties test. The proposed standard duties test provided that an exempt 
professional employee must have ``a primary duty of performing office 
or non-manual work: (i) Requiring knowledge of an advanced type in a 
field of science or learning customarily acquired by a prolonged course 
of specialized intellectual instruction, but which also may be acquired 
by alternative means such as an equivalent combination of intellectual 
instruction and work experience; or (ii) Requiring invention, 
imagination, originality or talent in a recognized field of artistic or 
creative endeavor.''
    The final rule modifies the proposed professional duties test in 
three ways, ensuring that the final professional test is as protective 
as the existing short duties test under which most employees are tested 
for exemption today. First, as under the other exemptions, the final 
rule changes the phrase ``a primary duty'' back to the current language 
of ``whose primary duty'' in response to commenter concerns that this 
change weakened the test for exemption. Second, consistent with the 
existing regulations, the final rule deletes the phrase ``office or 
non-manual'' work. This revision was made in response to commenter 
concerns about the confusion that would result from applying the 
``office and non-manual'' requirement to the professional exemption for 
the first time. Employer commenters express concerns that occupations 
clearly satisfying the requirements of the existing tests for learned 
or creative professionals would not be exempt under the proposal 
because some aspect of the employee's duties requires ``manual'' work, 
such as a surgeon using a scalpel or a portrait artist using a brush. 
The Department did not intend this result, and thus has removed the 
``office and non-manual'' language from the professional exemption. 
Third, the final rule deletes from subsection 541.300(a)(2)(i) the 
phrase, ``but which also may be acquired by alternative means such as 
an equivalent combination of intellectual instruction and work 
experience.'' As discussed more fully under section 541.301 below, some 
commenters view the addition of this language as a significant 
expansion of the learned professional exemption. No such result was 
intended. Rather, this proposed language was merely an attempt to 
streamline and summarize the discussion of the word ``customarily'' in 
subsection 541.301(d) of the current regulations.
Section 541.301 Learned Professionals
    Proposed section 541.301(a) restated the duties tests for the 
learned professional exemption and defined ``advanced knowledge'' as 
``knowledge that is customarily acquired through a prolonged course of 
specialized intellectual instruction, but which also may be acquired by 
alternative means such as an equivalent combination of intellectual 
instruction and work experience.'' The proposed subsection (a) also 
included a list of traditional fields of science or learning such as 
law, medicine, theology and teaching ``that have a recognized 
professional status based on the acquirement of advanced knowledge and 
performance of work that is predominantly intellectual in character as 
opposed to routine, mental, manual, mechanical or physical work.'' The 
remaining subsections in proposed section 541.301 defined the key terms 
in the duties test and provided examples of occupations which generally 
meet or do not meet the duties requirements for the learned 
professional exemption.
    The final section 541.301(a) has been modified to track the 
existing learned professional duties test, and then list separately the 
three elements of this duties test: ``(1) The employee must perform 
work requiring advanced knowledge; (2) The advanced knowledge must be 
in a field of science or learning; and (3) The advanced knowledge must 
be customarily acquired by a prolonged course of specialized 
intellectual instruction.'' Other text from proposed subsection (a) has 
been moved as appropriate to final subsection (b) defining the phrase 
``advanced knowledge,'' final subsection (c) defining the phrase 
``field of science or learning,'' and final subsection (d) defining the 
phrase ``customarily acquired by a prolonged course of specialized 
intellectual instruction.'' The final subsection (e) contains examples, 
consistent with existing case law as detailed below, illustrating how 
the learned professional duties test applies to specific occupations. 
The language in proposed subsection (f) has been deleted as redundant 
with the new section 541.3, and proposed subsection (g) has been 
renumbered.
    Commenters on the learned professional exemption focus most of 
their discussion on the educational requirements for the exemption. 
Proposed section 541.301(a) provided that the advanced knowledge 
required for exemption is ``customarily acquired through a prolonged 
course of specialized intellectual instruction,'' but may also ``be 
acquired by alternative means such as an equivalent combination of 
intellectual instruction and work experience.'' Similarly, proposed 
section 541.301(d) provided: ``However, the word ``customarily'' means 
that the exemption is also available to employees in such professions 
who have substantially the same knowledge level as the degreed 
employees, but who attained such knowledge through a combination of 
work experience, training in the armed forces, attending a technical 
school, attending a community college or other intellectual 
instruction.'' This new ``equivalent combination'' language generated 
sharp disagreement among the commenters.
    Many commenters, including the FLSA Reform Coalition, the National 
Restaurant Association, the Food Marketing Institute, the State of 
Oklahoma Office of Personnel Management, the Johnson County Government 
Human Resources Department and Henrico County, Virginia, generally 
support the proposal as more appropriately focusing on an employee's 
knowledge level and application of such knowledge. Such commenters 
state that the proposal reflects the realities of the modern workplace 
where employees may take an alternative educational path, but perform 
the same duties as the degreed professionals. Comments filed by the HR 
Policy Association, for example, recognize that the current regulations 
allow some non-degreed employees to be classified as exempt learned 
professionals by providing that the requisite knowledge is 
``customarily'' acquired by a prolonged course of intellectual 
instruction. However, the HR Policy Association writes that the 
Department has not provided sufficient guidance, under the current or 
proposed regulations, on the application of this ``customarily'' 
language. The HR Policy Association endorses the Department's proposal 
as providing a workable and reasonable standard which recognizes that 
more workers today perform work requiring professional knowledge 
without possessing a formal professional degree. The Society for Human 
Resource Management (SHRM)

[[Page 22149]]

expresses concern that the existing test requires an employer to 
classify and pay employees differently even if they who perform the 
same work and if they acquired their knowledge in different ways. SHRM 
supports the proposal because it would allow employers to classify and 
pay employees the same when they have the same knowledge level and 
perform the same work. The Workplace Practices Group similarly notes 
that the existing rule arguably creates difficulties for an employer 
who must treat differently two employees who perform the same work but 
acquired their knowledge in different manners. The National Association 
of Manufacturers (NAM) states that the proposal reflects the realities 
of the 21st century workplace while remaining consistent with the 
purposes of the FLSA. NAM agrees with the Department's proposal, 
stating that the regulations should focus on the employee's knowledge 
and application of that knowledge, not on how the employee acquired 
such knowledge. Comments filed by the U.S. Chamber of Commerce 
(Chamber) supporting the proposal discuss how the professions and 
professional education have evolved since the current regulations were 
promulgated in 1940. The current focus of the regulations, the Chamber 
notes, is inconsistent with this evolution in how knowledge is 
acquired.
    Other commenters, however, argue that the proposed ``equivalent 
combination'' language would greatly and unjustifiably expand the scope 
of the professional exemption. The AFL-CIO acknowledges that ``on its 
face,'' the proposal ``does not permit occupations that currently do 
not meet the test for learned professionals to qualify for the 
exemption under the new alternative educational requirement.'' The AFL-
CIO notes that the 1940 Stein Report recognized a need for flexibility 
in the professional duties test to allow the exemption for the 
occasional employee who did not acquire the requisite knowledge for 
exemption through a formal degree program. The AFL-CIO also 
acknowledges that the court in Leslie v. Ingalls Shipbuilding, Inc., 
899 F. Supp. 1578 (S.D. Miss. 1995), focused on the knowledge level to 
find that an engineer without a formal degree was an exempt 
professional. Nonetheless, the AFL-CIO argues that the proposal would 
have the practical effect of allowing employers to classify as exempt 
any employee who has some post-high school education and job 
experience. According to the AFL-CIO, entire occupations such as 
medical technicians, licensed practical nurses, engineering technicians 
and other technical workers could be classified as exempt employees 
under the proposal. The American Federation of State, County and 
Municipal Employees claims that the Department's proposed rule would 
replace an existing ``bright line'' test with a confusing standard. The 
National Treasury Employees Union argues that the proposal creates a 
new category of exempt technical professionals, which the Department 
lacks the statutory authority to do. The American Federation of 
Government Employees (AFGE) describes the proposal as substituting ``a 
vague and unworkable ``knowledge'' test'' for an existing ``workable 
educational requirement.'' The AFGE also claims that the proposed 
professional exemption ``utterly destroys'' the requirement that an 
exempt professional be in a recognized profession and eliminates any 
requirement for an advanced education degree. The International 
Association of Machinists and Aerospace Workers claims the proposal is 
an ``unwarranted relaxation of FLSA standards.'' The International 
Federation of Professional and Technical Engineers argues that the 
proposal opens the door to classifying beauticians, barbers, 
radiological technicians and technicians that test or repair mechanical 
or electric equipment as exempt learned professionals.
    The Department believes the proposal was consistent with current 
case law, and that the proposal would not have caused substantial 
expansion of the professional exemption. Nonetheless, after careful 
consideration of all the comments, the Department has modified sections 
541.301(a) and (d) to ensure our intent cannot be so misconstrued. The 
Department did not and does not intend to change the long-standing 
educational requirements for the learned professional exemption. 
Rather, the revisions to these subsections were intended to provide 
additional guidance on the existing language, ``customarily acquired'' 
by a prolonged course of specialized intellectual instruction.
    The Department has modified proposed section 541.301(a) in response 
to the comments evidencing confusion regarding the different elements 
of the primary duty test for the learned professional exemption. As 
noted above, some commenters express concern that allowing the 
exemption for employees with ``an equivalent combination of 
intellectual instruction and work experience'' would result in 
significant expansion of the exemption to new occupations never before 
considered to be professions, such as licensed practical nursing, the 
skilled trades, and various engineering and repair technicians. These 
concerns are unfounded because they incorrectly conflate the three 
separate elements of the learned professional duties test as described 
in the 1940 Stein Report:

    The first element in the requirement is that the knowledge be of 
an advanced type. Thus, generally speaking, it must be knowledge 
which cannot be attained at the high-school level. Second, it must 
be knowledge in a field of science or learning. This in itself is 
not entirely definitive but will serve to distinguish the 
professions from the mechanical arts where in some instances the 
knowledge is of a fairly advanced type, but not in a field of 
science or learning. * * * The requisite knowledge, in the third 
place, must be customarily acquired by a prolonged course of 
specialized intellectual instruction and study.

1940 Stein Report at 38-39. All three of these essential elements must 
be satisfied before an employee qualifies as an exempt learned 
professional under the existing, proposed and final rule. Thus, for 
example, a journeyman electrician may acquire advanced knowledge and 
skills through a combination of training, formal apprenticeship, and 
work experience, but can never qualify as an exempt learned 
professional because the electrician occupation is not a ``field of 
science or learning'' as required for exemption. A licensed practical 
nurse may work in a ``field of science or learning,'' but cannot meet 
the requirements for the professional exemption because the occupation 
does not require knowledge ``customarily acquired by a prolonged course 
of specialized intellectual instruction.''
    The proper focus of inquiry is upon whether all three required 
elements have been satisfied, not upon any job title or ``status'' the 
employee might have. Rather, only occupations that customarily require 
an advanced specialized degree are considered professional fields under 
the final rule. For example, no amount of military training can turn a 
technical field into a profession. Similarly, a veteran who received 
substantial training in the armed forces but is working on a 
manufacturing production line or as an engineering technician cannot be 
considered a learned professional because the employee is not 
performing professional duties.
    The Department intended, and still intends, that these three 
essential elements, as set forth in the 1940 Stein Report, remain 
applicable and relevant today. Accordingly, final section 541.301(a) 
now separately lists the three elements, thus ensuring that nothing in

[[Page 22150]]

this section can be interpreted as allowing the professional exemption 
to be claimed for licensed practical nurses, skilled tradespersons, 
engineering technicians and other occupations that cannot meet all 
three of the elements.
    Although the Department has removed the ``equivalent combination'' 
language from the final section 541.301(a), the references to the 
educational requirements for the professional exemption and the term 
``customarily'' are discussed in subsection (d). As the AFL-CIO notes, 
the 1940 Stein Report recognized a need for flexibility in the 
professional duties test to allow the exemption for the occasional 
employee who does not possess the specialized academic degree usually 
required for entry into the profession. This flexibility is discussed 
in the existing regulations at section 541.301(d) which states, in 
part:

    Here it should be noted that the word ``customarily'' has been 
used to meet a specific problem occurring in many industries. As is 
well known, even in the classical profession of law, there are still 
a few practitioners who have gained their knowledge by home study 
and experience. Characteristically, the members of the profession 
are graduates of law schools, but some few of their fellow 
professionals whose status is equal to theirs, whose attainments are 
the same, and whose word is the same did not enjoy that opportunity. 
Such persons are not barred from the exemption.

Thus, the existing section 541.301(d) states, the learned professional 
exemption is ``available to the occasional lawyer who has not gone to 
law school, or the occasional chemist who is not the possessor of a 
degree in chemistry.''
    The final section 541.301(d), defining the phrase ``customarily 
acquired by a prolonged course of specialized intellectual 
instruction,'' retains these general concepts while providing 
additional guidance to clarify when an employee working in a ``field of 
science or learning,'' but without a formal degree, can qualify as an 
exempt learned professional. The final subsection (d) requires two 
separate inquiries. First, as in the existing regulations, the 
occupation must be in a field of science or learning where specialized 
academic training is a standard prerequisite for entrance into the 
profession. Thus, the learned professional exemption is available for 
lawyers, doctors and engineers, but not for skilled tradespersons, 
technicians, beauticians or licensed practical nurses, as none of these 
occupations require specialized academic training at the level intended 
by the regulations as a standard prerequisite for entrance into the 
profession. Second, employees within such a learned profession can then 
only qualify for the learned professional exemption if they either 
possess the requisite advanced degree or ``have substantially the same 
knowledge level and perform substantially the same work as the degreed 
employees, but who attained the advanced knowledge through a 
combination of work experience and intellectual instruction.''
    The final subsection (d) thus recognizes, as evidenced by many 
comments and recognized in the existing regulations, that some 
employees, occasional though they may be, have the same knowledge level 
and perform the same work as degreed employees but obtain that advanced 
knowledge by a non-traditional path.'' \9\ An employee with the same 
knowledge level and performing the same work in a professional field of 
science or learning as the degreed professionals should be classified 
and paid in the same manner as those degreed professionals. This 
principle does not expand the learned professional exemption to new 
quasi-professional fields. Rather, it merely ensures, as in the current 
regulations, that employees performing the same work, and who met the 
other requirements for exemption, are treated the same--a common theme 
in employment law today.
---------------------------------------------------------------------------

    \9\ The preamble to the proposal, 68 FR at 15568, invited 
comments on whether the regulations should specify equivalencies of 
work experience and other intellectual instruction that could 
substitute for a specialized advanced degree. A few commenters 
supported various specific equivalencies, but most commenters 
opposed them because equivalencies might vary by industry or be an 
``arbitrary exercise subject to abuse.'' The Department has decided 
not to impose inflexible equivalencies in the final regulations. 
However, we have added the phrase ``and performs substantially the 
same work'' to the final section 541.301(d), which should be a 
better guide for the regulated community in determining when a non-
degreed employee working in a recognized professional field of 
science or learning can qualify as an exempt learned professional by 
focusing the inquiry on the actual work performed by the employee. 
See, e.g., Leslie v. Ingalls Shipbuilding, Inc., 899 F. Supp. 1578 
(S.D. Miss. 1995).
---------------------------------------------------------------------------

    To ensure that the final rule is not interpreted to exempt entire 
occupations previously considered nonexempt by the Department, the 
final rule deletes the phrase in proposed section 541.301(d) that 
equivalent knowledge may be obtained ``through a combination of work 
experience, training in the armed forces, attending a technical school, 
attending a community college or other intellectual instruction.'' 
Instead, final section 541.301(d) provides that the word 
``customarily'' means ``that the exemption is also available to 
employees in such professions who have substantially the same knowledge 
level and perform substantially the same work as the degreed employees, 
but who attained the advanced knowledge through a combination of work 
experience and intellectual instruction.''
    Thus, a veteran who is not performing work in a recognized 
professional field will not be exempt, regardless of any training 
received in the armed forces. The International Federation of 
Professional & Technical Engineers, for example, describes its members 
as technicians who test and repair electronic or mechanical equipment 
using knowledge gained through on-the-job training, military training 
and technical or community colleges. This commenter states that such 
technicians ``generally do not have specialized college degrees in 
engineering or scientific fields, and do not have the detailed and 
sophisticated knowledge that scientists or engineers possess.'' Such 
technical workers are entitled to overtime under the existing and final 
regulations because their work does not require advanced knowledge in a 
field of science or learning customarily acquired by a prolonged course 
of specialized intellectual instruction.
    To further avoid any misunderstanding of our intent, the final rule 
adds the following additional language to subsection (d):

    Thus, for example, the learned professional exemption is 
available to the occasional lawyer who has not gone to law school, 
or the occasional chemist who is not the possessor of a degree in 
chemistry. However, the learned professional exemption is not 
available for occupations that customarily may be performed with the 
general knowledge acquired by an academic degree in any field, with 
knowledge acquired through an apprenticeship, or with training in 
the performance of routine mental, manual, mechanical or physical 
processes. The learned professional exemption also does not apply to 
occupations in which most employees have acquired their skill by 
experience rather than by advanced specialized intellectual 
instruction.

Some jobs require only a four-year college degree in any field or a 
two-year degree as a standard prerequisite for entrance into the field. 
Other jobs require only completion of an apprenticeship program or 
other short course of specialized training. The final section 
541.301(d), drawn from existing subsection 541.301(d) and proposed 
section 541.301(f), makes clear that such occupations do not qualify 
for the learned professional exemption.
    The decision in Palardy v. Horner, 711 F. Supp. 667 (D. Mass. 1989) 
(applying Office of Personnel Management and FLSA regulations), cited 
by the AFL-CIO, would not

[[Page 22151]]

change if analyzed under the proposed or final regulations. The 
employees in that case were technicians employed by the Navy at the GS-
11 grade level who performed ``technical tasks relating to the proper 
design, repair, testing and overhaul of naval ship systems and 
equipment, as well as the vessels themselves.'' Id. at 668. The court 
described the employees as ``primarily responsible for preparing 
drawings and schematics used in installing and reconfiguring equipment 
on navy vessels,'' but these tasks were ``accomplished by consulting 
standard texts, guides and established formulas.'' Id. The work was 
``practical rather than theoretical,'' with the more complex tasks 
performed by professional engineers. Id. at 668-69. The only 
educational requirement for the positions was a high school diploma, 
and the skills needed to perform the work were ``obtained through on 
the job training.'' Id. The work did ``not require an advanced course 
of academic study.'' Id. Such technicians would be entitled to overtime 
pay under the final regulations, because the standard prerequisite for 
entry into such jobs is only a high school education, not advanced 
specialized academic training. In addition, the technicians would be 
entitled to overtime pay under the final regulations because they did 
not perform the same work as the professional engineers. In contrast, 
the employee in Leslie v. Ingalls Shipbuilding, Inc., 899 F. Supp. 1578 
(S.D. Miss. 1995), who had completed three years of engineering study 
at a university and had many years of experience in the field of 
engineering, would continue to be properly classified as an exempt 
learned professional.
    The Department also received substantial comments on the proposal 
to eliminate the existing ``short'' test requirement that an exempt 
professional employee ``consistently exercise * * * discretion and 
judgment.'' Many commenters such as the U.S. Chamber of Commerce 
(Chamber), the HR Policy Association, the Public Sector FLSA Coalition, 
the National Restaurant Association, and the National Association of 
Chain Drug Stores support this change. The Chamber, for example, notes 
that the ``discretion and judgment'' requirement is inconsistent with 
modern workforce practices, citing the case of Hashop v. Rockwell Space 
Operations Co., 867 F. Supp. 1287, 1297 (S.D. Tex. 1994) (employees 
with degrees in electronic engineering and mathematics who trained 
Space Shuttle ground control personnel held not exempt). Difficulties 
in articulating and defining this requirement, the HR Policy 
Association states, have resulted in confusion in its application and 
have spawned numerous lawsuits. The HR Policy Association notes that 
professional employees are increasingly guided by operational 
parameters or standards because of the increased acceptance of 
international standards, especially in fields like engineering and 
science. According to the commenter, this evolution in work performed 
by professional employees has accelerated confusion with, and 
litigation over, the current professional exemption. The HR Policy 
Association also cites the Rockwell Space Operations case to illustrate 
that the current test can lead to illogical results.
    Other commenters, such as the AFL-CIO, the American Federation of 
State, County and Municipal Employees, the National Treasury Employees 
Union, the American Federation of Government Employees and the 
International Federation of Professional and Technical Engineers, urge 
the Department to restore ``discretion and judgment'' as a requirement 
for the professional exemption. Such commenters argue that the exercise 
of discretion and judgment demonstrates the independence and authority 
that is an inherent part of professional work. Similarly, the National 
Employment Law Project contends that the ``discretion and judgment'' 
requirement ``is a key limiting factor of the exemption and is intended 
to weed out those workers who are not bona fide exempt employees.'' 
Some of these commenters also believe that the proposal eliminated the 
``long'' duties test requirement that exempt professionals perform work 
``predominantly intellectual and varied in character.'' Such commenters 
object to the perceived deletion of the ``predominantly intellectual'' 
requirement as further weakening the requirements for exemption.
    The Department continues to believe that having a primary duty of 
``performing work requiring advanced knowledge in a field of science or 
learning customarily acquired by a prolonged course of specialized 
intellectual instruction'' includes, by its very nature, exercising 
discretion and independent judgment. Indeed, existing section 541.305 
defines ``discretion and judgment'' under the professional exemption by 
stating only that: ``A prime characteristic of professional work is the 
fact that the employee does apply his special knowledge or talents with 
discretion and judgment. Purely mechanical or routine work is not 
professional.'' See also 1940 Stein Report at 37 (``A prime 
characteristic of professional work is the fact that the employee does 
apply his special knowledge or talents with discretion and 
judgment.''). The Department has been unable to identify any occupation 
that would meet the primary duty test for the professional exemption, 
but not require the consistent exercise of discretion and judgment.
    The Department observes that only a few courts have discussed the 
definition of the phrase ``includes work requiring the consistent 
exercise of discretion and judgment'' in the existing ``short'' 
professional duties test, and how this standard differs from the phrase 
``includes work requiring the exercise of discretion and independent 
judgment'' in the existing ``short'' administrative duties test. See, 
e.g., Piscione v. Ernst & Young, L.L.P., 171 F.3d 527, 536 (7th Cir. 
1999); Hashop, 867 F. Supp. at 1298 n.6. The Department also notes that 
the ``consistent exercise of discretion and judgment'' standard under 
the learned professional exemption is less stringent than the 
``includes work requiring the exercise of discretion and independent 
judgment'' standard of the administrative exemption. See De Jesus 
Rentas v. Baxter Pharmacy Services Corp., 286 F. Supp. 2d 235, 241 
(D.P.R. 2003) (noting that the discretion required for the professional 
exemption is ``a lesser standard'' than the discretion required under 
the administrative exemption).
    The Department continues to agree that a ``prime characteristic of 
professional work is the fact that the employee does apply his special 
knowledge or talents with discretion and judgment,'' 29 CFR 541.305(b), 
and did not intend to delete this concept entirely from the 
professional duties test. Thus, consistent with existing section 
541.305(b), the Department has included the ``consistent exercise of 
discretion and judgment'' in final subsection 541.301(b) as part of the 
definition of ``work requiring advanced knowledge,'' one of three 
essential elements of the learned professional primary duty tests:

    The phrase ``work requiring advanced knowledge'' means work 
which is predominantly intellectual in character, and which includes 
work requiring the consistent exercise of discretion and judgment, 
as distinguished from performance of routine mental, manual, 
mechanical or physical work. An employee who performs work requiring 
advanced knowledge generally uses the advanced knowledge to analyze, 
interpret or make deductions from varying facts or circumstances. 
Advanced knowledge cannot be attained at the high school level.


[[Page 22152]]


    This language, consistent with existing section 541.305, 
acknowledges that the exercise of ``discretion and judgment'' is a 
prime characteristic of professional work, while also providing a more 
substantive definition of ``advanced knowledge'' than the definition in 
existing section 541.301(b), which merely defines advanced knowledge as 
``knowledge which cannot be attained at a high school level.'' These 
clarifications in the final rule are based on current law, should make 
the professional duties test easier to apply, and will not cause 
currently nonexempt employees to be classified as exempt learned 
professionals. At the same time, the final rule recognizes that some 
learned professionals in the modern workplace are required to comply 
with national or international standards or guidelines. Certified 
Public Accountants have not under current law, and will not under the 
final rule, lose the learned professional exemption because they follow 
the Generally Accepted Accounting Principles (GAAP). Similarly, a 
lawyer who follows Security and Exchange Commission rules to prepare 
corporate filings should still qualify for exemption even though such 
rules today allow for little variation. In such cases, the exempt 
professional employee applies advanced knowledge to identify and 
interpret varying facts and circumstances. As noted by several 
commenters, the decision in Hashop v. Rockwell Space Operations Co., 
867 F. Supp. 1287 (S.D. Tex. 1994), demonstrates the absurd result from 
too literally applying the current ``discretion and judgment'' 
requirement to a 21st century job. While this case has not been 
followed by any court in the decade since it was decided, the Rockwell 
Space Operations decision has caused confusion for employers attempting 
to determine the exempt status of employees. The plaintiffs in the 
Rockwell Space Operations case were instructors who trained ``Space 
Shuttle ground control personnel during simulated missions.'' Id. at 
1291. The plaintiffs provided ``instruction on all communications, 
data, tracking, and telemetry information that ordinarily flows between 
the Space Shuttle and the Johnson Space Center Mission Control 
Center.'' Id. The plaintiffs were responsible for assisting in 
development of the script for the simulated missions, running the 
simulation, and debriefing Mission Control on whether the trainees 
handled simulated anomalies correctly. Id. at 1291-92. The plaintiffs 
also wrote workbooks and technical guides. Id. The plaintiffs had 
college degrees in electrical engineering, mathematics or physics. Id. 
at 1296. Nonetheless, the court found the plaintiffs did not 
``consistently exercise discretion and judgment,'' and thus were 
entitled to overtime pay, because the appropriate responses to 
simulated Space Shuttle malfunctions were contained in a manual. Id. at 
1297-98. In the Department's view, the reliance by an engineer or 
physicist on a manual outlining appropriate responses to a Space 
Shuttle emergency (or a problem in a nuclear reactor, as another 
example) should not transform an otherwise learned professional 
scientist into a nonexempt technician. The clarifications to the 
professional duties test are designed to prevent such an absurd result.
    The definition of ``advanced knowledge'' also retains the 
``predominantly intellectual'' concept from the existing ``long'' 
duties test. The Department notes that the proposal did not eliminate 
the requirement that exempt professional work must be predominantly 
intellectual. We agree with the commenters stating that professional 
work, by its very nature, must be intellectual. Thus, proposed section 
541.301(a) defined learned professions to include those ``occupations 
that have a recognized professional status based on the acquirement of 
advanced knowledge and performance of work that is predominantly 
intellectual in character as opposed to routine mental, manual, 
mechanical or physical work.'' Nonetheless, the comments demonstrate 
that the proposal did not sufficiently stress this concept, and may 
have been unclear as to how the ``predominantly intellectual'' 
requirement fits into the primary duty test. Moving the ``predominantly 
intellectual'' language to final section 541.301(b) should address the 
commenter concerns discussed above.
    A number of commenters ask the Department to declare various 
occupations as qualifying for the learned professional exemption, but 
these commenters did not provide sufficient information regarding the 
educational requirements of the occupations necessary for us to make 
that determination. For example, the Newspaper Association of America 
(NAA) suggests that the Department consider including a specific 
discussion on the applicability of the learned professional exemption 
to journalists, particularly given the guidance in the existing 
regulations that the learned professional exemption does not apply to 
``quasi-professions'' such as journalism. The NAA cites a 1996 survey 
of daily newspaper editors conducted at the Ohio State Newspaper 
finding that 86 percent of daily newspaper entry-level hires just out 
of college had journalism and mass communication degrees. The 
Department, however, has no further supporting information about the 
requirements for the profession and, as such, declines to include 
journalists in the learned professional exemption at this time. Further 
discussion regarding journalists is retained as in the existing 
regulations under the creative professional exemption.
    The record evidence is sufficient for the Department to provide 
additional guidance regarding the following occupations, some of which 
are covered by the current regulations but repeated here:
    Nurses. The proposal retained the Department's existing 
interpretation regarding the exempt status of registered nurses (RNs). 
Simply stated, nurses who are registered by an appropriate state 
licensing board satisfy the duties requirements for exemption as 
learned professional employees. This well-established regulatory 
exemption for registered nurses has appeared in the existing 
interpretative guidelines for more than 32 years:

    Registered nurses have traditionally been recognized as 
professional employees by the Division in its enforcement of the 
act. Although, in some cases, the course of study has become 
shortened (but more concentrated), nurses who are registered by the 
appropriate examining board will continue to be recognized as having 
met the requirement of Sec.  541.3(a)(1) of the regulations.

29 CFR 541.301(e)(1) (36 FR 22978, December 2, 1971). Final rule 
section 541.301(e)(2) continues to provide that RNs satisfy the duties 
test for the professional exemption, and clarifies that other nurses, 
such as licensed practical nurses (LPNs), would not be exempt from 
eligibility for overtime.
    The AFL-CIO, the American Federation of Teachers (AFT), the 
American Nurses Association, the Maine State Nurses Association, the 
Minnesota Nurses Association, the Service Employees International Union 
(SEIU) and United Food and Commercial Workers International Union 
(UFCW), as well as many individual nurses, express reservations about 
the knowledge equivalency language of the proposal. They state that the 
proposed formulation of the professional standard duty test would 
exempt additional classes of healthcare workers, such as LPNs. For 
example, AFT and SEIU note that LPNs have some level of formal 
education but do

[[Page 22153]]

not possess the same level to be considered degreed exempt employees, 
as are RNs. SEIU also argues that the proposal ignored the differences 
in the permitted scope of practice between RNs and LPNs. The UFCW 
argues that the difference between RNs and LPNs is that the former 
typically enter the nursing profession by attending a specialized 
school and obtaining a specialized nursing degree while the latter do 
not. The UFCW criticizes the proposal as eliminating this distinction 
between RNs and LPNs, and for eliminating overtime for LPNs and other 
technical workers who have experience or training but do not have an 
advanced degree in a recognized field of science or learning. In 
describing the work and qualifications of LPNs, or a licensed 
vocational nurse (LVNs) in the state of California, UFCW comments that 
they perform patient care tasks pursuant to the direct and close 
supervision of RNs or physicians. LPNs and LVNs are not required to 
have an advanced degree or undergo a prolonged course of study in a 
recognized field of science or learning. ``Typically, all that is 
required is a high school education and a year's training in a 
vocational school.'' As for their job duties, UFCW states that LPNs and 
LVNs have limited discretion and little supervisory or administrative 
duties; rather, they perform tasks such as ``routine bedside care, 
including bathing, dressing, personal hygiene, feeding, and tending to 
patients' comfort and emotional needs.'' Since such nurses are 
nonexempt under the current regulatory framework, UFCW calls on the 
Department to expressly affirm that such nurses remain nonexempt under 
the final regulations. The Minnesota Nurses Association states that the 
proposal would detrimentally affect the nursing profession. Other 
organizations, such as the National Organization for Women and Women 
Employed Institute, also express similar concerns that nurses could be 
classified as exempt and no longer entitled to overtime.
    Some of these same commenters view the proposal as classifying RNs 
as bona fide professionals and thereby exempting them from overtime for 
the first time. For example, the American Nurses Association states 
that the proposal would add RNs as exempt from overtime. Also, the 
Maine State Nurses Association argues that RNs should be treated as 
eligible for overtime.
    As noted above, the existing regulations have treated RNs as 
performing exempt learned professional duties since 1971. The 
Department's long-standing position is that RNs satisfy the duties test 
for exempt learned professionals, but LPNs do not. See Wage and Hour 
Opinion Letters dated April 1, 1999, June 23, 1983, May 16, 1983 and 
November 16, 1976. As re-emphasized by the Administrator in an October 
19, 1999 Opinion Letter, ``in virtually every case, licensed practical 
nurses cannot be considered exempt, bona fide, professionals.'' 
Similarly, the scant case law in this area is consistent. For example, 
in Fazekas v. Cleveland Clinic Foundation Health Care Ventures, Inc., 
204 F.3d 673 (6th Cir. 2000), the parties did not dispute that the 
plaintiff RNs who made home health care visits possessed the requisite 
knowledge of an advanced type in a field of science to satisfy the 
duties test for the professional exemption. There, as in most reported 
cases involving claims by nurses for overtime pay, the issue was 
whether the nurses were paid on a fee basis that would meet the salary 
or fee basis test. See also Elwell v. University Hospitals Home Care 
Services, 276 F.3d 832, 835-36 (6th Cir. 2002) (dispute regarding 
whether home health care nurse providing ``skilled nursing services'' 
was paid on a salary or fee basis, but no dispute that nurse met the 
duties test); Klem v. County of Santa Clara, California, 208 F.3d 1085, 
1088-90 (9th Cir. 2000) (dispute on whether RN was paid on a salary 
basis, but no dispute that registered nurse met the duties test for the 
learned professional exemption).
    The Department did not and does not have any intention of changing 
the current law regarding RNs, LPNs or other similar health care 
employees, and no language in the proposed regulations suggested 
otherwise. Consequently, the final rule reiterates the long-standing 
position that RNs satisfy the duties test for bona fide learned 
professional employees. The Department further clarifies that LPNs and 
other similar health care employees generally do not qualify as exempt 
learned professionals, regardless of work experience and training, 
because possession of a specialized advanced academic degree is not a 
standard prerequisite for entry into such occupations.
    Physician Assistants. Proposed section 541.301(e)(4) included an 
enforcement policy articulated in section 22d23 of the Wage and Hour 
Division Field Operations Handbook (FOH) that physician assistants who 
complete three years of pre-professional study (or 2,000 hours of 
patient care experience) and not less than one year of professional 
course work in a medical school or hospital generally meet the duties 
requirements for the learned professional exemption. Although a few 
commenters object to this section, the final rule retains this long-
standing recognition of physician assistants as exempt learned 
professionals. However, the Department has modified the educational and 
certification requirements in final section 541.301(e)(4) in response 
to a comment filed by the American Academy of Physician Assistants 
(AAPA).
    According to the AAPA, the standard prerequisite for practice as a 
physician assistant is graduation from a physician assistant program 
accredited by the Accreditation Review Commission on Education for the 
Physician Assistant and certification by the National Commission on 
Certification of Physician Assistants (NCCPA). The AAPA states that the 
proposal, and thus section 22d23 of the FOH, describes the educational 
background or experience typical of an individual who is admitted into 
an accredited physician assistant program and includes an abbreviated 
version of the physician assistant educational curriculum--not the 
standard an individual must satisfy to practice as a physician 
assistant. For entry into an accredited physician assistant educational 
program, an individual should have a Bachelor's degree and 45 months of 
health care experience, according to the AAPA. Physician assistant 
programs are located at schools of medicine or health sciences, 
universities and teaching hospitals and typically consist of 111 weeks 
of instruction: 400 classroom and laboratory hours in the basic 
sciences with at least 70 hours in pharmacology, more than 149 hours in 
behavioral sciences and more than 535 hours in clinical medicine. In 
the second year of the program, 2,000 hours are spent in clinical 
rotations divided between primary care medicine and various 
specialties. To practice as a physician assistant, an individual must 
pass a national certifying examination jointly developed by the 
National Board of Medical Examiners and NCCPA. Physician assistants 
also must take continuing medical education credits and a 
recertification to maintain certification.
    The Department recognizes that the FOH section has not been updated 
in many years and thus may be out of date. The information provided by 
the AAPA reveals a more lengthy and involved required course of study 
than is currently set forth in the FOH. The national testing and 
certification requirement also is consistent with exempt learned 
professional status. Thus, the Department concludes that physician 
assistants who have graduated from a program accredited by

[[Page 22154]]

the Accreditation Review Commission on Education for the Physician 
Assistant and who are certified by the National Commission on 
Certification of Physician Assistants generally meet the duties 
requirements for the learned professional exemption. Final section 
541.301(e)(4) has been modified accordingly.
    Chefs. Section 541.301(e)(6) of the proposal provided that chefs, 
such as executive chefs and sous chefs, ``who have attained a college 
degree in a culinary arts program, meet the primary duty requirement 
for the learned professional exemption.'' The Department received few 
comments addressing this section. The National Restaurant Association 
confirms that a four-year college degree in culinary arts is the 
standard prerequisite in the industry for executive chefs. The National 
Restaurant Association argues, however, that the Department should more 
explicitly allow work experience to substitute for a college degree. In 
contrast, the AFL-CIO expresses concern that the proposed language 
unjustly would expand the ``learned professional'' exemption to cover 
employees properly considered nonexempt cooks.
    The Department agrees that the proposed language should be 
clarified to better distinguish between exempt professional chefs with 
four-year culinary arts degrees and nonexempt ordinary cooks who 
perform predominantly routine mental, manual, mechanical or physical 
work. The Department has no intention of departing from current law 
that ordinary cooks are not exempt professionals. See, e.g., Wage and 
Hour Opinion Letter of February 18, 1983 (``Cooks and bakers are not 
considered to be executive, administrative, or professional employees 
within the meaning of the regulations regardless of how highly skilled 
or paid such employees may be''). See also Cobb v. Finest Foods, Inc., 
755 F.2d 1148, 1150 (5th Cir. 1985) (employee who directed the work of 
two or more employees and whose primary duty was management of hot food 
section of cafeteria was exempt executive); Noble v. 93 University 
Place Corp., 2003 WL 22722958, at *10 (S.D.N.Y. 2003) (summary judgment 
denied because of factual dispute over whether employee was head chef 
and kitchen manager with numerous managerial and supervisory 
responsibilities or ``simply a chef who spent 75 to 100 percent of his 
time cooking'').
    Accordingly, to avoid any misinterpretations, the final rule 
replaces the proposed language ``a college degree'' with ``a four-year 
specialized academic degree'' and states that cooks are not exempt 
professionals. The final subsection 541.301(e)(6) thus provides: 
``Chefs, such as executive chefs and sous chefs, who have attained a 
four-year specialized academic degree in a culinary arts program, 
generally meet the duties requirements for the learned professional 
exemption. The learned professional exemption is not available to cooks 
who perform predominantly routine mental, manual, mechanical or 
physical work.'' This language is consistent with industry standard 
educational prerequisites as represented by the National Restaurant 
Association and distinguishes the exempt learned professional chef from 
the nonexempt cook. The Department rejects the National Restaurant 
Association's suggestion that the regulations should broadly allow work 
experience to substitute for a four-year college degree in the culinary 
arts because it would inappropriately expand the scope of the learned 
professional exemption.
    The National Restaurant Association also argues that certain chefs 
qualify as creative professionals. The Department agrees that certain 
forms of culinary arts have risen to a recognized field of artistic or 
creative endeavor requiring ``invention, imagination, originality or 
talent.'' The National Restaurant Association points to the 
Department's Occupational Outlook Handbook, 2002-2003, stating at page 
306 that ``[d]ue to their skillful preparation of traditional dishes 
and refreshing twists in creating new ones, many chefs have earned 
fame* * *.'' The National Restaurant Association also references 
various publications emphasizing the creative nature of certain 
culinary innovation, including the specialization of creating 
distinctive, unique dishes. Another commenter, a wage and hour 
consultant, also suggests that the Department consider the creative 
professional exemption for such chefs, noting the ``national acclaim'' 
and ``reputation and power in the industry'' enjoyed by certain chefs.
    Accordingly, after careful consideration of this issue, the 
Department concludes that to the extent a chef has a primary duty of 
work requiring invention, imagination, originality or talent, such as 
that involved in regularly creating or designing unique dishes and menu 
items, such chef may be considered an exempt creative professional. 
Recognizing that some chefs may qualify as exempt creative 
professionals is consistent with the Department's long-standing 
enforcement policy regarding floral designers and other federal case 
law. See Wage and Hour Opinion Letter of September 4, 1970, 1970 WL 
26442 (``The requirement that work must be original and creative in 
character would be, generally speaking, met by a flower designer who is 
given a subject matter, theme or occasion for which a floral design or 
arrangement is needed and creates the floral design or floral means of 
communicating an idea for the occasion. Work of this type is original 
and creative and depends primarily on the invention, imagination and 
talent of the employee''). See also Freeman v. National Broadcasting 
Co., 80 F.3d 78, 82 (2nd Cir. 1996) (employees ``talented'' because 
they have a ``native and superior ability in their fields''); Reich v. 
Gateway Press, Inc., 13 F.3d 685, 700 (3rd Cir. 1994) (``developing an 
entirely fresh angle on a complicated topic''); Shaw v. Prentice Hall, 
Inc., 977 F. Supp. 909, 914 (S.D. Ind. 1997) (``employees who have been 
found to meet the artistic professional exemption performed work that 
was much more inventive and `artistic'''). However, there is a wide 
variation in duties of chefs, and the creative professional exemption 
must be applied on a case-by-case basis with particular focus on the 
creative duties and abilities of the particular chef at issue. The 
Department intends that the creative professional exemption extend only 
to truly ``original'' chefs, such as those who work at five-star or 
gourmet establishments, whose primary duty requires ``invention, 
imagination, originality, or talent.''
    Paralegals. The Department received a number of comments from 
paralegals and legal assistants expressing concern that they would be 
classified as exempt under the proposed regulations. Other commenters 
urge the Department to declare that paralegals are exempt learned 
professionals. However, none of these commenters provided any 
information to demonstrate that the educational requirement for 
paralegals is greater than a two-year associate degree from a community 
college or equivalent institution. Although many paralegals possess a 
Bachelor's degree, there is no evidence in the record that a four-year 
specialized paralegal degree is a standard prerequisite for entry into 
the occupation. Because comments revealed some confusion regarding 
paralegals, the final rule contains new language in section 
541.301(e)(7) providing that paralegals generally do not qualify as 
exempt learned professionals. The final rule, however, also states that 
the learned professional exemption is available for paralegals

[[Page 22155]]

who possess advanced specialized degrees in other professional fields 
and apply advanced knowledge in that field in the performance of their 
duties. For example, if a law firm hires an engineer as a paralegal to 
provide expert advice on product liability cases or to assist on patent 
matters, that engineer would qualify for exemption.
    Athletic Trainers. The Department requested and received a number 
of comments on athletic trainers. Commenters describe an athletic 
trainer's duties as evaluation of injuries and illnesses of athletes; 
designing and administering care, treatment and rehabilitation; keeping 
and maintaining records of injuries and progress; directly supervising 
student athletic trainers and student team managers; and maintaining 
current catalogues and files on research and information related to 
sports medicine. Athletic trainers are on call 24 hours a day to assist 
coaches and teams with athletic injuries, according to the commenters, 
and often travel to away competitions with teams.
    In the past, the Department has taken the position that athletic 
trainers are not exempt learned professionals. However, the court in 
Owsley v. San Antonio Independent School District, 187 F.3d 521 (5th 
Cir. 1999), cert. denied, 529 U.S. 1020 (2000), rejected this position 
and held that athletic trainers certified by the State of Texas 
qualified for the learned professional exemption based upon their 
possession of a specialized advanced degree.
    Further, the information submitted by commenters indicates that 
athletic trainers are nationally certified and that a specialized 
academic degree is a standard prerequisite for entry into the field. 
Athletic trainers are nationally certified by the Board of 
Certification of the National Athletic Trainers Association (NATA) Inc. 
In order to qualify for such certification, a candidate must meet 
NATA's basic requirements that include a Bachelor's degree in a 
curriculum accredited by the Commission on Accreditation of Allied 
Health Education Programs (CAAHEP). The CAAHEP-accredited curriculums 
are in specialized fields such as athletic training, health, physical 
education or exercise training, and require study in six particular 
courses--Human Anatomy, Human Physiology, Biometrics, Exercise 
Physiology, Athletic Training and Health/Nutrition. Candidates are 
strongly encouraged to take additional courses in the areas of Physics, 
Pharmacology, Recognition of Medical Conditions, Pathology of Illness 
and Injury, and Chemistry. Finally, a candidate must participate in 
extensive clinicals under the supervision of NATA licensed trainers. At 
least 25 percent of these clinical hours must be obtained on location, 
at the practice or game, in one of many eligible sports such as 
football, soccer, wrestling, basketball or gymnastics.
    In light of the Owsley decision and the comments evidencing the 
specialized academic training required for certification, the 
Department concludes that athletic trainers certified by NATA, or under 
an equivalent state certification procedure, would qualify as exempt 
learned professionals. We have modified the regulation accordingly by 
adding a section on athletic trainers at final section 541.301(e)(8).
    Funeral Directors. Comments from the National Funeral Directors 
Association (NFDA) include detailed information on the educational and 
licensure requirements in each state for licensed funeral directors and 
embalmers. The NFDA comments indicate that the licensing requirements 
for funeral directors or embalmers in 16 states require at least two 
years of college plus graduation from an accredited college of mortuary 
science, which requires two years of study. According to NFDA, the 
American Board of Funeral Service Education (ABFSE) is the sole 
national academic accreditation agency for college and university 
programs in funeral service and mortuary science education, and the 
ABFSE is recognized by the U.S. Department of Education and Council on 
Higher Education Accreditation. The ABFSE-recommended curriculum is 
used in all accredited mortuary colleges in the United States. The 
ABFSE stipulates that the minimum educational standard for the funeral 
service profession consists of 60 semester hours (equivalent to two 
years of college-level credits) in public health and technical studies, 
such as chemistry, anatomy and pathology; business management, such as 
funeral home management and merchandising and funeral directing; social 
sciences, such as grief dynamics and counseling; legal, ethical and 
regulatory subjects, such as mortuary law; and electives in general 
education or non-technical courses. Thus, licensed funeral directors or 
embalmers in 16 states must complete at least the equivalent of four 
years of post-secondary education which is sufficient, NFDA argues, to 
meet the educational requirements for the learned professional 
exemption. The NFDA comments also reveal that one state, Colorado, has 
no educational or licensing requirements for funeral directors or 
embalmers, and five states require funeral directors or embalmers to 
have only a high school education. The other states fall somewhere in 
between: some requiring high school and mortuary college, and some 
requiring one year of post-secondary education plus completion of the 
mortuary college program. Twelve states also require passage of a state 
or national exam for licensure.
    Other commenters oppose recognizing licensed funeral directors or 
embalmers as learned professionals. For example, the International 
Brotherhood of Teamsters (Teamsters) contend that the proposed rule 
would improperly exempt most licensed funeral directors and embalmers. 
The Teamsters argue that the specialized intellectual instruction and 
apprenticeship that a licensed funeral director or embalmer attains 
does not constitute the requisite knowledge of an exempt professional. 
The Teamsters state that a four-year course of study is not a 
prerequisite to licensure, and cites a November 23, 1999, Wage and Hour 
Opinion letter in support of its position. In this opinion letter, the 
Wage and Hour Division wrote that ``[a] prolonged course of specialized 
instruction and study generally has been interpreted to require at 
least a baccalaureate degree or its equivalent which includes an 
intellectual discipline in a particular course of study as opposed to a 
general academic course otherwise required for a baccalaureate 
degree.'' 1999 WL 33210905. The Teamsters also express concern that, 
under the proposal, more licensed funeral directors and embalmers could 
be classified as exempt professional employees because they could 
obtain the requisite knowledge through a combination of educational 
requirements, apprenticeships and on-the-job training.
    The issue of the exempt status of funeral directors and embalmers 
presents precisely the situation long contemplated by the existing 
regulations at section 541.301(e)(2) that the ``areas in which 
professional exemptions may be available are expanding. As knowledge is 
developed, academic training is broadened, degrees are offered in new 
and diverse fields, specialties are created and the true specialist, so 
trained, who is given new and greater responsibilities, comes closer to 
meeting the tests.'' See also discussion of final section 541.301(f), 
infra. In the past, the Department has taken the position that licensed 
funeral directors and embalmers are not exempt learned professionals. 
The Department took this position as amicus curiae in support of a 
funeral director's argument that he was not an exempt learned 
professional in the case of Rutlin v. Prime Succession, Inc., 220 F.3d 
737 (6th Cir.

[[Page 22156]]

2000). However, the court in Rutlin did not agree with the Department's 
position and held that funeral directors certified by the State of 
Michigan qualified for the learned professional exemption. In Rutlin, 
the district court found that the plaintiff funeral director's work 
``required knowledge of an advance type in a field of science or 
learning customarily acquired by a prolonged course of specialized 
intellectual instruction and study * * *.'' 220 F.3d at 742. Quoting 
from the lower court's decision, the appellate court agreed:

    As a funeral director and embalmer, plaintiff had to be licensed 
by the state. In order to become licensed, plaintiff had to complete 
a year of mortuary science school and two years of college, 
including classes such as chemistry and psychology, take national 
board tests covering embalming, pathology, anatomy, and cosmetology, 
practice as an apprentice for one year, and pass an examination 
given by the state.

    Id. The appellate court characterized plaintiff's educational 
requirement as ``a specialized course of instruction directly relating 
to his primary duty of embalming human remains,'' notwithstanding the 
fact that plaintiff ``was not required to obtain a bachelor's degree.'' 
Id. The court noted that ``[t]he FLSA regulations do not require that 
an exempt professional hold a bachelor's degree; rather, the 
regulations require that the duties of a professional entail advanced, 
specialized knowledge'' and concluded ``that a licensed funeral 
director and embalmer must have advanced, specialized knowledge in 
order to perform his duties.'' Id. See also Szarnych v. Theis-Gorski 
Funeral Home Inc., 1998 WL 382891 (7th Cir. 1998) (licensed funeral 
director/embalmer in Illinois was exempt learned professional).
    After carefully weighing the comments and case law, the Department 
concludes that some licensed funeral directors and embalmers may meet 
the duties requirements for the learned professional exemption. The 
Teamsters state that a four-year course of study is not a prerequisite 
for licensure as a funeral director or embalmer. However, the detailed, 
state-by-state analysis submitted by NFDA evidences that four years of 
post-secondary education, including two years of specialized 
intellectual instruction in an accredited mortuary college, is a 
prerequisite for licensure in many states. In such states, a prolonged 
course of specialized intellectual instruction has become a standard 
prerequisite for entrance into the profession. See, e.g., Reich v. 
State of Wyoming, 993 F.2d 739, 742 (10th Cir. 1993) (the Department's 
argument that game wardens were not exempt professionals because 
``there is a lack of uniformity among states as to the requirement and 
duties of game wardens'' was rejected by the court, which stated that 
``Wyoming may rightfully require more duties of its game wardens than 
other states''). Further, the only federal appellate courts to address 
this issue--the Sixth Circuit in Rutlin and the Seventh Circuit in 
Szarnych--have held the licensed funeral directors and embalmers are 
exempt learned professionals. Indeed, the educational and licensing 
requirements for funeral directors or embalmers in the 16 states that 
require two years of post-secondary education and completion of a two-
year program at an accredited mortuary college are comparable to the 
educational requirements for certified medical technologists, who have 
long been recognized in the existing regulations as exempt 
professionals. Accordingly, consistent with the case law and the 
existing rule on medical technologists, a new subsection 541.301(e)(9) 
in the final rule provides:

    Licensed funeral directors and embalmers who are licensed by and 
working in a state that requires successful completion of four 
academic years of pre-professional and professional study, including 
graduation from a college of mortuary science accredited by the 
American Board of Funeral Service Education, generally meet the 
duties requirements for the learned professional exemption.

    The Department recognizes, however, that some employees with the 
job title of ``funeral director'' or ``embalmer'' have not completed 
the four years of post-secondary education required in final subsection 
541.301(d)(9). In fact, the NFDA comments reveal that the state of 
Colorado has no educational requirements for funeral directors and 
embalmers, and five other states require only a high school education. 
Such employees, of course, cannot qualify as exempt learned 
professionals.
    Pilots. Most pilots are exempt from the FLSA overtime requirements 
under section 13(b)(3) of the Act, which exempts ``any employee of a 
carrier by air subject to the provisions of title II of the Railway 
Labor Act.'' Thus, pilots who are employed by commercial airlines are 
exempt from overtime under section 13(b)(3). However, the exempt status 
of other pilots, such as pilots of corporate jets, is determined under 
section 13(a)(1), and has been the subject of recent litigation.
    The Department has taken the position that pilots are not exempt 
professionals. We have maintained that aviation is not a ``field of 
science or learning,'' and that the knowledge required to be a pilot is 
not ``customarily acquired by a prolonged course of specialized 
intellectual instruction.'' See Wage and Hour Opinion Letter dated 
January 20, 1975; In re U.S. Postal Service ANET and WNET Contracts, 
2000 WL 1100166, at *7 (DOL Admin. Rev. Bd.).
    A contrary result was reached in Paul v. Petroleum Equipment Tools 
Co., 708 F.2d 168 (5th Cir. 1983). In Paul, the Fifth Circuit allowed 
the learned professional exemption for a company airline pilot who held 
an airline transport pilot (ATP) certificate, a flight instructor 
certificate, a commercial pilot certificate, an instrument flight rules 
(IFR) rating, and was authorized to fly both single and multiengine 
airplanes. The court examined the Federal Aviation Authority 
regulations setting forth the requirements for the licenses and 
ratings, finding the combination of instruction and flight tests 
sufficient to satisfy the requirement of a prolonged course of 
specialized instruction, ``despite its distance from campus.'' Id. at 
173.
    Despite Paul, the Department continued to assert that pilots are 
not exempt in Kitty Hawk Air Cargo, Inc. v. Chao, 2004 WL 305603 (N.D. 
Tex. 2004) (Service Contract Act case), supported by the decision in 
Ragnone v. Belo Corp., 131 F. Supp. 2d 1189, 1193-94 (D. Ore. 2001), 
holding that a helicopter pilot was not exempt under section 13(a)(1).
    However, the district court in Kitty Hawk, relying on Paul, ruled 
on January 26, 2004, that the pilots at issue did in fact meet the 
requirements of the professional exemption. In addition, a number of 
commenters argue that the Department should reconsider its position on 
pilots. Such commenters note that aviation degrees are now available 
from a few institutions of higher education. Further, pilots must 
complete classroom training, hours of flying with an instructor, pass 
tests and meet other requirements to obtain FAA licenses. Because of 
the conflict in the courts, and the insufficient record evidence on the 
standard educational requirements for the various pilot licenses, the 
Department has decided not to modify its position on pilots at this 
time.
    Other Professions. The final rule adopts without change subsection 
541.301(e)(1) on medical technologists, subsection 541.301(e)(3) on 
dental hygienists and subsection 541.301(e)(5) on accountants. These 
subsections are consistent with the existing regulations and long-
standing policies of the Wage and Hour Division. None of the

[[Page 22157]]

comments received provided information justifying departure from the 
current law.
    Finally, consistent with the existing regulations and the proposal, 
final section 541.301(f) recognizes that the areas in which the 
professional exemption may be available are expanding. Final section 
541.301(f) also now provides:

    Accrediting and certifying organizations similar to those listed 
in subsections (e)(1), (3), (4), (8) and (9) of this section also 
may be created in the future. Such organizations may develop similar 
specialized curriculums and certification programs which, if a 
standard requirement for a particular occupation, may indicate that 
the occupation has acquired the characteristics of a learned 
profession.

    This new language is adopted to ensure that final subsections 
541.301(e)(1), (3), (4), (8) and (9) do not become outdated if the 
accrediting and certifying organizations change or if new organizations 
are created. Accredited curriculums and certification programs are 
relevant to determining exempt learned professional status to the 
extent they provide evidence that a prolonged course of specialized 
intellectual instruction has become a standard prerequisite for 
entrance into the occupation as required under section 541.301. Neither 
the identity of the certifying organization nor the mere fact that 
certification is required is determinative, if certification does not 
involve a prolonged course of specialized intellectual instruction. For 
example, certified physician assistants meet the duties requirements 
for the learned professional exemption because certification requires 
four years of specialized post-secondary school instruction; employees 
with cosmetology licenses are not exempt because the licenses do not 
require a prolonged course of specialized intellectual instruction.
Section 541.302 Creative Professionals
    Proposed section 541.302 provided further guidance on the primary 
duties test for creative professionals. In the proposal, subsection (a) 
set forth the general rule that creative professionals must have ``a 
primary duty of performing office or non-manual work requiring 
invention, imagination, originality or talent in a recognized field of 
artistic or creative endeavor as opposed to routine mental, manual, 
mechanical or physical work. The exemption does not apply to work which 
can be produced by a person with general manual ability and training.'' 
Proposed subsection (b) set forth some general examples of fields of 
``artistic or creative endeavor.'' Proposed subsection (c) set forth 
more specific examples of creative professionals, and proposed 
subsection (d) provided guidance on journalists.
    The final rule deletes the ``office or non-manual work'' language 
in subsection 541.302(a) for the reasons discussed above under section 
541.300. In addition, the words ``or intellectual'' have been 
reinserted from the existing regulations into subsection (a) because 
its deletion in the proposal was unintentional. To add further clarity 
to the requirement of ``invention, imagination, originality or 
talent,'' final subsection (c) adds: ``The duties of employees vary 
widely, and exemption as a creative professional depends on the extent 
of the invention, imagination, originality or talent exercised by the 
employee. Determination of exempt creative professional status, 
therefore, must be made on a case-by-case basis.'' As described in more 
detail below, the final rule also makes substantial changes to 
subsection (d) regarding journalists.
    Because the proposal adopted the primary duty test of the existing 
regulations with few changes, the Department received few substantive 
comments on this section except for comments regarding journalists. The 
American Federation of Television and Radio Artists expresses concern 
that the proposed regulations would lead to an across-the-board 
exemption of all journalists, including employees of smaller news 
organizations, whom the organization believes should not be exempt. In 
an opposing view, the Newspaper Association of America and the National 
Newspaper Association, an organization of smaller newspapers,\10\ 
support the proposed regulations relating to journalists and would seek 
to have all reporters of community newspapers classified as exempt.
---------------------------------------------------------------------------

    \10\ Employees of small newspapers and small radio and 
television stations are statutorily exempt from the overtime pay 
requirement under sections 13(a)(8) and 13(b)(9) of the Act, 
respectively. 29 U.S.C. 213(a)(8); 29 U.S.C. 213(b)(9).
---------------------------------------------------------------------------

    Proposed subsection (d) was intended to reflect current federal 
case law regarding the status of journalists as creative professionals. 
Reich v. Gateway Press, Inc., 13 F.3d 685, 689 (3rd Cir. 1994), for 
example, involved the exempt status of reporters who worked for weekly 
newspapers either rewriting press releases under various topics such as 
``what's happening,'' ``church news,'' ``school lunch menus,'' and 
``military news,'' or writing standard recounts of public information 
by gathering facts on routine community events. In affirming the lower 
court's decision that the plaintiffs were not exempt, the appellate 
court evaluated the duties of reporters in light of the Department's 
interpretive guidelines, current section 541.302(d), which states: 
``The majority of reporters do work which depends primarily on 
intelligence, diligence, and accuracy. It is the minority whose work 
depends primarily on `invention, imaging [sic], or talent.''' The court 
concluded that the duties of the weekly newspaper reporters did not 
require invention, imagination, or talent:

    This work does not require any special imagination or skill at 
making a complicated thing seem simple, or at developing an entirely 
fresh angle on a complicated topic. Nor does it require invention or 
even some unique talent in finding informants or sources that may 
give access to difficult-to-obtain information.

13 F.3d at 700. However, the appellate court did recognize that not all 
fact-gathering duties are necessarily nonexempt work. While some fact-
gathering would entail the skill or expertise of an investigative 
reporter or bureau chief, the court found that the fact gathering 
performed by the reporters in the Gateway case did not rise to such 
level.
    The First Circuit reached a similar conclusion in Reich v. 
Newspapers of New England, Inc., 44 F.3d 1060 (1st Cir. 1995). In 
Newspapers of New England, the reporters had duties similar to those in 
the Gateway case. In finding such reporters nonexempt, the court 
observed that ``the day-to-day duties of these three reporters 
consisted primarily of `general assignment' work,'' and the reporters 
``[r]arely'' were ``asked to editorialize about or interpret the events 
they covered.'' Rather, the focus of their writing was ``to tell 
someone who wanted to know what happened * * * in a quick and 
informative and understandable way.'' Id. at 1075. Like the Third 
Circuit in Gateway, the First Circuit concluded that the reporters 
``were not performing duties which would place them in that minority of 
reporters `whose work depends primarily on invention, imaging [sic], or 
talent.''' Id. (citation omitted). See also Bohn v. Park City Group 
Inc., 94 F.3d 1457 (10th Cir. 1996) (employee employed as a technical 
writer or documenter in software and training departments did not 
perform work requiring artistic invention, imagination, or talent to 
qualify as an exempt artistic professional); Shaw v. Prentice Hall, 
Inc., 977 F. Supp. 909, 914 (S.D. Ind. 1997), aff'd, 151 F.3d 640 (7th 
Cir. 1998) (district court found that production editor in book 
publishing industry did not qualify as exempt

[[Page 22158]]

creative professional because the ``duty * * * to manage a book project 
through the editing and publishing process'' did not entail 
``invention, imagination, or talent in an artistic field of 
endeavor.'').
    In addition to examining the nature of the journalists' duties to 
determine exempt creative professional status, courts have looked to 
whether an employee's work is subject to substantial control from 
management. For example, in Dalheim v. KDFW-TV, 918 F. 2d 1220, 1229 
(5th Cir. 1990), the court found that while general-assignment 
reporters could be exempt creative professionals, the reporters in this 
case were nonexempt because ``their day-to-day work is in large part 
dictated by management.'' In addition, the court held that news 
producers were not exempt creative professionals because they performed 
work pursuant to ``a well-defined framework of management policies and 
editorial convention.''
    In contrast, other courts have recognized that some journalists 
perform work requiring invention, imagination and talent, and thus 
qualify as exempt creative professionals. For example, in Freeman v. 
National Broadcasting Co., 80 F.3d 78 (2nd Cir. 1996), the appellate 
court found that the duties of a domestic news writer, domestic 
producer, and field producer for television news shows involved a 
sufficient amount of creativity to qualify them as exempt ``employees 
whose primary duty consists of the performance of work requiring 
invention, imagination, or talent in a recognized field of artistic 
endeavor.'' Id. at 82. The court noted that technological changes and 
the more sophisticated demands of the current news consumer have caused 
changes in the news industry, and stated that the lower court erred in 
finding the plaintiffs were nonexempt because it relied on a 
nonbinding, outdated, and inapplicable interpretation by the U.S. 
Department of Labor of the artistic professional exemption, section 
541.302(a). One of the reasons the appellate court gave scant weight to 
the Department's interpretation was the Department's failure to reflect 
the vast changes in the industry. The court described the transition 
that modern news organizations had experienced as follows:

    Dizzying technological advances and the sophisticated demands of 
the news consumer have resulted in changes in the news industry over 
the past half-century. This is particularly true of television news 
where the same news may be communicated by a variety of combined 
audio and visual presentations in which creativity is at a premium. 
Yet, over this period, the DOL has failed to update the journalism 
interpretations.

Id. at 85. Citing Sherwood v. Washington Post, 871 F. Supp. 1471, 1482 
(D.D.C. 1994), the NBC court acknowledged that there is a fundamental 
difference between a journalist working for a major news organization 
and a journalist working as a small press reporter. It would be 
``anachronistic, even irrational,'' the court wrote, ``to continue to 
impose these guidelines on many journalists in major news 
organizations.'' 80 F.3d at 85. The court in Truex v. Hearst 
Communications, Inc., 96 F. Supp. 2d 652, 661 (S.D. Tex. 2000), denying 
the employer's summary judgment motion regarding a sportswriter, also 
acknowledged the continuum that, on one end, consists of nonexempt 
reporters who gather and ``regurgitate'' facts and, on the other end, 
consists of exempt creative professionals who generate and develop 
ideas for stories in print or broadcast, with little editorial input.
    In proposed subsection (d), the Department intended to modify the 
existing regulations to reflect this federal case law. The Department 
did not intend to create an across the board exemption for journalists. 
As stated in the case law, the duties of employees referred to as 
journalists vary along a spectrum from the exempt to the nonexempt, 
regardless of the size of the news organization by which they are 
employed. The less creativity and originality involved in their 
efforts, and the more control exercised by the employer, the less 
likely are employees classified as journalists to qualify as exempt. 
The determination of whether a journalist is exempt must be made on a 
case-by-case basis. The majority of journalists, who simply collect and 
organize information that is already public, or do not contribute a 
unique or creative interpretation or analysis to a news product, are 
not likely to be exempt.
    In order to reflect this case law more accurately, the Department 
has modified section 541.302(d) to state as follows:

    Journalists may satisfy the duties requirements for the creative 
professional exemption if their primary duty is work requiring 
invention, imagination, originality or talent, as opposed to work 
which depends primarily on intelligence, diligence and accuracy. 
Employees of newspapers, magazines, television and other media are 
not exempt creative professionals if they only collect, organize and 
record information that is routine or already public, or if they do 
not contribute a unique interpretation or analysis to a news 
product. Thus, for example, newspaper reporters who merely rewrite 
press releases or who write standard recounts of public information 
by gathering facts on routine community events are not exempt 
creative professionals. Reporters also do not qualify as exempt 
creative professionals if their work product is subject to 
substantial control by the employer. However, journalists may 
qualify as exempt creative professionals if their primary duty is 
performing on the air in radio, television or other electronic 
media; conducting investigative interviews; analyzing or 
interpreting public events; writing editorials, opinion columns or 
other commentary; or acting as a narrator or commentator.
Section 541.303 Teachers
    The Department received few comments on this provision and does not 
believe any substantive changes to this section are necessary in light 
of those comments.
Section 541.304 Practice of Law or Medicine
    The Department received few comments on this provision and does not 
believe any substantive changes to this section are necessary in light 
of those comments.

Subpart E, Computer Employees

Sections 541.400-402
    The proposed regulations consolidated all of the regulatory 
guidance on the computer occupations exemption into a new regulatory 
Subpart E, by combining provisions of the current regulations found at 
sections 541.3(a)(4), 541.205(c)(7), and 541.303. Proposed Subpart E 
collected into one place the substance of the original 1990 statutory 
enactment, the 1992 final regulations, and the 1996 statutory enactment 
(section 13(a)(17) of the FLSA). Because the key regulatory language 
that resulted from the 1990 enactment is now substantially codified in 
section 13(a)(17) of the FLSA, no substantive changes were proposed to 
that language comprising the primary duty test for the computer 
exemption. However, the proposal removed the additional regulatory 
requirement, not contained in section 13(a)(17) of the FLSA, that an 
exempt computer employee must consistently exercise discretion and 
judgment. Because of the tremendously rapid pace of significant changes 
occurring in the information technology industry, the proposal did not 
cite specific job titles as examples of exempt computer employees, as 
job titles tend to quickly become outdated.
    Based on the comments received and for reasons discussed below, 
several changes have been made in the final rule to further align the 
regulatory text with the specific standards adopted by the Congress for 
the computer employee

[[Page 22159]]

exemption in section 13(a)(17) of the FLSA. Section 541.401 of the 
proposed rule, which discussed the high level of skill and expertise in 
``theoretical and practical application'' of specialized computer 
systems knowledge as a prerequisite for exemption (a carry-over from 
the rules in effect prior to the 1996 statutory amendment), has been 
deleted from the final rule, as it goes beyond the scope of the 
specific standards adopted by Congress in section 13(a)(17).
    As described in the preamble to the proposed rule, the exemption 
for employees in computer occupations has a unique legislative and 
regulatory history. In November 1990, Congress enacted legislation 
directing the Department of Labor to issue regulations permitting 
computer systems analysts, computer programmers, software engineers, 
and other similarly-skilled professional workers to qualify as exempt 
executive, administrative, or professional employees under FLSA section 
13(a)(1). This enactment also extended the exemption to employees in 
such computer occupations if paid on an hourly basis at a rate at least 
6\1/2\ times the minimum wage. Final implementing regulations were 
issued in 1992. See 29 CFR 541.3(a)(4), 541.303; 57 FR 46744 (Oct. 9, 
1992); 57 FR 47163 (Oct. 14, 1992). However, when Congress increased 
the minimum wage in 1996, Congress enacted, almost verbatim, most--but 
not all--of the Department's regulatory language comprising the 
computer employee ``primary duty test'' as a separate statutory 
exemption, under a new FLSA section 13(a)(17). Section 13(a)(17) 
exempts ``any employee who is a computer systems analyst, computer 
programmer, software engineer, or other similarly skilled worker, whose 
primary duty is (A) the application of systems analysis techniques and 
procedures, including consulting with users, to determine hardware, 
software or system functional specifications; (B) the design, 
development, documentation, analysis, creation, testing or modification 
of computer systems or programs, including prototypes, based on and 
related to user or system design specifications; (C) the design, 
documentation, testing, creation or modification of computer programs 
related to machine operating systems; or (D) a combination of [the 
aforementioned duties], the performance of which requires the same 
level of skills * * *.'' The 1996 enactment also froze the hourly 
compensation test at $27.63 (which equaled 6\1/2\ times the former 
$4.25 minimum wage). The 1996 enactment included no delegation of 
rulemaking authority to the Department of Labor to further interpret or 
define the scope of the exemption; however, the original 1990 statute 
was not repealed by the 1996 amendment.
    A number of employers and business groups commenting on the 
proposal believe that the Department should update the computer 
exemption regulations to reflect the status of the many new job 
classifications that have arisen since the computer exemption 
regulations were first promulgated in the early 1990s. They suggest 
that the Department expand the computer employee exemption beyond the 
specific terms used in section 13(a)(17), to include additional job 
titles like network managers, LAN/WAN administrators, database 
administrators, web site design and maintenance specialists, and 
systems support specialists performing similar duties with hardware, 
software and communications networks.
    The Wisconsin Department of Employment Relations notes that most 
computer professionals now work within a personal computer, network-
based environment and recommends adding language to the duties test 
that addresses hardware, software, and network-based duties, to make 
the test more relevant and applicable to current computer environments. 
The HR Policy Association comments that the computer professionals 
exemption was written 11 years ago, and considerable confusion exists 
over which jobs are covered. The commenter suggests that the Department 
provide additional guidance in the preamble through illustrative 
examples analyzing exempt computer jobs. The HR Policy Association also 
recommends clarifying the duties for computer employees who do not 
program yet have highly sophisticated roles in maintaining computer 
software and systems, such as network managers, systems integration 
professionals, programmers, certain help desk professionals, and those 
who provide end-user support. The U.S. Chamber of Commerce asks the 
Department to recognize that the computer exemption applies not only to 
analysts, programmers, and engineers, but also to those with similar 
skills, and suggested amendments to the regulations to include network, 
LAN, and database analysts and developers, Internet administrators, 
individuals responsible for troubleshooting, those who train new 
employees, and those who install hardware and software. The Financial 
Services Roundtable comments that the specialized education necessary 
to acquire the complex knowledge associated with software languages, 
relational database applications, and/or communication or operating 
system software should correlate with the exemption for computer 
employees. The Information Technology Industry Council and Organization 
Resources Counselors suggest the Department clarify that computer 
networks and the Internet are included in the phrase ``computer 
systems,'' and that high-level work on a computer's database or on the 
Internet is covered by the reference to programming or analysis.
    The Workplace Practices Group notes that past distinctions between 
software and hardware positions have long converged. Today, according 
to this commenter, enterprise applications run on sophisticated 
networks administered by highly skilled and highly compensated LAN/WAN 
professionals who typically understand both networking and 
telecommunications theory and practice, some of whom are required to 
have a college degree in computer science, management information 
systems, or the equivalent, often with an additional preference that 
the individual have server or system-level engineer certification.
    The National Association of Computer Consultant Businesses (NACCB) 
notes that the computer employee exemption is unique in that it has a 
dual statutory basis--section 13(a)(1) (from the 1990 law) and section 
13(a)(17) (from 1996). NACCB urges that the Department explore how the 
exemption applies under the 1990 law to workers beyond those covered by 
section 13(a)(17) in 1996, and address what other duties, apart from 
those listed in the proposed regulations, should be included in the 
computer employee exemption in accordance with the 1990 enactment. This 
commenter suggests an illustrative list of ``similarly skilled 
workers'' covered by the exemption, to include database administrators, 
network or system administrators, computer support specialists 
including help desk technicians, and technical writers. This commenter 
also suggests definitions for ``system functional specifications,'' 
``computer systems,'' and ``machine operating systems.''
    Other commenters, in contrast, question the Department's authority 
to expand the computer employee exemption beyond the express terms used 
by the Congress in 1996 under section 13(a)(17). The McInroy & Rigby 
law firm states that the Department should not expand the computer 
exemption, and that there is no justification for any such expansion. 
The Fisher & Phillips law firm states

[[Page 22160]]

that, unlike in section 13(a)(1), in section 13(a)(17) Congress granted 
no authority to the Secretary of Labor to define or delimit the 
computer employee exemption. This commenter suggests that the final 
regulations clarify that references to section 13(a)(17) are 
illustrative only and are not to be taken as affecting the scope or 
application of that exemption in any respect.
    The Workplace Practices Group also traces the evolution of the 
statutory exemption for computer employees noting that, while the 
Department has authority to define and delimit the section 13(a)(1) 
exemptions by regulation, the Department has no such authority under 
the computer exemption in section 13(a)(17). If additional positions 
are to be found exempt under the computer exemption, that status must 
be found clearly within the provisions specified by Congress under 
section 13(a)(17), according to this commenter.
    While the Department recognizes that the computer employee 
exemption has been particularly confusing given its history, and that 
comments were invited on whether any further clarifications were 
possible under the terms of the statute, the Department believes that 
creating two different definitions for computer employees exempt under 
sections 13(a)(1) and 13(a)(17) of the FLSA would be inappropriate 
given that Congress recently spoke directly on this issue in 1996 under 
section 13(a)(17). Moreover, adopting such inconsistent definitions 
would be confusing and unwieldy for the regulated community.
    Section 13(a)(17) exempts computer positions that are ``similarly 
skilled'' to a systems analyst, programmer, or software engineer, but 
only if the primary duty of the position in question includes the 
specified ``systems analysis techniques * * * to determine hardware, 
software, or system functional specifications'' or a combination of 
duties prescribed in section 13(a)(17), ``the performance of which 
requires the same level of skills.'' Depending on the particular facts, 
some of the computer occupations mentioned in the comments could in 
fact meet this statutory primary duty test for the computer exemption 
without having to specifically cite job titles in the regulations to 
qualify for exemption. Where the prescribed duties tests are met, the 
exemption may be applied regardless of the job title given to the 
particular position. Since an employee's job duties, not job title, 
determine whether the exemption applies, we do not believe it is 
appropriate, given the history of the computer employee exemption, to 
cite additional job titles as exempt beyond those cited in the primary 
duty test of the statute itself. In each instance, regardless of the 
job title involved, the exempt status of any employee under the 
computer exemption must be determined from an examination of the actual 
job duties performed under the criteria in section 13(a)(17) of the 
Act. In addition, the Department notes that certain jobs cited in the 
comments could in fact meet the duties test for the administrative 
employee exemption and be exempt on that basis where all those tests 
are met, as the proposed regulations pointed out (see proposed section 
541.403) and some commenters observe.
    Several commenters question whether it was an oversight for the 
Department not to include the computer employee exemption within the 
proposed special exemption for highly compensated employees. As 
originally proposed in section 541.601, an employee performing office 
or non-manual work who is guaranteed total annual compensation of at 
least $65,000 and who performs any one or more of the exempt duties or 
responsibilities of an executive, administrative, or professional 
employee could be found exempt. Because Congress included a detailed 
primary duty test in the computer exemption, the Department did not 
apply the highly compensated exemption to computer employees. We 
continue to believe that decision was sound, and follows the statutory 
primary duty standards adopted by the Congress in section 13(a)(17) of 
the Act. It should also be noted that, for the same reason, the 
Department in its proposal removed the limitation contained in section 
541.303 of the current rule (adopted prior to 1996) that limited the 
exemption to employees who work in software functions, as no such 
limitation exists in the statutory exemption enacted in 1996. 
Similarly, the Department rejects, as inconsistent with the 1996 
enactment, comments suggesting that we reinsert the requirement that an 
exempt computer employee must ``consistently exercise discretion and 
judgment.'' Minor editorial revisions have been made to further conform 
the regulatory language to the statute, but no other suggested 
revisions have been adopted.

Subpart F, Outside Sales Employees

Section 541.500 General Rule for Outside Sales Employees
    Section 13(a)(1) of the FLSA contains a separate exemption for any 
employee employed ``in the capacity of outside salesman.'' Proposed 
section 541.500 set forth the general rule for exemption of such 
``outside sales'' employees.\11\ Under proposed subsection 541.500(a), 
the outside sales exemption applied to any employee ``with a primary 
duty of (i) making sales within the meaning of section 3(k) of the Act, 
or (ii) obtaining orders or contracts for services or for the use of 
facilities for which a consideration will be paid by the client or 
customer.'' In addition, to qualify for exemption the outside sales 
employee must be ``customarily and regularly engaged away from the 
employer's place or places of business in performing such primary 
duty.'' Finally, proposed subsection 541.500(b) stated that in 
determining the primary duty of an outside sales employee, ``work 
performed incidental to and in conjunction with the employee's own 
outside sales or solicitations, including incidental deliveries and 
collections, shall be regarded as exempt outside sales work.'' Under 
this subsection, other work that furthers the employee's sales effort, 
including ``writing sales reports, updating or revising the employee's 
sales or display catalogue, planning itineraries and attending sales 
conferences,'' is also considered exempt work.
---------------------------------------------------------------------------

    \11\ Although the statute refers to ``salesman,'' the final 
rule, without objection from commenters, replaces this gender-
specific term with ``outside sales employees.''
---------------------------------------------------------------------------

    The Department has retained this general rule as proposed.
    The only modification intended in the proposed regulations was 
removing the restriction that exempt outside sales employees could not 
perform work unrelated to outside sales for more than 20-percent of the 
hours worked in a workweek by nonexempt employees of the employer. This 
revision was proposed for consistency with the ``primary duty'' 
approach adopted for the other section 13(a)(1) exemptions. In 
addition, the current outside sales 20-percent restriction is 
particularly complicated and confusing since it relies on the work 
hours of nonexempt employees and requires tracking the time of 
employees who, by definition, spend much of their time away from the 
employer's place of business.
    A large majority of the comments that address the outside sales 
exemption express support for the adoption of the ``primary duty'' test 
in lieu of the 20-percent rule. For example, the Society for Human 
Resource Management (SHRM) and Grocery Manufacturers of America (GMA) 
state that this revision would provide a more practical method for 
employers to determine whether an employee qualifies as an exempt 
outside sales employee. According to SHRM, in

[[Page 22161]]

order to keep an account of the percentage of time that outside sales 
employees spend on exempt versus nonexempt tasks, as required under the 
20-percent rule, employers essentially have to track the hours of their 
outside sales employees. SHRM notes that it is very difficult for 
employers to meet this responsibility given that outside sales 
employees spend large amounts of time away from their employers' 
regular places of business. GMA shares these concerns, stating that 
keeping track of an outside sales employee's individual activities to 
determine whether they are exempt, nonexempt or incidental to exempt 
sales activity is administratively difficult, if not impossible. The 
National Small Business Association comments that moving away from a 
percentage basis to the new definition of ``primary duty'' will 
alleviate much of the administrative burden on small business owners.
    Two law firms commenting on the outside sales exemption (Goldstein 
Demchak Baller Borgen & Dardarian and McInroy & Rigby) ask the 
Department to retain the current 20-percent limit on nonexempt work. 
Both firms express concern that the outside sales exemption would be 
subject to abuse by employers without a ``bright-line'' 20-percent 
test. In other words, employers might misclassify sales personnel as 
exempt under the outside sales exemption by merely requiring that they 
perform only minor amounts of outside sales work. A few commenters, 
such as the AFL-CIO, generally oppose removing the 20-percent 
limitation on nonexempt work for the same reasons discussed above in 
connection with the executive, administrative and professional 
exemptions.
    After review of the relevant comments, the Department continues to 
believe that the application of the primary duty test to the outside 
sales exemption is preferable to the 20-percent tolerance test. As 
noted in several comments, the primary duty test is relatively simple, 
understandable and eliminates much of the confusion and uncertainty 
that are present under the existing rule. Cf. Ackerman v. Coca-Cola 
Enterprises, Inc., 179 F.3d 1260, 1267 (10th Cir. 1999) (citing 
existing Sec.  541.505(a) to the effect that `` `[a] determination of 
an employee's chief duty or primary function must be made in terms of 
the basic character of the job as a whole' and that ``the time devoted 
to the various duties is an important, but not necessarily controlling, 
element' ''), cert. denied, 528 U.S. 1145 (2000). It also avoids the 
necessity that employers track the hours of its outside sales 
employees, which is consistent with the underlying rationale for 
exempting outside salespersons. Utilization of the primary duty concept 
also provides a consistent approach between the outside sales exemption 
and the exemptions for executive, administrative and professional 
employees. Finally, the Department is of the view that concerns 
relating to potential abuse under the new rule are addressed by the 
objective criteria and factors for determining an employee's primary 
duty that are contained in section 541.700.
Section 541.501 Making Sales or Obtaining Orders
    Proposed section 541.501 defined the term ``sales'' consistent with 
section 3(k) of the FLSA, to include ``any sale, exchange, contract to 
sell, consignment for sale, shipment for sale, or other disposition.'' 
Proposed subsection (b) also stated that ``sales'' includes the 
transfer of title to tangible property and transfer of tangible and 
valuable evidences of intangible property. Proposed subsections (c) and 
(d) defined the phrase ``obtaining orders or contracts for services or 
for the use of facilities'' to include such activities as selling of 
time on radio or television; soliciting of advertising for newspapers 
and other periodicals; soliciting of freight for railroads and other 
transportation agencies; and taking orders for a service which may be 
performed for the customer by someone other than the person taking the 
order.
    The Department's proposal removed outdated examples and unnecessary 
language from current section 541.501, but did not intend any 
substantive changes. The Department has retained the proposed changes 
to section 541.501 in the final rule.
    The Department received few comments on this section. However, one 
commenter expresses concern regarding the Department's decision to 
remove current section 541.501(e), which states that the outside sales 
exemption does not apply to ``servicemen even though they may sell the 
service which they themselves perform.'' The commenter claims that, 
because of the removal of subsection (e), service technicians would be 
classified as exempt outside sales employees. The Department believes 
that subsection (e) is an unnecessary example, and its removal is not a 
substantive change. The Department agrees with the commenter that an 
employee whose primary duty is to repair or service products (e.g., 
refrigerator repair) does not qualify as an exempt outside sales 
employee. However, we continue to believe that this conclusion is 
obvious from the regulations and this example is unnecessary.
Section 541.502 Away From Employer's Place of Business
    An outside sales employee must be customarily and regularly engaged 
``away from the employer's place or places of business.'' This phrase 
was defined in proposed section 541.502, which began in subsection (a) 
by stating: ``The Administrator does not have authority to define this 
exemption for `outside' sales under section 13(a)(1) of the Act as 
including inside sales work. Section 13(a)(1) does not exempt inside 
sales and other inside work (except work performed incidental to and in 
conjunction with outside sales and solicitations). However, section 
7(i) of the Act exempts commissioned inside sales employees of 
qualifying retail or service establishments if those employees meet the 
compensation requirements of section 7(i).'' The actual definition of 
``away from the employer's place of business'' was contained in 
proposed subsection (b) which requires that an exempt outside sales 
employee make sales ``at the customer's place of business or, if 
selling door-to-door, at the customer's home.'' Proposed subsection (b) 
also stated that: ``Outside sales does not include sales made by mail, 
telephone or the Internet unless such contact is used merely as an 
adjunct to personal calls. Thus, any fixed site, whether home or 
office, used by a salesperson as a headquarters or for telephonic 
solicitation of sales is considered one of the employer's places of 
business, even though the employer is not in any formal sense the owner 
or tenant of the property.''
    Numerous commenters request that the Department delete the language 
in proposed section 541.502(a) regarding the Administrator's lack of 
authority to expand the outside sales exemption to include inside sales 
work. For example, the U.S. Chamber of Commerce urges the Department 
not to use expansive language that could be read to render all inside 
sales employees nonexempt, even if they meet the requirements of the 
executive, administrative or professional exemptions.
    The Department has decided to make the changes requested by these 
commenters, not due to any inaccuracy in the sentence, but because we 
agree that this language might imply that sales employees, inside or 
outside, can only have exempt status by meeting the requirements for 
the section 13(a)(1) ``outside sales'' exemption. Thus, the final rule 
eliminates most of the regulatory text in proposed section 541.502(a), 
including the language

[[Page 22162]]

regarding the Administrator's lack of authority to define the 
``outside'' sales exemption to include ``inside'' sales work and the 
language regarding the section 7(i) exemption. The Department is 
deleting this language to avoid any misunderstanding that the outside 
sales exemption is the only exemption available for sales employees. 
Other exemptions in the statute, including the section 7(i) exemption 
for commissioned employees of retail and service establishments, and 
the executive, administrative and professional exemptions, are also 
available for sales employees who can meet all the requirements for any 
of those exemptions.
    The Department emphasizes, however, that notwithstanding these 
deletions to the proposed language of section 541.502(a), the 
Administrator does not have statutory authority to exempt inside sales 
employees from the FLSA minimum wage and overtime requirements under 
the outside sales exemption. Those comments that ask the Department to 
revise the regulatory definition of an outside sales employee to 
include inside sales employees, on the basis that they perform much the 
same functions as outside sales employees, must be rejected as beyond 
the statutory authority of the Administrator. For example, the National 
Association of Manufacturers (NAM) states that, because of 
technological advances, inside sales employees perform the same 
functions as outside sales employees, with the only distinction being 
an on-site visit by the outside sales employee. According to NAM, fax 
machines, voice-mail, teleconferencing, cellular phones, computers, and 
videoconferencing all enable office-based sales personnel to emulate 
the customer contact formerly within the exclusive province of outside 
salespersons.
    Finally, the National Automobile Dealers Association asks that the 
definition of ``away from the employer's place of business'' be 
expanded to encompass trade shows. The Department believes that, if 
sales occur, trade shows are similar to the ``hotel sample room'' 
example in the current and proposed regulations. In trade shows, as in 
the hotel sample room, a sales employee displays the employer's product 
over a short time period and for the purpose of promoting or making 
sales in a room not owned by the employer. Accordingly, we have added 
language to clarify that an outside sales employee does not lose the 
exemption by displaying the employer's products at a trade show. If 
selling actually occurs, rather than just sales promotion, trade shows 
of short duration (i.e., one or two weeks) should not be considered as 
the employer's places of business.
Section 541.503 Promotion Work
    Under proposed section 541.503, ``promotional work'' is exempt 
outside sales work if it ``is actually performed incidental to and in 
conjunction with an employee's own outside sales or solicitations.'' 
However, ``promotional work that is incidental to sales made, or to be 
made, by someone else is not exempt outside sales work.'' Proposed 
subsections 541.503(b) and 541.503(c) include examples to illustrate 
when promotional activities are exempt versus nonexempt work. To 
address commenter concerns discussed below, the Department has made 
minor changes to section 541.503(c).
    Several commenters, including the Grocery Manufacturers Association 
(GMA), ask the Department to eliminate the emphasis upon an employee's 
``own'' sales in the proposed regulations. According to GMA, because of 
team selling, customer control of order processing, and increasing 
computerization of sales and purchasing activities, many of its members 
do not analyze performance of their salespersons by looking at their 
``own'' sales. In other words, they do not evaluate their sales 
personnel based on their ``sales numbers,'' but rather their ``sales 
efforts.'' GMA urges the Department to modify the outside sales 
regulations to exempt promotion work when it is performed incidental to 
and in connection with an employee's ``sales efforts'' and to delete 
the requirement that such work be incidental to the employee's ``own'' 
sales. GMA states this change is necessary to maintain the exemption 
where customers enter orders into a computer system, rather than by 
submitting a paper order to the outside sales employee whose 
promotional efforts helped facilitate the sale.
    The U.S. Chamber of Commerce (Chamber) expresses similar concerns, 
stating that due to advances in computerized tracking of inventory and 
product shipment, the sales of manufactured goods are increasingly 
driven by computerized recognition of decreases in customer's 
inventory, rather than specific face-to-face solicitations by outside 
sales employees. The Chamber states that, under these circumstances, 
the role of the outside sales employee has, in many instances, changed 
to one of facilitation of sales. The Chamber maintains that promotional 
activities, even when they do not culminate in an individual sale, are 
nonetheless an integral part of the sales process.
    The National Association of Manufacturers (NAM) also expresses 
concern that the proposal does not take into account the extent to 
which modern technology affects the outside sales exemption. NAM 
states, for example, that outside sales employees might lose their 
exempt status where products stored in centralized warehouses are 
ordered through the customer's internal computerized purchasing system. 
In other words, such employees might not be viewed as having 
``consummated the sale'' or ``directed efforts toward the consummation 
of the sale.'' NAM comments that employees who have long functioned as 
outside sales employees may no longer be exempt under the proposed 
regulations because they no longer execute contracts or write orders 
due to technological advances in the retail business.
    After reviewing the comments and current case law, the Department 
has made minor changes to section 541.503(c) to address commenter 
concerns that technological changes in how orders are taken and 
processed should not preclude the exemption for employees whose primary 
duty is making sales. As indicated in the proposal, the Department does 
not intend to change any of the essential elements required for the 
outside sales exemption, including the requirement that the outside 
sales employee's primary duty must be to make sales or to obtain orders 
or contracts for services. An employer cannot meet this requirement 
unless it demonstrates objectively that the employee, in some sense, 
has made sales. See 1940 Stein Report at 46 (outside sales exemption 
does not apply to an employee ``who does not in some sense make a 
sale'') (emphasis added). Extending the outside sales exemption to 
include all promotion work, whether or not connected to an employee's 
own sales, would contradict this primary duty test. See 1940 Stein 
Report at 46 (outside sales exemption does not extend to employees 
``engaged in paving the way for salesmen, assisting retailers, and 
establishing sales displays, and so forth'').
    Nonetheless, the Department agrees that technological changes in 
how orders are taken and processed should not preclude the exemption 
for employees who in some sense make the sales. Employees have a 
primary duty of making sales if they ``obtain a commitment to buy'' 
from the customer and are credited with the sale. See 1949 Weiss Report 
at 83 (``In borderline cases

[[Page 22163]]

the test is whether the person is actually engaged in activities 
directed toward the consummation of his own sales, at least to the 
extent of obtaining a commitment to buy from the person to whom he is 
selling. If his efforts are directed toward stimulating the sales of 
his company generally rather than the consummation of his own specific 
sales his activities are not exempt''). See also Ackerman v. Coca-Cola 
Enterprises, Inc., 179 F.3d 1260, 1266-67 (10th Cir. 1999) (substantial 
merchandising responsibilities, including restocking of store shelves 
and setting up product displays, did not defeat outside sales exemption 
for soft drink advance sales reps and account managers where such 
responsibilities were ``incidental to and in conjunction with'' sales 
they consummated at stores they visited), cert. denied, 528 U.S. 1145 
(2000); Wirtz v. Keystone Readers Service, Inc., 418 F.2d 249, 261 (5th 
Cir. 1969) (``student salesmen'' not exempt where engaged in 
promotional activities incidental to sales thereafter made by others).
    Exempt status should not depend on whether it is the sales employee 
or the customer who types the order into a computer system and hits the 
return button. The changes to proposed section 541.503(c) are intended 
to avoid such a result. Finally, the Department notes that outside 
sales employees may also qualify as exempt executive, administrative or 
professional employees if they meet the requirements for those 
exemptions. For example, an employee whose primary duty is promotion 
work such as advertising or marketing--not selling--may not meet the 
requirements for the ``outside sales'' exemption, but could be an 
exempt administrative employee.
Section 541.504 Drivers Who Sell
    Under proposed section 541.504(a), drivers ``who deliver products 
and also sell such products may qualify as exempt outside sales 
employees only if the employee has a primary duty of making sales.'' 
Proposed subsection (b) provided factors that should be considered when 
determining whether the driver's primary duty is making sales: ``A 
comparison of the driver's duties with those of other employees engaged 
as truck drivers and as salespersons; possession of a selling or 
solicitor's license when such license is required by law or ordinances; 
presence or absence of customary or contractual arrangements concerning 
amounts of products to be delivered; description of the employee's 
occupation in collective bargaining agreements; the employer's 
specifications as to qualifications for hiring; sales training; 
attendance at sales conferences; method of payment; and proportion of 
earnings directly attributable to sales.''
    The Department has made no substantive changes to proposed section 
541.504, although editorial changes have been made to final subsections 
541.504(a) and 541.504(c)(4) as described below.
    The Grocery Manufacturers Association (GMA) has several concerns 
regarding proposed section 541.504. In its comments, for example, GMA 
sees a possible inconsistency between the language of proposed section 
541.500(b) and proposed section 541.504(a). Proposed section 541.500(b) 
states that ``[i]n determining the primary duty of an outside sales 
employee, work performed incidental to and in conjunction with an 
employee's own outside sales or solicitations, including incidental 
deliveries and collections, shall be regarded as exempt outside sales 
work.'' Proposed section 541.504(a) states with respect to drivers who 
sell that ``[i]f the employee has a primary duty of making sales, all 
work performed incidental to and in conjunction with the employee's own 
sales efforts * * * is exempt work.'' GMA believes that it is 
inconsistent with section 541.500(b) to make the inclusion of driver/
salesperson's incidental work within the outside sales exemption 
conditional upon the employee having a primary duty of making sales. 
GMA therefore urges the Department to delete the conditional phrase 
``[i]f the employee has a primary duty,'' from the second sentence of 
proposed section 541.504(a).
    The Department had no intention of creating a different standard 
regarding incidental work for drivers who sell as opposed to other 
outside sales employees. The two subsections at issue used different 
language to describe the same concept, which could lead to confusion. 
Accordingly, we have modified final section 541.504(a) to track the 
language from section 541.500(b).
    GMA also requests that the Department clarify section 
541.504(c)(1), to the extent it describes a driver who may qualify for 
the outside sales exemption as one ``who receives compensation 
commensurate with the volume of products sold.'' GMA does not believe 
that commissions alone should be used to determine exempt status. GMA 
therefore suggests that this regulation be broadened to recognize 
compensation systems which, while not commission-based, provide 
``compensation at least partially based on the volume of products 
sold,'' such as bonuses or other forms of recognition based on 
individual, group or corporate goals and volumes.
    The Department believes that the phrase in question, ``[a] driver * 
* * who receives compensation commensurate with the volume of products 
sold,'' helps provide an accurate example of an employee who has a 
primary duty of making sales. This phrase generally describes an 
employee paid on a commission basis, which is a commonly and frequently 
utilized method for compensating sales personnel. Since section 
541.504(c)(1) is intended to provide guidance by presenting an example 
of a driver who may qualify as an exempt outside sales employee and, as 
such, does not foreclose the exemption for employees who receive other 
types of compensation, we have not made the requested change.
    GMA also suggests that the Department delete the phrase ``and 
carrying an assortment of the employer's products'' from proposed 
section 541.504(c)(4), because it should not matter whether the driver/
salesperson is carrying one product or an assortment of them. The 
Department agrees with the comment that it is not necessary for a 
driver to carry ``an assortment'' of products in order to qualify as 
exempt under the outside sales exemption. The availability of this 
exemption does not depend on either the volume or variety of products 
carried by the driver/salesperson in question. Accordingly, we have 
made the suggested change.
    Another commenter asks that the Department clarify that 
``Professional Drivers'' are nonexempt. This exemption covers drivers 
who have a primary duty of making sales. The primary duty test offers 
an alternative to job titles that may not accurately reflect job duties 
and actual performance. Therefore, the Department believes that a 
blanket statement that ``Professional Drivers'' are not exempt 
employees would not serve the interest of a more accurate rule.
    Finally, a commenter asks for more examples of outside sales 
employees, including drivers who sell. Proposed subsection 541.504(c) 
and 541.504(d) already contain a number of examples of drivers who 
would or would not qualify as exempt employees. The Department does not 
believe that there will be any value added to the regulation through 
additional examples.

Subpart G, Salary Requirements

Section 541.600 Amount of Salary Required
    Salary level tests have been included as part of the exemption 
criteria since

[[Page 22164]]

the original regulations of 1938. With a few exceptions, executive, 
administrative and professional employees must earn a minimum salary 
level to qualify for the exemption.\12\ Employees paid below the 
minimum salary level are not exempt, irrespective of their job duties 
and responsibilities. Employees paid a salary at or above the minimum 
level in the regulations are only exempt if they also meet the salary 
basis and job duties tests. To qualify for exemption under the existing 
regulations, an employee must earn a minimum salary of $155 per week 
($8,060/year) for the executive and administrative exemptions, and $170 
per week ($8,840/year) for the professional exemption. Employees paid 
above these minimum salary levels must meet a ``long'' duties test to 
qualify for the exemption. The existing regulations also provide, under 
special provisions for ``high salaried'' employees (see 29 CFR 541.119, 
541.214 and 541.315), that employees paid above a higher salary rate of 
$250 per week ($13,000/year) are exempt if they meet a ``short'' duties 
test. As the name implies, the short tests contain fewer duties 
requirements. Because the salary levels have not been increased since 
1975, the existing salary levels are outdated and no longer useful in 
distinguishing between exempt and nonexempt employees. A full-time 
minimum wage worker, in comparison, earns $206 per week ($5.15/hour x 
40 hours)--an amount above the existing ``long'' test levels and 
closely approaching the existing ``short'' test level. As a result, 
under the existing regulations, most employees are now tested for 
exemption under the ``short'' duties tests.
---------------------------------------------------------------------------

    \12\ For many years, the regulations have contained no salary 
level test for outside sales employees and some professional 
employees (teachers, doctors, lawyers). Such employees are exempt 
regardless of their salary. The final rule makes no changes in this 
area. Also, in 1990, Congress amended the FLSA to exempt certain 
hourly-paid computer professionals paid at least 6\1/2\ times the 
minimum wage (which then totaled $27.63 per hour; $57,470 per year, 
assuming 40 hours per week). Congress froze this compensation test 
at $27.63 per hour in 1996.
---------------------------------------------------------------------------

    The Department proposed that the minimum salary level required for 
exemption as an executive, administrative, or professional employee be 
increased from $155 per week ($8,060/year) to $425 per week ($22,100/
year). Thus, under proposed section 541.600(a), all employees earning 
less than $425 per week, either on an hourly or salary basis, would be 
guaranteed overtime protection, irrespective of their job duties and 
responsibilities. Employees earning $425 or more on a salary basis 
would only qualify for exemption if they met a new ``standard'' test of 
duties.
    The final rule adopts the new structure of the proposal to include 
a ``standard'' test of duties tied to a minimum salary level. However, 
the proposed rule used the Bureau of Labor Statistics' (BLS) year 2000 
Current Population Survey Outgoing Rotation Group data set, the most 
recent data available from BLS when the Preliminary Regulatory Impact 
Analysis was completed. When the Regulatory Impact Analysis for this 
final rule was completed, the most recent data available was the 2002 
CPS data set. Based on the more recent data, and taking into account 
numerous comments about the salary levels in the proposal, the 
Department has raised the minimum weekly salary level required for 
exemption in the final rule from $425 per week to $455 per week, an 
increase of $30 from the proposed regulations and an increase of $300 
per week from the existing minimum salary level. As a result of this 
increase, 6.7 million salaried workers who earn between $155 and $455 
per week will be guaranteed overtime protection, regardless of their 
duties.
    The remaining subsections of 541.600 retained, without substantive 
change from the existing regulations, certain special provisions 
regarding the salary requirements: Subsection (b) set forth the minimum 
salary levels required if the employee is paid on a biweekly, 
semimonthly or monthly basis; subsection (c) discussed the salary 
required for academic administrative employees; subsection (d) set 
forth the salary required for computer employees; and subsection (e) 
provided that the salary requirements do not apply to teachers, lawyers 
and doctors. The Department did not receive significant comments on 
these subsections, and thus no other changes have been made to section 
541.600.
    Most commenters agree that the minimum salary level needed to be 
increased, but disagreed sharply regarding the size of the increase. 
Some commenters state that the proposed $425 minimum salary level is 
too high, other commenters say it is too low, and some say it is just 
right.
    Some employer commenters, such as the U.S. Small Business 
Administration's Office of Advocacy, the American Health Care 
Association, and the Securities Industry Association's Human Resources 
Management Committee, strongly oppose the $425 per week minimum salary 
as too high. The Associated Builders and Contractors state that $425 
per week ``may be particularly high for rural areas of the country.'' 
Similarly, the National Grocers Association (NGA) comments that the 
$425 level ``could prove problematic for some retail grocers operating 
in differing geographic regions, such as rural areas and the South 
where economic conditions vary and pay scales are less.'' Based on 
their 2003 compensation survey, NGA suggests that the Department lower 
the minimum salary level to $400 per week. Some owners of small retail 
and restaurant businesses also filed comments asserting that $425 per 
week is too high. An owner of four Dairy Queen stores in Austin, Texas, 
for example, asks the Department to lower the minimum salary level to 
$400 per week because supervisor salaries in the area start at $21,000 
per year. A comment from Wesfam Restaurants requests that the 
Department lower the minimum salary level to $350 per week because the 
Department's proposed $425 level will cost the company at least 
$100,000 each year.
    Other organizations representing employer interests generally 
support the $425 salary level, but object to any further increase in 
this proposed minimum. For example, the U.S. Chamber of Commerce 
(Chamber) does not oppose the minimum salary level, but states that a 
significant minority of its members oppose the proposed compensation 
level as too high. Nevertheless, the Chamber opposes an increase to 
$425 per week if ``unaccompanied by significant changes in the duties 
and salary basis tests,'' and would oppose any compensation level 
higher than $425. The FLSA Reform Coalition, the Public Sector FLSA 
Coalition, the American Corporate Counsel Association and the HR Policy 
Association believe that the $425 per week minimum is reasonable. The 
National Restaurant Association recognizes that the salary levels have 
not been changed for many years, but states: ``Under no circumstance 
should the threshold be increased to a higher salary level [than $425 
per week]. In fact, the Association urges DOL to review the methodology 
used to establish the proposed minimum salary threshold of $425/wk. and 
reevaluate the impact of this threshold on specific industry sectors, 
including restaurants and retail establishments. Strong consideration 
should be given to adjusting the threshold downward to reflect the 
realities of variations in industry and regional compensation levels.'' 
Similarly, the National Council of Chain Restaurants asks the 
Department to ``resist any pressure to raise the salary threshold to an 
even

[[Page 22165]]

higher level, which would wreak havoc on the chain restaurant industry, 
and retailers generally.'' The Food Marketing Institute also opposes 
increasing the minimum salary level above $425, noting that this salary 
level will already particularly affect independent, family-owned 
grocery stores.
    On the other hand, organizations representing employee interests 
oppose the standard salary level as being too low. Such organizations 
advocate salary levels ranging from $530 per week to $1,000 per week. 
The AFL-CIO and the International Association of Machinists and 
Aerospace Workers, for example, purporting to apply the approach set 
forth in the 1958 Kantor Report to the current ``long'' and ``short'' 
duties test structure, suggest salary levels of at least $610 per week 
for the long test and $980 for the short test. The United Food and 
Commercial Workers International Union would adjust the current salary 
levels for inflation using the Consumer Price Index (CPI), resulting in 
a ``minimum of $530/week for the first level ($580 for professionals), 
and $855 for the second level.'' The American Federation of State, 
County and Municipal Employees similarly comments that adjusting the 
current salary levels to reflect changes in the CPI would increase the 
salary level under the ``long'' test for executive and administrative 
employees to $530 per week ($580 for professional employees) and to 
$855 per week for the ``short'' test.
    The Department has long recognized that the salary paid to an 
employee is the ``best single test'' of exempt status (1940 Stein 
Report at 19), which has ``simplified enforcement by providing a ready 
method of screening out the obviously nonexempt employees'' and 
furnished a ``completely objective and precise measure which is not 
subject to differences of opinion or variations in judgment.'' As the 
Department stated in 1949:

    [T]he salary tests, even though too low in the later years to 
serve their purpose fully, have amply proved their effectiveness in 
preventing the misclassification by employers of obviously nonexempt 
employees, thus tending to reduce litigation. They have simplified 
enforcement by providing a ready method of screening out the 
obviously nonexempt employees, making an analysis of duties in such 
cases unnecessary. The salary requirements also have furnished a 
practical guide to the inspector as well as to employers and 
employees in borderline cases. In an overwhelming majority of cases, 
it has been found by careful inspection that personnel who did not 
meet the salary requirements would also not qualify under other 
sections of the regulations as the Divisions and the courts have 
interpreted them. In the years of experience in administering the 
regulations, the Divisions have found no satisfactory substitute for 
the salary test.
* * * * *
    Regulations of general applicability such as these must be drawn 
in general terms to apply to many thousands of different situations 
throughout the country. In view of the wide variation in their 
applicability the regulations cannot have the precision of a 
mathematical formula. The addition to the regulations of a salary 
requirement furnishes a completely objective and precise measure 
which is not subject to differences of opinion or variations in 
judgment. The usefulness of such a precise measure as an aid in 
drawing the line between exempt and nonexempt employees, 
particularly in borderline cases, seems to me to be established 
beyond doubt.

    1949 Weiss Report at 8-9. See also 1940 Stein Report at 42 
(``salary paid the employee is the best single test''); 1958 Kantor 
Report at 2-3 (salary levels ``furnish a practical guide to the 
investigator as well as to employers and employees in borderline cases, 
and simplify enforcement by providing a ready method of screening out 
the obviously nonexempt employees'').
    While the purpose of the FLSA is to provide for the establishment 
of fair labor standards, the law does not give the Department authority 
to set minimum wages for executive, administrative and professional 
employees. These employees are exempt from any minimum wage 
requirements. The salary level test is intended to help distinguish 
bona fide executive, administrative, and professional employees from 
those who were not intended by the Congress to come within these exempt 
categories. Any increase in the salary levels from those contained in 
the existing regulation, therefore, has to have as its primary 
objective the drawing of a line separating exempt from nonexempt 
employees. Moreover, it has long been recognized that ``such a dividing 
line cannot be drawn with great precision but can at best be only 
approximate.'' 1949 Weiss Report at 11.
    Some of the comments opposed to the proposed $425 minimum salary 
level question the Department's methodology for setting the appropriate 
salary levels. The Department determined the appropriate methodology 
for adjusting the salary levels after a thorough review of the 
regulatory history of previous increases. The initial minimum salary 
level requirement for exemption, adopted in the 1938 regulations, was 
$30 a week for executive and administrative employees. The 1938 
regulations did not include a salary requirement for professional 
employees, or a ``short test'' salary level. We could find no 
regulatory history from 1938 regarding the rationale for setting the 
salary level at $30 a week. But see 1940 Stein Report at 20-21 ($30 
salary level adopted from the National Industrial Recovery Act and 
State law). Since 1938, and as shown in Table 1, the Department has 
increased the salary levels on six occasions--in 1940, 1949, 1958, 
1963, 1970 and 1975. Until 1975, the Department increased salary levels 
every five to nine years, and the largest increase was only $50 per 
week.

                                  Table 1.--Weekly Salary Levels for Exemption
----------------------------------------------------------------------------------------------------------------
                                              Executive      Administrative     Professional       Short test
----------------------------------------------------------------------------------------------------------------
1938....................................               $30               $30              None              None
1940....................................                30                50                50              None
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
----------------------------------------------------------------------------------------------------------------

    The regulatory history of these six increases reveals that, in 
determining appropriate salary levels, the Department has examined data 
on actual salaries and wages paid to exempt and nonexempt employees. In 
1940, the Department considered salary surveys by government agencies, 
experience under the National Industrial Recovery Act, and federal 
government salaries. 1940 Stein Report at 9, 20, 31-32. The Department 
then

[[Page 22166]]

used these salary data to determine the average salary that was the 
``dividing line'' between exempt and nonexempt employees, and to find 
the percentage of employees earning below various salary levels. The 
Department set the minimum required salary at levels below the average 
salary dividing exempt from nonexempt employees: ``Furthermore, these 
figures are averages, and the act applies to low-wage areas and 
industries as well as to high-wage groups. Caution therefore dictates 
the adoption of a figure that is somewhat lower, though of the same 
general magnitude.'' 1940 Stein Report at 32.
    In 1949, the Department looked at salary data from state and 
federal agencies, including the Bureau of Labor Statistics (BLS). The 
Department considered wages in small towns and low-wage industries, 
wages of federal employees, average weekly earnings for exempt 
employees and starting salaries for college graduates. 1949 Weiss 
Report at 10, 14-17, 19. The Department compared weekly earnings in 
1940 with weekly earnings in 1949 to determine the average percentage 
increase in earnings. As in 1940, the Department then set a salary 
level at a ``figure slightly lower than might be indicated by the 
data'' because of concerns regarding the impact of the salary level 
increases on small businesses: ``The salary test for bona fide 
executives must not be so high as to exclude large numbers of the 
executives of small establishments from the exemption.'' 1949 Weiss 
Report at 15.
    In 1958, the Department considered data collected during 1955 Wage 
and Hour Division investigations on ``the actual salaries paid'' to 
employees who ``qualified for exemption'' (i.e., met the applicable 
salary and duties tests), grouped by geographic region, broad industry 
groups, number of employees and size of city. 1958 Kantor Report at 6. 
The Department then set the salary tests for exempt employees ``at 
about the levels at which no more than about 10 percent of those in the 
lowest-wage region, or in the smallest size establishment group, or in 
the smallest-sized city group, or in the lowest-wage industry of each 
of the categories would fail to meet the tests.'' 1958 Kantor Report at 
6-7.
    The Department followed this same methodology when determining the 
appropriate salary level increase in 1963. The Department examined data 
on salaries paid to exempt workers collected in a special survey 
conducted by the Wage and Hour Division in 1961. 28 FR 7002 (July 9, 
1963). The salary level for executive and administrative employees was 
increased to $100 per week, for example, when the 1961 survey data 
showed that 13 percent of establishments paid one or more exempt 
executives less than $100 per week; and 4 percent of establishments 
paid one or more exempt administrative employees less than $100 a week. 
28 FR 7004 (July 9, 1963). The professional salary level was increased 
to $115 per week, when the 1961 survey data showed that 12 percent of 
establishments surveyed paid one or more professional employees less 
than $115 per week. 28 FR 7004. The Department noted that these salary 
levels approximated the same percentages used in 1958:

    Salary tests set at this level would bear approximately the same 
relationship to the minimum salaries reflected in the 1961 survey 
data as the tests adopted in 1958, on the occasion of the last 
previous adjustment, bore to the minimum salaries reflected in a 
comparable survey, adjusted by trend data to early 1958. At that 
time, 10 percent of the establishments employing executive employees 
paid one or more executive employees less than the minimum salary 
adopted for executive employees and 15 percent of the establishments 
employing administrative or professional employees paid one or more 
employees employed in such capacities less than the minimum salary 
adopted for administrative and professional employees. (28 FR 7004).

    The Department continued to use this methodology when adopting 
salary level increases in 1970. In 1970, the Department examined data 
from 1968 Wage and Hour Division investigations and 1969 BLS wage data. 
The Department increased the salary level for executive employees to 
$140 per week when the salary data showed that 20 percent of executive 
employees from all regions and 12 percent of executive employees in the 
West earned less than $130 a week. 35 FR 884 (January 22, 1970).
    The last increase to the salary levels was in 1975. Instead of 
following the prior approaches, in 1975 the Department set the salary 
levels based on increases in the Consumer Price Index, although it 
adjusted the salary level downward to eliminate any potential 
inflationary impact. 40 FR 7091 (February 19, 1975) (``However, in 
order to eliminate any inflationary impact, the interim rates 
hereinafter specified are set at a level slightly below the rates based 
on the CPI''). More to the point, the salary levels adopted were 
intended as interim levels ``pending the completion and analysis of a 
study by the Bureau of Labor Statistics covering a six month period in 
1975.'' Id. Thus, the Department again intended to increase the salary 
levels based on actual salaries paid to employees. However, the 
intended process was never completed, and the so-called ``interim'' 
salary levels have remained untouched for 29 years.
    In summary, the regulatory history reveals a common methodology 
used, with some variations, to determine appropriate salary levels. In 
almost every case, the Department examined data on actual wages paid to 
employees and then set the salary level at an amount slightly lower 
than might be indicated by the data. In 1940 and 1949, the Department 
looked to the average salary paid to the lowest level of exempt 
employee. Beginning in 1958, however, the Department set salary levels 
to exclude approximately the lowest-paid 10 percent of exempt salaried 
employees. Perhaps the best summary of this methodology appears in the 
1958 Kantor Report at pages 5-7:

    The salary tests have thus been set for the country as a whole * 
* * with appropriate consideration given to the fact that the same 
salary cannot operate with equal effect as a test in high-wage and 
low-wage industries and regions, and in metropolitan and rural 
areas, in an economy as complex and diversified as that of the 
United States. Despite the variation in effect, however, it is clear 
that the objectives of the salary tests will be accomplished if the 
levels selected are set at points near the lower end of the current 
range of salaries for each of the categories. Such levels will 
assist in demarcating the ``bona fide'' executive, administrative 
and professional employees without disqualifying any substantial 
number of such employees.
* * * * *
    It is my conclusion, from all the evidence, that the lower 
portion of the range of prevailing salaries will be most nearly 
approximated if the tests are set at about the levels at which no 
more than about 10 percent of those in the lowest-wage region, or in 
the smallest size establishment group, or in the smallest-sized city 
group, or in the lowest-wage industry of each of the categories 
would fail to meet the tests. Although this may result in loss of 
exemption for a few employees who might otherwise qualify for 
exemption * * * in the light of the objectives discussed above, this 
is a reasonable exercise of the Administrator's authority to 
``delimit'' as well as define.

    Using this regulatory history as guidance, the Department reached 
the proposed minimum salary level of $425 per week after considering 
available data on actual salary levels currently being paid in the 
economy, broken out by broad industry categories and geographic areas. 
We reviewed a preliminary report on actual salary levels based on the 
BLS year 2000 Current Population Survey (CPS) Outgoing Rotations Group 
data set. These data included all full-time (defined as 35 hours or 
more per week),

[[Page 22167]]

salaried workers aged 16 and above, but excluded the self-employed, 
agricultural workers, volunteers and federal employees (who are all not 
subject to the salary level tests in the Part 541 regulations). We 
considered the data in Table 2 below showing the salary levels of the 
bottom 10 percent, 15 percent and 20 percent of all salaried employees, 
and salaried employees in the lower-wage South and retail sectors:

       Table 2.--Wages of Full-Time Salaried Employees (2000 CPS)
------------------------------------------------------------------------
                                               All      South    Retail
------------------------------------------------------------------------
10%.......................................   $18,195   $15,955   $15,600
15%.......................................    21,050    19,950    19,400
20%.......................................    24,455    22,200    21,800
------------------------------------------------------------------------

    As in the 1958 Kantor Report analysis, the Department's proposal 
looked to ``points near the lower end of the current range of 
salaries'' to determine an appropriate salary level for the standard 
test--although we relied on the lowest 20 percent of salaried employees 
in the South, rather than the lowest 10 percent, because of the 
proposed change from the ``short'' and ``long'' test structure and 
because the data included nonexempt salaried employees. Applying this 
analysis, the Department proposed a standard salary level of $425 per 
week, an increase of $270 per week over the existing rule's salary 
level of $155 per week.\13\ Using this level, approximately the bottom 
20 percent of all salaried employees covered by the FLSA would fall 
below the minimum salary requirement and be automatically entitled to 
overtime.
---------------------------------------------------------------------------

    \13\ The Department's proposal to eliminate the different salary 
level associated with the professional ``long'' duties test is 
adopted in the final regulations as most commenters supported this 
as simplifying the existing regulations.
---------------------------------------------------------------------------

    Many commenters find this methodology appropriate and reasonable. 
Comments filed by the U.S. House of Representatives Committee on 
Education and the Workforce, for example, ``commend the Department for 
its thoughtful analysis of the prior revisions to the salary level 
test,'' and ``endorse the Department's review of and adherence to 
regulatory precedent.''
    However, some commenters who oppose the proposed $425 minimum 
salary level as too low argue that the Department should adjust the 
existing salary levels for inflation by applying the Consumer Price 
Index. This methodology would result in salary levels of $530 per week 
($580 for professionals) for the ``long'' duties test and $855 per week 
for the ``short'' duties tests, according to the commenters.
    Other commenters, including the AFL-CIO, agree with the Department 
that the 1958 Kantor Report methodology of looking to the ``range of 
salaries actually paid'' to employees is the ``most accurate approach 
to set the salary levels,'' but assert that the Department 
``misrepresented and misused the Kantor Report.'' Thus, comments filed 
by the AFL-CIO, and adopted by many of their affiliated unions, state:

    The Department has taken several approaches in the past to 
decide how to increase the salary levels used in the regulations. 
The most accurate approach to set salary levels for exempt 
executive, administrative, and professional employees is first to 
determine the range of salaries actually paid to employees who 
qualify for the exemption in each of the three categories. The 
Department took this approach when it set new salary levels 
effective in 1959, based on the Kantor Report. The Kantor Report 
also noted, as the Department mentions in its preamble, that: ``the 
objectives of the salary tests will be accomplished if the levels 
selected are set at points near the lower end of the current range 
of salaries for each of the categories. Such levels will assist in 
demarcating the bona fide executive, administrative, and 
professional employees without disqualifying any substantial number 
of such employees.'' 68 Fed. Reg. at 15570, quoting Kantor Report at 
5. The Department's present proposal purports to use the approach of 
the Kantor Report. However * * * the Department has completely 
misrepresented and misused the Kantor Report. The actual methodology 
used in the Kantor Report would result today not in a ``standard 
salary'' of $425 as proposed by the Department, but instead in a 
``long test'' salary of $610 per week and a ``short test'' salary of 
$980 per week. (Emphasis in comment.)

The AFL-CIO claims that the Department ``misused'' the Kantor 
methodology by relying on year 2000 BLS data regarding salary levels of 
all salaried employees: ``Kantor's salary survey was limited to those 
executive, administrative and professional employees who were found to 
be exempt--that is, employees who were paid on a salary basis, and met 
the applicable salary and duties tests. * * * Instead, the DOL survey 
encompasses the broadest possible group--all salaried employees in 
every occupation, even those who could not be regarded by any stretch 
of the imagination as executive, administrative, or professional 
employees.'' The AFL-CIO thus suggests that the Department use more 
current salary data and look only at salaries of exempt employees.
    The National Association of Convenience Stores (NACS) also believes 
the Department misapplied the Kantor methodology, but resulting in a 
salary level that is too high, rather than too low as the AFL-CIO 
contends: ``Instead of setting the threshold at the lowest 10% of the 
salaries reviewed as was done in 1958, the proposed cutoff has been set 
at 20%. * * * NACS submits that, to remain faithful to the wise 
principles of the Kantor Report, the Labor Department should use the 
10% guideline and should apply it to the salaries in the lowest 
geographical or industry sector (whichever of the two data sets is 
lower), rather than to composite figures which represent a combination 
of high-wage and low-wage geographical and/or industry sectors.''
    The Department recognizes the strong views in this area, and has 
carefully considered the comments addressing the amount of the proposed 
minimum salary level. The Department continues to believe that its 
methodology is consistent with the regulatory history and, most 
importantly, is a reasonable approach to updating the salary level 
tests. For example, instead of investigating the lowest 10% of exempt 
salaried employees, an approach that depends on uncertain assumptions 
regarding which employees are actually exempt, the Department decided 
to set the minimum salary level based on the lowest 20% of all salaried 
employees. The Department felt this adjustment achieved much the same 
purpose as restricting the analysis to a lower percentage of exempt 
employees. Assuming that employees earning a lower salary are more 
likely non-exempt, both approaches are capable of reaching exactly the 
same endpoint, as discussed more fully below. The Department, in order 
to address the many comments regarding this assumption, decided for 
this final rule to directly test whether our method for setting the 
salary threshold was robust to different analytical approaches. In 
fact, the Department found that our proposed approach to setting salary 
levels was very consistent with past approaches. Therefore we disagree 
with the AFL-CIO's contention that the proposed analysis was flawed and 
not consistent with the Kantor approach.
    The final rule reflects the Department's long-standing tradition of 
avoiding the use of inflation indicators for automatic adjustments to 
these salary requirements. The 1949 Weiss Report, for example, 
considered and rejected proposals to increase salary levels based upon 
the change in the cost of living from the 1940 levels:

    Actual data showing the increases in the prevailing minimum 
salary levels of bona fide executive, administrative and 
professional employees since October 1940 would be the best evidence 
of the appropriate

[[Page 22168]]

salary increases for the revised regulations. * * * The change in 
the cost of living which was urged by several witnesses as a basis 
for determining the appropriate levels is, in my opinion, not a 
measure of the rise in prevailing minimum salary levels.

1949 Weiss Report at 12. The Department continues to believe that such 
a mechanical adjustment for inflation could have an inflationary impact 
or cause job losses. We are particularly concerned about, and required 
to consider, the impact that an inflation adjustment could have on 
lower-wage sectors such as businesses in rural areas, businesses in the 
retail and restaurant industry, and small businesses.
    Thus, as in the proposal, the Department determined the minimum 
salary level in the final rule by examining available data on actual 
salary levels currently being paid in the economy as suggested by the 
1958 Kantor Report. In the proposed rule, we relied on year 2000 salary 
data because it was the most current data available at that time. 
However, the Department should rely on the most current salary data 
available. Thus, for the final rule, we carefully reviewed a report on 
actual salary levels based on the 2002 Current Population Survey (CPS) 
Outgoing Rotation public use data set, the most current data available 
at the time the analysis was conducted.\14\ As explained in more detail 
under section VI of this preamble, the CPS data is the best available 
data source because of its size (more than 474,000 observations) and 
its breadth of detail (e.g., occupation classifications, salary, hours 
worked and industry). Consistent with the proposal, the Department 
examined a subset of the 2002 CPS data, broken out by broad industry 
categories and geographic areas, that included full-time (working 35 or 
more hours per week) employed workers age 16 years and older who are 
both covered by the Fair Labor Standards Act and subject to the Part 
541 salary tests. Thus, the Department relied on a data set that 
excluded: (1) The self-employed, unpaid volunteers and religious 
workers who are not covered by the FLSA; (2) agricultural workers, 
certain transportation workers, and certain automobile dealerships 
employees who are exempt from overtime under other provisions of the 
Act; (3) teachers, academic administrative personnel, certain medical 
professionals, outside sales employees, lawyers and judges who are not 
subject to the Part 541 salary tests; and (4) federal employees who are 
not subject to the Part 541 regulations.
---------------------------------------------------------------------------

    \14\ The 2003 CPS data was made available after much of the 
economic analysis was completed. The Department reviewed the 2003 
data in order to ensure that it had considered the most current 
salary information available. As explained in detail in Appendix B, 
an analysis of the 2003 data demonstrates that using this data would 
not alter the determination of the minimum salary level because the 
results are consistent under both data sets.
---------------------------------------------------------------------------

    Using this subset of the 2002 CPS data, the final rule again 
follows the 1958 Kantor Report analysis and looks to ``points near the 
lower end of the current range of salaries'' to determine an 
appropriate salary level. The Department acknowledges that the 1958 
Kantor Report used data regarding the wages of exempt employees, and 
set the salary level so that ``no more than about 10 percent'' of such 
exempt employees ``in the lowest-wage region, or in the smallest size 
establishment group, or in the smallest-sized city group, or in the 
lowest-wage industry of each of the categories would fail to meet the 
tests.'' 1958 Kantor Report at pages 5-7. The Department's proposal 
used a different data set--all salaried employees covered by the FLSA, 
rather than just exempt employees. However, the proposal accounted for 
these differences in data by setting a salary level excluding from the 
exemptions approximately the lowest 20 percent of all salaried 
employees, rather than the Kantor Report's 10 percent of exempt 
employees.
    In developing the salary level for the final rule, the Department 
first looked at the proposed salary level of $425 per week to determine 
what percentage of salaried employees would fail to meet the test. As 
shown in Table 3, approximately 18 percent of full-time salaried 
employees in the South region and in the retail industry would fail to 
meet the $425 salary level. Because the Department was concerned by 
this drop from the 20 percent level used in the proposal, we assessed 
the salary level that would be necessary in order to exclude 20 percent 
of all salaried employees in the South region and in the retail 
industry.
    As shown in Table 3, applying the 2002 CPS data, the lowest 20 
percent of full-time salaried employees in the South region earn 
approximately $450 per week. The lowest 20 percent of full-time 
salaried employees in the retail industry earn approximately $455 per 
week. The lowest 20 percent of all salaried employees earn somewhere 
between $475 and $500 per week.
    The Department maintains that this slight departure from the Kantor 
Report analysis was appropriate and within its discretion. As the AFL-
CIO itself noted, the ``Department has taken several approaches in the 
past to decide how to increase the salary levels used in the 
regulations.'' The regulatory history described above reveals that 
these various approaches have three things in common: (1) Relying on 
actual wages earned by employees; (2) setting the salary level slightly 
lower than indicated by the data because of the impact on lower-wage 
industries and regions; and (3) rejecting suggestions to mechanically 
adjust the salary levels based on an inflationary measure. 
Historically, however, the Department has looked at different wage 
surveys in an effort to find the best data available.
    Nonetheless, to address concerns of the AFL-CIO, the National 
Association of Convenience Stores and other commenters regarding the 
Department's methodology, we also examined salary ranges for employees 
in the subset of 2002 CPS data who, applying a methodology modified 
from the GAO Report,\15\ likely qualify as exempt employees under 
Section 13(a)(1) of the FLSA and the existing Part 541 regulations. 
Section VI of this preamble includes a detailed description of the 
Department's methodology for estimating the number and salary levels of 
exempt employees. The result of this analysis is Table 4, showing 
salary ranges for likely exempt workers. As shown in Table 4, the 
lowest 10 percent of all likely exempt salaried employees earn 
approximately $500 per week. The lowest 10 percent of likely exempt 
salaried employees in the South earn just over $475 per week. The 
lowest 10 percent of likely exempt salaried employees in the retail 
industry earn approximately $450 per week.
---------------------------------------------------------------------------

    \15\ Fair Labor Standards Act: White Collar Exemptions in the 
Modern Work Place, GAO/HEHS-99-164, September 30, 1999.

[[Page 22169]]



                                     Table 3.--Full-Time Salaried Employees
----------------------------------------------------------------------------------------------------------------
                           Earnings                                                Percentile
----------------------------------------------------------------------------------------------------------------
                   Weekly                          Annual            All             South            Retail
----------------------------------------------------------------------------------------------------------------
$155........................................           $8,060              1.6              1.6              1.8
255.........................................           13,260              4.6              5.3              5.4
355.........................................           18,460             10.0             11.8             12.0
380.........................................           19,760             11.1             13.3             13.3
405.........................................           21,060             14.1             16.9             17.1
425.........................................           22,100             15.2             18.3             18.1
450.........................................           23,400             16.7             20.2             19.9
455.........................................           23,660             16.8             20.2             20.0
460.........................................           23,920             16.9             20.4             20.1
465.........................................           24,180             18.3             21.9             21.9
470.........................................           24,440             18.4             21.9             21.9
475.........................................           24,700             18.7             22.3             22.3
500.........................................           26,000             22.7             26.9             27.4
550.........................................           28,600             25.8             30.6             30.7
600.........................................           31,200             32.4             37.9             38.3
650.........................................           33,800             36.0             41.7             42.5
700.........................................           36,400             41.9             47.9             49.6
750.........................................           39,000             45.8             51.6             53.6
800.........................................           41,600             50.8             56.8             58.9
850.........................................           44,200             54.2             59.9             61.8
900.........................................           46,800             57.9             63.6             64.9
950.........................................           49,400             60.7             66.6             67.9
1,000.......................................           52,000             66.6             72.1             73.5
1,100.......................................           57,200             70.8             75.9             76.9
1,200.......................................           62,400             76.0             80.8             80.8
1,300.......................................           67,600             79.2             83.5             83.3
1,400.......................................           72,800             82.8             86.6             85.9
1,500.......................................           78,000             85.8             89.2             88.7
1,600.......................................           83,200             88.0             90.9             90.3
1,700.......................................           88,400             89.6             92.2             91.4
1,800.......................................           93,600             91.1             93.3             93.0
1,900.......................................           98,800             92.0             94.0             93.7
1,925.......................................          100,100             93.7             95.3             95.1
1,950.......................................          101,400             93.7             95.4             95.1
1,975.......................................          102,700             93.9             95.5             95.2
2,000.......................................          104,000             94.2             95.6             95.4
2,100.......................................          109,200             94.6             96.1             95.9
2,200.......................................          114,400             95.2             96.5             96.2
2,300.......................................          119,600             95.4             96.6             96.5
2,400.......................................          124,800             96.2             97.1             97.1
2,500.......................................          130,000             97.0             97.6             97.8
----------------------------------------------------------------------------------------------------------------


                                        Table 4.--Likely Exempt Employees
----------------------------------------------------------------------------------------------------------------
                           Earnings                                                Percentile
----------------------------------------------------------------------------------------------------------------
                   Weekly                          Annual            All             South            Retail
----------------------------------------------------------------------------------------------------------------
$155........................................           $8,060              0.0              0.0              0.0
255.........................................           13,260              1.3              1.6              1.6
355.........................................           18,460              3.6              4.2              5.3
380.........................................           19,760              4.0              4.9              6.2
405.........................................           21,060              5.4              6.5              8.4
425.........................................           22,100              5.9              7.2              9.0
450.........................................           23,400              6.6              8.1             10.2
455.........................................           23,660              6.7              8.2             10.2
460.........................................           23,920              6.7              8.2             10.3
465.........................................           24,180              7.7              9.2             11.7
470.........................................           24,440              7.8              9.3             11.8
475.........................................           24,700              7.9              9.5             12.0
500.........................................           26,000             10.3             12.3             15.3
550.........................................           28,600             12.3             14.9             18.1
600.........................................           31,200             17.2             20.5             24.6
650.........................................           33,800             20.0             23.9             29.3
700.........................................           36,400             25.2             29.9             36.3
750.........................................           39,000             28.9             33.7             40.7
800.........................................           41,600             33.7             39.0             46.0
850.........................................           44,200             37.3             42.4             49.4
900.........................................           46,800             41.2             46.7             53.0
950.........................................           49,400             44.5             50.4             56.9

[[Page 22170]]

 
1,000.......................................           52,000             51.3             57.2             63.5
1,100.......................................           57,200             56.7             62.2             67.6
1,200.......................................           62,400             63.5             69.3             72.9
1,300.......................................           67,600             67.9             73.3             76.4
1,400.......................................           72,800             73.1             77.9             80.4
1,500.......................................           78,000             77.5             81.9             83.7
1,600.......................................           83,200             80.8             84.7             85.9
1,700.......................................           88,400             83.3             86.8             87.7
1,800.......................................           93,600             85.7             88.6             90.0
1,900.......................................           98,800             87.2             89.8             90.8
1,925.......................................          100,100             89.8             92.0             92.7
1,950.......................................          101,400             89.9             92.1             92.8
1,975.......................................          102,700             90.1             92.3             92.9
2,000.......................................          104,000             90.6             92.6             93.1
2,100.......................................          109,200             91.3             93.3             93.6
2,200.......................................          114,400             92.2             93.9             94.1
2,300.......................................          119,600             92.6             94.2             94.4
2,400.......................................          124,800             93.9             95.0             95.4
2,500.......................................          130,000             95.2             95.9             96.4
----------------------------------------------------------------------------------------------------------------


                                       Table 5.--Full-Time Hourly Workers
----------------------------------------------------------------------------------------------------------------
                           Earnings                                                Percentile
----------------------------------------------------------------------------------------------------------------
                   Weekly                          Annual            All             South            Retail
----------------------------------------------------------------------------------------------------------------
$155........................................           $8,060              1.2              1.3              2.0
255.........................................           13,260              7.6              9.5             13.7
355.........................................           18,460             25.8             30.4             41.4
380.........................................           19,760             31.4             36.6             47.9
405.........................................           21,060             38.5             44.4             55.9
425.........................................           22,100             41.3             47.5             59.1
450.........................................           23,400             46.1             52.4             64.1
455.........................................           23,660             46.4             52.8             64.5
460.........................................           23,920             47.3             53.6             65.4
465.........................................           24,180             47.9             54.3             65.9
470.........................................           24,440             48.3             54.8             66.4
475.........................................           24,700             48.7             55.2             66.9
500.........................................           26,000             54.8             61.5             71.9
550.........................................           28,600             60.6             67.0             76.7
600.........................................           31,200             68.2             73.9             82.6
650.........................................           33,800             72.2             77.5             85.8
700.........................................           36,400             76.3             81.1             88.7
750.........................................           39,000             79.6             83.9             90.9
800.........................................           41,600             83.6             87.1             93.2
850.........................................           44,200             85.9             88.9             94.1
900.........................................           46,800             88.0             90.7             95.1
950.........................................           49,400             89.6             92.0             95.7
1,000.......................................           52,000             91.9             93.9             96.7
1,100.......................................           57,200             94.0             95.5             97.4
1,200.......................................           62,400             95.8             96.9             98.0
1,300.......................................           67,600             96.7             97.6             98.3
1,400.......................................           72,800             97.6             98.2             98.8
1,500.......................................           78,000             98.2             98.6             99.1
1,600.......................................           83,200             98.7             99.0             99.4
1,700.......................................           88,400             99.0             99.2             99.5
1,800.......................................           93,600             99.2             99.4             99.6
1,900.......................................           98,800             99.3             99.4             99.6
1,925.......................................          100,100             99.4             99.5             99.7
1,950.......................................          101,400             99.4             99.5             99.7
1,975.......................................          102,700             99.4             99.5             99.7
2,000.......................................          104,000             99.5             99.6             99.7
2,100.......................................          109,200             99.6             99.6             99.7
2,200.......................................          114,400             99.6             99.6             99.7
2,300.......................................          119,600             99.7             99.7             99.8
2,400.......................................          124,800             99.7             99.7             99.8
2,500.......................................          130,000             99.8             99.8             99.8
----------------------------------------------------------------------------------------------------------------


[[Page 22171]]

    Under the final rule, the minimum salary level for an employee to 
be exempt is increased from $155 per week ($8,060/year) to $455 per 
week ($23,660/year), a large increase by almost any yardstick. The $455 
minimum salary level, as shown in Table 6, is an unprecedented increase 
in both absolute dollar amount and percentage terms. The $455 minimum 
salary level is a $10.34 annual dollar increase from 1975 to 2004, the 
highest annual dollar increase in the 65-year history of the FLSA.

                                                     Table 6.--Comparison of Salary Level Increases
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                       Executive long
                                                                       Years since      test salary     Dollar change    Percent change   Average annual
                                                                      last increase        level                                          dollar change
--------------------------------------------------------------------------------------------------------------------------------------------------------
1949...............................................................  ...............              $55  ...............  ...............  ...............
1958...............................................................                9               80               25             45.5             2.78
1963...............................................................                5              100               20             25.0             4.00
1970...............................................................                7              125               25             25.0             3.57
1975...............................................................                5              155               30             24.0             6.00
2004...............................................................               29              455              300            193.5            10.34
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The Department believes that a $455 minimum salary level for 
exemption is consistent with the Department's historical practice of 
looking to ``points near the lower end of the current range of 
salaries'' to determine an appropriate salary level. A minimum salary 
level of $455 per week represents the lowest 10.2 percent of likely 
exempt employees in the lower-wage retail industry; the lowest 8.2 
percent of likely exempt employees in the South; and the lowest 6.7 
percent of all likely exempt employees. The $455 level also represents 
the lowest 20.0 percent of salaried employees in the retail industry; 
the lowest 20.2 percent of salaried employees in the South; and the 
lowest 16.8 percent of all salaried employees. As shown in Table 5, the 
$455 minimum salary level also automatically excludes 46.4 percent of 
hourly workers from the exemptions. In addition, based on the comments 
from the business community, the Department believes this increase is 
clearly at the upper boundary of what is capable of being absorbed by 
employers without major disruptions to local labor markets. 
Accordingly, the Department concludes that a minimum salary level of 
$455 per week ``will assist in demarcating the `bona fide' executive, 
administrative and professional employees without disqualifying any 
substantial number of such employees.'' Kantor Report at 5.
    Concerns by employer groups that a $455 per week salary level will 
disproportionately impact small businesses, businesses in rural areas, 
and retail businesses are misplaced. The Department examined the 2002 
CPS data broken out by industry and geographic area, and as in the 
Kantor Report, selected a salary level ``near the lower end of the 
current range of salaries'' to ensure the minimum salary level is 
practicable over the broadest possible range of industries, business 
sizes and geographic regions. Kantor Report at 5.
    Similarly, the AFL-CIO's attempt to apply the Kantor Report 
analysis, yielding a result of $610 per week, is also flawed. Rather 
than starting with the 2002 CPS data, the AFL-CIO began its analysis by 
identifying the salary level for the lowest 10 percent of likely exempt 
employees from the 1998 data in the GAO Report. Then, the AFL-CIO 
adjusted that salary level for inflation by applying the Employment 
Cost Index. The problem with this approach is that the GAO Report 
methodology, as discussed in Section VI, inappropriately excludes from 
the analysis exempt employees in lower-wage regions and industries. The 
AFL-CIO then exacerbates the GAO's biased result by using the ECI to 
adjust the 1998 data, rather than using the available 2002 data. Table 
4 contains more accurate data on current salary ranges of likely exempt 
employees. Applying these data, the AFL-CIO suggestion of a $610 salary 
level represents approximately the lowest 17 percent of all likely 
exempt salaried employees, the lowest 21 percent of such employees in 
the South, and the lowest 25 percent of such employees in retail--not 
the lowest 10 percent used by Kantor.
    Finally, the comments raise a number of additional issues which the 
Department considered but did not find persuasive. First, several 
commenters urge the Department to adopt different salary levels for 
different areas of the country (or urban and rural areas) or for 
different kinds or sizes of businesses. The Department does not believe 
that this approach is administratively feasible because of the large 
number of different salary levels this would require. In addition, we 
believe that the traditional methodology addresses the concerns of such 
commenters by looking toward the lower end of the salary levels and 
considering salaries in the South and in the retail industry. We also 
considered but rejected comments requesting a special rule for part-
time employees. The regulations have never included a different salary 
level for part-time employees, and such a rule appears unnecessary.
    Second, some commenters ask the Department to provide for future 
automatic increases of the salary levels tied to some inflationary 
measure, the minimum wage or prevailing wages. Other commenters suggest 
that the Department provide some mechanism for regular review or 
updates at a fixed interval, such as every five years. Commenters who 
made these suggestions are concerned that the Department will let 
another 29 years pass before the salary levels are again increased. The 
Department intends in the future to update the salary levels on a more 
regular basis, as it did prior to 1975, and believes that a 29-year 
delay is unlikely to reoccur. The salary levels should be adjusted when 
wage survey data and other policy concerns support such a change. 
Further, the Department finds nothing in the legislative or regulatory 
history that would support indexing or automatic increases. Although an 
automatic indexing mechanism has been adopted under some other 
statutes, Congress has not adopted indexing for the Fair Labor 
Standards Act. In 1990, Congress modified the FLSA to exempt certain 
computer employees paid an hourly wage of at least 6\1/2\ times the 
minimum wage, but this standard lasted only until the next minimum wage 
increase six years later. In 1996, Congress froze the minimum hourly 
wage for the computer exemption at $27.63 (6\1/2\ times the 1990 
minimum wage of $4.25 an hour). In addition, as noted above, the 
Department has repeatedly rejected requests to mechanically rely on 
inflationary measures when setting the salary levels in the past 
because of

[[Page 22172]]

concerns regarding the impact on lower-wage geographic regions and 
industries. This reasoning applies equally when considering automatic 
increases to the salary levels. The Department believes that adopting 
such approaches in this rulemaking is both contrary to congressional 
intent and inappropriate.
    Third, the Puerto Rico Chamber of Commerce recommends a special 
salary test for Puerto Rico of $360 per week (the same as the proposed 
salary level test for American Samoa). The Department considered this 
comment and concluded that such a differential in Puerto Rico would be 
inconsistent with the FLSA Amendments of 1989 (Pub. L. 101-157), which 
deleted Puerto Rico and the Virgin Islands from the special industry 
wage order proceedings under section 6(a)(1) of the FLSA allowing 
industry minimum wage rates that are lower than the U.S. mainland 
minimum wage. Before 1989, Puerto Rico, the Virgin Islands, and 
American Samoa all had minimum wages below the U.S. mainland and 
consequently lower salary level tests traditionally were established 
for employees in these jurisdictions. However, since Puerto Rico is now 
subject to the same minimum wage as the U.S. mainland, there is no 
longer a basis for a special salary level test. The final rule 
maintains the special minimum salary level for employees in American 
Samoa at approximately the same ratio to the mainland test (84 percent) 
used under the existing rule--which computes to $380 per week.
    Fourth, the National Association of Chain Drug Stores (NACDS) 
comments that the exception to a minimum salary test for physicians 
should apply to pharmacists. The NACDS states that the educational 
requirements and professional standards for pharmacists have increased 
substantially since these regulations were last revised. For example, 
pharmacists graduating today complete a doctoral program before they 
are licensed to practice. In the Department's view, pharmacists can 
qualify, along with doctors, teachers, lawyers, etc., as professionals 
under the FLSA exemption. However, the fact that the standards for the 
profession are rising does not mean that the minimum salary requirement 
to be exempt should be removed. The Department also considered but 
rejected suggestions from commenters that we remove the salary 
requirements for registered nurses and others. The Department does not 
think it is appropriate to expand the original, limited number of 
professions that were not subject to the salary test.
    Fifth, several commenters favor a final rule that would eliminate 
the salary tests entirely. These commenters point out that this 
approach would eliminate concerns about how the salary levels might 
affect lower wage regions and industries. They argue that the duties 
tests have been the only active tests for some time, given the erosion 
of the value of the salary levels in the prior existing rule. Fairfax 
County states that the salary test should be eliminated because of the 
wide variation across the country in living costs and labor market 
viability. The National Automobile Dealers Association and others 
comment that the salary tests were simply unnecessary. The Central Iowa 
Society for Human Resource Management comments that job content should 
be the deciding factor, not salary level. On the other hand, many 
commenters oppose this approach. The Department has carefully 
considered the comments in this area and has not adopted this 
alternative, among other reasons, because this approach would be 
inconsistent with the Department's long-standing recognition that the 
amount of salary paid to an employee is the ``best single test'' of 
exempt status. 1940 Stein Report at 19. Moreover, this alternative 
would require a significant restructuring of the regulations and 
probably the use of more rigid duties tests. Thus, this alternative 
conflicts with a key purpose of this rulemaking, namely, to simplify 
and streamline these regulations.
Section 541.601 Highly Compensated Employees
    Proposed section 541.601 set forth a new rule for highly 
compensated employees. Under the proposed rule, an employee who had a 
guaranteed total annual compensation of at least $65,000 was deemed 
exempt under section 13(a)(1) of the Act if the employee performed an 
identifiable executive, administrative or professional function as 
described in the standard duties tests. Subsection (b) of the proposed 
rule defined ``total annual compensation'' to include ``base salary, 
commissions, non-discretionary bonuses and other non-discretionary 
compensation'' as long as that compensation was ``paid out to the 
employee as due on at least a monthly basis.'' Proposed subsection (b) 
also provided for prorating the $65,000 annual compensation for 
employees who work only part of the year, and allowed an employer to 
make a lump-sum payment sufficient to bring the employee to the $65,000 
level by the next pay period after the end of the year. Proposed 
subsection (c) stated that a ``high level of compensation is a strong 
indicator of an employee's exempt status, thus eliminating the need for 
a detailed analysis of the employee's job duties,'' and provided an 
example to illustrate the duties requirement applicable to highly 
compensated employees under this rule: ``an employee may qualify as a 
highly compensated executive employee, for example, if the employee 
directs the work of two or more other employees, even though the 
employee does not have authority to hire and fire.'' Proposed 
subsection (d) provided that the highly compensated rule applied only 
to employees performing office or non-manual work, and was not 
applicable to ``carpenters, electricians, mechanics, plumbers, iron 
workers, craftsmen, operating engineers, longshoremen, construction 
workers, teamsters and other employees who perform manual work * * * no 
matter how highly paid they might be.''\16\
---------------------------------------------------------------------------

    \16\ Even if the requirements of section 541.601 are not met, an 
employee may still be tested for exemption under the standard tests 
for the executive, administrative or professional exemption.
---------------------------------------------------------------------------

    The final section 541.601 raises the total annual compensation 
required for exemption as a highly compensated employee to $100,000, an 
increase of $35,000 from the proposal. The final rule also makes a 
number of additional changes, including: Requiring that the total 
annual compensation must include at least $455 per week paid on a 
salary or fee basis; modifying the definition of ``total annual 
compensation'' to include commissions, nondiscretionary bonuses and 
other nondiscretionary compensation even if they are not paid to the 
employee on a monthly basis; allowing the make-up payment to be paid 
within one month after the end of the year and clarifying that such a 
payment counts toward the prior year's compensation; allowing a similar 
make-up payment to employees who terminate employment before the end of 
the year; and deleting the word ``guaranteed'' to clarify that 
compliance with this provision does not create an employment contract. 
In addition, the final rule modifies the duties requirement to provide 
that the employee must ``customarily and regularly'' perform one or 
more exempt duties. Finally, subsection (d) in the final rule has been 
modified to better reflect the language of new subsection 541.3(a) and 
now provides:

    This section applies only to employees performing office or non-
manual work. Thus, for example, non-management production-line 
workers and non-management employees in maintenance, construction 
and similar occupations such as carpenters, electricians, mechanics, 
plumbers, iron workers, craftsmen, operating engineers,

[[Page 22173]]

longshoremen, construction workers, laborers and other employees who 
perform work involving repetitive operations with their hands, 
physical skill and energy are not exempt under this section no 
matter how highly paid they might be.

    Comments on proposed section 541.601 disagree sharply. The AFL-CIO 
and other affiliated unions object entirely to section 541.601, 
claiming the section is beyond the scope of the Department's authority. 
The unions characterize this section as a ``salary-only'' test that 
will exempt every employee earning above the highly compensated salary 
level. The unions argue that Congress did not intend to exempt all 
employees who are paid over a certain level. If Congress intended to 
exempt employees who are paid over a certain level, the unions argue, 
it could easily have done so. Comments submitted by unions and other 
employee advocates also argue that the highly compensated test should 
be deleted entirely because proposed section 541.601 will allow the 
exemption for employees traditionally entitled to overtime pay. Such 
commenters also argue that the proposed $65,000 level is too low and 
the proposed duties requirements too lax.
    In contrast, organizations representing employer interests 
generally support the new provision, although a number of these 
commenters ask for technical modifications. However, some employer 
commenters argue that the total annual compensation requirement of 
$65,000 per year is too high. In addition, a significant number of 
employer commenters find a duties requirement in proposed section 
541.601 unnecessary, and ask the Department to eliminate it. The 
Morgan, Lewis & Bockius law firm, for example, argues that the duties 
test for highly compensated employees can be eliminated because 
employees paid more than 80 percent of all full-time salaried workers 
are not the persons Congress sought to protect from exploitation when 
it passed the FLSA. The U.S. Chamber of Commerce comments that a 
``bright line'' (i.e., salary only) test for highly compensated 
employees would add significant clarity to the regulations and is 
consistent with the historical approach of guaranteeing overtime 
protections to workers earning below the minimum salary level, 
regardless of duties performed. The Society for Human Resource 
Management adds that high compensation is indicative of likely exempt 
status and a bright line rule for highly compensated employees based on 
earnings alone would eliminate the need for an expensive and 
potentially confusing legal inquiry into whether the employee's duties 
truly are exempt.
    The Department agrees with the AFL-CIO that the Secretary does not 
have authority under the FLSA to adopt a ``salary only'' test for 
exemption, and rejects suggestions from employer groups to do so. 
Section 13(a)(1) of the FLSA requires that the Secretary ``define and 
delimit'' the terms executive, administrative and professional 
employee. The Department has always maintained that the use of the 
phrase ``bona fide executive, administrative or professional capacity'' 
in the statute requires the performance of specific duties. For 
example, the 1940 Stein report stated: ``Surely if Congress had meant 
to exempt all white collar workers, it would have adopted far more 
general terms than those actually found in section 13(a)(1) of the 
act.'' 1940 Stein Report at 6-7. In fact, as the AFL-CIO and other 
unions note, Congress rejected several statutory amendments during the 
FLSA's early history which would have established ``salary only'' 
tests. In 1940, for example, Congress rejected an amendment which would 
have provided the exemption to all employees earning more than $200 per 
week. H.R. 8624, 76th Cong. (1940). See also Deborah Malamud, 
Engineering the Middle Class: Class Line-Drawing in New Deal Hours 
Legislation, 96 Mich. L. Rev. 2212, 2299-2303 (August 1998) (discussing 
four separate proposals to exempt all highly paid employees between 
1939 and 1940). Finally, as the unions also correctly note, in Jewell 
Ridge Coal Corp. v. United Mine Workers of America, Local No. 6167, 325 
U.S. 161, 167 (1949), the Supreme Court stated that ``employees are not 
to be deprived of the benefits of the Act simply because they are well 
paid.'' See also Overnite Motor Transportation Co. v. Missel, 316 U.S. 
572, 578 (1942) (the primary purposes of the overtime provisions were 
to ``spread employment'' and assure workers additional pay ``to 
compensate them for the burden of a workweek beyond the hours fixed in 
the Act'').
    However, the Department rejects the view that section 541.601 does 
not contain a duties test. As noted above, the proposed section did 
require that an exempt highly compensated employee perform ``any one or 
more exempt duties or responsibilities of an executive, administrative 
or professional employee identified in subparts B, C or D of this 
part.'' Some commenters find this language insufficient and confusing, 
arguing that it would allow employees to qualify for exemption under 
section 541.601 even if they performed only a single exempt duty once a 
year. The Department never intended to exempt as ``highly compensated'' 
employees those who perform exempt duties only on an occasional or 
sporadic basis. Accordingly, to clarify this duties requirement for 
highly compensated employees and ensure exempt duties remain a 
meaningful aspect of this test, the final rule adds to section 
541.601(a) that an employee must ``customarily and regularly'' perform 
work that satisfies one or more of the elements of the standard duties 
test for an executive, administrative or professional employee.
    The Department has the authority to adopt a more streamlined duties 
test for employees paid at a higher salary level. Indeed, no commenter 
challenges this authority. The Part 541 regulations have contained 
special provisions for ``high salaried'' employees since 1949. Although 
commonly referred to as the ``short'' duties tests today, the existing 
regulations actually refer to these tests as the ``special proviso for 
high salaried executives'' (29 CFR 541.119), the ``special proviso for 
high salaried administrative employees'' (29 CFR 541.214), and the 
``special proviso for high salaried professional employees'' (29 CFR 
541.315). Perhaps the courts appropriately refer to these special 
provisions as the ``short'' tests today because the associated salary 
level is only $250 per week ($13,000 annually)--hardly ``high 
salaried'' in today's economy.
    In any case, these special provisions applying more lenient duties 
standards to employees earning higher salaries have been in the Part 
541 regulations for 52 years. The rationale for a highly compensated 
test was set forth in the 1949 Weiss Report and is still valid today:

    The experience of the Divisions has shown that in the categories 
of employees under consideration the higher the salaries paid the 
more likely the employees are to meet all the requirements for 
exemption, and the less productive are the hours of inspection time 
spent in analysis of the duties performed. At the higher salary 
levels in such classes of employment, the employees have almost 
invariably been found to meet all the other requirements of the 
regulations for exemption. In the rare instances when these 
employees do not meet all the other requirements of the regulations, 
a determination that such employees are exempt would not defeat the 
objectives of section 13(a)(1) of the act. The evidence supported 
the experience of the Divisions, and indicated that a short-cut test 
of exemption along the lines suggested above would facilitate the 
administration of the regulations without defeating the purposes of 
section 13(a)(1). A number of management representatives stated that 
such a provision

[[Page 22174]]

would facilitate the classification of employees and would result in 
a considerable saving of time for the employer.
    The definition of bona fide ``executive,'' ``administrative,'' 
or ``professional'' in terms of a high salary alone is not 
consistent with the intent of Congress as expressed in section 
13(a)(1) and would be of doubtful legality since many persons who 
obviously do not fall into these categories may earn large salaries. 
The Administrator would undoubtedly be exceeding his authority if he 
included within the definition of these terms craftsmen, such as 
mechanics, carpenters, or linotype operators, no matter how highly 
paid they might be. A special proviso for high salaried employees 
cannot be based on salary alone but must be drawn in terms which 
will actually exclude craftsmen while including only bona fide 
executive, administrative, or professional employees. The evidence 
indicates that this objective can best be achieved by combining the 
high salary requirements with certain qualitative requirements 
relating to the work performed by bona fide executive, 
administrative or professional employees, as the case may be. Such 
requirements will exclude craftsmen and others of the type not 
intended to come within the exemption.

1949 Weiss Report at 22-23.
    Section 541.601 is merely a reformulation of such a test. Although 
final section 541.601 strikes a slightly different balance than the 
existing regulations `` a much higher salary level associated with a 
more flexible duties standard `` that balance, in the experience of the 
Department, still meets the goals of the 1949 Weiss Report of providing 
a ``short-cut test'' that combines ``high salary requirements with 
certain qualitative requirements relating to the work performed by bona 
fide executive, administrative or professional employees,'' while 
excluding ``craftsmen and others of the type not intended to come 
within the exemption.'' Thus, the final section 541.601 provides that 
an exempt highly compensated employee must earn $100,000 per year and 
``customarily and regularly'' perform exempt duties, and that 
``carpenters, electricians, mechanics, plumbers, iron workers, 
craftsmen, operating engineers, longshoremen, construction workers, 
laborers and other employees who perform work involving repetitive 
operations with their hands, physical skill and energy are not exempt 
under this section no matter how highly paid they might be.''
    The Department also received a substantial number of comments on 
the proposed $65,000 earnings level. Some commenters such as the 
National Association of Manufacturers, the American Corporate Counsel 
Association, the Society for Human Resource Management and the FLSA 
Reform Coalition endorse the proposed $65,000 level as appropriately 
serving the purposes of the FLSA. However, other employer groups state 
that the salary level is too high. The U.S. Chamber of Commerce asks 
the Department to lower the earnings level to $50,000 per year. The 
National Retail Federation also suggests a $50,000 level, arguing that 
the $65,000 standard is prohibitively high for most retailers. The 
National Grocers Association and the International Mass Retail 
Association similarly state that $65,000 is far too high a level, 
particularly in the retail industry. The National Association of 
Convenience Stores suggests that the Department should set the salary 
level for highly compensated employees at $36,000 per year or, in the 
alternative, at a level related to the minimum salary level for 
exemption, such as $44,200 per year, twice the proposed minimum.
    Other commenters, including labor unions, argue that $65,000 is too 
low. The National Employment Lawyers Association argues that the 
$65,000 proposed level is not much higher than the annualized level of 
$57,470 per year for computer employees exempt under section 13(a)(17) 
of the FLSA, which retains substantial duties tests. The National 
Association of Wage Hour Consultants notes that, although the top 20 
percent of salaried employees earn $65,000 in base wages, that number 
does not include other types of compensation (e.g., commissions) that 
the proposal includes within the definition of ``total annual 
compensation.'' Accordingly, this commenter argues, the Department 
either should raise the salary level to $80,000 per year or modify the 
provision to exclude non-salary compensation. The American Federation 
of Government Employees suggests that the salary level should be fixed 
at the rate for a federal GS-15/step 1 employee ($85,140 per year, at 
the time the comment was submitted, without the locality pay 
differentials that can raise the total to in excess of $100,000). Two 
employers suggest that the section 541.601 salary level should conform 
to the Internal Revenue Service pay threshold for highly compensated 
employees, which is currently $90,000 per year.
    The Department continues to find that employees at higher salary 
levels are more likely to satisfy the requirements for exemption as an 
executive, administrative or professional employee. The purpose of 
section 541.601 is to provide a ``short-cut test'' for such highly 
compensated employees who ``have almost invariably been found to meet 
all the other requirements of the regulations for exemption.'' 1949 
Weiss Report at 22. Thus, the highly compensated earnings level should 
be set high enough to avoid the unintended exemption of large numbers 
of employees--such as secretaries in New York City or Los Angeles--who 
clearly are outside the scope of the exemptions and are entitled to the 
FLSA's minimum wage and overtime pay protections.
    Accordingly, the Department rejects the comments from employer 
groups that the highly compensated salary level should be reduced to as 
low as $36,000 per year, and instead sets the highly compensated test 
at $100,000 per year. In the Department's experience, employees earning 
annual salaries of $36,000 often fail the duties tests for exemption, 
while virtually every salaried ``white collar'' employee with a total 
annual compensation of $100,000 per year would satisfy any duties test. 
Employees earning $100,000 or more per year are at the very top of 
today's economic ladder, and setting the highly compensated test at 
this salary level provides the Department with the confidence that, in 
the words of the Weiss report: ``in the rare instances when these 
employees do not meet all other requirements of the regulations, a 
determination that such employees are exempt would not defeat the 
objectives of section 13(a)(1) of the Act.'' 1949 Weiss Report at 22-
23.
    Only roughly 10 percent of likely exempt employees who are subject 
to the salary tests earn $100,000 or more per year (Table 4). This is 
broadly symmetrical with the Kantor approach of setting the minimum 
salary level for exemption at the lowest 10 percent of likely exempt 
employees. In contrast, approximately 35 percent of likely exempt 
employees subject to the salary tests exceed the proposed $65,000 
salary threshold. In addition, less than 1 percent of full-time hourly 
workers (0.6 percent) earn $100,000 or more (Table 5). Thus, at the 
$100,000 or more per year salary level, the highly compensated 
provision will not be available to the vast majority of both salaried 
and hourly employees. Unlike the $65,000 or more per year salary level, 
setting the highly compensated test at the $100,000 avoids the 
potential of unintended exemptions of large numbers of employees who 
are not bona fide executive, administrative or professional employees. 
At the same time, because the Department believes that many employees 
who earn between $65,000 and $100,000 per year also satisfy the 
standard duties tests, the section 13(a)(1) exemptions will still be 
available for such employees. The

[[Page 22175]]

Department believes this $100,000 level is also necessary to address 
commenters' concerns regarding the associated duties test, the 
possibility that workers in high-wage regions and industries could 
inappropriately lose overtime protection, and the effect of future 
inflation. The Department recognizes that the duties test for highly 
compensated employees in final section 541.601 is less stringent than 
the existing ``short'' duties tests associated with the existing 
special provisions for ``high salaried'' employees (29 CFR 541.119, 
541.214, 541.315). But this change is more than sufficiently off-set by 
the $87,000 per year increase in the highly compensated level. Under 
the existing regulations, a ``high salaried executive'' earns only 
$13,000 annually, which is approximately 60 percent higher than the 
minimum salary level of $8,060. Under the final rule, a highly 
compensated employee must earn $100,000 per year, which is more than 
400 percent higher than the final minimum salary level of $23,660 
annually.\17\
---------------------------------------------------------------------------

    \17\ In addition, the final compensation level of $100,000 for 
highly compensated employees is almost twice the highest salary 
level that the AFL-CIO advocates as necessary to update the salary 
level associated with the existing ``short'' duties tests. The AFL-
CIO did not suggest an alternative salary level for section 541.601, 
likely because of its strong objections to this section as a whole. 
However, the AFL-CIO suggests that the salary level associated with 
the existing ``short'' duties test should be increased either to 
$855 per week ($44,460 annually) if based on inflation or to $980 
per week ($50,960 annually) if based on the Kantor Report.
---------------------------------------------------------------------------

    A number of commenters question the definition of ``total annual 
compensation'' and the mechanics of applying the highly compensated 
test. First, a number of commenters are concerned that the requirement 
that an employee must be ``guaranteed'' the total annual compensation 
amount would be interpreted as creating an employment contract for an 
employee who otherwise would be an at-will employee. Because the 
Department did not intend this result, we have deleted the word 
``guaranteed.''
    Second, several commenters, including the Morgan, Lewis & Bockius 
law firm, the Securities Industry Association and the HR Policy 
Association, suggest that employers should be permitted to prorate the 
total annual compensation amount if an employee uses leave without pay, 
such as under the Family and Medical Leave Act. The Department does not 
believe that such deductions are appropriate. The test for highly 
compensated employees is intended to provide an alternative, simplified 
method of testing a select group of employees for exemption. We believe 
that the test for highly compensated employees should remain 
straightforward and easy to administer by maintaining a single, overall 
compensation figure applicable to every employee. Determining the 
variety of reasons that might qualify for deduction, such as for a 
medical leave of absence, a military leave of absence, or an 
educational leave of absence, and establishing rules about the lengths 
of time such absences must cover before deductions could be made, would 
unnecessarily complicate this rule.
    Third, because the final rule increases the compensation level 
significantly, from $65,000 to $100,000, the Department agrees with 
comments that the definition of ``total annual compensation'' should 
include commissions, nondiscretionary bonuses and other 
nondiscretionary compensation earned during a 52-week period, even if 
such compensation is not ``paid out to the employee as due on at least 
a monthly basis'' as proposed in subsection 541.601(b)(1). Numerous 
commenters state that such payments often are paid on a quarterly or 
less frequent basis. Accordingly, we have deleted this requirement from 
the final rule. However, we have not adopted comments suggesting that 
discretionary bonuses should be included in ``total annual 
compensation'' because there is not enough information in the record on 
the frequency, size and types of such payments. The Department also 
does not agree with comments that the costs of employee benefits, such 
as payments for medical insurance and matching 401(k) pension plan 
payments, should be included in computing total annual compensation. 
The inclusion of such costs in the calculations for testing highly 
compensated employees would make the test administratively unwieldy.
    Fourth, final subsection 541.601(b)(1) contains a new safeguard 
against possible abuses that are of concern to some commenters, 
including the AFL-CIO: the ``total annual compensation'' must include 
at least $455 per week paid on a salary or fee basis. This change will 
ensure that highly compensated employees will receive at least the same 
base salary throughout the year as required for exempt employees under 
the standard tests, while still allowing highly compensated employees 
to receive additional income in the form of commissions and 
nondiscretionary bonuses. As explained below, the salary basis 
requirement is a valuable and easily applied criterion that is a 
hallmark of exempt status. Accordingly, the Department has modified the 
final subsection 541.601(b)(1) to provide:

    ``Total annual compensation'' must include at least $455 per 
week paid on a salary or fee basis. Total annual compensation may 
also include commissions, nondiscretionary bonuses and other 
nondiscretionary compensation earned during a 52-week period. Total 
annual compensation does not include board, lodging and other 
facilities as defined in Sec.  541.606, and does not include 
payments for medical insurance, payments for life insurance, 
contributions to retirement plans and the cost of other fringe 
benefits.

    Fifth, the final rule also continues to permit a catch-up payment 
at the end of the year. Such a catch-up payment is necessary because, 
according to some commenters, many highly compensated employees receive 
commissions, profit sharing and other incentive pay that may not be 
calculated or paid by the end of the year. However, some commenters 
state that it would be difficult to compute the amount of any such 
payment due by the first pay period following the end of the year, as 
required by proposed section 541.601(b)(2). They emphasize that it 
takes some time after the close of the year to compute the amounts of 
any commissions or bonuses that are due, such as those based on total 
sales or profits. Thus, for example, the Mortgage Bankers Association, 
the Consumer Bankers Association and the Consumer Mortgage Coalition 
suggest that employers be allowed one month to make the catch-up 
payment. The Department recognizes that an employer may need some time 
after the close of the year to make calculations and determine the 
amount of any catch-up payment that is due. Accordingly, we have 
clarified that such a payment may be made during the last pay period of 
the year or within one month after the close of the year. The final 
rule also provides that a similar, but prorated, catch-up payment may 
be made within one month after termination of employment for employees 
whose employment ends before the end of the 52-week period. Finally, 
the final rule clarifies that any such payments made after the end of 
the year may only be counted once, toward the ``total annual 
compensation'' for the preceding year. To ensure appropriate evidence 
is maintained of such catch-up payments, employers may want to document 
and advise the employee of the purpose of the payment, although this is 
not a requirement of the final rule.
    Finally, some commenters suggest applying the highly compensated 
test to outside sales and computer employees. Outside sales employees 
have never been subject to a salary level or a salary

[[Page 22176]]

basis test as a requirement for exemption, and the Department did not 
propose to add these requirements. Since outside sales employees are 
not subject to the standard salary level test, it would not be 
appropriate to apply the highly compensated test to these employees. We 
have not applied the highly compensated test to computer employees 
because, as explained under subpart E, Congress has already created 
special compensation provisions for this industry in section 13(a)(17) 
of the Act.
Section 541.602 Salary Basis
    In its proposal, the Department retained the requirement that, to 
qualify for the executive, administrative or professional exemption, an 
employee must be paid on a ``salary basis.'' Proposed section 
541.602(a) set forth the general rules for determining whether an 
employee is paid on a salary basis, which were retained virtually 
unchanged from the existing regulation. Under this subsection (a), an 
employee must regularly receive a ``predetermined amount'' of salary, 
on a weekly or less frequent basis, that is ``not subject to reduction 
because of variations in the quality or quantity of the work 
performed.'' With a few identified exceptions, the employee ``must 
receive the full salary for any week in which the employee performs any 
work without regard to the number of days or hours worked.'' Subsection 
(a) also provides that an ``employee is not paid on a salary basis if 
deductions from the employee's predetermined compensation are made for 
absences occasioned by the employer or by the operating requirements of 
the business. If the employee is ready, willing and able to work, 
deductions may not be made for time when work is not available.'' 
Exempt employees, however, ``need not be paid for any workweek in which 
they perform no work.''
    Proposed subsection (b) included several exceptions to the salary 
basis rules that are in the existing regulations. An employer may make 
deductions from the guaranteed pay: when the employee is ``absent from 
work for a full day for personal reasons, other than sickness or 
disability''; for absences of a full day or more due to sickness or 
disability, if taken in accordance with a bona fide plan, policy or 
practice providing wage replacement benefits; for any hours not worked 
in the initial and final weeks of employment; for hours taken as unpaid 
FMLA leave; as offsets for amounts received by an employee for jury or 
witness fees or military pay; or for penalties imposed in good faith 
for ``infractions of safety rules of major significance.'' The proposed 
subsection (b) also added a new exception to the salary basis rule for 
deductions for ``unpaid disciplinary suspensions of a full day or more 
imposed in good faith for infractions of workplace conduct rules,'' 
such as rules prohibiting sexual harassment or workplace violence. Such 
suspensions must be imposed ``pursuant to a written policy applied 
uniformly to all workers.''
    The Department's final rule retains both the requirement that an 
exempt employee must be paid on a ``salary basis'' and the exceptions 
to this rule specified in the proposal, with only a few minor 
modifications. We have changed the phrase ``a full day or more'' to 
read ``one or more full days'' throughout section 541.602 to clarify 
that certain deductions can only be made for full day increments. In 
addition, the final rule modifies the text of the new disciplinary 
deduction exception to indicate more clearly that the disciplinary 
policy must be applicable to all employees.
    A number of commenters, such as the Fisher & Phillips law firm, the 
National Association of Convenience Stores and the American Bakers 
Association, urge the Department to abandon the salary basis test 
entirely, arguing that this requirement serves as a barrier to the 
appropriate classification of exempt employees. These comments note 
that the explanation in the proposal that payment on a salary basis is 
the quid pro quo for an exempt employee not receiving overtime pay 
reflects an inappropriate regulation of the compensation of an 
otherwise exempt employee.
    In contrast, commenters such as the AFL-CIO and the Goldstein, 
Demchak, Baller, Borgen & Dardarian law firm view the salary basis 
requirement as a hallmark of exempt status. In fact, many commenters 
such as the New York State Public Employees Federation, the National 
Employment Lawyers Association, and the National Employment Law 
Project, request that the salary basis test be tightened.
    After considering the salary basis test in light of its historical 
context and judicial acceptance, the Department has decided that it 
should be retained. As early as 1940, the Department noted that there 
was ``surprisingly wide agreement'' among employers and employees 
``that a salary qualification in the definition of the term `executive' 
is a valuable and easily applied index to the `bona fide' character of 
the employment. * * * '' 1940 Stein Report at 19. The basis of that 
agreement was that ``[t]he term `executive' implies a certain prestige, 
status, and importance'' that is captured by a salary test. Id. Also, 
because ``executive'' employees are denied the protection of the Act, 
``[i]t must be assumed that they enjoy compensatory privileges,'' 
including a salary ``substantially higher'' than the minimum wages 
guaranteed under the Act. Id. The 1940 Stein Report recommended a 
salary test for executives that would be satisfied if the ``employee is 
guaranteed a net compensation of not less than $30 a week `free and 
clear.' '' Id. at 23 (emphasis added). The Report concluded that the 
inclusion of a salary test was vital in defining administrative and 
professional employees as well. Id. at 26 (``[A] salary criterion 
constitutes the best and most easily applied test of the employer's 
good faith in claiming that the person whose exemption is desired is 
actually of such importance to the firm that he is properly describable 
as an employee employed in a bona fide administrative capacity''); id. 
at 36 ([I]n order to avoid disputes, to assist in the effective 
enforcement of the act and to prevent abuse, it appears essential * * * 
to include a salary test in the definition [of professional]'').
    Based on the 1940 Stein Report's recommendation, the Department 
promulgated regulations providing that an exempt executive must be 
``compensated for his services on a salary basis at not less than $30 
per week.'' 29 CFR 541(e) (1940 Supp.). The regulations required that 
exempt administrative and professional employees (except physicians and 
attorneys) must be paid ``on a salary or fee basis at a rate of not 
less than $200 per month.'' 29 CFR 541.2(a) (administrative), 541.3(b) 
(professional) (emphasis added).
    In 1944, the Wage and Hour Division issued Release No. A-9, which 
addressed the meaning of ``salary basis.'' The Release stated that an 
employee will be considered to be paid on a salary basis if ``under his 
employment agreement he regularly receives each pay period, on a 
weekly, biweekly, semi-monthly, monthly or annual basis, a 
predetermined amount constituting all or part of his compensation, 
which amount is not subject to reduction because of variations in the 
number of hours worked or in the quantity or quality of the work 
performed during the pay period.'' Release No. A-9 (Aug. 24, 1944), 
reprinted in Wage & Hour Manual (BNA) 719 (cum. ed. 1944-1945). The 
Release further explained that because ``bona fide executive, 
administrative, and professional employees are normally allowed some 
latitude with respect to the time spent at work,'' such employees 
should

[[Page 22177]]

generally be free to go home early or occasionally take a day off 
without reduction in pay. Id.
    After hearings conducted in 1947, the Wage and Hour Division 
recommended retention of the salary basis test in the 1949 Weiss 
Report, stating:

    The evidence at the hearing showed clearly that bona fide 
executive, administrative, and professional employees are almost 
universally paid on a salary or fee basis. Compensation on a salary 
basis appears to have been almost universally recognized as the only 
method of payment consistent with the status implied by the term 
``bona fide'' executive. Similarly, payment on a salary (or fee) 
basis is one of the recognized attributes of administrative and 
professional employment.

    1949 Weiss Report at 24. Based on the Weiss Report recommendations, 
the Department issued revised Part 541 regulations in 1949 that 
retained the salary basis test. 29 CFR 541.1(f), 541.2(e), 541.3(e) 
(1949 Supp.). Shortly thereafter, the Department published the first 
version of 29 CFR 541.118 (1949 Supp.) in a new Subpart B, entitled 
``Interpretations.'' Section 541.118(a) provided as follows:

    An employee will be considered to be paid on a salary basis 
within the meaning of the regulations in Subpart A of this part, if 
under his employment agreement he regularly receives each pay period 
on a weekly, or less frequent basis, a predetermined amount 
constituting all or part of his compensation, which amount is not 
subject to reduction because of variations in the number of hours 
worked in the workweek or in the quality or quantity of the work 
performed. The employee must receive his full salary for any week in 
which he performs any work without regard to the number of days or 
hours worked.

    In 1954, the Administrator issued a revised section 541.118(a) that 
retained the salary basis test, but added a number of exceptions to the 
rule. In 1958, the Wage and Hour Division again conducted hearings for 
the purpose of determining whether the salary levels should be changed. 
Although the resulting 1958 Kantor Report related primarily to the 
salary levels, it reiterated that salary is a ``mark of [the] status'' 
of an exempt employee, and reaffirmed the criterion's importance as an 
enforcement tool, noting that the Department had ``found no 
satisfactory substitute for the salary tests.'' 1958 Kantor Report at 
2-3. Since 1954, the salary basis test has remained unchanged.
    The Department thus has determined over the course of many years 
that executive, administrative and professional employees are nearly 
universally paid on a salary basis. This practice reflects the widely-
held understanding that employees with the requisite status to be bona 
fide executives, administrators or professionals have discretion to 
manage their time. Such employees are not paid by the hour or task, but 
for the general value of services performed. See Kinney v. District of 
Columbia, 994 F.2d 6, 11 (D.C. Cir. 1993); Brock v. Claridge Hotel & 
Casino, 846 F.2d 180, 184 (3d Cir.), cert. denied, 488 U.S. 925 (1988). 
There is nothing in this rulemaking record that contradicts the 
Department's long-standing view. The comments accusing the Department 
of improperly regulating the wages of exempt employees miss the mark. 
The quid pro quo referenced in the proposal was simply a way to explain 
that payment on a salary basis reflects an employee's discretion to 
manage his or her time and to receive compensatory privileges 
commensurate with exempt status.
    Many commenters, including the FLSA Reform Coalition, the Fisher & 
Phillips law firm, the U.S. Chamber of Commerce, the HR Policy 
Association and the Oklahoma Office of Personnel Management, support 
the proposed new exception to the salary basis rule for ``unpaid 
disciplinary suspensions of a full day or more imposed in good faith 
for infractions of workplace conduct rules.'' These commenters note 
that this additional exception will permit employers to apply the same 
progressive disciplinary rules to both exempt and nonexempt employees, 
and is needed in light of federal and state laws requiring employers to 
take appropriate remedial action to address employee misconduct. A 
number of commenters ask the Department to construe the term 
``workplace misconduct'' more broadly to include off-site, off-duty 
conduct. The National Association of Manufacturers suggests that the 
term should be clarified, at a minimum, to refer to the standards of 
conduct imposed by state and federal anti-discrimination laws.
    In contrast, commenters such as the AFL-CIO, the Communications 
Workers of America, the New York State Public Employees Federation and 
the National Employment Law Project oppose the new exception, arguing 
that the current rule properly recognizes that receiving a salary 
includes not being subject to disciplinary deductions of less than a 
week. These commenters argue that employers have other ways to 
discipline exempt employees without violating the salary basis test.
    The final rule includes the exception to the salary basis 
requirement for deductions from pay due to suspensions for infractions 
of workplace conduct rules. The Department believes that this is a 
common-sense change that will permit employers to hold exempt employees 
to the same standards of conduct as that required of their nonexempt 
workforce. At the same time, as one commenter notes, it will avoid 
harsh treatment of exempt employees--in the form of a full-week 
suspension--when a shorter suspension would be appropriate. It also 
takes into account, as the comments of Representative Norwood, 
Representative Ballenger and the American Bakers Association recognize, 
that a growing number of laws governing the workplace have placed 
increased responsibility and risk of liability on employers for their 
exempt employees' conduct. See Burlington Industries, Inc. v. Ellerth, 
524 U.S. 742 (1998); Faragher v. City of Boca Raton, 524 U.S. 775 
(1998) (liability for sexual harassment by supervisory employees may be 
imputed to the employer where employer fails to take prompt and 
effective remedial action). At the same time, the Department does not 
intend that the term ``workplace conduct'' be construed expansively. As 
the term indicates, it refers to conduct, not performance or 
attendance, issues. Moreover, consistent with the examples included in 
the regulatory provision, it refers to serious workplace misconduct 
like sexual harassment, violence, drug or alcohol violations, or 
violations of state or federal laws. Although we believe that this 
additional exception to the general no-deduction rule is warranted (as 
was the exception added in 1954 for infractions of safety rules of 
major significance), it should be construed narrowly so as not to 
undermine the essential guarantees of the salary basis test. See 
Mueller v. Reich, 54 F.3d 438 (7th Cir. 1995). However, the fact that 
the employee misconduct occurred off the employer's property should not 
preclude an employer from imposing a disciplinary suspension, as long 
as the employer has a bona fide workplace conduct rule that covers such 
off-site conduct.
    Commenters such as the FLSA Reform Coalition, the Fisher & Phillips 
law firm and the National Association of Chain Drug Stores urge the 
Department to delete the proposed requirement that any pay deductions 
for workplace conduct violations must be imposed pursuant to a 
``written policy applied uniformly to all workers.'' These commenters 
question the need for the policy to be in writing, and are concerned 
that the uniform application requirement would breed litigation and 
diminish employer flexibility to take individual circumstances into 
account. The American Corporate Counsel

[[Page 22178]]

Association notes that it ``would not object if the present draft were 
further modified to condition full-day docking on the employer either 
adopting a written policy notifying employees of the potential for a 
suspension without pay as a disciplinary measure or providing the 
employee with written notice of a finding of job-related misconduct.'' 
The Department has decided to retain the requirement that the policy be 
in writing, on the assumption that most employers would put (or already 
have) significant conduct rules in writing, and to deter misuse of this 
exception. This provision is a new exception to the salary basis test, 
and the Department does not believe restricting this new exception to 
written disciplinary policies will lead to changes in current employer 
practices regarding such policies. However, the written policy need not 
include an exhaustive list of specific violations that could result in 
a suspension, or a definitive declaration of when a suspension will be 
imposed. The written policy should be sufficient to put employees on 
notice that they could be subject to an unpaid disciplinary suspension. 
We have clarified the regulatory language to provide that the written 
policy must be ``applicable to all employees,'' which should not 
preclude an employer from making case-by-case disciplinary 
determinations. Thus, for example, the ``written policy'' requirement 
for this exception would be satisfied by a sexual harassment policy, 
distributed generally to employees, that warns employees that 
violations of the policy will result in disciplinary action up to and 
including suspension or termination.
    Commenters raise a number of other issues related to deductions 
from salary. First, in response to comments from the National 
Association of Convenience Stores and the Fisher & Phillips law firm, 
we have changed the phrase ``of a full day or more'' to ``one or more 
full days'' in sections 541.602(b)(1), (2) and (5), to clarify that a 
deduction of one and one-half days, for example, is impermissible.
    Second, commenters, such as the National Association of Chain Drug 
Stores, the U.S. Chamber of Commerce, the HR Policy Association and the 
National Retail Federation, suggest that partial day deductions be 
permitted for any leave requested by an employee, including for 
sickness or rehabilitation, or for disciplinary suspensions. We believe 
that partial day deductions generally are inconsistent with the salary 
basis requirement, and should continue to be permitted only for 
infractions of safety rules of major significance, for leave under the 
Family and Medical Leave Act, or in the first and last weeks of 
employment.
    Third, several commenters, such as the Morgan, Lewis & Bockius law 
firm, suggest an additional exception to the general no-docking rule: 
payments in the nature of restitution, fines, settlements or judgments 
an employer must make based on the misconduct of an employee. Such an 
additional exception, in our view, would be inappropriate and 
unwarranted because it would grant employers unfettered discretion to 
dock large amounts from the salaries of exempt employees in 
questionable circumstances (judgments against employers because of 
discriminatory employment actions taken by an exempt employee, for 
example). The new disciplinary deduction exception only allows 
deductions for unpaid suspensions of one or more days--not fines, 
settlements or judgments which could arguably be blamed on an exempt 
employee.
    Fourth, the U.S. Chamber of Commerce and a few other commenters 
request that the Department expand proposed section 541.602 (b)(7) to 
include employee absences under an employer's family or medical leave 
policy. Subsection (b)(7) provides an exception from the no-deduction 
rule for weeks in which an exempt employee takes unpaid leave under the 
Family and Medical Leave Act (FMLA). This exception was mandated by 
Congress when it passed the FMLA in 1993. 29 U.S.C. 2612(c) (``Where an 
employee is otherwise exempt under regulations issued by the Secretary 
pursuant to section 13(a)(1) of the Fair Labor Standards Act of 1938, * 
* * the compliance of an employer with this title by providing unpaid 
leave shall not affect the exempt status of the employee. * * * ''). 
There is no basis to enlarge the statutory exception. We also would 
note that deductions may be made for absences of one or more full days 
occasioned by sickness under section 541.602(b)(2).
    Fifth, several commenters, including the National Association of 
Manufacturers and the American Corporate Counsel Association, urge the 
Department expressly to recognize that compensation shortages resulting 
from payroll system errors may not constitute impermissible 
``dockings.'' We do not believe it is appropriate to provide such a 
general rule in the context of this rulemaking. Whether payroll system 
errors constitute impermissible ``dockings'' depends on the facts of 
the particular case, including the frequency of the errors, whether the 
errors are caused by employee data entry or the computer system, 
whether the employer promptly corrects the errors, and the feasibility 
of correcting the payroll system programming to eliminate the errors.
    Sixth, a few commenters, such as the National Association of Chain 
Drug Stores and the National Council of Chain Restaurants, suggest that 
employers should be able to recover leave and salary advances from an 
employee's final pay. Recovery of salary advances would not affect an 
employee's exempt status, because it is not a deduction based on 
variations in the quality or quantity of the work performed. Recovery 
of partial-day leave advances, however, essentially are deductions for 
personal absences and would constitute an impermissible deduction. 
Whether recovery for a full-day leave is permissible depends on whether 
such a leave is covered by one of the section 541.602(b) exceptions.
    Seventh, the New York State Public Employees Federation requests 
that if the Department retains the disciplinary deduction provision, it 
should eliminate the current pay-docking rule applicable to public 
employers. The public accountability rationale for the public employer 
pay-docking rule (section 541.709) continues to be valid, however, and 
is not affected by the new exception for disciplinary suspensions.
    Finally, a number of commenters, including the Society for Human 
Resource Management, the National Association of Chain Drug Stores, the 
National Council of Chain Restaurants and the National Retail 
Federation, ask the Department to confirm that certain payroll and 
record keeping practices continue to be permissible under the new 
rules. We agree that employers, without affecting their employees' 
exempt status, may take deductions from accrued leave accounts; may 
require exempt employees to record and track hours; may require exempt 
employees to work a specified schedule; and may implement across-the-
board changes in schedule under certain circumstances. See, e.g., 
Webster v. Public School Employees of Washington, Inc., 247 F.3d 910 
(9th Cir. 2001) (accrued leave accounts); Douglas v. Argo-Tech Corp., 
113 F.3d 67 (6th Cir. 1997) (record and track hours); Aaron v. City of 
Wichita, Kansas, 54 F.3d 652 (10th Cir.) (accrued leave accounts, 
record and track hours), cert. denied, 516 U.S. 965 (1995); Graziano v. 
The Society of the New York Hospital, 1997 WL 639026 (S.D.N.Y. 1997) 
(accrued leave accounts); Wage and Hour Opinion Letter of 2/23/98, 1998 
WL 852696 (across-the-board changes in schedule); Wage and Hour Opinion

[[Page 22179]]

Letter of 4/15/95 (accrued leave accounts); Wage and Hour Opinion 
Letter of 3/30/94, 1994 WL 1004763 (accrued leave accounts); and Wage 
and Hour Opinion Letter of 4/14/92, 1992 WL 845095 (accrued leave 
accounts).
Section 541.603 Effect of Improper Deductions From Salary
    Proposed section 541.603 discussed the effect of improper 
deductions from salary and established a new ``safe harbor'' rule. 
Subsection (a) of the proposal set forth the general rule that: ``An 
employer who makes improper deductions from salary shall lose the 
exemption if the facts demonstrate that the employer has a pattern and 
practice of not paying employees on a salary basis. A pattern and 
practice of making improper deductions demonstrates that the employer 
did not intend to pay employees in the job classification on a salary 
basis.'' Factors for determining whether an employer had such a 
``pattern and practice'' listed in this subsection included: The 
``number of improper deductions; the time period during which the 
employer made improper deductions; the number and geographic location 
of employees whose salary was improperly reduced; the number and 
geographic location of managers responsible for taking the improper 
deductions; the size of the employer; whether the employer has a 
written policy prohibiting improper deductions; and whether the 
employer corrected the improper pay deductions.'' Proposed subsection 
(a) also provided that ``isolated or inadvertent'' deductions would not 
result in loss of the exemption. Proposed section 541.603(b) further 
provided: ``If the facts demonstrate that the employer has a policy of 
not paying on a salary basis, the exemption is lost during the time 
period in which improper deductions were made for employees in the same 
job classification working for the same managers responsible for the 
improper deductions. Employees in different job classifications who 
work for different managers do not lose their status as exempt 
employees.'' Finally, proposed section 541.603(c) included a new ``safe 
harbor'' provision: ``If an employer has a written policy prohibiting 
improper pay deductions as provided in Sec.  541.602, notifies 
employees of that policy and reimburses employees for any improper 
deductions, such employer would not lose the exemption for any 
employees unless the employer repeatedly and willfully violates that 
policy or continues to make improper deductions after receiving 
employee complaints.''
    The final rule makes a number of substantive changes to the 
proposed section 541.603. We have modified the first two sentences of 
subsection (a) to better clarify that the effect of improper deductions 
depends upon whether the facts demonstrate that the employer intended 
to pay employees on a salary basis, and to substitute the phrase 
``actual practice'' of making improper deductions for the ``pattern and 
practice'' language in proposed subsection (a). The final subsection 
(a) makes four changes in the factors to consider when determining 
whether an employer has an actual practice of making improper 
deductions: (1) Adding consideration of ``the number of employee 
infractions warranting discipline'' as compared to the number of 
deductions made; (2) modifying the written policy factor to state, 
``whether the employer has a clearly communicated policy permitting or 
prohibiting improper deductions'' (3) deleting the ``size of employer'' 
factor; and (4) deleting the ``whether the employer corrected the 
improper deductions'' factor. The final rule moves the language 
regarding isolated or inadvertent improper deductions to subsection 
(c), and inserts language, developed from the existing regulations, 
requiring an employer to reimburse employees for isolated or 
inadvertent improper deductions. The ``safe harbor'' provision, found 
in final section 541.603(d), substitutes ``clearly communicated 
policy'' for the proposed ``written policy''; adds that the policy must 
include a complaint mechanism; deletes the term ``repeatedly''; 
clarifies that the safe harbor is not available if the employer 
``willfully violates the policy by continuing to make improper 
deductions after receiving employee complaints''; and clarifies that if 
an employer fails to reimburse employees for any improper deductions or 
continues to make improper deductions after receiving employee 
complaints, the exemption is lost during the time period in which the 
improper deductions were made for employees in the same job 
classification working for the same manager responsible for the actual 
improper deductions.
    Proposed subsection 541.603(a) contained the general rule regarding 
the effect of improper deductions from salary on the exempt status of 
employees: ``An employer who makes improper deductions from salary 
shall lose the exemption if the facts demonstrate that the employer has 
a pattern and practice of not paying employees on a salary basis.'' 
Many commenters, including the FLSA Reform Coalition, the National 
Association of Manufacturers, the U.S. Chamber of Commerce and the AFL-
CIO, express concern that the phrase ``pattern and practice of not 
paying employees on a salary basis'' in proposed subsection 541.603(a) 
was ambiguous and would engender litigation and perhaps result in 
unintended consequences. The final rule clarifies that the central 
inquiry to determine whether an employer who makes improper deductions 
will lose the exemption is whether ``the facts demonstrate that the 
employer did not intend to pay employees on a salary basis.'' The final 
subsection (a) replaces the proposed ``pattern and practice'' language 
with the phrase ``actual practice,'' and also states that an ``actual 
practice of making improper deductions demonstrates that the employer 
did not intend to pay employees on a salary basis.'' The phrase 
``pattern and practice'' is a legal term of art in other employment law 
contexts which we had no intent to incorporate into these regulations. 
These changes should provide better guidance to the regulated 
community.
    Most commenters support the listed factors in subsection (a) for 
determining when an employer has an actual practice of making improper 
deductions. Responding to comments submitted by the Fisher & Phillips 
law firm and the National Association of Convenience Stores, the final 
rule states that the number of improper deductions should be considered 
``particularly as compared to the number of employee infractions 
warranting discipline.'' The Second Circuit in Yourman v. Giuliani, 229 
F.3d 124, 130 (2nd Cir. 2000), cert. denied, 532 U.S. 923 (2001), 
provided the following useful comparison: an employer that regularly 
docks the pay of managers who come to work five hours late has more of 
an ``actual practice'' of improper deduction than does an employer that 
only sporadically docks the pay of managers who come to work five 
minutes late, even though the penalties imposed by this second employer 
could far outnumber the penalties imposed by the first. Thus, it is the 
ratio of deductions to infractions that is most informative, rather 
than simply the number of deductions, because the total number of 
deductions is significantly influenced by the size of the employer. In 
light of this change, we have also deleted the size of the employer as 
a relevant factor in final subsection (a), as we did not intend that 
this section be applied differently depending on the size of the 
employer, and have deleted ``whether the employer

[[Page 22180]]

has corrected the improper pay deductions'' as a relevant factor in 
determining whether an employer has an actual practice of improper pay 
deductions. We have modified the written policy factor to state: 
``Whether the employer has a clearly communicated policy permitting or 
prohibiting improper deductions'' because, as discussed below under 
subsection 541.603(d), the U.S. Small Business Administration Office of 
Advocacy and other commenters state that the written policy factor may 
be prejudicial to small businesses.
    Final subsection 541.603(b), as in the proposal, addresses which 
employees will lose the exemption, and for what time period, if an 
employer has an actual practice of making improper deductions. The 
proposal provided that the exemption would be lost ``during the time 
period in which improper deductions were made for employees in the same 
job classification working for the same managers responsible for the 
improper deductions.'' The comments express strongly contrasting views 
on whether proposed section 541.603(b) should be retained or modified 
either to mitigate the impact on employers or to expand the 
circumstances in which employees would lose their exempt status. 
Commenters such as the Federal Wage Hour Consultants, the Society for 
Human Resource Management and the National Association of Chain Drug 
Stores support the proposal as resolving many of the misunderstandings 
that exist under the existing regulations and current case law. Other 
commenters, however, including the FLSA Reform Coalition, the U.S. 
Chamber of Commerce, the National Council of Chain Restaurants, the 
National Retail Federation, the HR Policy Association, and the County 
of Culpeper, Virginia, suggest that improper deductions should affect 
only the exempt status of the individual employees actually subjected 
to the impermissible pay deductions. These commenters argue that the 
possibility that employees who have never experienced a salary 
reduction could also lose their exempt status was first raised by the 
decision in Abshire v. County of Kern, California, 908 F.2d 483 (9th 
Cir. 1990), cert. denied, 498 U.S. 1068 (1991), and has led to 
extensive litigation thereafter. The HR Policy Association states that 
the Supreme Court in Auer v. Robbins, 519 U.S. 452 (1997), ``did not 
rectify the central flaw in the current interpretation: that a few 
deductions made against a couple of employees arguably converts whole 
classes of employees to nonexempt.''
    In contrast, commenters such as the AFL-CIO, the McInroy & Rigby 
law firm, the National Employment Law Project, the Goldstein, Demchak, 
Baller, Borgen & Dardarian law firm and the National Employment Lawyers 
Association urge the Department to modify the proposed provision to 
state that employees will lose their exempt status if they are subject 
to an employment policy permitting impermissible deductions, even 
absent any actual deductions. These comments note that the Supreme 
Court in Auer deferred to the Department's view, as expressed in its 
legal briefs to the Court, that employees should lose their exempt 
status if there is either an actual practice of making impermissible 
deductions or an employment policy that creates a significant 
likelihood of such deductions.
    After giving this complex issue careful consideration, the 
Department has decided to retain in final subsection 541.603(b) the 
proposed approach that an employer who has an actual practice of making 
improper deductions will lose the exemption during the time period in 
which the improper deductions were made for employees in the same job 
classification working for the same managers responsible for the actual 
improper deductions. The final regulation also retains the language 
that employees in different job classifications or who work for 
different managers do not lose their status as exempt employees. Any 
other approach, on the one hand, would provide a windfall to employees 
who have not even arguably been harmed by a ``policy'' that a manager 
has never applied and may never intend to apply, but on the other hand, 
would fail to recognize that some employees may reasonably believe that 
they would be subject to the same types of impermissible deductions 
made from the pay of similarly situated employees.
    The final rule represents a departure from the Department's 
position in Auer v. Robbins, 519 U.S. 452 (1997). In Auer, the Supreme 
Court, deferring to arguments made in an amicus brief filed by the 
Department, found that the existing salary basis test operated to deny 
exempt status when ``there is either an actual practice of making such 
deductions or an employment policy that creates a `significant 
likelihood' of such deductions.'' Id. at 461. In deferring to the 
Department, the Supreme Court stated:

    Because the salary-basis test is a creature of the Secretary's 
own regulations, his interpretation of it is, under our 
jurisprudence, controlling unless ``plainly erroneous or 
inconsistent with the regulation.''
* * * * *
    Petitioners complain that the Secretary's interpretation comes 
to us in the form of a legal brief; but that does not, in the 
circumstances of this case, make it unworthy of deference.

Id. at 461-62 (citations omitted). Thus, in Auer, the Supreme Court 
relied on arguments made in the Department's amicus brief interpreting 
ambiguous regulations existing at the time of the decision. The 
``significant likelihood'' test is not found in the FLSA itself or 
anywhere in the existing Part 541 regulations. Moreover, nothing in 
Auer prohibits the Department from making changes to the salary basis 
regulations after appropriate notice and comment rulemaking. See Keys 
v. Barnhart, 347 F.3d 990, 993 (7th Cir. 2003).
    We are concerned with those employees who actually suffer harm as a 
result of salary basis violations and want to ensure that those 
employees receive sufficient back pay awards and other appropriate 
relief. We disagree, however, with those comments arguing that only 
employees who suffered an actual deduction should lose their exempt 
status. An exempt employee who has not suffered an actual deduction 
nonetheless may be harmed by an employer docking the pay of a similarly 
situated co-worker. An exempt employee in the same job classification 
working for the same manager responsible for making improper 
deductions, for example, may choose not to leave work early for a 
parent-teacher conference for fear that her pay will be reduced, and 
thus is also suffering harm as a result of the manager's improper 
practices. Because exempt employees in the same job classification 
working for the same managers responsible for the actual improper 
deductions may reasonably believe that their salary will also be 
docked, such employees have also suffered harm and therefore should 
also lose their exempt status. The Department's construction best 
furthers the purposes of the section 13(a)(1) exemptions because it 
realistically assesses whether an employer intends to pay employees on 
a salary basis. For the same reasons, final subsection (a) provides 
that ``whether the employer has a clearly communicated policy 
permitting or prohibiting improper deductions'' is one factor to 
consider when determining whether the employer has an actual practice 
of not paying employees on a salary basis.
    A number of commenters, such as the FLSA Reform Coalition, the U.S. 
Chamber of Commerce and the National

[[Page 22181]]

Employment Lawyers Association, ask the Department to clarify how 
section 541.603(b) would apply if deductions result from a corporate-
wide policy or the advice a manager receives from the human resources 
department. We believe that final section 541.603 calls for a case-by-
case factual inquiry. Thus, for example, under final subsection 
541.603(a), a corporate-wide policy permitting improper deductions is 
some evidence that an employer has an actual practice of not paying 
employees on a salary basis, but not sufficient evidence by itself to 
cause the exemption to be lost if a manager has never used that policy 
to make any actual deductions from the pay of other employees. 
Moreover, in such a circumstance, the existence of a clearly 
communicated policy prohibiting such improper deductions would weigh 
against the conclusion that an actual practice exists.
    Final subsection (c) contains language taken from proposed 
subsection 541.603(a) and the existing ``window of correction'' in 
current subsection 541.118(a)(6) regarding the effect of ``isolated'' 
or ``inadvertent'' improper deductions. Some commenters request 
additional clarification regarding the meaning of these terms. 
Inadvertent deductions are those taken unintentionally, for example, as 
a result of a clerical or time-keeping error. See, e.g., Jones v. 
Northwest Telemarketing, Inc., 2000 WL 568352, at *3 (D. Or. 2000); 
Reeves v. Alliant Techsystems, Inc., 77 F. Supp. 2d 242, 251 (D.R.I. 
1999). See also Furlong v. Johnson Controls World Services, Inc., 97 F. 
Supp. 2d 1312, 1317 (S.D. Fla. 2000) (partial day deductions, made 
pursuant to the employer's mistaken belief that the employee's absences 
were covered by the Family and Medical Leave Act's statutory exemption 
to the salary basis test due to the employee's representations and 
actions, are considered inadvertent). Whether deductions are 
``isolated'' is determined by reference to the factors set forth in 
final subsection 541.603(a). Other commenters object to the proposed 
``isolated or inadvertent'' language because the proposal did not 
require employees to be reimbursed for the improper deductions that are 
isolated or inadvertent.
    The AFL-CIO, for example, states that the ``underlying purpose of 
the window of correction is not simply to ensure that an employer does 
not lose the FLSA exemption because of inadvertent or isolated 
incidents of improper pay deductions, but rather to provide a means for 
an employer who has demonstrated an objective intention to pay its 
employees on a salary basis to remedy improper deductions and avoid 
further liability.'' We agree with commenters who state that employees 
whose salary has been improperly docked should be reimbursed, even if 
the improper deductions were isolated or inadvertent. Thus, final 
subsection (c) provides: ``Improper deductions that are either isolated 
or inadvertent will not result in loss of the exemption for any 
employees subject to such improper deductions, if the employer 
reimburses the employees for such improper deductions.'' The Department 
continues to adhere to current law that reimbursement does not have to 
be made immediately upon the discovery that an improper deduction was 
made. See, e.g., Moore v. Hannon Food Service, Inc., 317 F.3d 489, 498 
(5th Cir.), cert. denied, 124 S. Ct. 76 (2003) (reimbursement made five 
days before trial held sufficient because reimbursement ``may be made 
at any time'').
    The existing ``window of correction'' is not a model of clarity. It 
has been difficult for the Department to administer, been the source of 
considerable litigation, and produced divergent interpretations in the 
courts of appeals. Most notably, federal courts have reached different 
conclusions regarding the interpretation and application of existing 
section 541.118(a)(6), ``or is made for reasons other than lack of 
work.'' Compare Moore v. Hannon Food Service, Inc., 317 F.3d 489 (5th 
Cir.), cert. denied, 124 S. Ct. 76 (2003), with Takacs v. Hahn 
Automotive Corp., 246 F.3d 776 (6th Cir.), cert. denied, 534 U.S. 889 
(2001), Whetsel v. Network Property Services, L.L.C., 246 F.3d 897 (7th 
Cir. 2001), Yourman v. Giuliani, 229 F.3d 124 (2nd Cir. 2000), cert. 
denied, 532 U.S. 923 (2001), and Klem v. County of Santa Clara, 208 
F.3d 1085 (9th Cir. 2000).
    There is no need to resolve the conflict between these cases for 
purposes of the final rule because of the changes made in this 
subsection (c) and the new safe harbor provision in final subsection 
(d). Under final subsection (c), isolated and inadvertent improper 
deductions do not result in loss of the exemption if the employer 
reimburses the employee for such improper deductions. Further, as 
discussed below, for other actual improper deductions, employers can 
preserve the exemption by taking advantage of the safe harbor 
provision. The safe harbor provision applies regardless of the reason 
for the improper deduction--whether improper deductions were made for 
lack of work or for reasons other than lack of work. For the reasons 
discussed below, the Department believes that the new ``safe harbor'' 
is the best approach going forward. However, we recognize that some 
cases, based on events arising before the effective date of these 
revisions, will be governed by the prior version of the ``window of 
correction.'' This final rule is not intended to govern those cases in 
any way, or to express a view regarding the correct interpretation of 
the prior version of the ``window of correction.'' Instead, we intend 
only to adopt a different approach going forward for the reasons stated 
herein.
    Many commenters, including the National Association of 
Manufacturers, the Society for Human Resource Management, the Federal 
Wage Hour Consultants, the American Health Care Association and the 
American Bakers Association, generally support the proposed safe harbor 
provision, moved to subsection (d) in the final rule. These commenters 
state that the proposal was an ``excellent common sense approach'' that 
promoted proactive steps by employers to protect employees without 
risking liability and resolved a conflict in the case law. Other 
commenters, however, while supporting the goal of the proposed safe 
harbor, believe it to be confusing and suggest modifications. The 
American Corporate Counsel Association, for example, notes that the 
interplay between sections 541.603(a), (b) and (c) ``is not immediately 
obvious to trained professionals responsible for securing compliance.'' 
The U.S. Chamber of Commerce (Chamber) comments that the phrase 
``repeatedly and willfully'' in the proposed provision was vague, and 
the Chamber supports the construction of the ``window of correction'' 
in Moore v. Hannon Food Service, Inc., 317 F.3d 489 (5th Cir.), cert. 
denied, 124 S. Ct. 76 (2003). The Chamber also argues that the proposal 
only provides an incentive for employers to adopt policies prohibiting 
improper deductions, but not to take corrective action; believes that 
the requirement for a written policy was impractical; and suggests 
eliminating the provision denying use of the safe harbor to employers 
that make improper deductions after receiving employee complaints. The 
U.S. Small Business Administration Office of Advocacy also objects to 
the written policy requirement as excluding some small businesses. The 
National Association of Manufacturers objects to the elimination of the 
phrase ``for reasons other than lack of work'' in the existing 
regulations.
    Commenters such as the AFL-CIO, the National Employment Lawyers 
Association, the National Employment Law Project and the Public Justice

[[Page 22182]]

Center oppose the proposed safe harbor provision, arguing that it 
eviscerated the salary basis requirement by permitting an employer to 
avoid overtime liability even after making numerous impermissible 
deductions.
    After careful consideration of the comments and case law, the 
Department continues to believe that the proposed safe harbor provision 
is an appropriate mechanism to encourage employers to adopt and 
communicate employment policies prohibiting improper pay deductions, 
while continuing to ensure that employees whose pay is reduced in 
violation of the salary basis test are made whole. Thus, the final rule 
retains the proposed language with several changes. In our view, this 
provision achieves the goals, supported by many comments, of both 
encouraging employers to adopt ``proactive management practices'' that 
demonstrate the employers' intent to pay on a salary basis, and 
correcting violative payroll practices. Cf. Kolstad v. American Dental 
Ass'n, 527 U.S. 526, 545 (1999) (Title VII of the Civil Rights Act is 
intended to promote prevention and remediation). In addition, employees 
will benefit from this additional notification of their rights under 
the FLSA and the complaint procedures. We intend this safe harbor 
provision to apply, for example, where an employer has a clearly 
communicated policy prohibiting improper deductions, but a manager 
engages in an actual practice (neither isolated nor inadvertent) of 
making improper deductions. In this situation, regardless of the 
reasons for the deductions, the exemption would not be lost for any 
employees if, after receiving and investigating an employee complaint, 
the employer reimburses the employees for the improper deductions and 
makes a good faith commitment to comply in the future. We believe it 
furthers the purposes of the FLSA to permit the employer who has a 
clearly communicated policy prohibiting improper pay deductions and a 
mechanism for employee complaints, to reimburse the affected employees 
for the impermissible deductions and take good faith measures to 
prevent improper deductions in the future. This is generally consistent 
with trends in employment law. An employer, for example, that has 
promulgated a policy against sexual harassment and takes corrective 
action upon receipt of a complaint of harassment may avoid liability. 
See Faragher v. City of Boca Raton, 524 U.S. 775 (1998), and Burlington 
Industries, Inc. v. Ellerth, 524 U.S. 742 (1998). Consistent with final 
subsection 541.603(b), final subsection (c) also provides that, if an 
employer fails to reimburse employees for any improper deductions or 
continues to make improper deductions after receiving employee 
complaints, ``the exemption is lost during the time period in which the 
improper deductions were made for employees in the same job 
classification working for the same managers responsible for the actual 
improper deductions.''
    The comments raise several additional issues. First, as previously 
noted, some commenters object to the requirement that an employer have 
a written policy in order to utilize the safe harbor. The U.S. Small 
Business Administration Office of Advocacy, for example, notes that 
small business representatives express concern that the safe harbor's 
requirement for a pre-existing written policy ``may exclude some small 
businesses which do not produce written compliance materials in the 
ordinary course of business.'' The U.S. Chamber of Commerce similarly 
heard concerns from its small business members that the requirement for 
a written policy would be impractical. It suggests that ``[w]hile 
employers seek to comply with the law, the safe harbor seems geared to 
those already sufficiently versed in the law and is likely to be of 
little effect to less sophisticated employers.'' Other commenters, such 
as the American Health Care Association, the American Corporate Counsel 
Association, and the National Association of Manufacturers, believe 
that adopting a written policy is an essential part of the employer's 
responsibility. We intend the safe harbor to be available to employers 
of all sizes. Thus, although a written policy is the best evidence of 
the employer's good faith efforts to comply with the Part 541 
regulations, we have concluded, consistent with an employer's 
obligation under Farragher and Ellerth, that a written policy is not 
essential. However, the policy must have been communicated to employees 
prior to the actual impermissible deduction. Thus, final subsection (d) 
provides that the safe harbor is available to employers with a 
``clearly communicated policy'' prohibiting improper pay deductions. To 
protect against possible abuses, final subsection (d) adds the 
requirement that the clearly communicated policy must include a 
``complaint mechanism.'' Final subsection (d) also states that the 
``clearly communicated'' standard may be met, for example, by 
``providing a copy of the policy to employees at the time of hire, 
publishing the policy in an employee handbook or publishing the policy 
on the employer's Intranet.'' For small businesses, the ``clearly 
communicated policy'' could be a statement to employees that the 
employer intends to pay the employees on a salary basis and will not 
make deductions from salary that are prohibited under the Fair Labor 
Standards Act; such a statement would also need to include information 
regarding how the employees could complain about improper deductions, 
such as reporting the improper deduction to a manager or to an employee 
responsible for payroll. To further assist small businesses, the 
Department intends to publish a model safe harbor policy that would 
comply with final subsection 541.603(d).
    Second, some commenters, such as the HR Policy Association and the 
National Employment Lawyers Association, support a requirement in the 
subsection (d) safe harbor provision that the employer must ``promise 
to comply'' in the future. Although other commenters oppose such a 
requirement, we believe that this promise is inherent in adopting the 
required employment policy and the duty to cease making improper 
deductions after receiving employee complaints. Thus, the Department 
has included as an explicit requirement for the safe harbor rule in 
final subsection (d) that the employer make a good faith commitment to 
comply in the future. There may be many ways that an employer could 
make and evidence its ``good faith commitment'' to comply in the future 
including, but not limited to: adopting or re-publishing to employees 
its policy prohibiting improper pay deductions; posting a notice 
including such a commitment on an employee bulletin board or employer 
Intranet; providing training to managers and supervisors; reprimanding 
or training the manager who has taken the improper deduction; or 
establishing a telephone number for employee complaints.
    Third, to avoid confusion that some commenters noted with the 
``actual practice'' determination under final subsection (a), we have 
changed the phrase ``repeatedly and willfully'' to ``willfully,'' and 
defined ``willfully'' as continuing to make improper deductions after 
receiving employee complaints. This definition of ``willfully'' is 
consistent with McLaughlin v. Richland Shoe, 486 U.S. 128, 133-35 
(1988) (``willfulness'' means that ``the employer either knew or showed 
reckless disregard for the matter of whether its conduct was prohibited 
by the statute''). Thus, as stated above, an employer with a clearly

[[Page 22183]]

communicated policy that prohibits improper pay deductions and includes 
a complaint mechanism will not lose the exemption for any employee if 
the employer reimburses employees for the improper deductions after 
receiving employee complaints and makes a good faith commitment to 
comply in the future. This rule applies, moreover, regardless of the 
reasons for the improper pay deductions. The safe harbor is available 
both for improper deductions made because there is no work available 
and for improper deductions made for reasons other than lack of work. 
If the employer fails to reimburse the employees for improper 
deductions or continues to make improper deductions after receiving 
employee complaints, final subsection (d) clarifies that ``the 
exemption is lost during the time period in which the improper 
deductions were made for employees in the same job classification 
working for the same managers responsible for the actual improper 
deductions.''
    Fourth, the HR Policy Association, the U.S. Chamber of Commerce, 
the National Association of Chain Drug Stores and others ask the 
Department to allow employers a reasonable amount of time to 
investigate after receiving an employee complaint to determine whether 
the deductions were improper, to take action to halt any improper 
deductions, and to correct any improper deductions. We have not changed 
the text of the regulation in response to this suggestion because the 
Department views it as self-evident that, before reimbursing the 
employee or taking other corrective action, an employer will need a 
reasonable amount of time to investigate an employee's complaint that 
an improper deduction was made. The amount of time it will take to 
complete the investigation will depend upon the particular 
circumstances, but employers should begin such investigations promptly. 
The mere fact that other employee complaints are received by the 
employer before timely completion of the investigation should not, by 
itself, defeat the safe harbor.
    Finally, a number of commenters, such as the Food Marketing 
Institute, ask the Department to clarify the burdens of proof. We do 
not intend to modify the burdens that courts currently apply. See 
Schaefer v. Indiana Michigan Power Co., 358 F.3d 394 (6th Cir. 2004) 
(employer has the burden to show employee was paid on a salary basis); 
Yourman v. Giuliani, 229 F.3d 124 (2nd Cir. 2000) (employee has the 
burden to show actual practice of impermissible deductions), cert. 
denied, 532 U.S. 923 (2001).
Section 541.604 Minimum Guarantee Plus Extras
    Under proposed section 541.604, an exempt employee may receive 
additional compensation beyond the minimum amount that is paid as a 
guaranteed salary. For example, an employee may receive, in addition to 
the guaranteed minimum paid on a salary basis, extra compensation from 
commissions on sales or a percentage of the profits. An exempt employee 
may also receive additional compensation for extra hours worked beyond 
the regular workweek, such as half-time pay, straight time pay, or a 
flat sum. Proposed section 541.604(b) provided that an exempt 
employee's salary may be computed on an hourly, daily or shift basis, 
if the employee is given a guarantee of at least the minimum weekly 
required amount paid on a salary basis regardless of the number of 
hours, days or shifts worked, and ``a reasonable relationship exists 
between the guaranteed amount and the amount actually earned.'' The 
reasonable relationship requirement is satisfied where the weekly 
guarantee is ``roughly equivalent'' to the employee's actual usual 
earnings. Thus, for example, the proposal stated that where an employee 
is guaranteed at least $500 per week, and the employee normally works 
four or five shifts per week and is paid $150 per shift, the reasonable 
relationship requirement is satisfied.
    The final rule does not make any substantive changes to the 
proposed rule, but does make a number of clarifying changes. The 
reasonable relationship requirement incorporates in the regulation Wage 
and Hour's long-standing interpretation of the existing salary basis 
regulation, which is set forth in the agency's Field Operations 
Handbook and in opinion letters. The courts also have upheld the 
reasonable relationship requirement. See, e.g., Brock v. Claridge Hotel 
& Casino, 846 F.2d 180, 182-83 (3rd Cir.) (salary basis requirement not 
met where employees are paid by the hour and the guarantee is ``nothing 
more than an illusion''), cert. denied, 488 U.S. 925 (1988). Some 
commenters, although not a significant number, object to the reasonable 
relationship requirement or question the clarity of the regulatory 
text, while others ask for additional specificity about the various 
types of additional compensation that may be paid above and beyond the 
guaranteed salary. The Department has made minor wording changes in 
response to the comments to clarify this provision.
    The National Association of Manufacturers (NAM) suggests that the 
Department list the range of compensation options, such as cash 
overtime in any increment, compensatory time off, and shift or holiday 
differentials, that employers may provide in addition to the guaranteed 
salary without violating the salary basis requirement. NAM gave the 
specific example of an employer who allows an exempt worker to take a 
day off as a reward for hours worked on a weekend outside the 
employee's normal schedule. The proposed regulation provided some 
examples and stated that additional compensation ``may be paid on any 
basis.'' We agree that the examples described above would not violate 
the salary basis test. However, we have not and could not include in 
the regulations every method employers might use to provide employees 
with extra compensation for work beyond their regular workweek. Thus, 
we have added only one of the examples NAM suggests regarding 
compensatory time off.
    The National Technical Services Association states that it was 
unclear whether the reasonable relationship requirement applies in all 
cases to employees who receive a salary and additional compensation. We 
have clarified that this requirement applies only when an employee's 
actual pay is computed on an hourly, daily or shift basis. Thus, for 
example, if an employee receives a guaranteed salary plus a commission 
on each sale or a percentage of the employer's profits, the reasonable 
relationship requirement does not apply. Such an employee's pay will 
understandably vary widely from one week to the next, and the 
employee's actual compensation is not computed based upon the 
employee's hours, days or shifts of work.
    A few commenters, including the National Association of Convenience 
Stores, the Fisher & Phillips law firm and the American Council of 
Engineering Companies, advocate the elimination of the reasonable 
relationship test. They question whether it was appropriate for the 
Department to require a reasonable relationship between the guaranteed 
salary and the employee's actual usual compensation when the payments 
are based on the employee's quantity of work, when the Department does 
not have such a requirement for salaries plus commissions or other 
similar compensation. They state that, so long as the employee also is 
guaranteed compensation of not less than the minimum required amount, 
it ought to be irrelevant how an employee's pay is computed. Moreover, 
they state that the terms ``reasonable relationship'' and

[[Page 22184]]

``roughly equivalent'' are uncertain and will be subject to litigation. 
Fisher & Phillips also states that the first sentence of proposed 
section 541.604(a) is ambiguous because it suggests that the extra 
compensation must somehow be paid consistent with the salary basis 
requirements. The Department does not agree with the comments 
suggesting the elimination of the reasonable relationship requirement. 
If it were eliminated, an employer could establish a pay system that 
calculated exempt employees' pay based directly upon the number of 
hours they work multiplied by a set hourly rate of pay; employees could 
routinely receive weekly pay of $1,500 or more and yet be guaranteed 
only the minimum required $455 (thus effectively allowing the employer 
to dock the employees for partial day absences). Such a pay system 
would be inconsistent with the salary basis concept and the salary 
guarantee would be nothing more than an illusion. We believe that the 
proposed regulation provided clear guidance about the reasonable 
relationship requirement. The Department has never suggested a 
particular percentage requirement in prior opinion letters, and this 
issue has rarely arisen in litigation over the years. The proposed rule 
clarified these terms by stating that an employee who is guaranteed 
compensation of ``at least $500 for any week in which the employee 
performs any work, and who normally works four or five shifts each 
week, may be paid $150 per shift consistent with the salary basis 
requirement.'' Therefore, we have not made any changes to the proposal 
in this regard. However, we have modified the introductory sentence to 
clarify that the extra compensation does not have to be paid on a 
salary basis.
    One commenter states that the ``minimum guarantee plus extras'' 
concept allows too much flexibility and essentially allows an employer 
to circumvent the prohibition against docking for absences due to a 
lack of work. The commenter gives the example of registered nurses 
whose average pay is $30 per hour, who would earn the guaranteed 
minimum in two shifts. The commenter believes that the entire balance 
of the workweek could be compensated as ``extra compensation.'' Thus, 
the commenter expresses concern that a nurse could be paid for all 
additional shifts on a straight time basis, with no overtime, and if 
the hospital had a lack of work, the nurse might not receive more than 
the two shifts required to earn the minimum guarantee. This commenter 
views such a system as effectively converting a nurse into an hourly 
employee not paid overtime, or a salaried employee whose pay was 
reduced due to variations in the quantity of work performed. However, 
under the final rule, if an employee is compensated on an hourly basis, 
or on a shift basis, there must be a reasonable relationship between 
the amount guaranteed per week and the amount the employee typically 
earns per week. Thus, if a nurse whose actual compensation is 
determined on a shift or hourly basis usually earns $1,200 per week, 
the amount guaranteed must be roughly equivalent to $1,200; the 
employer could not guarantee such an employee only the minimum salary 
required by the regulation.
    Another commenter states that allowing an exempt employee to be 
paid based on an hourly computation is inconsistent with the general 
requirement that exempt employees must be paid on a salary basis. This 
comment does not take account of the fact that the employees affected 
by the reasonable relationship requirement must receive a salary 
guarantee that applies in any week in which they perform any work. The 
tolerance for computing their actual pay on an hourly, shift or daily 
basis is for computation purposes only; it does not negate the fact 
that such employees must receive a salary guarantee that will be in 
effect any time the employer does not provide sufficient hours or 
shifts for them to reach the guarantee. We believe that the reasonable 
relationship requirement, which has been a Wage and Hour Division 
policy for at least 30 years (see FOH Sec.  22b03), ensures that the 
salary guarantee for such employees is a meaningful guarantee rather 
than a mere illusion.
Section 541.605 Fee Basis
    Proposed section 541.605 simplified the fee basis provision in the 
current rule, but made no substantive change. Thus, the proposed rule 
provided that administrative and professional employees may be paid on 
a fee basis, rather than a salary basis: ``An employee may be paid on a 
`fee basis' within the meaning of these regulations if the employee is 
paid an agreed sum for a single job regardless of the time required for 
its completion.'' Generally, a ``fee'' is paid for a unique job. 
``Payments based on the number of hours or days worked and not on the 
accomplishment of a given single task are not considered payments on a 
fee basis.''
    The final rule does not make any changes to the proposed rule. Very 
few comments were submitted on this provision. The Fisher & Phillips 
law firm notes that the Sixth Circuit in Elwell v. University Hospitals 
Home Care Services, 276 F.3d 832 (6th Cir. 2002), held that a 
compensation plan that combines fee payments and hourly pay does not 
qualify as a fee basis because it ties compensation, at least in part, 
to the number of hours or days worked and not on the accomplishment of 
a given single task. It asks the Department to amend the rule to permit 
combining the payment of a fee with additional, non-fee-based 
compensation. The Department has decided not to change the long-
standing fee basis rule because the only appellate decision that 
addresses this issue accepted the ``fee-only'' requirement, and Fisher 
& Phillips conceded that this is an ``arcane and rarely-used'' 
provision. We continue to believe that payment of a fee is best 
understood to preclude payment of additional sums based on the number 
of days or hours worked. Another commenter asks the Department to 
revise the rule to eliminate the necessity for ``employers to track 
hours on a project or assignment in order to determine the exempt 
status of employees.'' However, as in the current rule, the final rule 
reasonably prescribes that in determining the adequacy of a fee 
payment, reference should be made to a standard workweek of 40 hours. 
Thus, ``[t]o determine whether the fee payment meets the minimum amount 
of salary required for exemption under these regulations, the amount 
paid to the employee will be tested by determining the time worked on 
the job and whether the fee payment is at a rate that would amount to 
at least $455 per week if the employee worked 40 hours.''
Section 541.606 Board, Lodging or Other Facilities
    Proposed section 541.606 defined the terms, ``board, lodging or 
other facilities.'' The Department did not receive substantive comments 
on this section, and has made no changes in the final rule.

Subpart H, Definitions and Miscellaneous Provisions

Section 541.700 Primary Duty
    Proposed section 541.700 defined the term ``primary duty'' as ``the 
principal, main, major or most important duty that the employee 
performs.'' The proposed rule stated that a determination of an 
employee's primary duty ``must be based on all the facts in a 
particular case,'' and set forth four nonexclusive factors to consider: 
``the relative importance of the exempt duties as compared with other 
types of duties; the amount of time spent performing exempt work; the 
employee's relative freedom from direct

[[Page 22185]]

supervision; and the relationship between the employee's salary and the 
wages paid to other employees for the same kind of nonexempt work.'' 
The proposed rule also provided that exempt employees are not required 
to spend over 50 percent of their time performing exempt work. However, 
because the amount of time spent performing exempt work ``can be a 
useful guide,'' employees who spend over 50 percent of their time 
performing exempt work ``will be considered to have a primary duty of 
performing exempt work.'' The section contained an example illustrating 
the circumstances in which employees spending less than 50 percent of 
their time performing exempt work can meet the primary duty test, and 
stated that the fact an employer has ``well-defined operating policies 
or procedures should not by itself defeat an employee's exempt 
status.''
    Section 541.700 of the final rule retains essentially the same 
principles as the proposed rule, but has been reorganized and 
supplemented with additional language and a second example to clarify 
the ``primary duty'' concept. Section 541.700(a) now sets forth the 
general principles regarding the ``primary duty'' requirement. The 
basic definition of ``primary duty,'' as the ``principal, main, major 
or most important duty that the employee performs,'' is unchanged. 
However, the final rule reinserts language from existing section 
541.304 that the words ``primary duty'' places the ``major emphasis on 
the character of the employee's job as a whole.'' The final section 
541.700(b) discusses in more detail the factor of the amount of time an 
employee spends performing exempt work. With only minor changes from 
the proposed rule, subsection (b) states that the ``amount of time 
spent performing exempt work can be a useful guide in determining 
whether exempt work is the primary duty of an employee. Thus, employees 
who spend more than 50 percent of their time performing exempt work 
will generally satisfy the primary duty requirement.'' In addition, 
subsection (b) now includes language reinserted from existing section 
541.103 with some editorial changes that: ``Time alone, however, is not 
the sole test, and nothing in this section requires that exempt 
employees spend more than 50 percent of their time performing exempt 
work. Employees who do not spend more than 50 percent of their time 
performing exempt duties may nonetheless meet the primary duty 
requirement if the other factors support such a conclusion.'' The final 
section 541.700(c) contains two examples applying the factors listed in 
subsection (a). The first example is modified from the proposed rule by 
deleting the proposed language ``handling customer complaints'' and 
substituting the phrase ``managing the budget.'' As explained elsewhere 
in this preamble, handling customer complaints may be exempt or 
nonexempt work depending on the facts of a particular case. Thus, 
``managing the budget'' is used as a better example of clearly exempt 
work. The second, new example states: ``However, if such assistant 
managers are closely supervised and earn little more than the nonexempt 
employees, the assistant managers generally would not satisfy the 
primary duty requirement.'' Finally, the sentence in the proposed rule 
regarding operating policies or procedures has been deleted here 
because it seems relevant only to the administrative exemption and is 
addressed in that subpart of the final regulations.
    Most of the commenters support the clarifying changes to the 
definition of ``primary duty'' in section 541.700. For example, the HR 
Policy Association, the U.S. Chamber of Commerce, the National 
Restaurant Association, and the National Association of Manufacturers 
welcome clarification of the primary duty concept, particularly with 
respect to the amount of time spent performing exempt work, and found 
section 541.700 simpler to apply and more reflective of the current 
workplace. The National Association of Federal Wage Hour Consultants 
states that: `` `Primary Duty' is currently one of the most 
misunderstood sections of the regulations. Too often enforcement 
personnel, the business community and its representatives confuse 
`primary' with a `mechanical' percentage test, i.e., 50-plus percent.''
    Some commenters object to the definition of ``primary duty'' in 
section 541.700 as the ``principal, main, major or most important duty 
that the employee performs.'' Commenters such as the National 
Employment Lawyers Association, for example, argue that terms such as 
``most important'' are vague, expand the primary duty analysis ``far 
beyond its current bounds,'' and would lead to increased litigation.
    This language is the first time the Department has attempted to 
include a short, general statement defining the term ``primary'' in the 
regulations, but it is not a change in current law. Numerous federal 
courts, relying primarily on dictionary definitions, have defined the 
term ``primary'' to mean ``most important,'' ``principal'' or 
``chief.'' See, e.g., Mellas v. City of Puyallup, 1999 WL 841240, at *2 
(9th Cir. 1999) (``most important'' duty); Dalheim v. KDFW-TV, 918 F.2d 
1220, 1227 (5th Cir. 1990) (``[T]he essence of the test is to determine 
the employee's chief or principal duty * * * [T]he employee's primary 
duty will usually be what she does that is of principal value to the 
employer''); Donovan v. Burger King Corp., 675 F.2d 516, 521 (2nd Cir. 
1982) (primary duty defined as the employee's ``principal 
responsibilities'' that are ``most important or critical to the 
success'' of the employer); Donovan v. Burger King Corp., 672 F.2d 221, 
226 (1st Cir. 1982) (primary duty defined as the ``principal'' or 
``chief'' duty, rather than ``over one-half'') (internal quotation 
marks omitted). Because the Department relied on these cases, the 
existing regulations, and dictionary definitions to formulate the 
general definition of ``primary,'' the commenters' concerns are without 
merit.
    The major comments expressing opposition to proposed section 
541.700 view the primary duty definition to be a major departure from a 
purported existing ``bright-line'' test in the current regulations 
requiring exempt employees to spend more than 50 percent of their time 
performing exempt work. The American Federation of Government Employees 
(AFGE), for example, states that proposed section 541.700 was 
``essentially, the destruction of the most crucial test in the entire 
FLSA exemption area.'' The AFGE, like other commenters objecting to 
this section, believes that the current primary duty test ``provides an 
absolutely essential `bright line' for exemption analysis: 50% of an 
employee's actual job performance must be engaged in exempt 
activities.'' Abandonment of this ``bright-line test,'' such commenters 
assert, will result in increased confusion and litigation. The National 
Employment Lawyers Association similarly states: ``If the definition of 
`primary duty' is to have meaning as a limit on the exemptions, it must 
contain a time component that has more effect than being one of five 
enumerated factors to consider.''
    After careful consideration, the Department must reject these 
objections. These comments fail to take account of the existing 
regulations and federal case law. Comments objecting to section 541.700 
are simply wrong in asserting that the current law defines ``primary 
duty'' by a bright-line 50 percent test. The existing section 541.103 
has for decades provided that ``it may be taken as a good rule of thumb 
that primary duty means the major part, or over 50 percent, of the 
employee's time'' but that ``[t]ime alone, however, is not the sole 
test.'' Thus, section 22c02 of the

[[Page 22186]]

Wage and Hour Field Operations Handbook states that ``the 50% test is 
not a hard-and-fast rule but rather a flexible rule of thumb. In many 
cases, an exempt employee may spend less than 50% of his time in 
managerial duties but still have management as his primary duty.'' 
Federal courts also recognize that the current regulations establish a 
50 percent ``rule of thumb''--not a ``bright-line'' test. Federal 
courts have found many employees exempt who spent less than 50 percent 
of their time performing exempt work. See, e.g., Jones v. Virginia Oil 
Co., 2003 WL 21699882, at *4 (4th Cir. 2003) (management found to be 
the ``primary duty'' of employee who spent 75 to 80 percent of her time 
on basic line-worker tasks); Murray v. Stuckey's, Inc., 939 F.2d 614, 
618-20 (8th Cir. 1991) (manager met the ``primary duty'' test despite 
spending 65 to 90 percent of his time in non-management duties), cert. 
denied, 502 U.S. 1073 (1992); Glefke v. K.F.C. Take Home Food Co., 1993 
WL 521993, at *4-5 (E.D. Mich. 1993) (employee found exempt despite 
assertion that she spent less than 20 percent of time on managerial 
duties because ``the percentage of time is not determinative of the 
primary duty question, rather, it is the collective weight of the four 
factors''); Stein v. J.C. Penney Co., 557 F. Supp. 398, 404-05 (W.D. 
Tenn. 1983) (employee spending 70 to 80 percent of his time on non-
managerial work held exempt because the ``overall nature of the job'' 
is determinative, not ``the precise percentage of time involved in a 
particular type of work'').
    Adopting a strict 50-percent rule for the first time would not be 
appropriate, as evidenced by the comments discussed in the Structure 
and Organization section above, because of the difficulties of tracking 
the amount of time spent on exempt tasks. An inflexible 50-percent rule 
has the same flaws as an inflexible 20-percent rule. Such a rule would 
require employers to perform a moment-by-moment examination of an 
exempt employee's specific daily and weekly tasks, thus imposing 
significant new monitoring requirements (and, indirectly, new 
recordkeeping burdens).
    Other commenters objecting to section 541.700, such as the 
International Federation of Professional & Technical Engineers, assert 
that section 541.700 adopts an ``Alice in Wonderland'' approach. They 
assert that this section creates an ``outcome-oriented double 
standard'' because it provides that employees who spend more than 50 
percent of their time performing exempt work generally satisfy the 
primary duty test, while employees spending less than 50 percent do not 
necessarily fail the test.
    But what the commenters call an ``Alice in Wonderland'' double 
standard actually appears in the current Part 541 regulations. For 
decades, current section 541.103 has created a presumption of exempt 
status for employees crossing the 50-percent threshold while 
recognizing no presumption of nonexempt status for those who do not 
cross the threshold. The existing section 541.103 states:

    Thus, an employee who spends over 50 percent of his time in 
management would have management as his primary duty. Time alone, 
however, is not the sole test, and in situations where the employee 
does not spend over 50 percent of his time in managerial duties, he 
might nevertheless have management as his primary duty if the other 
pertinent factors support such a conclusion.

See also Auer v. Robbins, 65 F.3d 702, 712 (8th Cir. 1995) (``if an 
employee spends less than 50% of his time on managerial duties, he is 
not presumed to have a primary duty of nonmanagement''), aff'd on 
another issue, 519 U.S. 452 (1997). The final rule retains this current 
language with only minor editorial changes.
    The final rule lists the same four non-exclusive factors as the 
proposal for determining the primary duty of an employee: (1) The 
relative importance of the exempt duties as compared with other types 
of duties; (2) the amount of time spent performing exempt work; (3) the 
employee's relative freedom from direct supervision; and (4) the 
relationship between the employee's salary and the wages paid to other 
employees for the same kind of nonexempt work. The time spent 
performing exempt work has always been, and will continue to be, just 
one factor for determining primary duty. Spending more than 50 percent 
of the time performing exempt work has been, and will continue to be, 
indicative of exempt status. Spending less than 50 percent of the time 
performing exempt work has never been, and will not be, dispositive of 
nonexempt status.
    Several commenters request clarification as to whether the 
determination of an employee's primary duty is made by looking to a 
single duty or many duties. The Morgan, Lewis & Bockius law firm, for 
example, suggests that the Department change ``primary duty'' to 
``primary duties,'' in order to reduce the perception that any single 
task, rather than the aggregate of job tasks, defines an employee's 
primary duty. In contrast, the AFL-CIO asserts that the term is 
properly considered in the singular.
    The current law is actually somewhere in the middle of these two 
viewpoints. Although ``primary duty'' is generally singular, an 
employee's primary duty can encompass multiple tasks. Thus, for 
example, an employee would have ``management'' as his primary duty if 
he performed tasks such as preparing budgets, negotiating contracts, 
planning the work, and reporting on performance. As stated in the 1949 
Weiss Report at 61, the search for an employee's primary duty is a 
search for the ``character of the employee's job as a whole.'' Thus, 
both the current and final regulations ``call for a holistic approach 
to determining an employee's primary duty,'' not ``day-by-day scrutiny 
of the tasks of managerial or administrative employees.'' Counts v. 
South Carolina Electric & Gas Co., 317 F.3d 453, 456 (4th Cir. 2003) 
(``Nothing in the FLSA compels any particular time frame for 
determining an employee's primary duty''). To clarify this ``holistic 
approach,'' the Department has reinserted in subsection (a) the 
language from current 541.304 that the determination of an employee's 
primary duty must be based on all the facts in a particular case ``with 
the major emphasis on the character of the employee's job as a whole.''
    The Department considered but has not incorporated in the final 
rule other various proposals to add, delete or modify section 541.700. 
For example, because the Department does not intend to eliminate the 
amount of time spent on exempt tasks as a factor for determining 
primary duty, we reject the suggestion of the Morgan, Lewis & Bockius 
law firm and others to remove the language stating that time is a 
``useful guide.'' The Smith Currie law firm proposes adding ``in the 
discretion of the employer'' to the definition of primary duty. 
However, the primary duty determination is based on all the facts and 
circumstances of each case, not upon the ``discretion'' of the 
employer. Similarly, the National Association of Chain Drug Stores 
(NACDS) proposes allowing employers the opportunity, as they have under 
the Americans with Disabilities Act, to create a ``rebuttable 
presumption'' regarding an employee's primary duty by identifying the 
principal duties of the employee in a job description. NACDS suggests 
adding ``as determined or expressed by the employer in any agreement, 
job status form, job offer, job description or other document created 
by the employer in good faith and acknowledged by the employee verbally

[[Page 22187]]

or in writing.'' The Department recognizes that such documents or 
agreements may be of some evidentiary value. However, the work actually 
performed by an employee--not any description or agreement--controls 
the determination of the employee's primary duty. See 1949 Weiss Report 
at 86 (rejecting proposal to permit employer and employee to reach 
agreement as to whether exemptions apply); 1940 Stein Report at 25 (``a 
title alone is of little or no assistance in determining the true 
importance of an employee to the employer. Titles can be had cheaply 
and are of no determinative value''). The Food Marketing Institute 
comments that the definition should explicitly state that employees, 
such as managers in retail establishments, ``should not be subject to 
arbitrary calculations of the time they spend performing manual labor. 
* * *'' As set forth in the cases cited above, and in the examples in 
the final rule, the Department has made clear that managers may perform 
exempt work less than 50 percent of the time and nevertheless have a 
primary duty of management, depending upon the collective weight of the 
factors. Final section 541.106 also provides that an employee's 
managerial duties can be performed concurrently with nonexempt tasks. 
No further clarification of this point is necessary. Finally, the 
Fisher & Phillips law firm seeks modification of the wage comparison 
factor to reflect that exempt employees are frequently eligible for 
other forms of compensation not widely available to nonexempt 
employees. Because final section 541.700(a) already provides that all 
the facts and circumstances of each case are relevant, such facts may 
be taken into account in determining primary duty without further 
changes in this section.
Section 541.701 Customarily and Regularly
    Proposed section 541.701 defined the phrase ``customarily and 
regularly'' to mean ``a frequency that must be greater than occasional 
but which, of course, may be less than constant. Tasks or work 
performed `customarily and regularly' includes work normally and 
recurrently performed every workweek; it does not include isolated or 
one-time tasks.''
    The final section 541.701 retains the proposed language without 
change.
    The Department received a few comments on section 541.701 that the 
``every workweek'' requirement in section 541.701 does not reflect that 
some exempt tasks may not be performed every week or only once each 
week. The Grocery Manufacturers of America (GMA), for example, states 
that this language is ambiguous and does not take into account that 
certain activities, such as lengthy preparation and presentation time 
that often goes into significant sales efforts, may not take place 
``recurrently'' within a given week. GMA proposes that the term 
``customarily and regularly'' should mean ``duties performed at least 
once in each workweek.'' Similarly, the McInroy & Rigby law firm and 
the Miller Canfield law firm seek clarification of the ``workweek-by-
workweek'' timeframe and its application in determining exempt 
activities.
    The Department does not believe any changes to section 541.701 are 
necessary. A similar definition of the term ``customarily and 
regularly'' has appeared for decades in section 541.107(b) of the 
existing regulations, and case law does not indicate significant 
difficulties with applying the definition. The term ``customarily and 
regularly'' requires a case-by-case determination, based on all the 
facts and circumstances, over a time period of sufficient duration to 
exclude anomalies. See, e.g., Wage and Hour Opinion of August 20, 1992, 
1992 WL 845098 (analysis should be ``over a significant time span, 
especially in smaller organizations * * * to eliminate the possibility 
of significant cycles in work requirements and to support that there 
are sufficient exempt duties on a week-in-week-out basis to support the 
exemption claimed''); Wage and Hour Field Operations Handbook, section 
22c00(d) (``The determination as to whether an employee customarily and 
regularly supervises other employees * * * depends on all the facts and 
circumstances''). Nothing in this section requires that, to meet the 
definition of ``customarily and regularly,'' a task be performed more 
than once a week or that a task be performed each and every workweek.
Section 541.702 Exempt and Nonexempt Work
    Proposed section 541.702 stated, ``The term `exempt work' means all 
work described in Sec. Sec.  541.100, 541.101, 541.102, 541.200, 
541.206, 541.300, 541.301, 541.302, 541.303, 541.304, 541.400 and 
541.500, and the activities directly and closely related to such work. 
All other work is considered `nonexempt.' '' The final rule deletes the 
inadvertent reference to a non-existent section 541.206 and the 
reference to the now-deleted ``sole charge'' exemption in proposed 
section 541.102. The Department received no significant comments on 
this section, and thus has made no other changes.
Section 541.703 Directly and Closely Related
    Proposed section 541.703 defined the phrase ``directly and closely 
related'' to mean ``tasks that are related to exempt duties and that 
contribute to or facilitate performance of exempt work.'' Subsection 
(a) further explains that ``directly and closely related'' work ``may 
include physical tasks and menial tasks that arise out of exempt 
duties, and the routine work without which the exempt employee's more 
important work cannot be performed properly. Work `directly and closely 
related' to the performance of exempt duties may also include 
recordkeeping; monitoring and adjusting machinery; taking notes; using 
the computer to create documents or presentations; opening the mail for 
the purpose of reading it and making decisions; and using a photocopier 
or fax machine. Work is not `directly and closely related' if the work 
is remotely related or completely unrelated to exempt duties.'' 
Proposed section 541.703(b) set forth 10 examples to illustrate the 
type of work that is and is not normally considered as directly and 
closely related to exempt work.
    The final section 541.703 retains the proposed language without 
change.
    The AFL-CIO comments that under the proposed section, ``it is hard 
to imagine any type of nonexempt work failing to qualify as `directly 
and closely related.' ''
    The Department notes that the explanation of the phrase ``directly 
and closely related'' in final section 541.703(a) is taken from the 
current sections 541.108 and 541.202, including the specific language 
concerning what is not ``directly and closely related'' to which the 
AFL-CIO objected. See current 29 CFR 541.202(d) (``These `directly and 
closely related' duties are distinguishable from * * * those which are 
remotely related or completely unrelated to the more important tasks'') 
(emphasis added). Similarly, the notion that ``directly and closely 
related'' work contributes to or facilitates the performance of exempt 
work is a long-standing and common sense concept reflected in the 
current rule. See current 29 CFR 541.202(c). The Department did not 
intend any substantive change to the meaning of the phrase ``directly 
and closely related'' and intends that the term be interpreted in 
accordance with the long-standing meaning under the current rule. See 
Harrison v. Preston Trucking Co., 201 F. Supp. 654, 658-59 (D. Md. 
1962) (``[T]he test is not whether the work is essential to the proper

[[Page 22188]]

performance of the more important work, but whether it is related'').
    The International Association of Fire Fighters comments, without 
offering any specific suggestions, that the Department should add 
examples to the section concerning what is not ``directly and closely 
related'' to exempt work. Other commenters make specific suggestions 
for additional tasks and examples including, among others, computer 
employees performing software debugging and other tasks (Contract 
Services Association), therapists or counselors participating in 
outdoor activities with patients as part of a treatment program (FLSA 
Reform Coalition) and financial consultants engaging in activities 
related to acquiring customers (Securities Industry Association).
    The Department has retained the proposed rule without any 
additions. The question of whether work is ``directly and closely 
related'' to the performance of exempt work is ``one of fact depending 
upon the particular situation involved.'' See 1949 Weiss Report at 30. 
The final rule provides 10 representative examples to assist in 
illustrating the ``directly and closely related'' concept. Each of the 
examples is taken directly from the current rule. In the interest of 
streamlining the regulations, the proposed and final rule consolidated 
the most salient examples. Given the fact-intensive nature of the 
inquiry, the Department believes that, similar to the approach taken in 
the current rule, providing guiding principles and these specific 
illustrative examples best enables a determination of what is and is 
not ``directly and closely related.'' The Department believes final 
section 541.703 is straightforward and amply offers guiding principles 
that readily can be applied.
Section 541.704 Use of Manuals
    Subpart H of the final regulations moves regulatory language on the 
use of manuals from proposed section 541.204, regarding the 
administrative exemption, to a new section 541.704 because the section 
is equally applicable to the other section 13(a)(1) exemptions. Final 
section 541.704 makes a number of minor editorial changes to the 
proposed language, none of which are intended as substantive. Final 
section 541.704 states:

    The use of manuals, guidelines or other established procedures 
containing or relating to highly technical, scientific, legal, 
financial or other similarly complex matters that can be understood 
or interpreted only by those with advanced or specialized knowledge 
or skills does not preclude exemption under section 13(a)(1) of the 
Act or the regulations in this part. Such manuals and procedures 
provide guidance in addressing difficult or novel circumstances and 
thus use of such reference material would not affect an employee's 
exempt status. The section 13(a)(1) exemptions are not available, 
however, for employees who simply apply well-established techniques 
or procedures described in manuals or other sources within closely 
prescribed limits to determine the correct response to an inquiry or 
set of circumstances.

    Some commenters object to the language in proposed subsections 
541.204(b) and (c) regarding the use of manuals, although most 
commenters are supportive of the proposed language. One commenter 
suggests that the Department eliminate the phrase ``very difficult or 
novel circumstances'' so as not to exclude from the exemptions a highly 
skilled employee who must rely on or comply with manuals in other 
routine circumstances. Other commenters suggest that the regulations 
should distinguish manuals used to apply prescribed skills and 
knowledge in recurring and routine situations from manuals that simply 
set forth the bounds within which discretion and independent judgment 
are to be exercised with substantial leeway. These commenters state 
that the regulations should reinforce the idea that sharply-constrained 
authority to make day-to-day decisions within a narrow range of options 
will not satisfy the tests for exemption.
    The Department has retained the provision on manuals in final 
section 541.704, with only minor wording changes. The proposal 
appropriately differentiated between manuals that dictate how an 
employee must apply prescribed skills in recurring and routine 
situations, and manuals that provide guidance involving highly complex 
information pertinent to difficult or novel circumstances. The 
provision adopted by the Department is consistent with existing case 
law. The employee in McAllister v. Transamerica Occidental Life 
Insurance Co., 325 F.3d 997 (8th Cir. 2003), for example, was a claims 
coordinator responsible for handling the most complex death and 
disability insurance claims independently, including the complex and 
large dollar cases involving contestable claims, fraud and 
disappearances. The employee oversaw the investigation of claims, 
reviewed investigation files and determined if further investigation 
was necessary. The court found the employee to be an exempt 
administrator even though she relied upon a claims manual. The court 
quoted a statement made in the introduction to the manual itself, 
stating that the manual could not be written in sufficient detail to 
cover all facets of claims handling and that a large percentage of the 
work could not be guided by the manual. The court held the employee was 
exempt because the manual gave her authority to decide whether to 
pursue a fraudulent claim investigation and she had significant 
settlement authority. She did not merely apply specific, well-
established guidance or constraining standards. See also Haywood v. 
North American Van Lines, Inc., 121 F.3d 1066, 1073 (7th Cir. 1997) 
(employee administratively exempt even though she followed established 
procedures because the guidelines gave employees latitude in 
negotiating a settlement, including advising employees to use ``common 
sense''); Dymond v. United States Postal Service, 670 F.2d 93 (8th Cir. 
1982) (finding postal inspectors exempt even though some of their 
duties required them to follow a field manual that contained detailed 
procedures and standards). Compare Brock v. National Health Corp., 667 
F. Supp. 557, 566 (M.D. Tenn. 1987) (``staff accountants'' utilizing 
two major reference manuals not exempt as administrative employees 
where they simply ``tabulated numbers by merely following the 
prescribed steps set out in a manual''). See also Ale v. Tennessee 
Valley Authority, 269 F.3d 680, 686 (6th Cir. 2001) (training officer 
not exempt administrative employee where employee simply applied 
knowledge in following prescribed procedures and determining whether 
specified standards were met under Administrative Orders); Cooke v. 
General Dynamics Corp., 993 F. Supp. 56, 65 (D. Conn. 1997) (citing 
section 541.207(c)(2)'s preclusion of administrative exemption to ``an 
inspector who must follow `well-established techniques and procedures 
which may have been cataloged and described in manuals or other 
sources' '').
    Final section 541.704 is intended to avoid the absurd result, noted 
by several commenters, reached in Hashop v. Rockwell Space Operations 
Co., 867 F. Supp. 1287 (S.D. Tex. 1994). The plaintiffs in the Rockwell 
Space Operations case were instructors who trained ``Space Shuttle 
ground control personnel during simulated missions.'' Id. at 1291. The 
plaintiffs were responsible for assisting in development of the script 
for the simulated missions, running the simulation, and debriefing 
Mission Control on whether the trainees handled simulated anomalies 
correctly. Id. at 1292. The plaintiffs had college degrees in 
electrical engineering,

[[Page 22189]]

mathematics or physics. Id. at 1296. Nonetheless, the court found the 
plaintiffs were not exempt professionals because the appropriate 
responses to simulated Space Shuttle malfunctions were contained in a 
manual. Id. at 1298. In the Department's view, the reliance by an 
engineer or physicist on a manual outlining appropriate responses to a 
Space Shuttle emergency (or a problem in a nuclear reactor, as another 
example) should not transform a learned professional scientist into a 
nonexempt technician.
    The Department believes that the discussion of company manuals in 
the final rule is consistent with the weight of existing case law. The 
Rockwell Space Operations case appears to be an anomaly which has not 
been followed by other courts. In addition, final section 541.704 
properly distinguishes between manuals that provide specific directions 
on routine and recurring circumstances and those that provide general 
guidance on addressing open-ended or novel circumstances.
Section 541.705 Trainees (Proposed Sec.  541.704)
    Proposed section 541.704 stated that the exemptions are not 
available to ``employees training for employment in an executive, 
administrative, professional, outside sales or computer employee 
capacity who are not actually performing the duties of an executive, 
administrative, professional, outside sales or computer employee.''
    Proposed section 541.704 has been renumbered to 541.705 in the 
final regulation, but the proposed language is adopted without change.
    The U.S. Chamber of Commerce (Chamber) suggests that this section 
should be modified to allow employees in bona fide executive training 
programs to qualify under the exemptions. The Chamber argues that the 
``principal'' duty of those in such training programs is not the varied 
nonexempt tasks they may perform, but rather, it is receiving the 
skills and knowledge necessary to assume managerial and/or executive 
roles. Furthermore, the Chamber states, the ``primary duty'' of such 
trainees is substantially different from nonexempt employees.
    The Department has no statutory authority to provide exemptions for 
management trainees who do not perform exempt duties and therefore must 
reject the Chamber's request to expand proposed section 541.704. See 
Wage and Hour Opinion of August 26, 1976, 1976 WL 41748; 1949 Weiss 
Report at 47-48. Employees, including trainees, who do not ``actually 
perform'' the duties of an exempt executive, administrative, 
professional, outside sales or computer employee cannot be considered 
exempt. See Wage and Hour Opinion of March 7, 1994, 1994 WL 1004555; 
Dole v. Papa Gino's of America, Inc., 712 F. Supp. 1038, 1042 (D. Mass. 
1989) (associate managers performing ``crew member'' work to ``learn by 
doing'' were nonexempt trainees).
    Other comments request additional clarification of the definition 
of ``trainee,'' ask whether trainees who would become exempt upon 
completion of their training should be exempt while in training, and 
ask whether ``interns'' are trainees.
    The Department does not believe further clarification is necessary 
because section 541.705 is relatively straightforward. The inquiry in 
all cases simply involves determining whether or not the employee is 
``actually performing the duties of'' an executive, administrative, 
professional, outside sales or computer employee. The Department 
recognizes that there may be formalized, bona fide executive or 
management training programs that involve employees ``actually 
performing'' exempt work, but other training programs can involve 
performance of significant nonexempt work. For example, an employee in 
a management training program of a restaurant who spends the first 
month of the program washing dishes and the second month of the program 
cooking does not have a primary duty of management. Accordingly, it is 
not appropriate to adopt a blanket exemption for all ``trainees.''
Section 541.706 Emergencies (Proposed Sec.  541.705)
    Proposed section 541.705(a) provided that an ``exempt employee will 
not lose the exemption by performing work of a normally nonexempt 
nature because of the existence of an emergency. Thus, when emergencies 
arise that threaten the safety of employees, a cessation of operations 
or serious damage to the employer's property, any work performed in an 
effort to prevent such results is considered exempt work.'' Proposed 
section 541.705(b) stated that an `` `emergency' does not include 
occurrences that are not beyond control or for which the employer can 
reasonably provide in the normal course of business. Emergencies 
generally occur only rarely, and are events that the employer cannot 
reasonably anticipate.'' Proposed section 541.705(c) set forth four 
illustrative examples to assist in distinguishing exempt emergency work 
from routine work that would not be considered exempt.
    Proposed section 541.705 has been renumbered as 541.706, but the 
final rule retains the proposed language without change.
    Comments from the Printing Industries of America and the Kullman 
Firm ask that the Department specifically include labor strikes and 
lockouts in this provision. Other comments, including those from the 
Miller Canfield law firm, suggest additional examples involving 
emergencies that endanger the public safety.
    In light of the clear guiding principles set forth in proposed 
section 541.705, the Department sees no reason to change the language 
of the final provision. The Department agrees with Miller Canfield that 
emergencies arising out of an employer's business and affecting the 
public health or welfare can qualify as emergencies under this section, 
applying the same standards as emergencies that affect the safety of 
employees or customers. The main purpose of this provision is to 
provide a measure of common sense and flexibility in the regulations to 
allow for real emergencies ``of the kind for which no provision can 
practicably be made by the employer in advance of their occurrence.'' 
See 1949 Weiss Report at 42. The Department also recognizes that, 
depending upon the circumstances, a labor strike may qualify as an 
emergency for some short time period, although all the facts must be 
considered in order to determine the length of the ``emergency'' 
situation. See Dunlop v. Western Union Telegraph Co., 22 Wage & Hour 
Cas. (BNA) 859 (D.N.J. 1976).
    The list of situations in which exempt employees could perform 
nonexempt work without loss of the exemption is not meant to be 
exhaustive. Other such instances of exempt employees performing 
nonexempt work under unanticipated circumstances without loss of the 
exemption could arise on a case-by-case basis. In addition, it 
continues to be the Department's position that nonexempt work cannot 
routinely be assigned to exempt employees solely for the convenience of 
an employer without calling into question the application of the 
exemption to that employee.
Section 541.707 Occasional Tasks (Proposed Sec.  541.706)
    Proposed section 541.706 provided that occasional, infrequently 
recurring tasks, ``that cannot practicably be performed by nonexempt 
employees, but are the means for an exempt employee to properly carry 
out exempt functions and responsibilities, are

[[Page 22190]]

considered exempt work.'' To determine whether such work is exempt 
work, proposed section 541.706 set forth the following factors: 
``whether the same work is performed by any of the executive's 
subordinates; practicability of delegating the work to a nonexempt 
employee; whether the executive performs the task frequently or 
occasionally; and existence of an industry practice for the executive 
to perform the task.''
    Proposed section 541.706 has been renumbered to 541.707. Since this 
section is equally applicable to all the exemptions, the final section 
541.707 deletes the inadvertent references to ``executives'' throughout 
and instead refers to ``exempt employees.''
    Various commenters state that the regulations should take into 
account that exempt employees may choose, consistent with the nature of 
the employer's establishment and its operational requirements at a 
particular time, to perform nonexempt work necessary to accomplish the 
employee's primary duty. The Department believes that this issue has 
been adequately addressed in final section 541.106 (concurrent duties), 
and no changes are necessary here.
Section 541.708 Combination Exemptions (Proposed Sec.  541.707)
    Proposed section 541.707 provided that employees ``who perform a 
combination of exempt duties as set forth in these regulations for 
executive, administrative, professional, outside sales and computer 
employees may qualify for exemption. Thus, for example, an employee who 
works 40 percent of the time performing exempt administrative duties 
and another 40 percent of the time performing exempt executive duties 
may qualify for exemption. In other words, work that is exempt under 
one section of this part will not defeat the exemption under any other 
section.''
    Proposed section 541.707 has been renumbered as section 541.708. 
The final rule modifies the second sentence of section 541.708 to read: 
``Thus, for example, an employee whose primary duty involves a 
combination of exempt administrative and exempt executive work may 
qualify for exemption.''
    The final rule retains the allowance for ``tacking,'' or combining 
exempt work which may fall under different subparts of Part 541, while 
responding to comments raising concerns about the interplay of 
``primary duty'' with the example set forth in proposed section 
541.707. The FLSA Reform Coalition and the American Insurance 
Association, for example, point out that the example in the proposed 
section suggests that an employee who works 40 percent of the time 
performing exempt administrative duties would be nonexempt absent the 
additional time spent on executive duties. The Department agrees with 
these concerns, and also agrees that such a suggestion in the proposal 
is contrary to the definition of ``primary duty'' in section 541.700. 
Under section 541.700, such an employee would be an exempt 
administrator, even without the executive duties, if his or her 
administrative tasks constituted the employee's primary duty, 
regardless of the amount of time spent on them. Accordingly, the 
Department has changed the second sentence of the proposed section as 
follows, to clarify the intent and interplay of final section 541.708 
with the primary duty concept of section 541.700: ``Thus, for example, 
an employee whose primary duty involves a combination of exempt 
administrative and exempt executive work may qualify for exemption.'' 
The Department's clarification responds to similar comments by the HR 
Policy Association, the Society for Human Resource Management, the Food 
Marketing Institute, the National Council of Agricultural Employers and 
the Public Sector FLSA Coalition.
Section 541.709 Motion Picture Producing Industry (Proposed Sec.  
541.708)
    Proposed section 541.708 provided an exception to the salary basis 
requirements for otherwise exempt executive, administrative, and 
professional employees in the motion picture producing industry. 
Generally, so long as such employees are earning a base rate of at 
least $650 a week based on a six-day workweek, employers may classify 
them as exempt even though they work partial workweeks and are paid a 
daily rate, rather than a weekly salary.
    Proposed section 541.708 has been renumbered as section 541.709. 
The final section 541.709 retains the proposed language, except for a 
single clarifying correction in grammar (changing ``under subparts B, C 
and D of this part'' to ``under subparts B, C or D of this part''). The 
final rule also adjusts the $650 figure to $695, consistent with the 
increased minimum salary level for exemption.
    The Department received only a few comments on this section. 
However, the Akin, Gump, Strauss, Hauer & Feld law firm argues, on 
behalf of a number of entertainment technology companies, that the 
rationale for section 541.709 is the project-based nature of the motion 
picture industry, one in which otherwise exempt employees are hired for 
finite periods of time and often work partial workweeks. Since the same 
``peculiar employment circumstances'' existing in the motion picture 
producing industry also exist throughout much of the entertainment 
industry, the firm states, section 541.709 should be expanded to cover 
the ``entertainment industry'' generally. The commenter suggests that 
the definition of the entertainment industry in the Employee Retirement 
Income Security Act (ERISA) could be adopted for purposes of section 
541.709.
    In adopting the exception for the motion picture producing industry 
in 1953, the Department agreed with the Association of Motion Picture 
Producers that given the ``peculiar employment conditions'' of the 
industry, the producers are not able to economically employ needed 
specialists on a constant basis, but must frequently employ such 
employees for partial workweeks. Accordingly, the industry developed 
over the years ``methods of compensation which reflect this pattern of 
operations.'' See 18 FR 2881 (May 19, 1953); 18 FR 3930 (July 7, 1953).
    Without further information and consideration of particular 
employment circumstances, the Department cannot extend the exception to 
the entire entertainment industry as suggested. The Department is not 
unaware, however, that technological advances in the past half century 
make it more likely that, on a case-by-case basis, the rationale 
underlying section 541.709 might be applied more broadly depending upon 
the specific facts. In that regard, the Department issued an opinion 
letter in 1963 extending the exception to employees of producers of 
television films and videotapes, noting, ``the production of T.V. films 
and videotapes encompasses the same employment practices and conditions 
which characterize the production of motion pictures.'' Wage and Hour 
Opinion of October 29, 1963; see also Wage and Hour Field Operations 
Handbook, section 22b09 (adopting this extension to television and 
videotapes).
    An additional commenter argues for the elimination of the 
``exemption'' for production assistants and post-production assistants. 
This commenter misunderstands that section 541.709 relates only to an 
exception from the salary basis requirements for otherwise exempt 
employees in the industry.
Section 541.710 Employees of Public Agencies (Proposed Sec.  541.709)
    Proposed section 541.709(a) provided that an ``employee of a public 
agency

[[Page 22191]]

who otherwise meets the salary basis requirements of Sec.  541.602 
shall not be disqualified from exemption under Sec. Sec.  541.100, 
541.200, 541.300 or 541.400 on the basis that such employee is paid 
according to a pay system established by statute, ordinance or 
regulation, or by a policy or practice established pursuant to 
principles of public accountability, under which the employee accrues 
personal leave and sick leave and which requires the public agency 
employee's pay to be reduced or such employee to be placed on leave 
without pay for absences for personal reasons or because of illness or 
injury of less than one work-day when accrued leave is not used by an 
employee because: (1) Permission for its use has not been sought or has 
been sought and denied; (2) Accrued leave has been exhausted; or (3) 
The employee chooses to use leave without pay.'' Proposed section 
541.709(b) stated that ``deductions from the pay of an employee of a 
public agency for absences due to a budget-required furlough shall not 
disqualify the employee from being paid on a salary basis except in the 
workweek in which the furlough occurs and for which the employee's pay 
is accordingly reduced.''
    Proposed section 541.709 has been renumbered as final section 
541.710, and retains the proposed language without change.
    The language in section 541.710 is from the current section 
541.5(d), and the reasons for its promulgation were explained in 57 FR 
37677 (August 19, 1992) and continue to be valid. The Department 
received comments from public employers and employees during the 
current rulemaking addressing many of the provisions of the entire 
proposal, including the salary basis of payment. None of their 
comments, however, addressed the constitutional or statutory public 
accountability requirements in the funding of state and local 
governments that was the original rationale for this particular 
provision. The Department continues to believe this is a necessary 
exception to the salary basis requirement for public employees, and it 
is included in the final regulations.

V. Paperwork Reduction Act

    This rule contains no new information collection requirements 
subject to review and approval by the Office of Management and Budget 
under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501, et seq.). 
The information collection requirements for employers who claim 
exemption under 29 CFR Part 541 are contained in the general FLSA 
recordkeeping requirements codified at 29 CFR Part 516, which were 
approved by the Office of Management and Budget under OMB Control 
number 1215-0017. See 29 CFR 516.0 and 516.3.

VI. Executive Order 12866 and the Small Business Regulatory Enforcement 
Fairness Act

    This rule has been drafted and reviewed in accordance with 
Executive Order 12866, section 1(b), Principles of Regulation. The 
Department has determined that this rule is an ``economically 
significant'' regulatory action under section 3(f)(1) of Executive 
Order 12866. Based on the analysis presented below, the Department has 
determined that the final rule will have an annual effect on the 
economy of $100 million or more. For similar reasons, the Department 
has concluded that this rule also is a major rule under the Small 
Business Regulatory Enforcement Fairness Act of 1996 (5 U.S.C. 801 et 
seq.). As a result, the Department has prepared a Regulatory Impact 
Analysis (RIA) in connection with this rule as required under Section 
6(a)(3) of the Order and the Office of Management and Budget has 
reviewed the rule. The RIA in its entirety is presented below.

Regulatory Impact Analysis

Chapter 1: Executive Summary
    The final rule will restore overtime protection for lower-wage 
workers, strengthen overtime protection for middle-income workers 
including first responders, and reduce costly and lengthy litigation. 
Both workers and employers will benefit from having clearer rules that 
are easier to understand and enforce. More workers will know their 
rights and if they are being paid correctly, more employers will 
understand exactly what their obligations are for paying overtime, and 
clearer more up-to-date rules will help the Wage and Hour Division more 
vigorously enforce the law, ensuring that workers are being paid fairly 
and accurately.
    Specifically:
     Raising the salary level test to $455 will 
strengthen overtime protection for more than 6.7 million salaried 
workers who earn $155 or more and less than $455 per week regardless of 
their duties or exempt status.
     There are 5.4 million currently nonexempt 
salaried workers whose overtime protection will be strengthened because 
their protection, which is based on the duties tests under the current 
regulation, will be automatic under the final rule. This includes 2.6 
million nonexempt salaried white collar employees who are at particular 
risk of being misclassified.
     There are 1.3 million currently exempt white 
collar salaried workers who will gain overtime protection.
     The final rule is as protective as the current 
regulation for the 57.0 million paid hourly and salaried workers who 
earn between $23,660 and $100,000 per year.
     An estimated 107,000 workers who earn $100,000 
or more per year could lose their overtime protection from the new 
highly compensated test.
     The total first-year implementation costs to 
employers are estimated to be $738.5 million, of which $627.1 is 
related to reviewing the regulation and revising overtime policies and 
$111.4 million is related to conducting job reviews.
     Transfers from employers to employees, in the 
form of greater overtime pay or higher base salaries, are estimated to 
be $375 million per year. Therefore, the total cost to employers is 
estimated to be $1.1 billion in year-one and $375 million per year 
thereafter.
     Updating and clarifying the rule will reduce 
Part 541 violations and are likely to save businesses at least $252.2 
million per year.
     There is not likely to be a substantial impact 
on small businesses or state and local governments.
    Due to data limitations, a variety of benefits from the final rule 
can only be discussed qualitatively. For example:
     It will be more difficult to exempt workers from 
overtime as executive employees.
     Raising the salary level test to $455 per week 
will strengthen overtime protection for 2.8 million salaried workers in 
blue-collar occupations, because their protection, which is based on 
the duties tests under the current regulation, will be automatic under 
the new rules. The Department concluded that most of these workers are 
nonexempt under the current regulation, however, making their nonexempt 
status certain will unambiguously increase their overtime protection.
     Updating and clarifying the rule will reduce the 
human resource and legal costs for classifying workers (particularly 
for small businesses), and reduced litigation could improve job 
opportunities.
     Updating the rule is an action forcing event and 
a catalyst for compliance. Employers who may not have undertaken an 
audit of the classification of their workforce will be more likely to 
do so after the promulgation of the final rule, resulting

[[Page 22192]]

in greater levels of compliance with the law.
Chapter 2: Summary of the Updates to Part 541 That Affect the Economic 
Analysis
    The first step in analyzing the costs and benefits associated with 
this rulemaking is to compare the existing Part 541 regulations with 
the final rule and determine the likely impact it will have on the 
exempt or nonexempt status of workers. After analyzing the impact of 
the salary level increase, updating the duties tests, and the highly 
compensated test, the Department reached the following conclusions:
     Employees earning less than $155 per week will 
not be affected.
     Increasing the salary level test will strengthen 
overtime protection for salaried workers who earn $155 or more and less 
than $455 per week regardless of their duties or current exempt status. 
Hourly workers in this income range will continue to be guaranteed 
overtime protection.
     Exempt employees earning less than $455 per week 
will gain overtime protection, thus resulting in additional payroll 
costs to employers.
     The final rule is as protective as the current 
regulation for workers who earn between $23,660 and $100,000 per year. 
On the whole, employees will gain overtime protection because some 
revisions are more protective than the existing short duties tests. 
However, this number is too small to estimate quantitatively.
     An estimated 107,000 employees earning $100,000 
per year or more could lose overtime protection under the highly 
compensated test.
     The final rule is more protective for police 
officers, fire fighters, paramedics, emergency medical technicians, and 
other first responders, and the highly compensated test does not apply 
to those who are not performing office or non-manual duties.
     The Part 541 exemptions also do not apply to 
manual laborers or other non-management blue-collar workers such as 
carpenters, electricians, mechanics, plumbers, iron workers, craftsmen, 
operating engineers, longshoremen, construction workers and laborers.
2.1 The Impact of Streamlining the Duties Tests and Raising the Salary 
Level Test
    Under the existing regulations, the minimum salary level for 
exemption is only $155 per week ($8,060 annually). Employees earning at 
least $155 per week and less than $250 per week are tested for 
exemption under the existing ``long'' duties tests. Employees earning 
at least $250 per week ($13,000 annually) are considered ``higher 
salaried'' employees under the existing regulations, and are tested for 
exemption under the ``short'' duties tests. The final rule increases 
the minimum salary level for exemption to $455 per week, a $300 per 
week increase.
    As discussed in the preamble, the Department disagrees with the 
commenters who argue that the Department's proposal to move away from 
the ``long'' and ``short'' duties test structure of the existing 
regulations will result in employees losing overtime protection. This 
assertion fails to account for the impact of the increased minimum 
salary level in the final rule. The final rule guarantees overtime 
protection for all workers earning less than $455 per week ($23,660 
annually), the new minimum salary level for exemption. Thus, all 
employees earning at least $155 per week and less than $250 per week--
the workers currently tested for exemption under the ``long'' duties 
tests--will be guaranteed overtime protection, regardless of their job 
duties, under the final regulations. Overtime protection is also 
guaranteed under the final rule for employees earning at least $250 per 
week and less than $455 per week who are currently tested for exemption 
under the existing ``short'' duties tests.
    Comparisons between the existing ``long'' duties tests and the 
standard tests in the final regulation to describe the impacts on 
workers are thus misleading and inappropriate. The ``long'' duties 
tests, under which some employees are exempt and others nonexempt, have 
been replaced in the final rule by guaranteed overtime protection. 
Accordingly, the Department concludes that no worker who earns less 
than $455 per week will lose their overtime protection under the final 
regulations. Most employees earning less than $455 per week ($23,660 
annually) who are exempt under the existing regulations will be 
entitled to overtime pay under the final regulations (there are some 
workers, such as teachers, doctors, lawyers, and clergy, who are 
statutorily exempt or whose exempt status is not affected by the 
increased salary requirement in the final rule).
    The additional overtime protections for employees currently earning 
less than $455 per week and tested for exemption under the ``long'' and 
``short'' duties tests are illustrated in Table 2-1:

                 Table 2-1.--Comparison of Salary Levels
------------------------------------------------------------------------
                                       Existing
            Earnings                  regulations      Final regulations
------------------------------------------------------------------------
Less than $155/week.............  Guaranteed          Guaranteed
                                   Overtime.           Overtime.
$155 to $249.99/week............  Long Duties Test..  Guaranteed
                                                       Overtime.
$250 to $454.99/week............  Short Duties Test.  Guaranteed
                                                       Overtime.
$455/week to $100,000/year......  Short Duties Test.  Standard Duties
                                                       Test.
$100,000/year or more...........  Short Duties Test.  Highly Compensated
                                                       Test.
------------------------------------------------------------------------

    In the sections that follow, the Department presents its assessment 
of the impact the standard tests will have on the exempt status of 
workers compared to the current short duties tests. In several cases, 
the Department determined that the impact of the final rule will be too 
small to assess quantitatively because of the methodology used to 
estimate the number of exempt workers (presented below in Chapter 3).
    The methodology used to estimate the number of currently exempt 
workers is based upon the broad WHD exemption probability categories 
presented in Table 3-2 that were designed to produce national estimates 
of the number of exempt and nonexempt workers. The WHD exemption 
probability categories were not designed to estimate the number of 
exempt workers for each Part 541 exemption (executive, administrative, 
or professional) because there is significant overlap in the exemptions 
with some workers in a number of occupations being potentially exempt 
under more than one duties test. Moreover, some occupations include 
both supervisory and production workers. Given the lack of data on the 
duties being performed by specific workers in the Current Population 
Survey, the Department concludes that it is impossible to 
quantitatively estimate the number of exempt workers

[[Page 22193]]

resulting from the deminimis differences in the standard duties tests 
compared to the current short duties tests (see the discussions 
presented below).
2.2 Impact of the Final Duties Test for Executive Employees
    Although some commenters asserted the proposed duties test for 
executive employees would reduce overtime protection for workers, as 
discussed in the preamble above and shown in Table 2-2, the final 
standard duties test for executives, like the proposed duties test, is 
stronger than the current short duties test because it incorporates an 
additional requirement taken from the current long duties test: An 
exempt executive must have authority to hire or fire other employees, 
or the exempt executive's suggestions and recommendations as to the 
hiring, firing, advancement, promotion or any other change of status of 
other employees must be given particular weight. The final rule also 
returns to the language in the current rule ``whose primary duty'' is 
management, instead of the proposed rule's ``with a primary duty'' of 
management.
    Because of these changes, the Department concludes the standard 
duties test for executive employees in the proposed and final 
regulations is more protective than the current short test and some 
workers may gain overtime protection. However, this number is too small 
to estimate quantitatively given the data limitations presented below 
in Chapter 3.

                          Table 2-2.--Comparing the Duties Test for Executive Employees
----------------------------------------------------------------------------------------------------------------
           Salary level               Current short test  $250 per week      Final standard test  $455 per week
----------------------------------------------------------------------------------------------------------------
Duties...........................  Whose primary duty consists of the      Whose primary duty is management of
                                    management of the enterprise in which   the enterprise in which the employee
                                    he is employed or of a customarily      is employed or of a customarily
                                    recognized department or subdivision    recognized department or subdivision
                                    thereof; and                            thereof;
                                   Who customarily and regularly directs   Who customarily and regularly directs
                                    the work of two or more other           the work of two or more other
                                    employees.                              employees; and
                                                                           Who has the authority to hire or fire
                                                                            other employees or whose suggestions
                                                                            and recommendations as to the
                                                                            hiring, firing, advancement,
                                                                            promotion or any other change of
                                                                            status of other employees are given
                                                                            particular weight.
----------------------------------------------------------------------------------------------------------------

2.3 Impact of the Final Duties Tests for Administrative Employees
    The proposed duties tests for administrative employees generated a 
significant number of comments. As discussed in the preamble above, the 
final rule's duties test for administrative employees is significantly 
different than the test contained in the proposed rule. In drafting the 
final language, the Department sought to avoid introducing new terms 
(such as ``position of responsibility'') that generated confusion in 
the comments on the proposal and to retain terms (such as ``primary 
duty,'' ``discretion and independent judgment'' and ``general business 
operations'') that are used in the current rule and have been clarified 
by court decisions and opinion letters. The final regulatory text also 
requires that the discretion and independent judgment must be exercised 
``with respect to matters of significance,'' language that appears only 
in the current interpretive guidelines and not the existing regulatory 
text.
    As Table 2-3 indicates, the standard duties test for administrative 
employees in the final rule is very similar, if not functionally 
identical, to the current short duties test when the current 
interpretive guidelines are taken into account as would be appropriate. 
Based on the significant changes the Department made in the final rule 
to return the administrative duties test to the structure in the 
current rule, the Department has concluded that the standard duties 
test for administrative employees in the final rule is as protective as 
the current short test. Therefore, the Department has determined that 
very few, if any, workers will lose their right to overtime as a result 
of updating the current short test with the final standard duties test. 
However, this number is too small to estimate quantitatively given the 
data limitations presented below in Chapter 3.

                       Table 2-3.--Comparing the Duties Test for Administrative Employees
----------------------------------------------------------------------------------------------------------------
           Salary level               Current short test  $250 per week      Final standard test  $455 per week
----------------------------------------------------------------------------------------------------------------
Duties...........................  Whose primary duty consists of the      Whose primary duty is the performance
                                    performance of office or non-manual     of office or non-manual work
                                    work directly related to management     directly related to the management
                                    policies or general business            or general business operations of
                                    operations of his employer or his       the employer or the employer's
                                    employer's customers; and               customers; and
                                   Which includes work requiring the       Whose primary duty includes the
                                    exercise of discretion and              exercise of discretion and
                                    independent judgment.                   independent judgment with respect to
                                                                            matters of significance.
----------------------------------------------------------------------------------------------------------------

2.4 The Impact of the Final Duties Tests for Learned Professional 
Employees
    For reasons discussed in the preamble above, the final standard 
duties test for the learned professional exemption was modified from 
the proposed test to track the current rule's primary duty test and to 
restructure the proposed rule's reference to acquiring advanced 
knowledge through other means such as an equivalent combination of 
intellectual instruction and work experience so that it is consistent 
with the current regulation. As the preamble explains, the Department 
did not intend to depart from the current rule's educational 
requirements for the

[[Page 22194]]

learned professional exemption. Accordingly, the final rule clarifies 
that, just as under the current primary duty test, an employee must 
meet all three requirements of the test in order to be exempt--the 
primary duty must be performing work that requires advanced knowledge; 
the knowledge must be in a field of science or learning; and the 
knowledge must be customarily acquired by a prolonged course of 
specialized intellectual instruction. The final rule also expands on 
each of those three components, using language from the current rule. 
For example, an employee's ``work requiring advanced knowledge'' must 
include work requiring the consistent exercise of discretion and 
judgment (see Table 2-4). The final standard duties test for learned 
professionals also adds language from the current long test in section 
541.301(b) by defining work requiring advanced knowledge as work that 
is ``predominantly intellectual in character'' as distinguished from 
the ``performance of routine mental, manual, mechanical or physical 
work.'' These revisions clarify that the final rule is at least as 
protective as current rule.

                        Table 2-4.--Comparing the Duties Test for Professional Employees
----------------------------------------------------------------------------------------------------------------
           Salary level               Current short test  $250 per week      Final standard test  $455 per week
----------------------------------------------------------------------------------------------------------------
Duties...........................  Whose primary duty consists of the      Whose primary duty is the performance
                                    performance of work requiring           of work requiring knowledge of an
                                    knowledge of an advanced type in a      advanced type (defined as work which
                                    field of science or learning            is predominantly intellectual in
                                    customarily acquired by a prolonged     character, and which includes work
                                    course of specialized intellectual      requiring the consistent exercise of
                                    instruction and study; and              discretion and judgment) in a field
                                   Which includes work requiring the        of science or learning customarily
                                    consistent exercise of discretion and   acquired by a prolonged course of
                                    judgment; or                            specialized intellectual
                                   Whose primary duty consists of the       instruction; or
                                    performance of work requiring          Whose primary duty is the performance
                                    invention, imagination, or talent in    of work requiring invention,
                                    a recognized field of artistic          imagination, originality or talent
                                    endeavor.                               in a recognized field of artistic or
                                                                            creative endeavor.
----------------------------------------------------------------------------------------------------------------

    Other commenters expressed concern the proposed duties test for 
learned professionals would result in many workers in some occupations 
(e.g., Licensed Practical Nurses, dental assistants, and cooks) losing 
overtime protection. Although most of the specific concerns raised by 
these comments were addressed by the Department's modifications to the 
proposed rule's professional duties test, discussed above, the 
Department notes the final rule clarifies a number of occupations. For 
example, Licensed Practical Nurses could not be classified as learned 
professionals because, unlike Registered Nurses, the possession of a 
specialized advanced academic degree is not a standard prerequisite for 
entry into that occupation. Therefore, the Department has determined 
very few, if any, workers will lose overtime protection as a result of 
updating the current short duties tests with the final standard duties 
test for learned professionals. However, this number is too small to 
estimate quantitatively given the data limitations presented below in 
Chapter 3.
2.5 The Impact of the Final Duties Test for Creative Professional 
Employees
    As discussed in the preamble above, the comments stating the 
proposed revisions weakened the current duties tests illustrate the 
confusion and misunderstanding that surrounds the current short duties 
test for artistic professionals. The Department considers the language 
in the final rule to be a restatement of the artistic primary duty test 
in the current short test (see Table 2-4). Further, the final rule 
reflects current case law regarding the creative professional exemption 
for journalists while recognizing, as the current regulations do, that 
the duties of employees referred to as journalists vary along a wide 
spectrum from the nonexempt to the exempt (29 CFR 541.302(f)). 
Therefore, the Department considers the language in the final rule for 
creative professionals to be as protective as the current short test 
and that few, if any, creative professionals will lose overtime 
protection as the result of the revisions. However, this number is too 
small to estimate quantitatively given the data limitations presented 
below in Chapter 3.
2.6 The Impact of the Final Duties Tests for Teachers and the Practice 
of Law or Medicine
    As discussed above in the preamble, contrary to the assertions made 
by some commenters, the proposed and final rule merely restate the 
current exclusions from the salary requirements and do not change the 
existing exemption criteria for teachers in educational establishments 
and licensed practitioners of law and medicine. The Department 
concludes these provisions in the final rule are not likely to result 
in any additional teachers in educational establishments, or licensed 
practitioners of law or medicine losing overtime protections compared 
to the current regulations.
2.7 The Impact of the Final Duties Tests for Computer Employees
    Based on the comments received and for reasons discussed in the 
preamble above, several revisions were made in the final rule to align 
the current regulatory text with the specific standards adopted by 
Congress in 1996 for the computer employee exemption in section 
13(a)(17) of the Act. As shown in Table 2-5, the Department considers 
the duties tests in the final regulations for computer employees to be 
functionally identical to those in the current regulations (section 
541.303(b)) and statute (29 U.S.C. 213(a)(17)). Therefore, the 
Department concludes that it is unlikely that any additional employees 
will lose overtime protection as a result of the final duties tests for 
computer employees as compared to current law.

[[Page 22195]]



            Table 2-5.--The Duties Tests for Computer Employees in the Current and Final Regulations
----------------------------------------------------------------------------------------------------------------
                                                                                           Final standard test
            Salary               Current short test  $250    Section 13(a)(17)  $27.63   $455 per week or $27.63
                                         per week                     an hour                    an hour
----------------------------------------------------------------------------------------------------------------
Duties........................  Employed as a computer      Employee who is a computer  The exemptions apply
                                 systems analyst, computer   systems analyst, computer   only to a computer
                                 programmer, software        programmer, software        employee whose primary
                                 engineer, or other          engineer, or other          duty consists of:
                                 similarly skilled worker    similarly skilled worker,  (1) The application of
                                 in the computer software    whose primary duty is       systems analysis
                                 field (as provided in      (A) application of systems   techniques and
                                 541.303).                   analysis techniques and     procedures, including
                                Primary duty of performing   procedures, including       consulting with users,
                                 work requiring              consulting with users, to   to determine hardware,
                                 theoretical and practical   determine hardware,         software or system
                                 application of highly-      software or system          functional
                                 specialized knowledge in    functional applications;    specifications;
                                 computer systems           (B) design, development,    (2) The design,
                                 analysis, programming,      documentation, analysis,    development,
                                 and software engineering;   creation, testing, or       documentation,
                                 and                         modification of computer    analysis, creation,
                                Whose work requires the      systems or programs,        testing or modification
                                 consistent exercise of      including prototypes,       of computer systems or
                                 discretion and judgment.    based on and related to     programs, including
                                                             user or system design       prototypes, based on
                                                             specifications;             and related to user or
                                                            (C) design, documentation,   system design
                                                             testing, creation or        specifications;
                                                             modification of computer   (3) The design,
                                                             programs related to         documentation, testing,
                                                             machine operating           creation or
                                                             systems; or                 modification of
                                                            (D) a combination of         computer programs
                                                             duties described in (A),    related to machine
                                                             (B) and (C), the            operating systems; or
                                                             performance of which       (4) A combination of the
                                                             requires the same level     aforementioned duties,
                                                             of skills.                  the performance of
                                                                                         which requires the same
                                                                                         level of skills.
----------------------------------------------------------------------------------------------------------------

2.8 The Impact of the Final Duties Tests for Outside Sales Employees
    As discussed in the preamble above, the Department has determined 
that the application of the proposed primary duty test to the outside 
sales exemption is preferable to the 20 percent tolerance test. 
Utilization of the explicit primary duty concept also provides a 
consistent approach between the structure of the outside sales 
exemption and the exemptions for executive, administrative, and 
professional employees. Moreover, any potential issues under the final 
rule are addressed by the objective criteria and factors for 
determining an employee's primary duty that are contained in section 
541.700. Therefore, the Department concludes that few, if any, 
employees would lose overtime protection as a result of the final 
revisions to the duties tests for outside sales employees. However, 
this number is too small to estimate quantitatively given the data 
limitations presented below in Chapter 3.
2.9 The Impact of the Final Rule on Police Officers, Fire Fighters, 
Paramedics, and Other First Responders
    As discussed in the preamble above, the final rule expressly 
provides that the section 13(a)(1) exemptions do not apply to police 
officers, fire fighters, paramedics, emergency medical technicians 
(EMTs), and other first responders ``regardless of rank or pay level, 
who perform work such as preventing, controlling or extinguishing fires 
of any type; rescuing fire, crime or accident victims; preventing or 
detecting crimes; conducting investigations or inspections for 
violations of law; performing surveillance; pursuing, restraining and 
apprehending suspects; detaining or supervising suspected and convicted 
criminals, including those on probation or parole; interviewing 
witnesses; interrogating and fingerprinting suspects; preparing 
investigative reports; or other similar work.'' Most courts have held 
that such workers generally are non-exempt because they typically do 
not perform the duties that are required for the executive or 
administrative exemption. Similarly, federal courts have held that 
police officers, paramedics, EMTs, and similar employees are not exempt 
professionals because they do not perform work requiring knowledge of 
an advanced type in a ``field of science or learning'' requiring 
knowledge ``customarily acquired by a prolonged course of specialized 
intellectual instruction'' as required under the current and final 
rules. The Department has no intention of departing from this 
established case law. Moreover, some police officers, firefighters, 
paramedics and EMTs treated as exempt executives under the current 
regulations may be entitled to overtime under the final rule because of 
the additional requirement in the standard duties test not found in the 
current short test that an exempt executive must have the authority to 
``hire or fire'' other employees or make recommendations given 
particular weight on hiring, firing, advancement, promotion or other 
change of status. Therefore, the Department concludes that the 
executive duties tests for police officers, fire fighters, paramedics, 
EMTs, or other first responders in the final rule is more stringent 
than the current short tests and some such workers may actually gain 
overtime protection. However, this number is too small to estimate 
quantitatively given the data limitations presented below in Chapter 3.
2.10 The Impact of the Final Highly Compensated Test
    Some employees earning $100,000 or more per year could lose 
overtime protection because of the less stringent duties test 
applicable to these employees under the highly compensated test adopted 
in the final regulations. However, the number of highly compensated 
employees earning $100,000 or more per year who could lose protection 
is relatively small--approximately 107,000 (see Chapter 4). Taking into 
account the differences in regional wage levels, the highly compensated 
test has been set high enough to avoid exempting employees who are 
likely to be otherwise entitled to overtime protection. Adopting a 
$100,000 salary level for the highly compensated test, increased from 
the proposed $65,000 level, will result in far fewer workers being 
reclassified as exempt compared to the proposed rule. Moreover, in the 
Department's enforcement experience, most salaried

[[Page 22196]]

white collar workers earning $100,000 or more per year would satisfy 
the existing short test and the final standard test. As shown below in 
Chapter 4, most salaried white-collar workers earning $100,000 or more 
per year are already exempt and there are very few hourly workers 
earning $100,000 or more per year in the white-collar occupations (only 
47,000) likely to be affected. The Department also notes that the 
highly compensated test will not affect police, fire fighters, 
paramedics, EMT's and other first responders who are not performing 
office or non-manual work, nor will it affect manual laborers or other 
blue-collar workers who perform work involving repetitive operations 
with their hands, physical skill and energy.
2.11 The Impact of the Final Safe Harbor Provision
    As explained in the preamble above, the Department has decided to 
retain in final subsection 541.603(c) the proposed approach that an 
employer who has an actual practice of making improper deductions will 
lose the exemption during the time period in which the improper 
deductions were made for employees in the same job classification 
working for the same managers responsible for the improper deductions. 
However, if an employer has a clearly communicated policy prohibiting 
improper deductions and includes a complaint mechanism, reimburses 
employees for any improper deductions and makes a good faith commitment 
to comply in the future, the employer will not lose the exemption 
unless the employer willfully violates the policy by continuing to make 
improper deductions after receiving employee complaints. The Department 
believes that the safe harbor provision is an appropriate mechanism to 
encourage employers to adopt and communicate employment policies 
prohibiting improper pay deductions, while continuing to ensure that 
employees whose pay is reduced in violation of the salary basis test 
are made whole without providing a windfall to workers who have not 
been harmed. The final rule encourages employers to adopt proactive 
management practices that demonstrate the employers' intent to pay on a 
salary basis and correct violative payroll practices. In addition, 
employees will benefit from the additional notification of their rights 
under the FLSA. The updated safe harbor provision in the final rule 
will reduce costly and lengthy litigation while ensuring that workers 
whose pay is decreased in violation of the salary basis test receive 
their back wages. Reducing litigation costs will free up resources and 
stimulate economic growth.
2.12 The Impact of a Clearer and Easier to Understand Rule
    Although there are a variety of benefits from the final rule that 
accrue to both workers and employers, data limitations enable the 
Department to discuss many benefits only qualitatively. One of the 
largest benefits to workers comes from having clearer rules that are 
easier to understand and enforce. More workers will know their rights 
and if they are being paid correctly (instead of going years without 
knowing they should be paid overtime). Fewer workers will be 
unintentionally misclassified, therefore they won't have to go to court 
and wait years for their back pay. Clearer more up-to-date rules will 
also help the Wage and Hour Division more vigorously enforce the law, 
ensuring that workers are being paid fairly and accurately.
    Salaried workers will also benefit from more equitable disciplinary 
actions (i.e., under the current rule an employer would have to suspend 
an exempt manager for a full week for a Title VII violation in order to 
preserve the employee's exempt status even if the company's policy 
called for just a three day suspension without pay. Under the final 
rule salaried employees would lose only three days of pay).
    Like workers, employers will also benefit from having clearer rules 
that are easier to understand. More employers will understand exactly 
what their obligations are for paying overtime. Fewer workers will be 
unintentionally misclassified, and the potential legal liability that 
employers have under the current regulation will be reduced.
    As explained elsewhere in the preamble, the Department recognizes 
the benefit of retaining relevant portions of the current standard so 
as not to completely jettison decades of federal court decisions and 
agency opinion letters and has made significant changes to the final 
rule that are intended to clarify the existing regulation, to make the 
rule easier to understand and apply to the 21st Century workplace, and 
to better reflect existing federal case law without substantially 
changing the current law. The Department believes that the final rule 
accomplishes these objectives and will result in some reduction in 
litigation, particularly in the long term.
Chapter 3: Estimating the Number of Workers Impacted by the Final Rule
    In this chapter, the Department presents its estimates of the 
number of workers covered by the FLSA, subject to the salary level or 
salary basis tests, and who are currently Part 541-exempt or nonexempt.
     An estimated 35.2 million hourly paid workers 
and 7.6 million nonhourly workers are in occupations with no measurable 
probability of meeting the current duties tests (e.g., blue-collar 
occupations).
     An estimated 32.7 million hourly workers and 
31.7 million nonhourly workers are in occupations with some possibility 
of meeting the duties tests (e.g., white-collar occupations).
     Of the estimated 31.7 million nonhourly workers 
in occupations with some possibility of meeting the duties tests, an 
estimated 19.4 million are exempt under the current rule.
    As discussed below, the Department's approach is similar to that 
used by previous researchers, with the primary difference being that 
the Department used a nonlinear model to estimate the relationship 
between income and the exemption probability among current workers.
3.1 Estimating the Number of Workers Covered by the FLSA
    Based on the previous work in this area by the U.S. General 
Accounting Office (GAO), the University of Tennessee, CONSAD Research 
Corporation (CONSAD), and the Economic Policy Institute (EPI), the 
Department started with the latest available data from the U.S. 
Department of Labor, Bureau of Labor Statistics (BLS), 2002 Current 
Population Survey (CPS) Outgoing Rotation Group public use data set to 
estimate the number of workers that would be affected by changes in the 
Part 541 regulations. The primary reason the Department used this 
particular data source is its size (more than 474,000 observations) and 
breadth of detail (e.g., occupation and industry classifications, 
salary, and hours worked). As the previous researchers found, no other 
data source provides the necessary detail for this type of analysis.
    The GAO used the CPS because after reviewing ``several Bureau of 
Labor Statistics (BLS) and DOL reports to determine whether any data 
sources could be used for [GAO's] purposes [and] discussions with DOL 
and experts, [the GAO] decided that the CPS Outgoing Rotations was the 
best available data source to estimate both the proportion of the labor 
force that is

[[Page 22197]]

covered by the white-collar exemptions and the demographic 
characteristics of this population.'' (GAO/HEHS-99-164, pg. 40)
    As discussed below, in order to provide transparency and the means 
for others to replicate our results, the Department chose to use the 
2002 CPS Outgoing Rotation Group public use data set even though the 
employment weights for the observations are based on the 1990 Census 
and not the 2000 Census.
    The Department created a subset of the entire survey that only 
included employed workers 16 years of age and older (Item PREMPNOT = 
1--This is the name of the variable and its value in the BLS dataset 
used to create this subset. Similar variable names and values are 
provided below to assist researchers in replicating the Department's 
results). The number of employed workers in 2002 was estimated by 
summing the CPS outgoing rotation weight (PWORWGT; note this weight 
must be divided by 120,000 to provide annual averages and to account 
for the 4 implied decimal points in the data) for each of the remaining 
observations in the dataset. This resulted in a total employment 
estimate of 134.3 million, which does not match BLS's published 2002 
total household employment of 136.5 million.
    The 1.6 percent discrepancy is due to different weights being used 
to estimate the published employment totals. The weights in the public 
use file utilized by the Department in this analysis are based on the 
1990 Census. In January 2003, the BLS revised the weights using the 
2000 Census. Although BLS changed its published employment totals back 
to January 2000, the weights in the public use files were not updated. 
The 134.3 million total for 2002 employment matches the published BLS 
2002 employment estimate before the weights were changed. As noted 
below in Chapter 4, several commenters criticized the estimates in the 
Preliminary Regulatory Impact Analysis (PRIA) for being difficult to 
reproduce. Therefore, the Department chose not to use an internally 
available dataset with updated weights and instead used the publicly 
available dataset with 1990 Census weights to make its estimates easier 
to reproduce.
    Using weights based on the 1990 Census does not significantly 
affect the accuracy or quality of the results. The difference between 
the employment totals (136.5 - 134.3 = 2.2 million) based on the two 
sets of weights is distributed across all occupations, in all 
industries in all regions of the country, and is thus unlikely to bias 
the estimates. For the final regulatory impact analysis, the Department 
has endeavored to ensure maximum transparency even though the estimates 
differ slightly from the most recent BLS-published estimates.
    Next, the Department excluded the 14.9 million workers not covered 
by the FLSA, such as the self-employed and unpaid volunteers (item 
PEIO1COW = 6, 7, or 8), and the clergy and religious workers (item 
PTIO1OCD = 176 and 177). An additional 3.1 million workers were 
excluded because they are in occupations specifically exempted from the 
FLSA's overtime provisions (see Table 3-1), which reduced the total to 
116.3 million workers. Another group, 1.5 million federal employees, 
were excluded from the total (item PEIO1COW = 1) because they are not 
subject to the regulations promulgated by the Department (they are 
covered by U.S. Office of Personnel Management regulations). However, 
federal workers (PEIO1COW = 1) in Postal Offices (PEIO1ICD= 412), the 
Tennessee Valley Authority (PEIO1ICD = 450 and in Kentucky, Tennessee, 
Mississippi, Alabama, Georgia, North Carolina, and Virginia), and the 
Library of Congress (PEIO1ICD = 852 in the Washington D.C. MSA) were 
included in the analysis, as they are covered by final rule. The 
remaining 114.8 million workers represent the Department's best 
estimate from available data of the total number of employees who are 
covered by the FLSA's overtime provisions (see Chart 1). They are 
comprised of 69.0 million hourly paid workers and 45.8 million salaried 
workers (item PEERNHRY = 1 and 2, respectively). For the purposes of 
this RIA, the Department, like the GAO, assumed that workers paid on a 
nonhourly basis (CPS variable, PEERNHRY = 2) were paid on a salary or 
fee basis, and henceforth uses the term ``salaried workers'' to refer 
to workers classified as nonhourly in the CPS.

   Table 3-1.--Occupations Exempt From the FLSA's Overtime Provisions
------------------------------------------------------------------------
                                                             Number of
                   CPS occupation code                        workers
------------------------------------------------------------------------
Self-Employed and Unpaid Family:                          ..............
    29 U.S.C. 203(e)....................................      14,288,000
Clergy and Religious Workers:                             ..............
    WHD Field Operations Handbook, Section 10b03........         569,000
Federal Workers covered by OPM regulations:               ..............
    29 U.S.C. 204(f)....................................       1,546,000
Certain Employees of Carriers Over Highways, Rail, Air,   ..............
 and Sea:
    29 U.S.C. 213(b)(1), (b)(2), (b)(3), and (b)(6)            1,562,000
     (PTIO1OCD = 823-826 in PEIO1ICD 400, PTIO1OCD =
     505, 507 & 804 in PEIO1ICD 410, PTIO1OCD = 828, 829
     & 833 in PEIO1ICD 420, and PTIO1OCD = 226, 508 &
     515 in PEIO1ICD 421)...............................
Certain Agricultural Workers:                             ..............
    29 U.S.C. 213(b)(12) (PEIO1ICD = 10, 11 & 30).......         995,000
Certain Partsmen, Salesmen, and Mechanics at Auto         ..............
 Dealers:
    29 U.S.C. 213(b)(10) (PTIO1OCD = 263, 269, 505, 506,         543,000
     507 & 514 in PEIO1ICD 612).........................
 
------------------------------------------------------------------------
Source: CONSAD and the U.S. Department of Labor.


[[Page 22198]]

[GRAPHIC] [TIFF OMITTED] TR23AP04.000

3.2 Estimating the Number of Workers Who Are Currently Exempt and 
Nonexempt
    Since the CPS does not contain a variable that can be used to 
determine whether workers are Part 541-exempt or nonexempt under the 
current, proposed, or final rules, the Department relied on a 
methodology that has been used in previous research and supported by 
the record. As noted by the GAO in its report, in order to estimate the 
number of workers covered by the white-collar exemptions using the CPS 
data, a determination must be made on the basis of the worker's primary 
occupational classification (GAO/HEHS-99-164, pg. 40). Although there 
are many variables in the CPS dataset, including earnings, occupation, 
industry, paid hourly, and hours worked, none of these variables either 
individually or in combination permit a precise mapping of a worker's 
exempt or nonexempt status under Part 541 because there is no 
information on the actual duties performed by a worker. As found in 
previous research, in order to develop estimates of Part 541-exempt 
workers under the current regulations, it is necessary to use some 
measure of expert judgment. The use of expert judgment in cases where 
it is necessary to make informed decisions or lower uncertainty is also 
consistent with OMB's regulatory analysis guidance.
    In response to a specific request from the GAO, the Wage and Hour 
Division (WHD) in 1998 assembled a group of experienced WHD employees 
to develop estimates of the probability that FLSA covered salaried 
workers in various CPS occupational categories would be Part 541-exempt 
under the current regulations (U.S. General Accounting Office, ``Fair 
Labor Standards Act: White-Collar Exemptions in the Modern Work 
Place,'' GAO/HEHS-99-164, September 30, 1999). Based upon their 
collective experience in FLSA enforcement, the WHD staff classified 
each of the 499 Occupational Classification Codes (OCC) used in the CPS 
(Item PEIO1COCD) according to an estimated probability that some 
workers in a particular OCC would be Part 541-exempt. The GAO, the 
University of Tennessee (U.S. Department of Labor, ``The `New Economy' 
and Its Impact on Executive, Administrative and Professional Exemptions 
to the Fair Labor Standards Act (FLSA),'' January 2001), CONSAD 
(``Economic Analysis of the Proposed and Alternative Rules for the Fair 
Labor Standards Act (FLSA) Regulations at 29 CFR 541,'' January 14, 
2003), and the EPI (``Eliminating the Right to Overtime Pay,'' June 26, 
2003), all based their estimates of the number of workers who are 
exempt under the current rule on these judgments or probabilities. The 
EPI report was submitted for the record as part of the AFL-CIO's 
comments.
    The GAO explained this methodology in the following manner: ``In 
determining which of the workers would likely be exempt and therefore 
included in our estimate, we applied the percentage ranges provided by 
the officials at DOL.'' However, ``Rather than counting the number of 
employees actually classified as exempt by employers, we estimated how 
many employees are likely to be classified as exempt, based on the 
occupational classifications and income reported in the CPS sample.'' 
(GAO/HEHS-99-164, pg. 41 and 42) The Department, as did the GAO, used 
the CPS variable for a worker's occupation (Item PTIO1OCD) as a proxy 
for the person's job classification (there are a variety of jobs in 
each CPS occupation code).
    The GAO also noted that there are data limitations and some 
uncertainty associated with their methodology that reduces the ability 
to precisely estimate the number of currently exempt workers (GAO/HEHS-
99-164, pg. 42). The Department notes that these same limitations and 
uncertainties, combined with the broad probability classifications 
provided by DOL to GAO

[[Page 22199]]

and used in this RIA and other research, make it impossible to 
accurately estimate the number of exempt workers by detailed industry 
or by state. Moreover, because of this uncertainty, the Department did 
not rely on its estimates of the number of exempt workers to set the 
salary levels and instead used these estimates as just one of several 
methods to confirm the reasonableness of the $455/week and $100,000/
year salary levels.
    Both the 1999 GAO report and the PRIA discussed the probability 
classifications in terms of Standard Occupational Classifications 
(SOCs). This resulted in some confusion among researchers attempting to 
replicate the estimates. For example, the AFL-CIO stated, ``the study's 
methodology is confusing, and because CONSAD does a poor job of 
explanation, it is not capable of replication * * * CONSAD relies upon 
both the Current Population Survey (CPS) and the 1998 Standard 
Occupational Classification (SOC) system. Conflicts between these two 
data sets make the study opaque.''
    In order to develop the probability estimates, the WHD staff 
utilized Appendix B in the CPS documentation to obtain the list of 
occupational titles. The CPS Appendix specifies the occupational title 
and the associated SOC codes used by the CPS for each OCC code. The CPS 
Appendix is available on the U.S. Census Bureau Web site (http://
www.census.gov/apsd/techdoc/cps/sep97/det-occ.html). According to the 
BLS, the OCC ``classification is developed from the 1980 Standard 
Occupational Classification.'' The WHD staff used the documentation on 
the SOC codes in assessing the exempt probability range for the 
associated OCC codes. This analysis was first used by GAO, and then 
followed by the University of Tennessee and by CONSAD Research 
Corporation in the Part 541 PRIA.
    In addition, for the PRIA, CONSAD also made its own assessments 
based upon O*NET data (O*NET, the Occupational Information Network, is 
a comprehensive database of worker attributes and job characteristics 
available at http://www.onetcenter.org/whatsnew.html).
    For the final RIA, however, the Department has reverted to the 
original estimates developed in 1998 by its WHD experts for the GAO. 
This adjustment from the proposed rule does not materially affect the 
total number of workers impacted, and ensures transparency and enables 
the public to replicate and evaluate the final RIA. Although newer and 
more detailed than the occupation descriptions available to the WHD 
staff in 1998, O*NET is still under development. Also, the O*NET 
categories do not directly correspond to the occupation categories used 
in the CPS making it difficult for the public to replicate the results. 
Some O*NET descriptions apply to more than one CPS occupation and some 
CPS occupations apply to more than one O*NET description.
    Of the 499 occupation codes in the CPS, one is not related to 
employment (code 905 is assigned to unemployed persons whose last job 
was in the Armed Forces), two are assigned to clergy and religious 
workers (codes 176 and 177) who are not covered by the FLSA, one had no 
observations (code 149 for home economics teachers), and five had no 
observations after the removal of various industry exemptions (code 474 
for horticultural specialty farmers, code 499 for hunters and trappers, 
code 826 for rail vehicle operators, code 639 for machinist 
apprentices, and code 655 for miscellaneous precision metal workers).
3.3 Estimated Number of Nonexempt Workers in the Blue-Collar 
Occupations
    In 1998, the WHD experts estimated that 239 of the remaining 490 
categories would be entirely comprised of nonexempt workers in ``blue-
collar'' occupations. The estimated number of hourly and salaried 
workers in each of the 239 occupations is presented in Table A-1 of 
Appendix A at the end of this preamble. Although the Department has 
consistently held (and continues to hold) the view that job titles and 
job descriptions cannot be used to determine the exempt status of any 
particular employee, for the purpose of this economic analysis only, 
the Department, with the expertise of the WHD, has determined that the 
CPS occupational groups in Table A-1 most likely contain jobs with 
nonexempt duties. This assumption was also made by the GAO and other 
researchers.
    There are 35.2 million hourly paid workers and 7.6 million salaried 
workers in these ``nonexempt'' blue-collar occupations (see Chart 2).

[[Page 22200]]

[GRAPHIC] [TIFF OMITTED] TR23AP04.001

    For purposes of this economic analysis, the Department has assumed 
that no workers within the 239 blue-collar occupations are Part 541-
exempt. However, it is important to note that the final rule will 
strengthen overtime protection for 2.8 million blue-collar salaried 
workers in these occupations who earn at least $155 and less than $455 
per week regardless of their duties or whatever occupational group in 
which they may be classified. Although the Department has determined 
that most, if not all, of these workers are currently nonexempt, they 
are currently subject to the long and short duties tests; therefore, 
their exempt status is fundamentally less certain than under the bright 
line salary test in the final rule.
3.4 Estimated Number of Workers in the White-Collar Occupations
    To determine the number of exempt workers that could be affected by 
the final rule, the Department, like the GAO, concentrated on the 251 
occupations likely to include exempt workers. As the GAO stated, ``To 
develop our estimate, we analyzed each of the 257 job titles likely to 
include exempt workers.'' (GAO/HEHS-99-164, pg. 41) After accounting 
for the six occupations with no observations (noted above), this 
corresponds with the 257 titles used by the GAO in 1999.
    Each of the remaining 251 ``white-collar'' occupations was then 
classified into one of four exemption probability ranges, or 
categories, presented below in Table 3-2. The GAO did the same in its 
1999 report when ``DOL officials provided [them] with one of four 
ranges of likelihood of exemption for each occupation.'' (GAO/HEHS-99-
164, pg. 42)

   Table 3-2.--Part 541 Exemption Probability Categories for Salaried
              Workers Under the Current Short Duties Tests
------------------------------------------------------------------------
                                            Lower bound     Upper bound
             Classification                  estimate        estimate
------------------------------------------------------------------------
1. High Probability of Exemption........             90%            100%
2. Probably Exempt......................             50%             90%
3. Probably Not Exempt..................             10%             50%
4. Low or No Probability of Exemption...              0%             10%
------------------------------------------------------------------------
Source: U.S. Department of Labor.
Note: Many occupations were classified as having a ``Low or No
  Probability of Exemption'' because the CPS data may include some
  supervisory employees who could potentially be exempt under the
  executive duties test, although the occupations would generally be
  nonexempt. (See GAO/HEHS-99-164, data limitations, pg. 42)

    Next, the Department excluded workers who are exempt under the 
current and final rules because they are in occupations that are not 
subject to the salary level or salary basis tests and will not be 
affected by the final rule (see Table 3-3). As noted by the GAO in its 
1999 report ``The exemption for physicians, lawyers, and teachers does

[[Page 22201]]

not depend on the income of the employee.'' (GAO/HEHS-99-164, pg. 41) 
These occupational groups consist of: outside sales employees (CPS item 
PTIO1OCD = 277); teachers and academic administrative personnel (item 
PTIO1OCD = 14, 113-159, and 163) in educational establishments (item 
PEIO1ICD = 842 and 850); certain medical professions (item PTIO1OCD = 
84, 85, 87, 88, and 89); and lawyers and judges (item PTIO1OCD = 178).

Table 3-3.--Number of Workers in CPS Occupations That Are Not Subject to
                     the Part 541 Salary Level Test
------------------------------------------------------------------------
                                                             Number of
                   Occupational title                         workers
------------------------------------------------------------------------
Teachers & Academic Administrative Personnel in Industry       6,106,083
 842 and 850............................................
Physicians..............................................         550,748
Dentists................................................          48,565
Optometrists............................................          20,288
Podiatrists.............................................           3,999
Health Diagnosing Practitioners, n.e.c. (1).............          17,020
Lawyers and Judges......................................         622,549
Street and Door-to-Door Sales Workers...................         184,998
                                                         ---------------
    Total...............................................       7,554,250
------------------------------------------------------------------------
(1) Not elsewhere classified.
Source: CONSAD and the U.S. Department of Labor
Note: These occupations are identified separately here since they differ
  from those in Table 3-1: they are covered by FLSA's overtime
  provisions but are not subject to the Part 541 salary level tests.

    After excluding from the analysis most of the observations for 
teachers and academic administrative personnel, and all of the 
observations for outside sales employees, certain medical professions, 
lawyers and judges, there remained 64.4 million workers in potentially 
exempt ``white-collar'' occupations who are both covered by the FLSA 
and subject to the Part 541 salary level tests and thus could be 
affected by the final rule.
    As noted above, for purposes of estimating the number of exempt 
workers, the Department, like the GAO, assumed that workers paid on a 
nonhourly basis (CPS variable, PEERNHRY=2) were paid on a salary or fee 
basis. There are 32.7 million hourly workers and 31.7 million salaried 
workers in potentially exempt ``white-collar'' occupations (see Chart 
3).
[GRAPHIC] [TIFF OMITTED] TR23AP04.002

    The estimated number of hourly and salaried workers in each of the 
251 white-collar occupations is presented in Table A-2 of Appendix A. 
Table A-2 also presents the Exempt Status Codes developed by WHD in 
1998 for each CPS occupation code.
3.5 Methodology Used To Estimate the Number of Exempt Salaried Workers
    In order to develop a baseline estimate of the number of currently 
exempt white-collar salaried workers, the Department reviewed several 
approaches. The first approach was used by the GAO, which ``made the 
following assumption: duties that make an employee more likely to be 
covered by the white-collar exemptions are duties that, generally 
speaking, elicit a higher salary. Under this assumption, as workers 
have more exempt duties and responsibilities, their incomes increase--
as does the likelihood of

[[Page 22202]]

being exempt.'' (GAO/HEHS-99-164, pg. 41) The GAO sorted the 
observations in each occupational code by earnings from highest to 
lowest. Then, beginning at the highest earnings, the GAO kept all of 
the observations until the number of workers represented by the 
observations as a percent of total employment in the occupation equaled 
the target estimated probability of being exempt for that occupation. 
The remaining observations (lower income workers) were assumed to be 
nonexempt. For example, the method used to estimate the upper bound 
coverage estimates for the Probably Not Exempt Classification (which 
has a 10 to 50 percent probability range of exemption) was developed by 
including the observations representing the highest 50 percent of 
earnings. The lower bound coverage estimates, on the other hand, were 
developed including the observations representing only the highest 10 
percent of earnings.
    Although this was the methodology used by the GAO, the Department 
decided not to follow it for the final RIA because the compensation 
within each occupation varies not only because of exempt status and 
duties, as the GAO assumed, but also because of the industry and 
geographic location where the worker is employed. The Department 
determined the GAO approach creates biased estimates for low-wage 
industries and localities because the GAO methodology excludes, as 
nonexempt, most of the observations for intermediate and low-wage 
workers who could be exempt in comparatively low-wage industries and 
occupations. In other words, while it is true that, all other things 
being equal, exempt employees generally receive higher salaries than 
nonexempt employees, it is also true that employees in certain 
industries and localities generally receive higher salaries than 
employees in the same occupation in other industries and localities.
    Further, in order to develop more accurate estimates based upon the 
GAO's methodology of completely excluding the lower-wage workers, the 
data would have to be stratified by both industry and locality. As the 
AFL-CIO stated in its comments, this analysis would have to be done at 
the 3-digit industry level because ``Generalizing to a 2-digit code 
loses important distinctions within industry sectors, and this causes a 
corresponding loss of precision.'' Similarly, the analysis may also 
have to be done at the county level, because generalizing to the state 
level could also cause the loss of too much precision. Multiplying the 
nearly 1,000 3-digit industry codes by the more than 3,000 counties 
would result in some 3 million industry and county combinations. As 
large as the CPS is, however, it will not accurately support this level 
of detailed analysis. GAO, in fact, did not even present (much less 
develop) its estimates at the state or 2-digit industry level of 
detail.
    The second approach was to give all observations in an occupation 
the same probability regardless of income. Under this approach, 
estimates are generated by multiplying the CPS weight (item PWORWGT) 
for each observation (worker) by the average of the upper and lower 
bound exemption probability associated with the occupation code. 
Although this approach corrects for the bias against the low-wage 
industries and localities, the Department determined it was 
unsatisfactory because it does not account for the fact that higher 
income workers are more likely to be exempt. For example, someone in 
real estate sales (OCC 254) earning $405 per week would be given the 
same 30 percent probability of being exempt (i.e., average of 10 
percent and 50 percent for ``probably not exempt classification'') as 
one earning $2,155 per week. Even considering the existence of regional 
and industry salary differentials, this approach did not seem 
reasonable.
    The Department employed two basic approaches to address these 
issues, which are discussed below. First, the Department used a linear 
model to combine aspects from both of the first two approaches. The 
Department excluded the 803,000 salaried workers with weekly earnings 
(item PTERNWA) below $155, because these workers are nonexempt under 
both the current and final rules. The GAO used a similar approach by 
considering workers earning less than $250 per week as nonexempt and 
eliminating them from the calculations. (GAO/HEHS-99-164, pg. 41) The 
Department used the lower figure primarily to account for 
nontraditional work arrangements. For example, under a job sharing 
arrangement, two workers sharing an exempt position could each work 
part-time earning only a portion of the total salary allocated to the 
position, when one of these workers is out, the other covers. At such 
times, the exempt worker would not be eligible for overtime even if the 
weekly hours exceed 40. There are only 670,000 salaried workers in the 
251 occupations earning at least $155 but less than $250 per week. As 
the analysis presented below demonstrates, only a small percentage of 
these were estimated to be exempt.
    The Department then modified the observation's weight for each OCC 
by multiplying the CPS weight (item PWORWGT) by the probability that an 
individual with that salary in that OCC is exempt. The specific 
probability of exemption for each salaried worker in a particular 
occupation code was estimated using linear interpolation according to 
the following equation:
[GRAPHIC] [TIFF OMITTED] TR23AP04.003

Where:

Prob--Exempt = Probability of individual in the occupational 
classification (OCC) being exempt
LB = WHD lower bound probability from Table 3-2
PTERNWA = CPS weekly earnings amount
UB = WHD upper bound probability from Table 3-2

    The equation above specifies that the probability of a worker with 
a weekly salary of $155 being exempt is equal to the lower bound 
probability specified by the WHD experts for a given white-collar 
occupation, while the probability of an individual with the highest 
weekly salary in the occupation (often the top coded value of $2,885) 
being exempt is equal to the upper bound probability specified for a 
given white-collar occupation. The probability of exemption for weekly 
salaries between $155 and $2,885 is derived using the above linear 
interpolation equation. Figure 3-1 presents a graphical illustration 
for the ``Probably Not Exempt'' classification (see Table 3-2). Similar 
graphs could be developed for the other three classifications but were 
not included in the RIA.

[[Page 22203]]

[GRAPHIC] [TIFF OMITTED] TR23AP04.004

    Although the linear model was designed to more accurately include 
lower-wage industries and regions while accounting for the 
determination by WHD that higher earnings are associated with a higher 
probability of exemption, the model appears to underestimate the total 
number of currently exempt workers compared to using the midpoint of 
the WHD probability range (e.g., averaging the WHD upper and lower 
bound estimates) at the national level. Table 3-4 shows this effect.

            Table 3-4.--Comparison of Part 541-Exempt Worker Estimates Mid-point Versus Linear Model
----------------------------------------------------------------------------------------------------------------
                                                                                   Estimated number exempt
                                             Number of white-  Midpoint of -------------------------------------
               WHD category                  collar salaried     the WHD    Number of workers
                                             workers earning   probability    times midpoint      Linear model
                                              $155 or more*       range        probability
----------------------------------------------------------------------------------------------------------------
High Probability of Exemption.............         14,053,817          95%         13,351,126         13,170,751
Probably Exempt...........................          6,102,827          70%          4,271,979          3,812,164
Probably Not Exempt.......................          4,904,421          30%          1,471,326          1,076,901
Low or No Probability of Exemption........          5,822,134           5%            291,107            130,662
                                           --------------------
    Total.................................         30,883,199  ...........         19,385,538        18,190,479
----------------------------------------------------------------------------------------------------------------
*Excludes workers not subject to salary test.
Source: CONSAD and the U.S. Department of Labor.

    This occurs because the underlying earnings distribution is not 
symmetric. Rather, it is skewed toward low earnings levels. When the 
linear model of exemption probabilities is applied to that earnings 
distribution, it produces estimates that are skewed toward low earnings 
levels. Figure 3-2 presents the histogram and cumulative distribution 
for the ``Probably Not Exempt'' category. The higher bar in Figure 3-2 
at $2,800 in weekly earnings level is a result of the top coding of the 
CPS data that includes all of the workers with weekly earnings of 
$2,800 or more into one group. Similar graphs were developed for the 
other three classifications but were not included in the RIA.

[[Page 22204]]

[GRAPHIC] [TIFF OMITTED] TR23AP04.005

    Because the linear model results in more observations being 
assigned a probability lower than the midpoint than a probability 
higher than the midpoint, it tends to underestimate the number of 
exempt workers compared to multiplying the number of workers by the 
midpoint probability. The Department considers the midpoint estimate to 
be a valid benchmark since it has been used by other researchers (such 
as EPI) and is equivalent to averaging the GAO estimates using updated 
data. Although this is not a classic statistical bias, the linear model 
implies that the average probability of being exempt within each 
category range is slightly lower than implied by the midpoint of the 
range, which was not the intent of the original probability 
determinations made by the WHD study. Since the overall estimate of the 
number of currently exempt workers using the linear model is 1.2 
million workers less than this benchmark, the Department decided to 
explore if a nonlinear model that is consistent with the assumptions 
about the likelihood of exemption would produce national level 
estimates that more closely match the midpoint benchmark.
    The Department applied a series of nonlinear models to try and 
compensate for the nonsymmetrical income distributions in the four 
exemption categories. First, the observations with weekly earnings less 
than $155 were excluded because these workers are nonexempt under the 
current and final rules. Next, the observations that were top coded for 
weekly earnings (Item PTWK =1) were excluded from the distribution to 
smooth out the right-hand tail (i.e., all of these observations were 
assigned the upper bound probability and keeping them in the 
distribution would only have distorted the curves). Finally, the 
cumulative probability distributions of three nonlinear functions 
(i.e., normal, lognormal, and gamma) were fitted to the cumulative 
income distributions for the remaining observations in each of the four 
exemption categories.
    Each of the functions was calibrated to the empirical data by using 
the mean and standard error of the empirical distributions. For the 
normal distribution the mean was set to the sample mean and the 
standard deviation was set to the standard error. For the gamma 
distribution, alpha was set to the square of the quotient of the sample 
mean divided by the standard error, and beta was set to the standard 
error squared divided by the sample mean. The lognormal distribution 
was developed by taking the logs of the sample data and then using a 
normal distribution with the mean set to the mean of the logs of the 
sample data and the standard deviation set to the standard error of the 
logs of the sample data (see Table 3-5).

        Table 3-5.--Parameters of Empirical Income Distributions
------------------------------------------------------------------------
                                                                Standard
                                                     Mean of    error of
        WHD category            Sample    Standard    logged     logged
                                 mean      error      sample     sample
                                                       data       data
------------------------------------------------------------------------
High Probability of               1,107        538        6.9        0.5
 Exemption..................

[[Page 22205]]

 
Probably Exempt.............        928        512        6.7        0.8
Probably Not Exempt.........        886        502        6.6        0.9
Low or No Probability of            630        375        6.2       0.8
 Exemption..................
------------------------------------------------------------------------
Source: CONSAD and the U.S. Department of Labor.

    Figure 3-3 presents plots depicting the goodness of fit of the 
three nonlinear functions that were estimated for the ``Probably Not 
Exempt'' category. Similar plots were developed for the other three 
classifications but were not included in the RIA. As one can see in 
figure 3-3, all three distributions had the same general shape as the 
empirical data; however, the function estimated for the gamma 
distribution appears to fit the actual data better than the functions 
estimated for the other two distributions. The Department, however, did 
not use a formal goodness of fit test to choose a distribution for the 
principal estimates of this final rule; rather, the Department measured 
how well each of the distributions matched up against the estimate as a 
function of the midpoint probabilities, since calibrating the totals to 
the midpoint probabilities was the primary reason for examining the 
non-linear models.
[GRAPHIC] [TIFF OMITTED] TR23AP04.006

    Before determining the distribution that would be used to develop 
the baseline for the RIA, the Department estimated the number of exempt 
workers using each of the three distributions and compared the 
estimates to the benchmark developed using the midpoint probability. 
For each of the four exemption categories (EC), the probability that an 
individual with a specific salary in each category is exempt was 
estimated using nonlinear interpolation according to the following 
equation:

Prob--Exempt = LB + Function--EC(PTERNWA) x (UB-LB)

Where:
Prob--Exempt = Probability of an individual in the exemption 
classification being exempt
LB = Lower bound probability from Table 3-2 for the exemption category
PTERNWA = CPS weekly earnings amount
UB = Upper bound probability from Table 3-2 for the exemption category
Function--EC(PTERNWA) = the cumulative probability of the distribution 
function for the

[[Page 22206]]

exemption category (i.e., calibrated as discussed above) at that 
earnings

    The total number of exempt salaried workers for each white-collar 
occupation was estimated by multiplying the estimated probability of 
being exempt (based upon the earnings and exemption category) by the 
CPS weight for each worker and then summing the modified weights for 
each occupation. Observations with earnings less than $155 per week 
were assigned a probability of zero and observations with top coded 
earnings were assigned the upper bound probability for the category. As 
shown in Table 3-6, the gamma distribution resulted in estimates that 
most closely approximated the number of exempt workers estimated using 
the midpoint probability. The symmetrical normal distribution 
underestimated the midpoint total by approximately 104,000 workers 
(0.5%) while the lognormal distribution overestimated the midpoint 
total by 3.2 million (16.5%). The gamma distribution resulted in 
essentially the same estimated number of exempt workers as using the 
midpoint probability. The two methods differ by approximately 0.2 
percent, or less than 60,000 workers.

                           Table 3-6.--Comparison of Part 541-Exempt Worker Estimates
----------------------------------------------------------------------------------------------------------------
                                                     Midpoint         Normal         Lognormal         Gamma
                  WHD category                      probability    distribution    distribution    distribution
                                                     estimate     model estimate  model estimate  model estimate
----------------------------------------------------------------------------------------------------------------
High Probability of Exemption...................      13,351,126      13,341,039      14,053,814      13,370,021
Probably Exempt.................................       4,271,979       4,232,533       5,492,548       4,294,132
Probably Not Exempt.............................       1,471,326       1,432,806       2,452,211       1,482,972
Low or No Probability of Exemption..............         291,107         274,707         582,213         292,266
                                                 -----------------
    Total.......................................      19,385,538      19,281,085      22,580,786     19,439,391
----------------------------------------------------------------------------------------------------------------
Source: CONSAD and the U.S. Department of Labor.

    Although the Department did not conduct formal goodness of fit 
tests, Figures 3-4 through 3-7 indicate that the gamma distribution 
preserves the shape of the empirical cumulative distribution for the 
four exemption categories. Thus, for the RIA the Department developed 
its baseline estimates of exempt workers using a gamma distribution 
model. Although some other distribution could exist that improves upon 
the gamma distribution, the Department has determined that it would not 
significantly alter the RIA results given how well the gamma 
distribution approximates the empirical data. In addition, as 
demonstrated above in Table 3-6, the estimated number of workers 
impacted by the final rule does not depend critically on any particular 
nonlinear model; in fact, the estimated number of workers impacted even 
under the linear model is not substantially different than under the 
gamma distribution model, proving that the Department's estimates are 
relatively robust to estimation procedure choices.
[GRAPHIC] [TIFF OMITTED] TR23AP04.007


[[Page 22207]]


[GRAPHIC] [TIFF OMITTED] TR23AP04.008


[[Page 22208]]


[GRAPHIC] [TIFF OMITTED] TR23AP04.009

    Like the linear model, this methodology accounts for the existence 
of lower-wage industries and regions while remaining consistent with 
the GAO's assumption that ``duties that make an employee more likely to 
be covered by the white-collar exemptions are duties that, generally 
speaking, elicit a higher salary.'' The non-linear model also accounts 
for the different marginal effect on exemption probabilities that lower 
wage and higher wage workers are likely to have. For example, the 
change in the exemption probability for social workers as their income 
rises is likely to be relatively small for social workers earning 
between $155 and $455 per week compared to a relatively constant change 
in the exemption probability for social workers earning between $455 
and $1,250 per week. However, once workers earn a relatively high pay 
level, the rate of change in their exemption probability is likely to 
decrease as their income increases and they approach the maximum 
exemption probability and maximum income reported for their job. The 
Department also feels that this methodology is consistent with recent 
findings in the economic literature. For example, Bell and Hart 
(``Unpaid Work,'' Economica, 66: 271-290, 1999) and Bell, Hart, Hubler, 
and Schwerdt (``Paid and Unpaid Overtime Working in Germany and the 
UK,'' IZA Discussion Paper Number 133, Bonn, Germany: The Institute for 
the Study of Labor, March 2000) found that unpaid overtime is more 
often worked by employees with managerial status and with comparatively 
high wage rates; whereas paid overtime is more often worked by 
employees with lower wage rates.
    Due to data limitations, this analysis was conducted on a national 
level and was intended to produce national estimates. For a specific 
occupation, individuals in low-wage industries or localities will 
likely have slightly higher probabilities than estimated using the 
gamma distribution model, while individuals in high-wage industries and 
localities will likely have slightly lower probabilities. However, the 
Department believes the overall estimates using this approach are 
reasonable because these factors tend to balance each other at the 
national level.
    Clearly, this approach cannot be used by an employer to determine 
the exempt status of individual employees. The approach was designed to 
estimate the number of exempt employees in entire occupations for 
statistical purposes only, not to determine the specific status of a 
particular individual in a specific occupation. The latter requires 
consideration of the individual's specific duties, which must be done 
on a case-by-case basis.
3.6 Estimated Number of Exempt Salaried Workers
    The total number of exempt salaried workers for each white-collar 
occupation was estimated by multiplying the estimated probability of 
being exempt by the CPS weight for each worker to produce a modified 
weight, and then summing the modified weights for each occupation. 
Based on this analysis, the Department estimates that 19.4 million of 
the 30.9 million white-collar workers who earn $155 or more per week 
and are subject to the Part 541 salary tests are currently exempt. 
Table 3-7 presents the number of exempt workers in each WHD category by 
weekly earnings. Table A-3 in Appendix A presents the number of exempt 
workers in each white-collar occupation. Also presented in Table A-3 is 
the number of nonexempt salaried workers in each of the 251 white-
collar occupations earning at least $155 per week.

[[Page 22209]]



             Table 3-7.--Number of Exempt Workers by Earnings and WHD Exemption Probability Category
----------------------------------------------------------------------------------------------------------------
                                                                          Weekly earnings
       WHD exemption probability category        ---------------------------------------------------------------
                                                   $155 to $455   $455 to $1,923     $1,923 +          Total
----------------------------------------------------------------------------------------------------------------
High Probability of Exemption...................         815,600      11,105,374       1,449,047      13,370,021
Probably Exempt.................................         364,607       3,540,717         388,809       4,294,132
Probably Not Exempt.............................          88,111       1,257,050         137,811       1,482,972
Low or No Probability of Exemption..............          29,535         253,597           9,134         292,266
                                                 -----------------
    Total.......................................       1,297,852      16,156,738       1,984,801     19,439,391
----------------------------------------------------------------------------------------------------------------
 Source: CONSAD and the U.S. Department of Labor.

    Chart 4 shows the distribution of the currently exempt and 
nonexempt workers by weekly earnings.
[GRAPHIC] [TIFF OMITTED] TR23AP04.010

Chapter 4: Estimating the Change in Overtime Protection

    In this chapter, the Department presents the estimated changes in 
exempt status of workers that are likely to occur as a result of the 
final rule. The estimates presented below are based on the assessment 
of the final rule presented in Chapter 2 and elsewhere in the preamble 
and on the coverage estimates presented in Chapter 3. The methodology 
detailed below differs from the PRIA because of modifications made to 
the proposed rule to address the comments. In addition to changes 
resulting from the revised methodology, the estimates are different 
from the PRIA because the data sources have been updated.
    The major findings in this chapter are as follows:
     Workers earning less than $155 per week will 
remain nonexempt under the final rule.
     An estimated 6.7 million workers earning $155 or 
more but less than $455 per week will be guaranteed overtime protection 
under the revisions regardless of their duties.
     There are an estimated 5.4 million currently 
nonexempt salaried workers whose overtime protection will be 
strengthened because their protection, which is based on the duties 
tests under the current rules, will be automatic under the new rules.

[[Page 22210]]

     There are an estimated 1.3 million white-collar 
salaried workers earning at least $155 but less than $455 per week 
currently exempt under the long and short duties tests who will gain 
overtime protection.
     Workers earning at least $455 per week will 
benefit from the clarification of the duties test requirements. This 
clarification is expected to reduce the uncertainty surrounding the 
application of the current outdated regulations. Both workers and 
employers will benefit from reduced litigation and from having greater 
confidence in the exemption status of employees. Workers will better 
understand their rights, employers will know their obligations, and WHD 
investigators will be better able to enforce the law.
     The Department has determined that the 
differences in the number of workers earning $455 or more to $1,923 per 
week who will be exempt under the standard tests as compared to the 
number currently exempt are too small to estimate quantitatively. In 
addition, the very few, if any, workers that might be converted from 
nonexempt status to exempt status as a result of the updated 
administrative and professional tests are likely to be offset by 
workers gaining overtime protection as the result of the tightened 
executive test.
     The Department estimates that approximately 
107,000 workers (47,000 hourly and 60,000 salaried) could be converted 
to exempt salaried status as a result of the new test for highly 
compensated workers. As explained more fully below, the primary reason 
for the low estimate is the small number of workers earning $100,000 or 
more per year, combined with the Department's assessment that most 
white-collar workers earning $100,000 or more per year are very likely 
currently Part 541-exempt.
4.1 Comments to the Proposed Rule on the Number of Exempt Workers
    The Department received comments in response to the estimated 
number of workers whose exempt status could change, contained in the 
PRIA and the CONSAD report upon which the PRIA was partially based. For 
example, the AFL-CIO stated, ``The Department asserts that its proposal 
will cause 644,000 employees to lose their right to overtime, 68 Fed. 
Reg. at 15580, and that roughly 1.3 million workers will become 
automatically nonexempt * * * [F]laws in the study's approach and 
methodology, as well as its lack of transparency, call into serious 
question the reliability of these estimates.''
    The Building and Construction Trades Department of the AFL-CIO 
stated, ``As the Economic Policy Institute points out in a report it 
recently issued, DOL seems to assume, without any factual support, that 
all of these highly compensated employees are already exempt under the 
current white-collar regulations. * * * However, as the Economic Policy 
Institute Briefing Paper observed, it is not at all clear that all of 
these highly compensated employees are already exempt under current 
law.''
    Several labor unions, citing the EPI analysis, asserted the 
Department's preliminary analysis greatly underestimated the effect of 
changing the overtime regulations. For example, the AFL-CIO stated, 
``Based on its analysis of 78 occupations, EPI concluded that more than 
8 million workers will lose overtime protection under the proposed 
regulatory changes * * * This includes 2.5 million salaried workers and 
5.5 million hourly employees who meet the duties test under the 
proposed rule and who are at risk of being converted to salaried 
status, thus eliminating their overtime protections. There are 1.3 
million workers [who] would lose overtime protection because of the new 
`''Highly Compensated Employee' category.'' In response to these 
comments and in the interest of transparency, the Department has chosen 
to set forth a detailed presentation of the methodology used to compute 
the estimates regarding the impact of the final rule.
4.2 Critique of the EPI Report
    Before explaining how the Department estimated the impact of the 
final rule, it is important to discuss the EPI report because it has 
received considerable publicity and was the only detailed alternative 
impact analysis of the proposed rule that was submitted to the record. 
The Department has concluded that the EPI report is unsound because its 
conclusions are based on a substantial number of errors, particularly 
regarding whether the proposal represented a change from the tests in 
the current regulation. Because those errors led EPI to overstate 
significantly the number of employees losing overtime protection as a 
result of the Department's proposal, it is important to present an 
overview of the most serious errors in the EPI report.
    First, the basis for the EPI estimate that millions of workers 
would lose their right to overtime was the contention that the proposed 
standard duties tests that applied to workers earning $425 or more per 
week were weaker than the current long and short duties tests. Many 
other commenters adopted this contention. For example, the National 
Treasury Employees Union stated, ``Millions of workers with salaries 
between $22,101 and $65,000 who now receive overtime pay could be 
reclassified as exempt under the broadened definitions of executive, 
administrative, and professional employees.'' The Public Justice Center 
added, ``If exemptions are easy to obtain, a large middle segment of 
the work force will be exempted. Employers will give this exempted 
portion of the workforce extra work, since they are essentially `free 
labor.' And employers will be discouraged from both hiring more entry 
level employees to do the extra work and from paying lower paid 
employees at the time and one-half rate, thereby undermining the very 
purposes of the hours-of-work standard and harming the classes of 
persons who need protection the most, the low-wage employee and 
unemployed worker.''
    Most of the adverse comments resulted from mistakenly comparing the 
new standard duties tests to the old long duties tests. As explained 
above, this comparison is not valid because the current long duties 
test is only applicable to workers earning less than $250 per week and 
the few workers that are subject to the long test under the current 
rule will be guaranteed overtime protection under the final rule.
    The EPI report erroneously claims that ``Changes in the primary 
duty test and the redefinition of `executive' will allow employers to 
deny overtime pay to workers who do a very low level of supervising and 
a great deal of manual or routine work, including employees who do set-
up work in factories and industrial plants. Employees who can only 
recommend--but not carry out--the hiring or firing of the two employees 
they supervise will be exempted as executives.'' In fact, both the 
Department's proposed and final rules will make it more difficult to 
qualify as an exempt executive. The final rule contains the same two 
requirements as the current regulation's short duties test, and it adds 
a third requirement from the existing, but essentially inoperative, 
long duties test. The ``only recommend'' hiring or firing language that 
EPI finds objectionable is the same language currently in section 
541.1(c), which has been in the regulations since 1949. Moreover, that 
requirement now appears only in the long test and thus is applicable 
only to employees earning less than $250 per week. The Department's 
proposed and final rules make this authority to recommend hiring or 
firing the third prong of the standard test, thus strengthening the 
executive duties test for workers earning $455 or more to $1,923 per 
week. Similarly, the reference to set-up work

[[Page 22211]]

that EPI finds objectionable also is taken substantially word-for-word 
from the current regulation at section 541.108(d), which describes work 
that may be treated as exempt work if it is directly and closely 
related to exempt work. Thus, EPI simply misses the mark in claiming 
the Department's proposed rule would exempt more workers as executives 
than under the current regulations. This claim is equally invalid under 
the final rule.
    EPI also claims the ``exemption for professional employees has been 
dramatically expanded to include occupations that not only do not 
require an advanced degree or postgraduate study, but also those that 
do not require even an associate's degree or any prolonged course of 
academic training or intellectual instruction (emphasis added).'' In 
fact, the Department's proposed and final rules do not change the 
current regulation's educational requirements for exemption as a 
learned professional. The Department retains the current regulatory 
requirement limiting the professional exemption to employees whose 
primary duty is work that requires advanced knowledge in a field of 
science or learning that is customarily acquired by a prolonged course 
of specialized intellectual instruction. The Department also 
recognizes, as the current regulation has recognized since 1949 at 
section 541.301(d), that an advanced, specialized degree is 
``customarily'' required but that an employee with equal status and 
knowledge--``the occasional chemist who is not the possessor of a 
degree in chemistry''--is not ``barred from the exemption.'' But, as 
the final regulation continues to recognize (section 541.301(d)), in 
all cases the exemption is restricted to professions where an advanced, 
specialized academic degree is a ``standard prerequisite for entrance 
into the profession.'' Because the professional exemption only applies 
to workers whose primary duty consists of performing work requiring 
knowledge of an advanced type in a field of science or learning 
customarily acquired by a prolonged course of specialized intellectual 
instruction and study, it is simply impossible for the changes proposed 
or finalized here to extend that exemption to occupations that do not 
meet this test, as EPI claims.
    Like many other commenters, EPI has confused the occupations 
specifically covered by proposed section 541.301(e). Based upon its 
misperception that the Department had changed the regulatory standard, 
the EPI report stated that under the proposed rule, ``no minimum level 
even of on-the-job training will be required'' for the professional 
exemption. In fact, the proposed and final rules clearly state that 
professional occupations do not include those whose duties may be 
performed with general knowledge acquired by an academic degree in any 
field or with knowledge acquired through an apprenticeship or from 
training in routine mental, manual, mechanical, or physical processes.
    Similarly, the EPI report claims that licensed practical nurses 
(LPNs) and an additional 40 percent of other technologists and 
technicians in the health care field will become newly exempt as 
learned professionals. In fact, there are no such changes regarding 
nurses and others in the health care field. The Department's current 
regulation, at section 541.301(e)(1), has long recognized that 
registered nurses perform exempt duties (and whether they are, in fact, 
exempt turns on whether they are paid on a salary basis). The proposed 
and final regulatory exemptions are similarly limited to registered 
nurses, not LPNs. Moreover, the final rule specifically states that 
``licensed practical nurses and other similar health care employees * * 
* generally do not qualify as exempt learned professionals because 
possession of a specialized advanced academic degree is not a standard 
prerequisite for entry into such occupations.'' The current regulation 
also recognizes that certified medical technologists would satisfy the 
duties test if they complete ``3 academic years of pre-professional 
study in an accredited college or university plus a fourth year of 
professional course work in a school of medical technology approved by 
the Council of Medical Education of the American Medical Association.'' 
This exact language appeared in the proposed rule and is in the final 
rule. Thus, EPI's claim that 40 percent of health technologists will 
lose the right to overtime pay because they would be considered learned 
professionals simply is incorrect.
    EPI's claim that ``the great majority of dental hygienists will be 
exempt professionals'' also is similarly wrong. The proposed and final 
rules provide that dental hygienists would qualify for exemption only 
if they have successfully completed four years of pre-professional and 
professional study in an accredited college or university approved by 
the Commission on Accreditation of Dental and Dental Auxiliary 
Educational Programs of the American Dental Association. The regulation 
simply restates what has long been in the Wage and Hour Division's 
Field Operations Handbook and its opinion letters (e.g., 1975 WL 40986, 
WHD Opinion Letter, WH-363, November 10, 1975) regarding dental 
hygienists, and thus there is no change from current law.
    Section 541.301(f) of the final rule also notes that accrediting 
and certifying organizations may be created in the future. Such 
organizations may develop similar specialized curriculums and 
certification programs which, if a standard requirement for a 
particular occupation, may indicate that the occupation has acquired 
the characteristics of a learned profession.
    EPI's report also is similarly flawed regarding the administrative 
exemption, which it claimed ``is vastly expanded by * * * eliminating 
the requirement that the employee's primary duty must be staff work 
rather than production work.'' In fact, the proposal expressly stated 
that it would ``reduce but not eliminate the emphasis on the so-called 
production versus staff dichotomy in distinguishing between exempt and 
non-exempt workers.'' Thus, the EPI's report simply misstates the 
impact of the proposal in this area. Moreover, the final rule retains 
the current regulatory requirement that an exempt employee's primary 
duty must be work directly related to the management or general 
business operations of the employer or the employer's customers, and 
includes a provision found only in the interpretive portion of the 
current rule (section 541.205(a)) clarifying that this phrase refers to 
activities relating to the running or servicing of a business as 
distinguished from working on a manufacturing production line or 
selling a product in a retail or service establishment.
    In addition to the workers that EPI estimated would lose the right 
to overtime protection under the proposed standard duties tests, EPI 
also estimated that millions of workers would lose their right to 
overtime protection as the result of the proposed duties tests for 
highly compensated employees: ``In FLSA-covered industries and 
occupations, there were 8.3 million white-collar employees who earned 
at least $65,000 in 2000. Approximately 7.4 million were paid a salary, 
and about 843,000 were paid hourly. Like the Department of Labor, we 
assume that hourly workers who would be exempt under the new rules if 
they were paid a salary will be converted to a salary basis by their 
employers and will therefore be exempt * * * We also assume that every 
employee paid $65,000 or more will be able to meet at least one prong 
of the many duties tests. There is no minimum educational attainment or 
job experience to qualify for this exemption.''

[[Page 22212]]

    The Department determined that EPI's estimate of 8.3 million is 
incorrect. First, this inflated figure includes a significant number of 
workers who are already exempt under the current short test, which 
double-counts millions of workers. More importantly, EPI erroneously 
described the impact of the highly compensated test, stating it would 
``deny overtime pay to white-collar employees who earn $65,000 or more 
a year, even if they do not meet the definition of executive, 
administrative or professional employees.'' In fact, the proposal would 
have exempted employees only if they earned at least $65,000 and 
performed ``office or non-manual work'' and performed ``one or more of 
the exempt duties and responsibilities of an executive, administrative, 
or professional employee.'' EPI similarly erred when it claimed that, 
``every employee paid $65,000 or more will be able to meet at least one 
prong of the many duties tests.'' This claim ignored the fact that only 
employees performing office or non-manual work could meet the test, 
thus ensuring that highly paid blue-collar workers such as plumbers, 
electricians, steelworkers, autoworkers and longshoremen would never 
qualify for exemption. Further, the highly compensated test in the 
final rule has been increased to $100,000 or more per year.
    These errors by EPI and other commenters are a good example of why 
the current regulation needs to be updated and clarified. If the group 
of ``experts in employment law and in the application of the FLSA 
exemptions'' that was consulted by EPI made these errors, it is 
probably similarly difficult for most small businesses to accurately 
understand their overtime obligations under the current rule.
    The Department also concluded the EPI analysis is flawed because it 
erroneously assumes that employers completely control the terms of 
employment and can at their sole discretion and without consequence 
convert millions of workers to exempt status to avoid paying overtime. 
In fact, the economic laws of supply and demand usually dictate the 
terms of employment; therefore, if employers offer too little 
compensation for the hours of work they demand they will not be able to 
attract a sufficient number of qualified workers to meet their needs. 
If employers could completely dictate the terms of employment, in the 
absence of a state or local ordinance, hourly workers covered by the 
FLSA would only receive the federally-mandated minimum wage. Similarly, 
salaried workers would be paid no more than $250 per week, the minimum 
required to meet the current short duties test. These workers would 
then be required by their employers to work extremely long hours with 
no overtime. Since this is clearly not the situation in today's labor 
market, it is a mistake to assume that employers are in complete 
control of the terms of employment.
    Consider the example of registered nurses. The Department received 
many comments alleging the proposal would cause registered nurses to 
lose overtime. For example, the American Nurses Association stated, 
``the proposed income test for white-collar employees, who are paid 
$65,000 or more annually, will exclude some of the most experienced 
registered nurses from overtime protections and will undermine efforts 
to retain these valuable members in the nursing workforce.'' The 
Massachusetts Nurses Association stated, ``according to a recent 
national survey conducted by Advance For Nurses (a nursing 
publication), 32 percent of all nurses are salaried, which, given the 
long-established status of RNs as `professionals' under the FLSA, means 
that 32 percent of nurses are subject to possible automatic exclusion 
from the FLSA simply based upon income if the proposed rule were 
adopted * * * Thus, the proposed regulation would likely render a great 
many rank-and-file RNs per se exempt from the FLSA.''
    These comments fail to recognize that RNs already satisfy the 
duties test for exemption under the current regulations, and have since 
1971. Section 541.301(e)(1) of the current rule specifically states 
``Registered nurses have traditionally been recognized as professional 
employees by the Division in the enforcement of the act * * * [N]urses 
who are registered by the appropriate State examining board will 
continue to be recognized as having met the requirement of 541.3(a)(1) 
of the regulations.'' Given that most (94.1 percent) registered nurses 
have weekly earnings greater than $250, almost all registered nurses 
could be classified as exempt under current regulations if they were 
paid on a salary basis. Nevertheless, 75.5 percent of RNs continue to 
be paid by the hour and are eligible for overtime pay, strongly 
indicating there are other labor market factors involved in determining 
how RNs are paid.
    Just as many RNs continue to be paid overtime despite the fact the 
current regulations classify them as performing exempt professional 
duties, the Department believes the same will happen for other 
occupations under the duties tests for highly compensated employees. 
There are many more factors involved in employee compensation beyond 
the FLSA requirements and an employer's desire to minimize overtime 
costs. The nature of the work (particularly peak work loads in relation 
to average work loads), the supply of qualified workers, the risk 
tolerance of both the employer and the employee, and tradition/culture 
are just some of the factors involved that influence whether or not a 
particular job is paid on a salaried or hourly basis.
    A review of the literature on pay policies posted by Human Resource 
(HR) professionals on publicly accessible Internet sites with workforce 
and salary themes (e.g., Salary.com) also indicates the ability of 
employers to dictate the terms and conditions of employment is limited 
by a variety of labor market conditions. The pertinent market 
conditions include: Competition among employers, scarcity of skilled 
workers, accessibility of information, and worker mobility.
    The effect of competition for skilled workers by firms operating in 
local or regional labor markets is clearly explained in the HR 
literature, ``Just as organizations compete to sell their products and 
services, they also compete with one another for talented employees.'' 
(Lena M. Bottos and Christopher J. Fusco, SPHR 2002, Competitive Pay 
Policy, Salary.com, Inc.) Firms expend time and resources designing 
compensation plans that attract and retain skilled workers, without 
exhausting their limited financial resources. Under those conditions, 
exploiting workers by imposing unsatisfactory working conditions, such 
as excessive unpaid overtime, detracts from such firms' overall 
competitive strategies. It also exposes them to increases in labor 
turnover as displeased workers seek and find new jobs with competing 
employers.
    Therefore, the Department concludes that any analysis or comment 
that explicitly or implicitly assumes that employers completely control 
all the terms of employment and can heedlessly convert millions of 
workers from nonexempt to exempt status to avoid paying overtime is 
inconsistent with prevailing economic theory (particularly regarding 
high-wage labor markets) and empirical analysis. For this reason, as 
well as the many mistakes and incorrect assumptions explained above, 
the Department finds the alternative impact analysis conducted by EPI 
and submitted by the AFL-CIO to the record to be unpersuasive.

[[Page 22213]]

4.3 Estimated Number of Workers Converted to Nonexempt Status as a 
Result of Raising the Salary Level
    The Department estimates that the final rule will strengthen 
overtime protection for millions of workers. Raising the salary level 
test to $455 will:
     Strengthen overtime protection for an additional 
6.7 million salaried workers earning $155 or more but less than $455 
per week regardless of their duties or exempt status. This includes 1.3 
million exempt white-collar salaried workers who will gain overtime 
protection and 5.4 million nonexempt salaried workers whose overtime 
protection will be strengthened by the higher bright-line salary level 
test compared to a combination of the salary basis test and the 
confusing long and short duties tests in the current regulations.
     Another 3.4 million white-collar employees who 
are paid by the hour (and earn $155 or more but less than $455 per 
week) but work in occupations with a high probability of being exempt 
also will have their overtime protection strengthened. Under the 
current regulations these workers are at some risk of being 
misclassified and denied overtime. Under the higher salary level test 
in the final rule, they will be guaranteed overtime regardless of their 
duties or how they are paid.
     These 10.1 million workers are predominantly 
married women with less than a college education.
    The estimated 1.3 million currently exempt salaried workers earning 
at least $155 but less than $455 per week for all white-collar 
occupations is the Department's best estimate of the number of workers 
who are likely to gain compensation under the final rule. A detailed 
breakdown of the estimates is presented in Table A-4 of Appendix A. The 
occupations gaining most from raising the salary level are 203,000 
managers and administrators not elsewhere classified, 143,000 
supervisors and proprietors of sales occupations, 52,000 accountants 
and auditors, 49,000 registered nurses, and 48,000 teachers not 
elsewhere classified.
    When developing this estimate, the Department did not focus 
exclusively on the number of workers reporting overtime (41 or more 
hours worked). The Department assumed that all of the estimated 1.3 
million exempt salaried workers earning at least $155 but less than 
$455 per week are likely to work some overtime during the year for two 
reasons: First, the CPS Outgoing Rotation Group dataset likely 
underestimated the number of employees who work some overtime during 
the year; and second, employers have an economic disincentive to exempt 
workers that never work overtime.
    Moreover, because the CPS Outgoing Rotation Group dataset is based 
on only twelve one-week reference periods, it provides a significantly 
lower estimate of the number of employees who actually worked overtime 
at some point during the year than a survey based upon a full-year 
reference period such as the CPS Supplement. For example, the Bureau of 
Labor Statistics notes that because the Annual Social and Economic 
Supplement to the CPS has a ``reference period [that] is a full year, 
the number of persons with some employment or unemployment greatly 
exceeds the average levels for any given month, which are based on a 1-
week reference period, and the corresponding annual average of the 
monthly estimates.'' (BLS, Work Experience of the Population in 2002, 
Press Release.) The Department has determined that the same is likely 
to be true for the number of workers who work overtime.
    The Department believes that including all 1.3 million workers is 
reasonable given the exempt status of these workers. Conferring exempt 
status on an employee has both costs and benefits. The cost is that 
these workers may work less than 40 hours per week without using leave, 
and under the salary basis test employers cannot adjust employee pay 
for working less than 40 hours. In fact, the CPS data states that about 
23 percent of likely exempt workers worked less than 35 hours per week 
during the reporting period. In this situation, employers have to pay 
for hours that are not worked. This cost must be offset by the benefit 
of flexibility. Both employers and employees may prefer a salary basis 
for payment in order to smooth out cash flows; however, that preference 
depends on the employer having a need for flexibility in the number of 
hours the employee works, and the employee accepting that their pay 
will not be tightly tied to hours worked. In other words, employers 
will have a need for overtime and salaried employees would be willing 
to work overtime. Therefore, employers have an economic disincentive to 
exempt workers that never work overtime, and the Department considers 
an exemption a strong signal that the worker is likely to work some 
overtime during the year.
    Furthermore, the Department considers the estimated 1.3 million 
workers gaining compensation to be a lower bound estimate of the 
workers who will benefit from raising the salary level to $455 per 
week. Specifically, the following workers will also benefit:
     An estimated 2.6 million nonexempt salaried 
workers earning $155 or more but less than $455 per week in the white 
collar occupations will gain some overtime protection (in the form of a 
reduced probability of being misclassified) from the $455 bright line 
salary level test compared to the current combination of long and short 
duties tests.
     Up to 14.0 million hourly paid workers earning 
$155 or more but less than $455 per week in the white-collar 
occupations will also benefit from the $455 bright line salary level 
test. Under the current regulations these workers are at some risk of 
being misclassified and denied overtime. Under the higher salary level 
test in the final rule, they will be guaranteed overtime regardless of 
their duties or how they are paid. This estimate includes the 3.4 
million white-collar employees noted above who are paid by the hour but 
work in occupations with a high probability of being exempt.
     Raising the salary level test to $455 per week 
will strengthen overtime protection for 2.8 million salaried workers in 
blue-collar occupations, because their protection, which is based on 
the duties tests under the current regulation, will be automatic under 
the new rules. The Department concluded that most of these workers are 
nonexempt under the current regulation, however, making their nonexempt 
status certain will unambiguously increase their overtime protection.
4.4 Estimated Number of Workers Changing Exempt Status as a Result of 
Updating the Duties Tests
    Given the comparability of the standard tests in the final rule and 
the current short tests (see Chapter 2), the Department has determined 
the final rule is as protective as the current regulation for the 57.0 
million workers who earn between $23,660 and $100,000 per year. The 
differences in the number of workers who could change exempt status 
under the standard duties tests compared to the current regulation are 
too small to estimate quantitatively. The very few, if any, workers 
whose exempt status might possibly change as a result of updating the 
administrative and professional duties tests are likely to be offset by 
workers gaining overtime protection as a result of the tightened 
executive test.
    Clearly, the final standard duties test for the executive exemption 
is more protective than the current regulation with the additional 
requirement from

[[Page 22214]]

the current long test. The numerous significant changes the Department 
made in the final rule to return the administrative duties test to the 
structure of the current rule, as well as the retention of terms that 
are used in the current rule that have been the subject of numerous 
clarifying court decisions and opinion letters, have made the standard 
duties test for administrative employees in the final rule as 
protective as the current short test. Further, the significant changes 
the Department made in the final standard duties test for the learned 
professional exemption to track the current rule's primary duty test, 
to restructure the reference to acquiring advanced knowledge through 
other means so that the final rule is consistent with the current rule, 
to add language from the current long test that defines work requiring 
advanced knowledge as ``work that is predominantly intellectual in 
character,'' and to define work requiring advanced knowledge as 
including work requiring the consistent exercise of discretion and 
judgment have made the learned professional exemption in the final rule 
at least as protective as the current rule. It should also be noted 
that both the current and final rule recognize that the areas in which 
the professional exemption may be available are expanding as knowledge 
is developed, academic training is broadened and specialized degrees 
are offered in new and diverse fields.
    Before reaching this determination, the Department convened a group 
of WHD and DOL employees with a combined total of more than 160 years 
of WHD experience. The group was asked to quantitatively compare the 
duties tests in the current and final standards with respect to how the 
updated final rule could impact the probability of exemption. The group 
concluded that, given the minor and editorial updates to the duties 
tests in the final rule, the CPS data limitations, and the broad 
probability ranges previously developed (see Table 3-2), the 
differences in the exemption probabilities under the current and final 
rule would be too small to estimate.
    As the GAO previously noted, basing the estimates on the CPS and 
the 1998 judgments of the WHD staff imposes some limitations on the 
analysis: ``There are two major limitations on the use of CPS data. 
First, the CPS occupational classifications do not distinguish between 
supervisory and nonsupervisory employees, which is important for the 
long and short duties tests under the Fair Labor Standards Act (FLSA). 
Therefore, one job title, `managers and administrators,' could include 
the President of General Motors, but it may also include an office 
assistant. Second, CPS respondents self-identify their duties and some 
may tend to exaggerate them. This may result in overestimates of the 
number of management employees and, consequently, may overestimate the 
number of exempt employees.'' (GAO/HEHS-99-164, pg. 42)
4.5 Estimated Number of Salaried Workers Converted to Exempt Status as 
a Result of the Highly Compensated Test
    Although the test in the final rule for highly compensated 
employees who earn $100,000 or more per year is clearly more protective 
than a simple salary level test, it is less stringent than both the 
current short duties tests and the standard duties tests in the final 
rule. The Department estimates that under the highly compensated test:
     About 107,000 nonexempt white-collar workers who 
earn $100,000 or more per year could be converted to exempt salaried 
status as a result of the new highly compensated test. This includes 
60,000 salaried and 47,000 paid hourly workers.
     No blue-collar workers will be affected because 
the test only applies to employees performing office or non-manual 
work. Carpenters, electricians, mechanics, plumbers, iron workers, 
craftsmen, operating engineers, longshoremen, construction workers, 
laborers, and other employees who perform manual work are not exempt 
under the test no matter how highly paid they might be.
     No police officers, fire fighters, paramedics, 
emergency medical technicians (EMTs), and other first responders will 
be affected by the highly compensated test.
     The vast majority of salaried white-collar 
workers who earn $100,000 or more per year, 2.0 million of the 2.3 
million, or 87.0 percent, are already exempt under the current short 
test and will not be affected by the highly compensated test.
    The methodology used to estimate the number of salaried workers 
that could be classified as exempt under the duties tests for highly 
compensated employees is similar to the methodology used to estimate 
the number of exempt workers under the current short duties tests. The 
primary distinction is that a higher set of probabilities was estimated 
for each white-collar CPS occupational classification reflecting the 
more limited duties tests for highly compensated workers.
    Since the exemption for highly compensated workers is a new 
provision, the probabilities of exemption for the four classifications 
could not be estimated on the basis of historical experience, as was 
done for the current duties tests in 1998 by the WHD staff (see Chapter 
3). Therefore, the Department used a comparative approach whereby the 
probabilities developed by the WHD staff were modified based upon an 
analysis of the provisions of the highly compensated test in the final 
rule relative to the short duties tests in the current rule. The 
Department determined that this comparative approach should be used for 
the highly compensated test because it is substantially different from 
the current short duties test, whereas it should not be used for the 
standard duties tests because they are substantially similar to the 
current short duties tests.
    In utilizing this approach, the Department rejected the worst-case 
assumption used by some commenters, that under the proposed highly 
compensated tests all workers earning more than the highly compensated 
salary level ($65,000 per year in the proposal) could be made exempt. 
Rather, the Department determined that some workers earning more than 
$100,000 per year would remain nonexempt because the final highly 
compensated test requires that exempt work be office or nonmanual and 
that the employee ``customarily and regularly'' perform one or more of 
the exempt duties or responsibilities of an executive, administrative, 
or professional employee, and that the employee be paid at least $455 
per week on a salary basis. Other workers would remain nonexempt 
because most employers will adjust their compensation policies in a way 
that maintains the stability of their workforce, pay structure, and 
output levels while preserving their investment in human capital and 
minimizing their turnover costs.
    Although the highly compensated test in the final rule is clearly 
more stringent than either a simple salary test or the highly 
compensated test in the proposed rule, it is also clear that the highly 
compensated test in the final rule is less stringent than both the 
current short tests and the standard duties tests in the final rule. To 
account for this, the Department determined that both the lower and 
upper bound probability estimates for the four probability categories 
should be higher than those used in Chapter 3 to estimate the number of 
currently exempt workers (see Table 3-2).
     For the ``Low or No Probability of Exemption'' 
classification, the Department raised the lower bound

[[Page 22215]]

probability of exemption from 9.9 percent estimated using the 
methodology presented in Chapter 3 for earnings of $1,923 per week 
(i.e., $100,000 per year) to 15.0 percent, and the upper bound 
probability of exemption by approximately the same 5 percentage points, 
from 10 percent to 15 percent (see Table 3-2). This represents an 
increase of at least 50 percent for both the lower and upper bound 
probabilities.
    These increases are sizable for occupations that have little or no 
probability of being exempt under the current short tests, but were 
included because the WHD staff in 1998 considered it conceivable that 
some exempt supervisors might be in the group.
     For the ``Probably Not Exempt'' classification 
both the lower and upper bound probabilities were raised by 10 
percentage points. This raised the lower bound probability by 
approximately 21 percent from the 48.4 percent calculated at $1,923 per 
week (i.e., $100,000 per year) to 58.4 percent, and increased the upper 
bound probability by 20 percent from the 50 percent in Table 3-2 to 60 
percent.
    These increases are sizable for occupations that have a relatively 
low probability of being exempt under the current short tests.
     For the ``Probably Exempt'' classification the 
lower bound probability was increased from 88 percent (at $100,000 per 
year) to 94 percent and the upper bound probability was raised from 90 
percent to 96 percent. This raised both probabilities by 6 percentage 
points and effectively reduced the probability of being nonexempt by 50 
percent for workers in this category who earn more than $100,000 per 
year.
     For the ``High Probability of Exemption'' 
category both the lower and upper bound were set at the maximum value 
of 100 percent.
    The lower bound probability for both the ``Probably Exempt'' and 
the ``High Probability of Exemption'' categories were already extremely 
high at earnings of $100,000 per year using the methodology in Chapter 
3 (88 percent and 99 percent, respectively). This is consistent with 
the belief of the WHD staff that most workers in these categories 
earning at least $100,000 are probably already exempt.
    The estimated probabilities of Part 541--exemption status under the 
duties tests for highly compensated employees are presented in Table 4-
1 for each coverage classification.

   Table 4-1.--Part 541--Exemption Probability Categories for Salaried
             Workers Under the Final Highly Compensated Test
------------------------------------------------------------------------
                                                Lower bound  Upper bound
                   Category                       estimate     estimate
                                                 (percent)    (percent)
------------------------------------------------------------------------
1. High Probability of Exemption..............          100          100
2. Probably Exempt............................           94           96
3. Probably Not Exempt........................         58.4           60
4. Low or No Probability of Exemption.........           15          15
------------------------------------------------------------------------
 Source: U.S. Department of Labor, based upon estimates in Table 3-2.

    The specific probabilities of exemption for the annual salaries 
between the $100,000 salary level for the highly compensated test and 
the top coded salary of $150,000 per year (i.e., $2,885 per week) were 
estimated using linear interpolation according to the following 
equation:
[GRAPHIC] [TIFF OMITTED] TR23AP04.011

Where:

Prob--Exempt--HC = Probability of the individual in occupational 
classification OCC being exempt under the duties tests for highly 
compensated employees
PTERNWA = CPS weekly earnings variable
LB* = Lower bound probability from Table 4-1
UB* = Upper bound probability from Table 4-1

    Linear interpolation was used rather than a nonlinear model because 
the income distributions for all four categories are relatively linear 
once weekly earnings reach $1,923 (i.e., the $100,000 annual earnings 
level). Figure 4-1 presents a graphical illustration of the probable 
exemption status for the ``Probably Not Exempt'' classification. 
Similar illustrations could have been developed for the other three 
classifications but were not included in the final RIA.
    As Figure 4-1 illustrates, the probability of being exempt is 
higher under the highly compensated test than under the standard test. 
To estimate the number of additional employees that become exempt as a 
result of the new highly compensated test, the Department simply 
subtracted the estimated number of workers who would be exempt under 
the standard tests from the total number who would be exempt under the 
highly compensated tests.

[[Page 22216]]

[GRAPHIC] [TIFF OMITTED] TR23AP04.012

    The Department excluded salaried computer system analysts and 
scientists (in occupation 64) and salaried computer programmers (in 
occupation 229) because they could have already been made exempt under 
section 13(a)(17) of the Act. In addition, salaried registered nurses 
(in occupation 95) and salaried pharmacists (occupation 96) were 
excluded because they could have already been made exempt under both 
the current short tests and the standard duties tests in the final 
rule. Thus, the Department estimates approximately 60,000 additional 
salaried workers earning $100,000 or more per year could become exempt 
under the highly compensated test as compared to the current short test 
or the standard duties tests in the final rule. A detailed breakdown of 
the additional number of workers who could be made exempt under the 
highly compensated tests is presented in Table A-5 of Appendix A.
4.6 Estimated Number of Hourly Paid Workers Converted to Exempt Status 
as a Result of the Highly Compensated Test
    The procedure used to estimate the number of highly compensated 
hourly employees that could be converted to exempt salaried status 
under the final rule is different from that used in Section 4.5 
because, under both current regulations and the final rule, virtually 
all hourly workers are considered nonexempt (except those not required 
to be paid on a salary basis, such as doctors and lawyers). Thus, 
before any hourly worker could be made exempt under the highly 
compensated tests, employers would first have to convert them to a 
salaried basis and pay them at least $455 per week plus commissions and 
bonuses that brings their total compensation to $100,000 or more per 
year. To estimate the number of hourly workers that could be converted, 
the Department utilized a number of reasonable assumptions.
    First, the Department assumed that over the 29 years since the last 
revision to Part 541 the market has established an optimal distribution 
between the number of salaried and hourly workers who earn $100,000 or 
more per year. Although there are many more factors involved in 
employee compensation beyond the FLSA requirements as was noted above 
in Section 4.2, it appears that both employers and employees prefer a 
salary basis for earnings at this level, given the greater than 7 to 1 
ratio of salaried workers (2,321,000) to hourly workers (345,000) 
subject to the Part 541 salary tests.
    The nature of the work, the supply of qualified workers, the risk 
tolerance of both the employer and the employee, and tradition/culture 
are just some of the factors involved that influence whether or not a 
particular job is paid on a salaried or hourly basis. Therefore, the 
Department has determined that just as 63.4 percent of the RNs and 76.1 
percent of the Pharmacists who earn $100,000 or more per year continue 
to be paid by the hour (and eligible for overtime) despite the fact the 
current regulations classify them as performing exempt professional 
duties, the same will happen for other white-collar occupations under 
the highly compensated test and that many paid hourly workers will 
remain paid by the hour. The Department then assumed:
     For both the ``Low or No Probability of 
Exemption'' and the ``Probably Not Exempt'' categories, that highly 
compensated white-collar hourly workers would have the same marginal 
probability of being converted to exempt salaried status as the 
currently nonexempt highly compensated salaried white-collar workers. 
Thus, highly compensated white-collar hourly workers in these two 
categories were assigned probabilities of exemption of 5 percent and 10 
percent, respectively.
    These probabilities are consistent with the Department's first 
assumption that the market has established an optimal distribution 
between the number of salaried and hourly workers who earn $100,000 or 
more per year and that only a marginal change is likely to occur in the 
exempt status of paid hourly workers who earn $100,000 or more per year 
in these two categories.
    Second, the Department assumed that:
     The probability of being converted to exempt 
salaried status for highly compensated white-collar hourly workers in 
the ``Probably Exempt'' category is twice that of highly compensated 
white-collar hourly workers in the ``Probably Not Exempt'' category, or 
20 percent. Unlike the two

[[Page 22217]]

categories discussed above, the Department did not base its estimates 
on the marginal probabilities for salaried white-collar workers in the 
``Probably Exempt'' category because, as discussed in Section 4.5, the 
upper bound probability for such workers in that category was limited 
by its close proximity to 100 percent.
     The Department also assumed that the probability 
of being converted to exempt salaried status for highly compensated 
white-collar hourly workers in the ``High Probability of Exemption'' 
category is twice that of highly compensated white-collar hourly 
workers in the ``Probably Exempt'' category, or 40 percent. The 
Department once again did not base its estimate on the marginal 
probabilities for salaried white-collar workers in the ``High 
Probability of Exemption'' category because, as discussed in Section 
4.5, the upper bound probability for such workers in that category was 
limited by its close proximity to 100 percent.
    These estimates are presented in Table 4-2.

 Table 4-2.--Estimated Probability of Exemption for White-Collar Hourly
               Workers Earning at Least $100,000 per Year
------------------------------------------------------------------------
                                                              Estimated
                          Category                           probability
                                                              (percent)
------------------------------------------------------------------------
1. High Probability of Exemption...........................           40
2. Probably Exempt.........................................           20
3. Probably Not Exempt.....................................           10
4. Low or No Probability of Exemption......................           5
------------------------------------------------------------------------
Source: U.S. Department of Labor.

    Further, the Department rejected the worst-case assumption that 
under the highly compensated test all paid hourly workers earning 
$100,000 or more per year could be made exempt. Rather, the Department 
determined that some paid hourly workers earning more than $100,000 per 
year would remain nonexempt because the final highly compensated test 
requires that exempt work be office or nonmanual and that the employee 
``customarily and regularly'' perform one or more of exempt duties. 
Other paid hourly workers would remain nonexempt because most employers 
will adjust their compensation policies in a way that maintains the 
stability of their workforce, pay structure, and output levels while 
preserving their investment in human capital and minimizing their 
turnover costs.
    The next step was to estimate the number of hourly white-collar 
workers earning $100,000 or more per year who would meet the duties 
tests for highly compensated employees in the final rule. The 
Department excluded approximately 29,000 computer professionals (in 
occupations 64 and 229) because these computer professionals earning 
$100,000 or more per year would currently be exempt under section 
13(a)(17) of the Act. Approximately 22,000 registered nurses 
(occupation 95) and 10,000 pharmacists (occupation 96) were also 
excluded because current section 541.301(e)(1) has long recognized that 
registered nurses and pharmacists perform exempt duties (and whether 
they are, in fact, exempt turns on whether they are paid on a salary 
basis). If it were advantageous for employers to convert any of these 
workers to exempt status, they could and presumably would have been 
converted under the current rule. After excluding these two groups, 
there are approximately 182,000 hourly white-collar workers earning at 
least $1,923 per week in the 251 white-collar occupations who 
potentially could be impacted by the highly compensated tests. Workers 
in occupations not subject to the salary level test (i.e., teachers in 
educational establishments, doctors and lawyers) were previously 
excluded from the analysis whether they are paid on a salary or hourly 
basis.
    The number of hourly workers in each white-collar occupation 
earning at least $1,923 per week was multiplied by the associated 
probability in Table 4-2 and summed across all occupations to arrive at 
the Department's estimate that about 47,000 hourly workers could be 
converted to exempt salaried status as the result of the highly 
compensated test (Note: this procedure is equivalent to using the same 
linear model as in Section 4.5 with all of the lines being horizontal). 
Managers and administrators not elsewhere classified (occupation 22) 
account for approximately 31 percent of all hourly workers that could 
potentially be converted to exempt salaried status. No other occupation 
accounts for more than five percent of the total. Table A-6 in Appendix 
A presents the detailed breakdown by occupation.
4.7 Estimated Total Number of Workers Converted to Exempt Status as a 
Result of the Highly Compensated Tests
    The Department estimates that 107,000 workers could be converted to 
exempt status as a result of the new highly compensated tests. The 
major reason for the decrease in this estimate compared to the PRIA is 
the salary level for the test being raised to $100,000 and there are 
far fewer workers earning this higher salary. The Department estimates 
there are 2.3 million salaried workers earning at least $100,000 in 
white-collar occupations subject to the salary test, compared to 7.0 
million earning at least $65,000. In addition, after excluding the 
computer programmers, RNs and pharmacists, because they could already 
be made exempt if paid on a salaried basis under the current rule, 2.0 
million of the 2.1 million remaining highly compensated white-collar 
salaried workers (95.2 percent) are estimated to be already exempt 
under the current short duties tests. In addition, there are only 
182,000 hourly workers that could be potentially impacted by the highly 
compensated test at the $100,000 level. Moreover, the final rule's 
highly compensated test applies only if the employee performs office or 
non-manual work.
    Thus, for example, police officers, firefighters, paramedics, and 
other first responders could not be exempt under the highly compensated 
test although the Department estimates that 1,300 police commissioners, 
police and fire chiefs, and police captains who earn $100,000 or more 
per year could be converted to exempt status. (However, 940 of these 
1,300 workers are performing exempt duties but are currently nonexempt 
because they report that they are paid by the hour, rather than on a 
salary basis. Therefore, the Department believes that many of them are 
unlikely to be converted because of the final rule.) Finally, by 
increasing the earnings level for the highly compensated test and 
adding the requirement that the exempt duties must be performed 
customarily and regularly, the Department increased the probability 
that the salaried workers at that level would already be exempt under 
the current rule.
    The Department notes that the CPS earnings data includes wages, 
commissions and tips, but does not include some bonuses. According to 
the Census Bureau Web site, the usual weekly earnings ``data represent 
earnings before taxes and other deductions, and include any overtime 
pay, commissions, or tips usually received (at the main job in the case 
of multiple jobholders). Earnings reported on a basis other than weekly 
(e.g., annual, monthly, hourly) are converted to weekly. The term 
`usual' is as perceived by the respondent. If the respondent asks for a 
definition of usual, interviewers are instructed to define the term as 
more than half the weeks worked during the past 4 or 5 months.'' 
(http://www.bls.census.gov/cps/bconcept.htm)

[[Page 22218]]

    The Department concludes that infrequent bonuses (e.g., Christmas 
bonuses) are probably not reported as usual earnings, while regular 
non-discretionary bonuses (such as those described in section 
541.601(b) of the final rule) are likely to be included. Given that 
some workers surveyed for the CPS may not have reported their non-
discretionary bonuses, the Department may have slightly underestimated 
the number of workers potentially impacted by the highly compensated 
test. However, the Department believes this is balanced by the fact 
that the analysis was conducted using weekly earnings rather than 
annual earnings as is required by the highly compensated test, which 
may result in an overestimate of the number of workers earning $100,000 
or more per year (weekly earnings were used because the CPS dataset 
does not contain a variable for annual salary). Since there are many 
more white-collar hourly workers earning less than $100,000 per year 
than earning $100,000 or more per year, it is likely that basing the 
estimate on a single week of data will likely result in the inclusion 
of many more workers with an abnormally high earnings week (e.g., due 
to a large amount of overtime or an unusually high commission) in the 
estimate of workers earning $100,000 or more per year than the number 
of workers excluded from the total of workers earning $100,000 or more 
per year due to one abnormally low earnings week (e.g., due to the lack 
of overtime or an unusually low commission).
    Finally, as discussed above in Section 4.6, the estimate of 47,000 
hourly workers who could be converted to exempt salaried status is 
likely an overestimation due to the assumptions made about the ease of 
converting these workers to a salary basis.
4.8 Estimated Total Impact of the Part 541 Revisions
    As indicated in Table 4-3, the Department estimates 1.3 million 
salaried workers earning less than $455 per week who are currently 
exempt under the long and short duties tests could benefit from higher 
earnings in the form of either paid overtime or higher base salaries. 
In addition, an estimated 47,000 hourly workers and 60,000 salaried 
workers with annual earnings of $100,000 or more could be converted to 
exempt status as a result of the new highly compensated test.

Table 4-3.--Estimated Impact of the Final Rule on the Overtime Status of
                          White-collar Workers
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Exempt to Nonexempt........................................    1,298,000
Salaried Nonexempt to Exempt...............................       60,000
Hourly Nonexempt to Salaried Exempt........................      47,000
------------------------------------------------------------------------
Source: CONSAD and the U.S. Department of Labor.

Chapter 5: Economic Profiles
    In the PRIA, the Department presented estimates at the 2-digit 
standard industry code (SIC) and by state. As noted above, several 
commenters suggested more detailed breakdowns should have been 
published. For example the AFL-CIO stated, ``Generalizing to a 2-digit 
code loses important distinctions within industry sector, and this 
causes a corresponding loss of precision within the study.''
    However, there are not a sufficient number of observations in the 
CPS dataset to provide reliable estimates even at the 2-digit level of 
detail, much less the 4-digit level suggested by the AFL-CIO. For 
example as discussed above, the methodology used in Chapter 3 was 
conducted on a national level and was intended to produce national 
estimates of the number of currently exempt workers. To produce 
industry specific or regional estimates, the income distributions would 
have had to have been developed at more disaggregated levels in order 
to account for the industry or regional wage structure. While 
sufficient to produce national estimates, the Department determined 
that the CPS dataset was too small to develop income distributions for 
each of the categories at this more disaggregated level.
    Similarly, the costs presented below in Chapter 6 were estimated at 
a national level and then allocated to specific major industry groups 
on the basis of employment or number of employers. Presenting the data 
at a more disaggregated level would simply indicate a degree of 
precision that does not exist.
    The Department decided to present nine industry sectors and the 
government sector because these estimates are based on at least 998 
observations, and an average observation number of 18,230 per sector. 
The Department felt that these sample sizes were sufficient to 
accurately represent the sectors. Further disaggregation would have 
required the Department to extrapolate from smaller samples. For 
example, a subset among all 50 states and industry categories would 
have implied a dependence on a minimum sample size of 1 observation 
(for a particular sector and state), and an average sample size of 14 
observations across all states and sectors. Extrapolating from these 
small sub-samples would be problematic, and would not offer the level 
of precision desired by the commenters.
    For this reason, the Department has developed the economic profiles 
for the nine major industry categories plus State and Local Government. 
Although compiled from more detailed levels, these profiles were 
aggregated to match the level of precision available in the coverage 
and cost estimates. The Department notes that due to these very same 
data limitations, the GAO took a similar approach in presenting 
aggregated data: ``Our work presents data for six industry groupings: 
(1) Services; (2) retail trade; (3) manufacturing; (4) finance, 
insurance, and real estate; (5) public sector; and (6) other. We 
developed these groups by combining 932 detailed CPS industry codes.'' 
(GAO/HEHS-99-164, pg. 41)
    Also, the number of employees presented in this chapter does not 
match the numbers presented in Chapter 3 because of different data 
sources and different time periods. For example, the covered employment 
numbers presented in Chapter 3 only count each individual once 
regardless of the number of jobs held. The covered employment numbers 
presented in Chapter 5 are based on the number of workers employed by 
each employer so some individuals are counted more than once.
5.1 Private Sector Profile
    The AFL-CIO commented on the PRIA that, ``CONSAD has not provided--
and, given the sheer number of the sources, probably could not 
provide--sufficient detail to allow for the reader to understand and/or 
replicate the process.'' The AFL-CIO also stated, ``the study's 
methodology is confusing, and because CONSAD does a poor job of 
explanation, it is not capable of replication. For example, CONSAD uses 
a myriad of statistical sources from several different time periods to 
come up with the data it needs to estimate the number of exempt 
employees under the proposal and the corresponding impact on 
business.'' In the following section, the Department has attempted to 
provide the detail that will allow the reader to understand and 
replicate this analysis.
    Since the FLSA and the Part 541 overtime regulations apply 
nationally, the Department obtained data on firms in the private sector 
primarily from the

[[Page 22219]]

U.S. Department of Commerce's Economic Census. The Economic Census is 
the only data source that has the scope covered by the revised 
regulations. The most recent Economic Census that is available was 
published in 2001 for the year 1997. As noted in the footnotes to the 
tables that follow, even this source had to be supplemented in some 
cases with additional data.
    First, the Department notes that it relied on only a single data 
source to produce its estimates of the number of salaried and hourly 
workers covered by the FLSA, the 2002 CPS Outgoing Rotation Group data 
set. This was also the only source used to produce the estimates of the 
number of exempt workers and the associated changes in overtime costs 
related to changes in the regulations. As noted in Chapter 3, the CPS 
data were supplemented with probabilities developed by the WHD 
enforcement staff concerning the likelihood that workers in various 
white-collar occupations would be exempt. These same assessments were 
previously used by both the GAO and the University of Tennessee. They 
were also used in an analysis by the EPI that the AFL-CIO submitted for 
the record. In order to make the estimates easier to replicate, the 
Department has added a considerable amount of additional detail in this 
preamble that was not provided in the PRIA. For example, the Exempt 
Status assessments of the WHD staff for each occupation are presented 
in Appendix A.
    Second, in order to estimate the one-time implementation costs, the 
Department had to rely on the 1997 Economic Census (supplemented by the 
1997 County Business Patterns) because some costs are based on the 
number of establishments or firms and these are the latest available 
data. Such information is not available in the 2002 CPS Outgoing 
Rotation Group dataset. After assessing the economic impact of the 
revisions, the Department relied on a number of other statistical 
sources, such as multiple years of IRS and Dun & Bradstreet (D&B) data, 
to obtain the payroll, revenue, and profit data needed to put the 
estimated payroll and implementation costs in perceptive. Moreover, as 
the AFL-CIO conceded, ``relying on several sources is not itself a 
fatal flaw.''
    Although the Department used various data sources covering 
different time periods, this could not be avoided to complete the 
required economic analysis since the primary data set used in the 
analysis, the 2002 CPS, is based on the Standard Industrial 
Classification (SIC) while most of the more recent data is based upon 
the newer North American Industry Classification System (NAICS). The 
U.S. Census Bureau cautions that ``While many of the individual SIC 
industries correspond directly to industries as defined under the NAICS 
system, most of the higher level groupings do not. Particular care 
should be taken in comparing data for retail trade, wholesale trade, 
and manufacturing, which are sector titles used in both NAICS and SIC, 
but cover somewhat different groups of industries.'' (http://
www.census.gov/epcd/ec97brdg/introbdg.htm) Given that the profit data 
from Dun & Bradstreet (D&B) were also SIC based, the Department decided 
to use data sets that were also SIC based rather than conduct a 
complicated crosswalk conversion that potentially introduces other 
errors into the analysis.
    Although the use of SIC based data required the use of data from 
several different years, the Department also determined that this was 
unlikely to significantly bias the results. The CPS Outgoing Rotation 
Group data came from 2002; the Economic Census, County Business 
Patterns, and IRS data came from 1997; and the D&B data came from 2000, 
2001 and 2002.
    The D&B data on profits match up fairly well with the payroll cost 
estimates derived from the 2002 CPS data presented in Chapter 6. The 
D&B data from 2002 were from the same year as the CPS data. The use of 
D&B data from 2000, the peak of the economic expansion, is likely to 
somewhat overstate 2002 profits, while the use of D&B from 2001, the 
year of the last recession and the 9/11 terrorist attacks, is likely to 
somewhat understate 2002 profits. So on average, the Department has 
determined that the use of D&B data from these three years is 
reasonable and provides a valid comparison with the cost estimates 
based upon the 2002 CPS data.
    However, using the 1997 Economic Census, 1997 County Business 
Patterns, and the 1997 IRS data is likely to affect the analysis 
because the economy expanded for three years after the 1997 data were 
collected. For example, civilian employment in 1997 averaged 129.6 
million, while employment in 2002 averaged 134.3 million (based upon 
the old weights). Therefore, use of the 1997 data is likely to 
understate the 2002 payroll employment.
    In Chapter 7, the Department adjusted the dollar values for the 
1997 payroll data because wages continued to increase from 1997 to 
2002. Nevertheless, the comparison of the adjusted 1997 payroll data 
with the cost estimates based upon the 2002 CPS data are likely to 
overstate the economic impacts presented in Chapter 7 because the 
denominator (based upon the 1997 employment) will be relatively smaller 
than the numerator (based upon 2002 employment).
    While acknowledging these data issues, the Department notes that 
they are unavoidable because the 1997 data is the latest available for 
the required economic analysis. Although some more recent data (e.g., 
2001 County Business Patterns and 2001 Statistics of U.S. Business) are 
available, these could not be used in this analysis because the newer 
data are based on the North American Industry Classification System 
(NAICS), while this analysis is tied to the dated Standard Industrial 
Classification (SIC) used in both the CPS and D&B data.
    Finally, some of the one-time implementation costs were based upon 
the number of establishments in the 1997 Economic Census (supplemented 
by the 1997 County Business Patterns). Although the Department was 
unable to ascertain the relation of the establishment estimates in 1997 
to those in 2002, it believes that on average the counts in 1997 are 
likely to be less than those in 2002. Therefore, the impact of some 
one-time implementation costs (i.e., those based on establishment 
counts) is likely to be somewhat understated. Again, attempting to 
update establishment counts using NAICS-based data would involve a 
complicated crosswalk conversion that potentially introduces other 
errors into the analysis. However, the sales revenue estimates are 
similarly based on 1997 data. Although the Department adjusted the 
dollar sales revenue data in Chapter 7 to account for inflation, no 
adjustments were made to account for the growth in the number of 
establishments. The Department believes these two effects will offset 
themselves to some degree when calculating the cost to revenue ratios 
in Chapter 7 and concludes this is the best approach available given 
the scope of the regulations and the limitations of the available data 
sources.
    In summary, the Department attempted wherever possible to ensure 
the compatibility of the different cost, payroll, revenue, and profit 
numbers. The Department adjusted the 1997 estimates for inflation and 
wage growth in order to allow for a valid comparison with the later 
year cost estimates. In practice, however, this adjustment made very 
little difference in the per firm percentage impacts described below; 
for example, the average decrease in impact due to adjusting the 
revenue numbers for inflation was less than one-tenth of

[[Page 22220]]

one percent. Therefore, the Department's per firm impact estimates are 
robust to these assumptions. Unfortunately, the Department is unable to 
adjust upward the number of establishments. This source of possible 
underestimation of cost, however, is more than offset since the 
Department did not quantify any of the benefits of this rule for the 
purposes of per firm impact analysis. These benefits do accrue to the 
same employers as the costs estimated in the following section.
    The resulting estimates, based on 1997 data, indicate that there 
are 6.5 million establishments with 99.8 million employees, annual 
payroll totaling $2.8 trillion, annual sales revenues of $17.9 
trillion, and annual pre-tax profits of $579.7 billion in the affected 
industry sectors (see Table 5-1). Across all industries, the services 
industry has the largest numbers of establishments, employees, and 
payroll. This is followed by retail trade for establishments and 
employees, and manufacturing for payroll. Annual sales are largest in 
wholesale trade followed by manufacturing. Annual pre-tax profits are 
largest for the finance, insurance, and real estate industry followed 
by manufacturing.
    On average, employment per establishment ranges from seven 
employees in the agricultural services, forestry, and fishing industry 
to 47 employees in manufacturing. The average annual payroll per 
establishment ranges from $71,000 in the agricultural services, 
forestry, and fishing industry to $1.6 million in manufacturing. The 
average annual sales per establishment ranges from $504,000 in the 
agricultural services, forestry, and fishing industry to $10.7 million 
in manufacturing, while the average annual pre-tax profits per 
establishment ranges from $20,000 in the agricultural services, 
forestry, and fishing industry to $1.0 million in the mining industry.

                Table 5-1.--Estimates of Establishments Covered by the FLSA and Their Associated Employment, Payrolls, Sales and Profits
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                      Sales, receipts,
                                                                    Number of         Number of      Annual payroll       value of       Pre-Tax profits
                       Industry Division                         establishments     employees \1\     ($1,000) \2\        shipments       ($1,000) \3\
                                                                                                                          ($1,000)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Agricultural Services, Forestry, and Fishing\4\...............           116,523           777,671        $8,318,830       $58,687,096        $2,357,130
Mining........................................................            25,103           531,683        21,566,696       179,763,175        25,488,881
Construction..................................................           639,478         5,702,374       176,357,238       859,877,289        28,628,686
Manufacturing.................................................           377,456        17,796,092       608,751,849     4,037,904,247        94,604,018
Transportation and Public Utilities\5\........................           331,594         6,767,563       247,245,240     1,226,952,529        76,411,219
Wholesale Trade...............................................           521,127         6,544,480       241,917,819     4,362,657,653        86,688,186
Retail Trade..................................................         1,561,195        20,145,349       268,498,043     2,459,061,733        37,467,739
Finance, Insurance, and Real Estate...........................           661,389         7,397,569       273,607,500     2,250,789,643       156,048,617
Services \6\..................................................         2,302,848        34,164,093       939,353,069     2,462,227,737        71,969,249
                                                               -------------------
      All Industries..........................................         6,536,713        99,826,874     2,785,616,284    17,897,921,102      579,663,726
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Unless otherwise noted, data are from USDOC (2001a).
Note: For SICs 07, 08, 09, and 89, the number of establishments, number of employees, and annual payroll are derived from the USDOC (1999) database.
  Sales data are derived from the D&B (2001a) database.
\1\Employment is estimated when data suppression occurs.
\2\Values may be underestimated due to data suppression in USDOC (2001a).
\3\Pre-tax profits are based on sales data and pre-tax profit rates from D&B (2002), except for SIC 09 which is from D&B (2001b), and SICs 21, 60, 63,
  and 64 which are from IRS (2000).
\4\Excludes agriculture (SICs 01 and 02).
\5\Excludes railroad transportation (SIC 40). All data for the U.S. Postal Service (SIC 43) are from USPS (1997). Also, data do not include large
  certificated passenger carriers (in SIC 45) that report to the Office of Airline Statistics, U.S. Department of Transportation.
\6\Excludes private households (SIC 88).
Sources: U.S. Department of Commerce, Bureau of the Census (USDOC, 2001a), 1997 Economic Census: Comparative Statistics, downloaded from http://
www.census.gov/epcd/ec97sic/index.htmldownload;
U.S. Department of Commerce, Bureau of the Census (USDOC (1999), 1997 County Business Patterns; Dun & Bradstreet (D&B, 2001a), National Profile of
  Businesses Database for Fiscal Year 2000;
Dun & Bradstreet (D&B, 2001b), Industry Norms and Key Business Ratios for Fiscal Year 2000/2001; Dun & Bradstreet (D&B, 2002), Industry Norms and Key
  Business Ratios for Fiscal Year 2001/2002;
U.S. Department of the Treasury, Internal Revenue Service (IRS, 2000) Corporate Tax Returns for Active Corporations for 1997; And U.S. Postal Service
  (USPS, 1997), 1997 Annual Report.

5.2 Private Sector Small Business Profile
    The Small Business Regulatory Enforcement Fairness Act (SBREFA) of 
1996 requires the Department to estimate the number of small businesses 
affected by the final rule. For the industries of interest here, the 
Small Business Administration (SBA) generally defines small businesses 
using either a criterion based on employment or a criterion based on 
annual sales. For a complete list of the SBA criteria, see the SBA Web 
site at http://www.sba.gov/size/indextableofsize.html.
    To estimate the number of, and employment in, firms covered under 
SBREFA and affected by the final rule, the Department used the data 
described above on the numbers of firms, establishments, employment, 
payroll, and annual receipts for various firm size categories (i.e., 
employment ranges). The first step in this process involved developing 
an employment-based firm size standard for each affected industry. For 
the manufacturing and the retail and wholesale trade sectors, the SBA 
firm size standard is based directly on employment. For other 
industries, the SBA most often uses annual sales to define a small 
business entity. For the industries where employment is not used, the 
standards specified by the SBA have been converted to employment-based 
firm size estimates. Specifically, employment-based firm size standards 
were estimated by first calculating an employment level, based on the 
industry average annual receipts per employee, that would be sufficient 
to produce total sales per firm that are consistent with the sales-
based firm size standard. Then, the employment-based firm size standard 
was chosen on the basis of the firm size categories defined in the 
County Business Patterns data.

[[Page 22221]]

Specifically, the chosen employment-based standard corresponds to the 
boundary between firm size categories in County Business Patterns that 
is closest to the calculated employment level, regardless of whether it 
is higher or lower than the calculated level.
    Using these employment-based firm size standards for each affected 
industry, the data have been used to estimate the percentages of all 
firms, establishments, employment, payroll, and receipts in the 
industry that correspond to the SBA firm size standard for a small 
business entity. Separate percentages have been calculated for each 
industry covered by the final rule. The percentages have then been 
used, in conjunction with the corresponding estimates in Table 5-1, to 
calculate the numbers of affected firms, establishments, employment, 
and sales, receipts, or value of shipments in each industry that are 
associated with firms covered under SBREFA.
    The resulting estimates, based on 1997 data, for establishments 
covered by SBREFA and the FLSA, indicate that there are 5.2 million 
establishments with 38.7 million employees, annual payroll totaling 
$939.7 billion, annual sales revenues of $5.7 trillion, and annual pre-
tax profits of $180.5 billion in the affected industry sectors (see 
Table 5-2). Across all industries, the services industry has the 
largest numbers of establishments, employees, and payroll. This is 
followed by retail trade for establishments, and manufacturing for 
employees and payroll. Annual sales are largest in wholesale trade 
followed by manufacturing. Annual pre-tax profits are largest for 
wholesale trade and services followed by manufacturing.
    On average, employment per establishment ranges from four employees 
in the finance, insurance, and real estate industry to 22 employees in 
manufacturing. The average annual payroll per establishment ranges from 
$43,000 in the agricultural services, forestry, and fishing industry to 
$613,000 in manufacturing. The average annual sales per establishment 
range from $145,000 in the agricultural services, forestry, and fishing 
industry to $4.7 million in wholesale trade, while the average annual 
pre-tax profits per establishment range from $5,000 in the agricultural 
services, forestry, and fishing industry to $319,000 in the mining 
industry.

   Table 5-2.--National Estimates of Establishments Covered by Both SBREFA and the FLSA, and Their Associated Employment, Payrolls, Sales and Profits
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                      Sales, receipts,
                                                                    Number of         Number of      Annual payroll       value of       Pre-tax profits
                       Industry division                         establishments     employees \1\     ($1,000) \2\        shipments       ($1,000) \3\
                                                                                                                          ($1,000)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Agricultural Services, Forestry, and Fishing \4\..............           112,753           533,953        $4,881,450       $16,352,802          $591,216
Mining........................................................            20,422           196,576         6,813,271        61,505,605         6,505,730
Construction..................................................           626,526         4,083,143       110,470,847       541,608,129        21,109,308
Manufacturing.................................................           336,378         7,438,944       206,153,159     1,051,526,216        27,723,186
Transportation and Public Utilities \5\.......................           213,230         1,651,188        42,500,111       187,741,483         6,210,156
Wholesale Trade...............................................           419,518         3,412,996       110,749,281     2,002,294,028        40,071,557
Retail Trade..................................................         1,072,889         7,321,520        85,165,909       672,361,280        17,360,512
Finance, Insurance, and Real Estate...........................           430,060         1,623,287        48,840,399       283,951,606        22,193,420
Services \6\..................................................         1,985,065        12,460,309       324,122,531       872,922,124        38,694,702
                                                               -------------------
      All Industries..........................................         5,216,843        38,721,918       939,696,957     5,690,263,273      180,459,786
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Firms covered under SBREFA are based on the Small Business Administration (SBA) firm size standard (maximum number of employees) for a small
  business entity.
Note: Unless otherwise noted, data are from USDOC (2001a).
Note: For SICs 07, 08, 09, and 89, the number of establishments, number of employees, and annual payroll are derived from the USDOC (1999) database.
  Sales data are derived from the D&B (2001a) database.
\1\ Employment is estimated when data suppression occurs.
\2\ Values may be underestimated due to data suppression in USDOC (2001a).
\3\ Pre-tax profits are based on sales data and pre-tax profit rates from D&B (2002), except for SIC 09 which is from D&B (2001b), and SICs 21, 60, 63,
  and 64 which are from IRS (2000).
\4\ Excludes agriculture (SICs 01 and 02).
\5\ Excludes railroad transportation (SIC 40). All data for the U.S. Postal Service (SIC 43) are from USPS (1997). Also, data do not include large
  Certificated passenger carriers (in SIC 45) that report to the Office of Airline Statistics, U.S. Department of Transportation.
\6\ Excludes private households (SIC 88).
Sources: U.S. Department of Commerce, Bureau of the Census (USDOC, 2001a), 1997 Economic Census: Comparative Statistics, downloaded from http://
www.census.gov/epcd/ec97sic/index.html#download;
U.S. Department of Commerce, Bureau of the Census (USDOC (1999), 1997 County Business Patterns; Dun & Bradstreet (D&B, 2001a), National Profile of
  Businesses Database for Fiscal Year 2000;
Dun & Bradstreet (D&B, 2001b), Industry Norms and Key Business Ratios for Fiscal Year 2000/2001; Dun & Bradstreet (D&B, 2002), Industry Norms and Key
  Business Ratios for Fiscal Year 2001/2002;
U.S. Department of the Treasury, Internal Revenue Service (IRS, 2000) Corporate Tax Returns for Active Corporations for 1997; and U.S. Postal Service
  (USPS, 1997), 1997 Annual Report.

5.3 State and Local Government Profile
    The Bureau of the Census collects data on state and local 
government finances for the 50 states. The local government entities 
for which data are collected include: 3,043 county governments, which 
provide general government activities in specified geographic areas; 
19,372 municipal governments, which provide general government services 
for a specific population concentration in a defined area; 16,629 
township governments, which provide general government services for 
areas without regard to population concentrations; 34,683 special 
district governments, which provide only one or a limited number of 
designated functions, and have sufficient administrative and fiscal 
autonomy to qualify as independent governments; and 13,726 school 
district governments, which provide public elementary, secondary, or 
higher education, and have sufficient administrative and fiscal 
autonomy to qualify as independent governments.
    Nearly 90,000 state and local governmental entities will be 
affected by the final rule. Nationwide, these entities receive more 
than $1.5 trillion in

[[Page 22222]]

general revenues, including revenues from taxes, some categories of 
fees and charges, and intergovernmental transfers (see Table 5-3). 
State and local government entities employ more than 16.7 million 
workers and their payrolls exceed $472.9 billion.

                     Table 5-3.--State and Local Government Employment, Payroll and Revenue
----------------------------------------------------------------------------------------------------------------
                                                                  Total                           Total revenue
                  Census region division                       employment       Total payroll     ($1,000)  (FY
                                                                 (1997)       ($1,000)  (1997)     1999-2000)
----------------------------------------------------------------------------------------------------------------
NORTHEAST REGION..........................................         3,125,659      $105,089,601      $343,863,277
    New England Division..................................           787,604        24,050,377        83,842,665
    Mid Atlantic Division.................................         2,338,055        81,039,224       260,020,612
MIDWEST REGION............................................         4,024,781       107,566,034       341,985,336
    East North Central Division...........................         2,695,154        75,893,117       240,173,619
    West North Central Division...........................         1,329,627        31,672,917       101,811,717
SOUTH REGION..............................................         5,938,313       148,975,497       484,923,138
    South Atlantic Division...............................         2,984,616        78,443,501       260,912,968
    East South Central Division...........................         1,026,199        23,959,899        78,848,812
    West South Central Division...........................         1,927,498        46,572,098       145,161,358
WEST REGION...............................................         3,644,206       111,309,198       370,550,730
    Mountain Division.....................................         1,093,048        27,431,594        91,648,161
    Pacific Division......................................         2,551,158        83,877,604       278,902,569
      U.S. Total--All Regions.............................        16,732,959       472,940,330    1,541,322,481
----------------------------------------------------------------------------------------------------------------
 Note: Employment, payroll and revenue data downloaded from the Census Bureau Web site. Some data suppression
  existed in the original data file.
 Note: General revenue consists of general revenue from own sources (taxes and some categories of fees and
  charges) plus intergovernmental revenue.
 Source: U.S. Department of Commerce (USDOC, 2002a), 1997 Census of Governments, for employment and payroll;
  U.S. Department of Commerce (USDOC, 2002c), State and Local Government Finances, by Level of Government and by
  State: 1999-2000, for General revenues.

Chapter 6: Estimated Implementation Costs and Payroll Impacts of the 
Final Rule
    In this section, the Department presents the methodology used to 
estimate the implementation costs and payroll impacts to employers that 
are associated with the final rule. As in the PRIA, the Department 
determined that there are two components to compliance: The one-time 
implementation costs associated with employers reviewing and coming 
into compliance with the revised regulations, and the incremental 
payroll transfers from employers to employees associated with changes 
in the exempt status of the labor force.
    The estimated costs of the final rule that are described below may 
be somewhat overstated because they do not take into account costs 
already borne by some employers under existing state or local laws. As 
noted above, a number of state laws arguably impose more stringent 
exemption standards than those provided under the current rules, or 
even the new final rules. The FLSA does not preempt any such stricter 
state and local standards. See Section 18 of the FLSA, 29 U.S.C. Sec.  
218 and section 541.4 in the final regulations. As indicated in 
Chapters 3 and 5 of this analysis, however, because of data limitations 
and some uncertainty with the methodology, combined with the broad 
probability classifications provided by DOL to GAO and used in this RIA 
and other research, estimates of the number of exempt workers can only 
be done at a national level and cannot be disaggregated by state. Thus, 
the Department has not estimated the costs already imposed on some 
employers by stricter pre-existing state or local laws, and, 
consequently, the estimated costs to employers to comply with this 
final rule may be somewhat overstated.
6.1 One-Time Implementation Costs
    The one-time implementation costs contain two components. The first 
component relates to the efforts employers will expend in adapting 
their overtime policies in response to the revised regulations, and 
then informing their employees about the updated policies. The second 
component relates to the efforts employers will expend in reviewing the 
duties performed by employees in particular job categories, and 
determining whether, based on their adapted overtime policies, 
employees in the job categories qualify for exemption from the overtime 
provisions of the FLSA. The final rule contains no new information-
collection requirements subject to review and approval by the Office of 
Management and Budget under the Paperwork Reduction Act of 1995 (44 
U.S.C. 3501, et seq.). The information-collection requirements for 
employers who claim exemption under 29 CFR Part 541 are contained in 
the general FLSA recordkeeping requirements codified at 29 CFR Part 
516, which were approved by the Office of Management and Budget under 
OMB Control Number 1215-0017.
    For both components, the costs are based on the amounts of time 
typically required to perform the associated efforts, the average 
hourly costs of the employees who perform the efforts and the numbers 
of employers and establishments for which the efforts are performed. 
Separate cost estimates are developed for nine broad industry divisions 
in the private sector and for state and local government in the 
aggregate. The industry divisions for which implementation costs have 
been estimated include: Agricultural services; mining; construction; 
manufacturing; transportation, communication, and public utilities; 
wholesale trade; retail trade; finance, insurance, and real estate; and 
services.
6.2 Estimated Costs Related To Adapting Overtime Policies
    To estimate the efforts typically required by employers to 
implement the revisions to the FLSA regulations, the Department of 
Labor contacted six human resource experts from different regions 
nationwide. For the first cost component, estimates were obtained for 
the amount of time employers will typically require to: (1) Read and 
understand the revised rule, (2) update and adapt their overtime 
policies, (3) notify their employees of the policy changes, and (4) 
perform all other pertinent activities at the corporate level. Separate 
estimates were provided

[[Page 22223]]

for employers in eight employment size ranges. The ranges are: 1 to 4, 
5 to 9, 10 to 19, 20 to 49, 50 to 99, 100 to 499, 500 to 999, and 1,000 
or more employees per employer.
    Based on the judgments provided by the human resource experts, it 
is estimated that, on average nationwide, the efforts associated with 
revising overtime policies will range from two hours per employer in 
the smallest size range to 57 hours per employer in the largest size 
range. The Department assumed the efforts required to implement the 
revised regulations will be furnished substantially by human resources 
specialists. The costs per hour for human resources specialists at 
eight different skill or experience levels have been obtained from the 
National Compensation Survey data compiled by the Bureau of Labor 
Statistics (BLS). The average costs per hour for personnel, training, 
and labor relation specialists working for employers in the eight 
employment size ranges were estimated as weighted averages of the costs 
per hour for the various skill or experience levels reported by the 
BLS. Weights were developed by positing a typical staffing pattern for 
human resources specialists working for employers or establishments in 
different size ranges, and then calculating the average cost per hour 
for the mix of workers corresponding to that staffing pattern. The 
estimates of costs per hour calculated through this process rise 
monotonically as size range increases, and range from $16.03 for the 
smallest size range to $25.08 for the largest size range. These 
estimates were then multiplied by a loading factor of 1.4 to account 
for fringe benefits.
    The cost per hour used for state and local governments is the 
estimated cost per hour for private sector employers in the size range 
from 100 to 499 employees.

                               Table 6-1.--Estimated Unit Implementation Time/Costs of the Final Rule by Size of Employer
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                     Number of employees per employer
             Unit time/cost category             -------------------------------------------------------------------------------------------------------
                                                     1 to 4       5 to 9      10 to 19     20 to 49     50 to 99    100 to 499   500 to 999     1000+
--------------------------------------------------------------------------------------------------------------------------------------------------------
Hours per employer to revise overtime policies
    Read and understand revised rule............          1.0          2.0          4.0          6.0          8.0         10.0         24.0         32.0
    Update or adapt overtime policies...........          0.5          0.5          1.3          2.0          3.0          5.0         12.0         16.0
    Notify employees............................          0.5          0.5          0.8          1.0          1.5          2.0          4.0          5.0
    Other related activities....................          0.0          0.3          0.5          1.0          1.0          2.0          4.0          4.0
                                                 --------------
      Total hours per employer..................          2.0          3.3          6.5         10.0         13.5         19.0         44.0         57.0
                                                 ==============
Wage Rate for human resources specialists.......       $16.03       $21.34       $21.78       $22.91       $23.39       $24.02       $24.20       $25.08
Cost per hour...................................       $22.44       $29.88       $30.49       $32.07       $32.75       $33.63       $33.88      $35.11
--------------------------------------------------------------------------------------------------------------------------------------------------------
 Source: CONSAD and the U.S. Department of Labor.

    The estimated implementation efforts and costs were derived by 
summing the corresponding estimates for the individual industry 
divisions and calculating ratios, as appropriate, to estimate average 
hours and average costs. For all industry divisions except state and 
local government, identical calculations were performed to estimate 
implementation costs. Those calculations are explained below and are 
followed by a discussion of the additional calculations involved in 
estimating implementation costs for state and local government.
    For each industry division, the estimated cost that employers will 
incur to revise their overtime policies was calculated, for each 
employment size range, as the product of: (1) The total hours required 
per employer, on average, to perform the associated efforts, (2) the 
average cost per hour for human resources specialists working for 
employers in that size range, and (3) the number of employers in the 
size range. The derivation of values for items (1) and (2) have been 
discussed above. The values for item (3) were derived from data in the 
U.S. Department of Commerce (2002), Statistics of U.S. Businesses 1996. 
The total estimated values for the industry division were calculated by 
summing the values for the various size ranges. It should be noted that 
using the 1996 data may understate these implementation costs because 
the number of employers likely has grown since then.
    The implementation costs for state and local government to review 
the final rule and to revise their overtime policies were estimated in 
a manner similar to that used for the private sector. However, because 
no data are available that describe the size distribution of state and 
local government entities, the estimation was performed at the 
aggregate level.
    As is shown in Table 6-2, the total nationwide cost to review the 
final rule and revise the overtime policies is estimated to be $627 
million.

         Table 6-2.--Estimated Costs To Review the Final Rule and Revise Overtime Policies, by Industry
----------------------------------------------------------------------------------------------------------------
                                                                               Total hours to    Cost to revise
                     Industry division                          Number of      revise overtime      overtime
                                                                employers         policies          policies
----------------------------------------------------------------------------------------------------------------
Agricultural services.....................................           101,356           350,553        $9,845,483
Mining....................................................            17,384            98,090         3,009,596
Construction..............................................           597,393         2,227,515        63,501,051
Manufacturing.............................................           297,154         2,231,762        70,711,656

[[Page 22224]]

 
Transportation, communication & public utilities..........           209,122           983,166        29,311,496
Wholesale trade...........................................           325,432         1,765,346        53,735,371
Retail trade..............................................           909,206         4,068,622       120,331,292
Finance, insurance & real estate (FIRE)...................           411,052         1,650,164        47,787,363
Services..................................................         1,877,862         7,662,502       222,849,283
State and Local Government................................            89,953           179,906         6,049,519
                                                           -------------------
      All Industries......................................         4,835,913        21,217,625      627,132,111
----------------------------------------------------------------------------------------------------------------
 Source: CONSAD and the U.S. Department of Labor.

    Estimates were also developed for the portion of the implementation 
costs in each private-sector industry division incurred by small 
businesses (i.e., businesses that are covered under the Small Business 
Regulatory Enforcement Fairness Act (SBREFA)). For each industry 
division, the portion of the aggregate costs of revising corporate 
overtime policies that will be incurred by firms covered by SBREFA was 
based on the portion of the total number of establishments in the 
industry division that are operated by small businesses and is 
presented in Table 6-3.

    Table 6-3.--Estimated Share of Costs To Review Final Rule and Revise Overtime Policies Incurred by Small
                                             Businesses, by Industry
----------------------------------------------------------------------------------------------------------------
                                                                              Small business share of total cost
                     Industry division                       Total industry  -----------------------------------
                                                                                 Percentage           Cost
----------------------------------------------------------------------------------------------------------------
Agricultural services.....................................        $9,845,483            0.9676        $9,526,490
Mining....................................................         3,009,596            0.8135         2,448,307
Construction..............................................        63,501,051            0.9797        62,211,980
Manufacturing.............................................        70,711,656            0.8912        63,018,228
Transportation, communication & public utilities..........        29,311,496            0.6430        18,847,292
Wholesale trade...........................................        53,735,371            0.8050        43,256,973
Retail trade..............................................       120,331,292            0.6872        82,691,664
Finance, insurance & real estate..........................        47,787,363            0.6502        31,071,344
Services..................................................       222,849,283            0.8620       192,096,082
                                                           -------------------
      Total private sector................................       621,082,592            0.8134      505,168,359
----------------------------------------------------------------------------------------------------------------
Source: CONSAD and the U.S. Department of Labor.

6.3 Estimated Cost To Reexamine Jobs
    The methodology used to estimate the costs related to the 
reexamination of jobs was significantly different from that used in 
Section 6.2 because the Department assumed that employers would have to 
conduct the job review at the establishment level. Therefore, rather 
then basing the cost estimates on the number of employers, as was done 
for the review of the final rule and the revision of the overtime 
policies, the Department based the cost estimates for the job reviews 
on the number of potentially affected white-collar workers. In 
addition, since the CPS database does not contain information related 
to the size of the worker's employer, the Department used an average 
cost of $32.41 per hour ($23.15, obtained from the BLS National 
Compensation Survey for a labor relation specialist, multiplied by 1.4 
to account for fringe benefits).
    Based upon the analysis in Chapter 3, the Department assumed that 
none of the blue-collar jobs (e.g., occupations in the 239 excluded 
OCCs) would have to be reviewed. As was shown in Chapter 2, none of the 
revisions should cause employers to think that currently nonexempt 
blue-collar workers could possibly be made exempt under the final rule. 
So employers should not incur any additional expenses related to these 
workers after completing the process of adapting their overtime 
policies in response to the revised regulations.
    The Department assumed that for the white-collar workers earning 
less than $455 per week, employers would only review the jobs of 
workers who are currently exempt and would not review the jobs of any 
currently nonexempt workers. As was shown in Chapter 2, the $455 salary 
level in the final rule should make it absolutely clear to employers 
that the currently nonexempt white-collar workers earning less than 
$455 per week could not possibly be made exempt under the final rule. 
So, again, employers should not incur any additional expenses related 
to these workers after completing the process of adapting their 
overtime policies in response to the revised regulations.
    As is more fully discussed in the next section of this chapter, 
employers will have to determine how to alter the compensation for each 
of the approximately 1.3 million currently exempt workers earning less 
than $455 per week. In some cases employers will decide to pay the 
overtime premium, while in others employers will decide to increase the 
worker's salary in order to maintain the exemption. The Department 
assumed that on average these reviews would take approximately \1/2\ 
hour per currently exempt employee to complete. For most employees, the 
review will consist of an examination of their payroll records to 
determine how they should be paid under the final rule (e.g., pay 
overtime or increase their salaries). The duties of the remaining, 
relatively small number of employees

[[Page 22225]]

(i.e., only a portion of those whom employers decide to maintain in 
exempt status by increasing their salaries to $455 or more) will have 
to be reexamined to determine if they continue to qualify for exemption 
given the minor differences in the duties tests under the final rule 
compared to the current rule. While it may take employers more than 30 
minutes to reexamine these few workers, it will take less than 30 
minutes for many others. Thus, the Department estimated that the cost 
of reexamining the jobs of workers earning less than $455 per week 
would be about $21 million (1.3 million workers x \1/2\ hour per worker 
x $32.41 per hour).
    In assessing the costs of reviewing the jobs of the highly 
compensated white-collar workers, the Department assumed that employers 
would use an approach complementary to that assumed for the lower-wage 
white-collar workers. Employers would only review the jobs of workers 
who are currently nonexempt and would not review the jobs of any 
currently exempt workers earning $100,000 or more per year. As shown in 
Chapter 2, the duties test for the highly compensated workers is less 
stringent than those under either the current short tests or the 
standard tests in the final rule. Thus, the Department assumed that 
after completing the process of adapting their overtime policies in 
response to the revised regulations, employers would conclude that all 
currently exempt highly compensated workers would continue to be exempt 
under the final rule and, therefore, would not expend additional 
resources to review any of these jobs. In addition, as explained in 
Chapter 4, the Department excluded computer programmers, registered 
nurses and pharmacists. It is unlikely that employers would review 
these jobs due to the final rule given that these workers could already 
be made Part 541-exempt under the current rule if they are paid on a 
salaried basis.
    The Department assumed that on average employers would take 
approximately \1/2\ hour to review the duties of each currently 
nonexempt highly compensated employee to determine if they could be 
made exempt under the highly compensated test. In addition, the 
Department assumed that employers would expend an additional \1/2\ hour 
to review the pay basis of each hourly worker to determine if it could 
be modified to comply with the requirements of the highly compensated 
test. For most employees, the review will consist of an examination of 
their payroll records to determine how they currently are paid and how 
they should be paid under the final rule (e.g., paid overtime or paid 
on a salary basis). While it may take employers more than one hour to 
reexamine both the duties and compensation of some workers, it will 
clearly not be necessary for employers to review both the duties and 
compensation of many others (e.g., there is no need to review the 
compensation of hourly workers whose duties are not exempt under the 
highly compensated test). The Department estimated that the cost of 
reexamining the jobs and pay of current salaried workers earning 
$100,000 or more per year would be approximately $4.4 million (270,000 
workers x \1/2\ hour per worker x $32.41 per hour) and the cost of 
reexamining the jobs of current hourly workers earning $100,000 or more 
per year would be approximately $6 million (182,600 workers x 1 hour 
per worker x $32.41 per hour). The Department believes that this 
estimate probably overstates the costs to businesses because many 
employers will probably choose not to review the jobs of hourly workers 
who could not easily be converted to a salary basis (e.g., workers 
covered by union contracts).
    For workers earning $455 to $1,923 per week, the Department assumed 
that none of the hourly workers would require a job review and that 
employers would review only a portion of the jobs held by salaried 
workers. Given the comparability of the standard tests in the final 
rule with the short tests in the current rule (see Chapter 2), the 
Department assumed that after completing the process of adapting their 
overtime policies in response to the revised regulations, employers 
would conclude that all of the current hourly workers earning $455 to 
$1,923 per week would continue to be nonexempt under the final rule and 
would not expend additional resources to review any of these jobs.
    The Department also assumed that, given the comparability of the 
standard tests in the final rule with the short tests in the current 
rule, extensive reexamination of exemption status will likely be 
required for only a minor portion of the white-collar jobs in which 
salaried workers earning $455 to $1,923 per week are employed in any 
establishment. As demonstrated above, the duties tests in the standard 
tests of the final rule do not differ greatly from the current short 
duties tests. As a result, employers will likely conclude, after 
completing the process of adapting their overtime policies, that no 
change in exemption status is warranted for most of their white-collar 
jobs.
    Appreciable effort will only be expended for reviewing the duties 
of the remaining, relatively small number of white-collar salaried 
employees earning $455 to $1,923 per week whose status might be 
impacted by the changed duties tests. To account for the slight changes 
in the rule (such as the inclusion of some requirements from the long 
tests), the Department assumed that employers would take one hour to 
review the duties of 10 percent of all white-collar salaried employees 
earning $455 to $1,923 per week to either ensure that they are still 
exempt or to determine if they could be made exempt under the final 
rule. Given the comparability of the duties tests in the current short 
tests and the final standard tests, the Department feels that both the 
one hour and the 10 percent may be overestimates. Nevertheless, based 
upon these assumptions, the Department estimated that the cost of 
reexamining the jobs of the white-collar salaried employees earning 
$455 to $1,923 per week would be approximately $80 million (10 percent 
x 24.7 million workers x 1 hour per worker x $32.41 per hour).
    The total nationwide cost to conduct the job reviews is estimated 
to be $111 million. As is shown in Table 6-4, these costs were then 
apportioned to each industry division in proportion to its share of the 
affected work force.

       Table 6-4.--Estimated Costs To Reexamine Jobs, by Industry
------------------------------------------------------------------------
                                       Total hours to        Cost to
          Industry division               reexamine         reexamine
                                        affected jobs     affected jobs
------------------------------------------------------------------------
Agricultural Services, Forestry, and            11,552          $374,407
 Fishing............................
Mining..............................            15,598           505,542
Construction........................           125,380         4,063,562
Manufacturing.......................           500,511        16,221,574
Transportation and Public Utilities.           256,757         8,321,482

[[Page 22226]]

 
Wholesale Trade.....................           212,294         6,880,451
Retail Trade........................           403,130        13,065,451
Finance, Insurance, and Real Estate.           488,120        15,819,984
Services............................         1,256,435        40,721,065
State and Local Government..........           167,532         5,429,724
                                     -------------------
      All Industries................         3,437,311      111,403,241
------------------------------------------------------------------------
Source: CONSAD and the U.S. Department of Labor.

    For each industry division, the portion of the aggregate costs of 
reexamining the exemption status of specific jobs that will be incurred 
by firms covered by SBREFA has been estimated on the basis of the 
proportion of the total employment in the industry division that is in 
such firms and is presented in Table 6-5.

        Table 6-5.--Estimated Share of Costs To Reexamine Jobs Incurred by Small Businesses, by Industry
----------------------------------------------------------------------------------------------------------------
                                                                                 Small business share of total
                                                                                         industry cost
                     Industry division                       Total industry  -----------------------------------
                                                                                 Percentage           Cost
----------------------------------------------------------------------------------------------------------------
Agricultural services.....................................          $374,407            0.6866          $257,068
Mining....................................................           505,542            0.3697           186,899
Construction..............................................         4,063,562            0.7160         2,909,511
Manufacturing.............................................        16,221,574            0.4180         6,780,618
Transportation, communication & public utilities..........         8,321,482            0.2440         2,030,442
Wholesale trade...........................................         6,880,451            0.5215         3,588,155
Retail trade..............................................        13,065,451            0.3634         4,747,985
Finance, insurance & real estate..........................        15,819,984            0.2194         3,470,904
Services..................................................        40,721,065            0.3647        14,850,972
                                                           -------------------
      Total private sector................................       105,973,517            0.3663       38,822,554
----------------------------------------------------------------------------------------------------------------
Source: CONSAD and the U.S. Department of Labor.

6.4 Incremental Payroll Impact
    The Department based its estimates of the incremental payroll 
impact on the preceding analysis used to estimate the number of 
salaried workers converted from exempt to nonexempt status as a result 
of raising the salary level for the standard tests to $455 per week. 
However, the Department acknowledges that these estimates may vary for 
a variety of reasons. For example, these estimates were developed 
utilizing a snapshot of the labor market provided by the 2002 CPS data, 
which may not be a perfect predictor of the amount of overtime worked 
in future years. Moreover, the Department also recognizes that 
employers may adjust their payrolls in reaction to the final rule in a 
variety of ways, especially in the long term as employers and employees 
adjust to the final rule.
    However, employers are, at all times, obligated to pay overtime in 
accordance with the FLSA. For example, employers could pay overtime to 
their low-income, white-collar workers for any hours worked over 40, or 
they could raise the salaries of these currently exempt workers to at 
least $455 per week to maintain their exempt status. The Department 
estimates that 1.3 million low-income, white-collar salaried workers 
are likely to see larger paychecks as a result of these responses.
    In this analysis, the Department assumes that the best estimate of 
the impact on employers of changing the status of some salaried workers 
from exempt to nonexempt as a result of raising the salary level for 
the standard tests is the lower of the amount of raising the worker's 
salary to $455 or the amount of the paying for the overtime hours that 
were previously exempt under the current rules. There were about 1,000 
observations in the potentially impacted occupations with weekly 
earnings (item PTERNWA) $155 or more and less than $455, and actual 
hours worked (PEHRACT1, the CPS variable name) greater than 40.
    The Department estimates the amount of raising the individual's 
salary to $455 by multiplying the net increase in salary ($455--
PTERNWA) by the Prob--Exempt and by the weight (PWORWGT).
    The Department estimated the number of exempt hours that would be 
converted to paid overtime hours by multiplying the number of hours in 
excess of 40 (PEHRACT1--40) for each of the workers by the Prob--Exempt 
and by the weight (PWORWGT). In this manner, the Department estimated 
173.0 million hours would be converted from exempt to nonexempt as a 
result of raising the salary level to $455.
    Since there is no hourly pay rate for salaried workers in the 
dataset, the employer impacts associated with converting exempt hours 
to nonexempt had to be estimated from the weekly earnings data. In 
addition, the Department assumed that the weekly wage for a salaried 
worker covers the usual hours worked by the employee. The equivalent 
hourly wage rate would be the weekly earnings (item PTERNWA) divided by 
the usual hours worked weekly (item PEHRUSL1). If the worker were 
converted from exempt to nonexempt status, the worker would only be 
paid an additional premium of one-half times the hourly rate for each 
hour worked in excess of 40, because the base compensation for the 
overtime hours is already included in the worker's salary. Thus, the 
amount of the employer's additional weekly overtime

[[Page 22227]]

pay would be the overtime hours converted to nonexempt times the hourly 
pay rate times 0.5 (this assumption is consistent with the enforcement 
approach currently used by the Department to calculate back pay when a 
salaried employee is found to not qualify for exemption under Part 541 
and it is clear that the salary was intended to serve as payment for 
all hours worked each week).
    The weekly increase in payroll for each worker is the lower of the 
amount of raising the worker's salary to $455 or the amount of paying 
for the overtime hours that were currently exempt. The total weekly 
impact due to raising the salary level would be the sum of the weekly 
increase in payroll for all workers. Since the data in the CPS annual 
Outgoing Rotation Group data set consists of 12 months of observations, 
the Department has assumed the data account for the seasonal variations 
in overtime hours worked. The annual impact is the weekly increase in 
payroll multiplied by 52, which is approximately $375 million. Table 6-
6 presents the impact for each industry division and the portion 
attributed to small businesses in the private sector.
    For the proposed rule, the Department estimated a range of impacts 
based, in part, on an alternative assumption that the pay of currently 
exempt salaried workers represents compensation for a standard 40-hour 
work week. For the final rule, the Department chose to develop a point-
estimate instead of a range for the impact associated with raising the 
salary level tests, and has estimated the impact in a way that is 
consistent with the longstanding enforcement approach used by the 
Department to calculate back pay when a salaried employee is found to 
not qualify for exemption under Part 541. For these reasons, and those 
mentioned above, the Department acknowledges that the impact of raising 
the salary level tests may vary. Employers, however, are obligated to 
pay time-and-one-half for any overtime hours worked by nonexempt 
employees beyond 40 per week.

                      Table 6-6.--Estimated Payroll Impact by Industry and Size of Business
----------------------------------------------------------------------------------------------------------------
                                                                                                 SBREFA covered
                                                                All firms      Percent SBREFA         firms
                   SIC industry division                       incremental         covered         incremental
                                                             payroll impact                      payroll impact
----------------------------------------------------------------------------------------------------------------
Agricultural Services, Forestry, and Fishing..............          $802,343             68.7%          $551,210
Mining....................................................            90,738              37.0            33,573
Construction..............................................        14,486,732              71.6        10,372,500
Manufacturing.............................................        28,377,501              41.8        11,861,795
Transportation and Public Utilities.......................        24,913,745              24.4         6,078,954
Wholesale Trade...........................................         7,168,683              52.2         3,742,053
Retail Trade..............................................       107,300,882              36.3        38,950,220
Finance, Insurance, and Real Estate.......................        39,960,717              21.9         8,751,397
Services..................................................       141,881,530              36.5        51,786,758
                                                           -------------------
      All Private Sector..................................       364,982,872              36.2       132,128,461
State and Local Government................................         9,850,334  ................  ................
                                                           -------------------
      All Industries......................................       374,833,206  ................  ................
----------------------------------------------------------------------------------------------------------------
Source: CONSAD and the U.S. Department of Labor.

6.5 Total Costs of the Final Rule
    The Department estimates that the total first-year costs are 
approximately $1.1 billion. This is equal to the sum of the 
implementation costs related to reviewing the regulation and revising 
company policies ($627 million), the implementation costs related to 
reviewing the jobs ($111 million), and the increased payroll costs 
related to raising the salary level to $455 per week ($375 million). In 
subsequent years, the Department estimates that employers could 
experience a payroll increase of as much as $375 million per year. 
Table 6-7 presents a summary of the costs by industry.

                               Table 6-7.--Estimated First Year Costs by Industry
----------------------------------------------------------------------------------------------------------------
                                              Revise OT                                         Total first year
            Industry division                 policies       Reexamine jobs     Payroll costs         costs
----------------------------------------------------------------------------------------------------------------
Agricultural Services, Forestry, and            $9,845,483          $374,407          $802,343       $11,022,234
 Fishing................................
Mining..................................         3,009,596           505,542            90,738         3,605,876
Construction............................        63,501,051         4,063,562        14,486,732        82,051,346
Manufacturing...........................        70,711,656        16,221,574        28,377,501       115,310,731
Transportation and Public Utilities.....        29,311,496         8,321,482        24,913,745        62,546,723
Wholesale Trade.........................        53,735,371         6,880,451         7,168,683        67,784,505
Retail Trade............................       120,331,292        13,065,451       107,300,882       240,697,625
Finance, Insurance, and Real Estate.....        47,787,363        15,819,984        39,960,717       103,568,065
Services................................       222,849,283        40,721,065       141,881,530       405,451,877
State and Local Government..............         6,049,519         5,429,724         9,850,334        21,329,577
                                         -------------------
      All Industries....................       627,132,111       111,403,241       374,833,206    1,113,368,558
----------------------------------------------------------------------------------------------------------------
Source: CONSAD and the U.S. Department of Labor.


[[Page 22228]]

    Total first-year costs for small business are approximately $676 
million as shown in Table 6-8. This is equal to the sum of the 
implementation costs related to reviewing the regulation and revising 
company policies ($505 million), the implementation costs related to 
reviewing the jobs ($39 million), and the increased payroll costs 
related to raising the salary level to $455 per week ($132 million). In 
subsequent years, the Department estimates that small business 
employers may experience a payroll increase of as much as $132 million 
per year.

                        Table 6-8.--Estimated First Year Small Business Costs by Industry
----------------------------------------------------------------------------------------------------------------
                                              Revise OT                                         Total first year
            Industry division                 policies       Reexamine jobs     Payroll costs         costs
----------------------------------------------------------------------------------------------------------------
Agricultural Services, Forestry, and            $9,526,490          $257,068          $551,210       $10,334,767
 Fishing................................
Mining..................................         2,448,307           186,899            33,573         2,668,779
Construction............................        62,211,980         2,909,511        10,372,500        75,493,991
Manufacturing...........................        63,018,228         6,780,618        11,861,795        81,660,641
Transportation and Public Utilities.....        18,847,292         2,030,442         6,078,954        26,956,687
Wholesale Trade.........................        43,256,973         3,588,155         3,742,053        50,587,181
Retail Trade............................        82,691,664         4,747,985        38,950,220       126,389,869
Finance, Insurance, and Real Estate.....        31,071,344         3,470,904         8,751,397        43,293,645
Services................................       192,096,082        14,850,972        51,786,758       258,733,812
                                         -------------------
      All Private Sector Industries.....       505,168,359        38,822,554       132,128,461      676,119,373
----------------------------------------------------------------------------------------------------------------
Source: CONSAD and the U.S. Department of Labor.

    Total first-year costs for state and local governments are 
approximately $21 million. This is equal to the sum of the 
implementation costs related to reviewing the regulation and revising 
agency policies ($6 million), the implementation costs related to 
reviewing the jobs ($5 million), and the increased payroll costs 
related to raising the salary level to $455 per week ($10 million). In 
subsequent years, the Department estimates that state and local 
governments may experience a payroll increase of as much as $10 million 
per year.
Chapter 7: Economic Impacts
7.1 Typical Impacts
    The impacts on the typical entity in each of the nine major private 
sector industry divisions and in state and local governments were 
examined using the ratios of the first-year costs to payrolls, revenue 
and profits. This approach was based on the assumption that if the 
first-year costs were manageable, so too would be the lower costs in 
subsequent years.
    As shown in Table 7-1, the ratio of total first-year costs to 
payrolls averaged 0.04 percent nationwide in the private sector. The 
largest impact relative to payrolls was approximately 0.12 percent in 
agricultural services. The ratio of total first-year costs to revenue 
averaged less than 0.01 percent nationwide in the private sector. The 
largest impact relative to revenue was approximately 0.02 percent in 
agricultural services and the services industries. The ratio of total 
first-year costs to pre-tax profit averaged 0.19 percent nationwide in 
the private sector. The largest impact relative to pre-tax profit was 
approximately 0.64 percent in the retail industry. The Department 
concludes that impacts of this magnitude are clearly affordable and 
will not result in significant disruptions to typical firms in any of 
the major industry sectors.

                         Table 7-1.--Economic Impacts of the Part 541 Revisions by Industry Division, Based on First-Year Costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                 First-year
                                                                                                                                 costs as a   First-year
                                                                  Sales, receipts,                     First-year   First-year   percentage   costs as a
               Industry division                 Annual payroll       value of       Pre-tax profits     costs      costs as a   of sales,    percentage
                                                    ($1,000)          shipments         ($1,000)        ($1,000)    percentage   receipts,    of pre-tax
                                                                      ($1,000)                                      of payroll    value of      profit
                                                                                                                                 shipments
--------------------------------------------------------------------------------------------------------------------------------------------------------
Agricultural services.........................        $9,324,346       $63,936,121        $2,357,130      $11,022         0.12         0.02         0.47
Mining........................................        24,173,512       195,841,349        25,488,881        3,606         0.01         0.00         0.01
Construction..................................       197,673,938       936,785,456        28,628,686       82,051         0.04         0.01         0.29
Manufacturing.................................       682,333,069     4,399,057,890        94,604,018      115,311         0.02         0.00         0.12
Trans., Comm., & Public Utilities.............       277,130,334     1,336,692,223        76,411,219       62,547         0.02         0.00         0.08
Wholesale trade...............................       271,158,976     4,752,857,521        86,688,186       67,785         0.02         0.00         0.08
Retail trade..................................       300,952,012     2,679,002,338        37,467,739      240,698         0.08         0.01         0.64
Finance, Insurance, and Real Estate...........       306,679,061     2,452,102,212       156,048,617      103,568         0.03         0.00         0.07
Services......................................     1,052,894,811     2,682,451,513        71,969,249      405,452         0.04         0.02         0.56
                                               -------------------
      All Industries..........................     2,785,616,284    17,897,921,102       579,663,726    1,092,039         0.04         0.01        0.19
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Annual payroll; sales, receipts, value of shipments; and pre-tax profits are from Table 5-1. Payrolls were adjusted from 1997 values using the CPI-
  U (1997 index = 160.5; 2002 index = 179.9). Sales revenue and Value of shipments were adjusted from 1997 using GDP Price Index (1997 index = 95.415;
  2002 index = 130.949).
First-Year Costs in 2002 dollars are from Table 6-7.


[[Page 22229]]

    The total first-year costs for state and local governments (also 
presented in Table 6-7) were allocated among census regions on the 
basis of data on the numbers of local governments, special districts, 
and school districts in each state. These were then aggregated to 
produce data on total numbers of local government entities by census 
region. The estimated 2,500 state government entities were allocated 
among the census regions on the basis of the numbers of local 
government entities in the census regions.
    As shown in Table 7-2, the ratio of total first-year costs to both 
payrolls and revenue were less than one-hundredth of one-percent 
nationwide in the public sector. The highest impact was in the West 
North Central Census Division, where the ratio of first-year costs to 
payrolls was 0.014 percent and the ratio of first-year costs to revenue 
was 0.004 percent. The Department concludes that impacts of this 
magnitude are clearly affordable and will not result in significant 
disruptions to typical state and local governments.
    Thus, the Department concludes that the Part 541 revisions will not 
have a significant impact on typical entities in either the public or 
private sectors.

 Table 7-2.--Economic Impacts of the Part 541 Revisions on State and Local Governments by Census Division Based
                                               on First-Year Costs
----------------------------------------------------------------------------------------------------------------
                                                                                         First-year   First-year
                                         Total payroll     Total revenue    First-year   costs as a   costs as a
           Census division                 ($1,000)          ($1,000)         costs      percentage   percentage
                                                                             ($1,000)    of payroll   of revenue
----------------------------------------------------------------------------------------------------------------
New England Division.................       $26,957,401       $91,341,625         $894        0.003        0.001
Mid Atlantic Division................        90,834,619       283,277,080        2,424        0.003        0.001
East North Central Division..........        85,066,491       261,654,955        4,729        0.006        0.002
West North Central Division..........        35,501,295       110,917,845        4,882        0.014        0.004
South Atlantic Division..............        87,925,145       284,249,249        1,506        0.002        0.001
East South Central Division..........        26,855,986        85,901,118        1,070        0.004        0.001
West South Central Division..........        52,201,373       158,144,715        2,074        0.004        0.001
Mountain Division....................        30,747,313        99,845,252        1,756        0.006        0.002
Pacific Division.....................        94,016,081       303,847,856        1,995        0.002        0.001
                                      -------------------
      All Census Divisions...........       530,105,704     1,679,179,695       21,330        0.004       0.001
----------------------------------------------------------------------------------------------------------------
Note: Annual payroll; sales, receipts, value of shipments; and pre-tax profits are from Table 5-3. Payrolls were
  adjusted from 1997 values using the CPI-U (1997 index = 160.5; 2002 index = 179.9). Sales revenue and Value of
  shipments were adjusted from 1997 using GDP Price Index (1997 index = 95.415; 2002 index = 130.949).
First-Year Costs (in 2002 dollars) are based on Table 6-7 (allocated amongst the Census divisions according to
  the procedure described in the text).

7.2 Small Business Impacts
    As is shown in Table 7-3, the ratio of first-year costs to payrolls 
averaged 0.07 percent for private sector small businesses nationwide. 
The largest impact relative to payrolls was approximately 0.19 percent 
for small businesses in agricultural services. The ratio of first-year 
costs to revenue averaged approximately 0.01 percent for private sector 
small businesses nationwide. The largest impact relative to revenues 
was approximately 0.06 percent for small businesses in agricultural 
services. The ratio of first-year costs to pre-tax profit averaged 0.37 
percent for private sector small businesses nationwide. The largest 
impact relative to pre-tax profit was approximately 1.75 percent for 
small businesses in agricultural services.
    Particular concern over such impacts was expressed by the National 
Restaurant Association, which stated, ``Since salary levels have not 
been changed in over a quarter century, the Association agrees that the 
existing salary levels are out of date. However, it is important to 
emphasize that the substantial increase proposed by DOL will have a 
major impact on employers in the restaurant industry, particularly 
those who are located in areas of the country with lower general wage 
rates. In addition, restaurants generally have very small profit-to-
loss (`P + L') margins each year.''
    The NFIB expressed concern that under the proposed rule two 
industries, general merchandise stores and private educational 
services, would suffer payroll cost increases of more than two percent 
of pretax profit. See Table 5.4 of Final Report, Economic Analysis of 
the Proposed and Alternative Rules for the Fair Labor Standards Act 
(FLSA) Regulations at 29 CFR 541, prepared by CONSAD Research 
Corporation, February 10, 2003, p. 75-76, incorporated by reference at 
68 FR 15573; March 31, 2003 (estimated 4.5 percent increase for general 
merchandise stores and 2.03 percent increase for educational services). 
The NFIB noted that given the ``large percentage of our members'' in 
the general merchandise category, the estimated 4.5 percent increased 
payroll cost ``would be a significant burden,'' particularly for a 
small business owner struggling with economic conditions. The NFIB also 
expressed similar concern regarding a ``significant burden'' for its 
members in the private educational services sector and urged the 
Department to carefully review any payroll increases resulting from 
updating the rule. The Department has given these comments serious 
consideration. Under the final rule, as noted in Table 7-3, first-year 
costs are estimated to be less than four-tenths of a percent of pre-tax 
profit for all SBREFA-covered small businesses, and approximately 
seven-tenths of a percent for all small business retail trade and 
services industries.
    As discussed throughout the preamble, the Department maintains it 
has taken a prudent course of action in revising Part 541. First-year 
costs of the magnitude estimated in Table 7-3 are clearly affordable 
and will not result in significant disruptions to small businesses in 
any of the major industry sectors. Moreover, these impacts do not 
include the possible decrease in payroll impacts due to the highly 
compensated test, and the benefits of the rule in the form of lower 
litigation costs, which accrue to the same groups of employers as the 
costs of the rule. The Department chose to look at the per-firm impacts 
to employers without netting out these advantages in order to look at 
what may accrue to firms that are not under current litigation risk and 
do not employ highly compensated employees who may be reclassified as 
exempt.

[[Page 22230]]

Therefore these averages likely overstate the true impact of the rule 
on businesses and small businesses.

      Table 7-3.--Economic Impacts of the Part 541 Revisions on Small Businesses Covered by SBREFA, by Industry Division Based on First-Year Costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                 First-year
                                                                                                                                 costs as a   First-year
                                                                  Sales, receipts,                     First-year   First-year   percentage   costs as a
               Industry division                 Annual payroll       value of       Pre-tax profits     costs      costs as a   of sales,    percentage
                                                    ($1,000)          shipments         ($1,000)        ($1,000)    percentage   receipts,    of pre-tax
                                                                      ($1,000)                                      of payroll    value of      profit
                                                                                                                                 shipments
--------------------------------------------------------------------------------------------------------------------------------------------------------
Agricultural services.........................        $5,471,482       $17,815,411          $591,216      $10,335         0.19         0.06         1.75
Mining........................................         7,636,807        67,006,719         6,505,730        2,669         0.03         0.00         0.04
Construction..................................       123,823,709       590,050,028        21,109,308       75,494         0.06         0.01         0.36
Manufacturing.................................       231,071,360     1,145,575,629        27,723,186       81,661         0.04         0.01         0.29
Trans., Comm., & Public Utilities.............        47,637,196       204,533,244         6,210,156       26,957         0.06         0.01         0.43
Wholesale trade...............................       124,135,798     2,181,380,935        40,071,557       50,587         0.04         0.00         0.13
Retail trade..................................        95,460,106       732,497,854        17,360,512      126,390         0.13         0.02         0.73
Finance, Insurance, and Real Estate...........        54,743,849       309,348,483        22,193,420       43,294         0.08         0.01         0.20
Services......................................       363,299,958       950,997,033        38,694,702      258,734         0.07         0.03         0.67
                                               -------------------
      All Industries..........................       939,696,957     5,690,263,273       180,459,786      676,119         0.07         0.01        0.37
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Annual payroll; sales, receipts, value of shipments; and pre-tax profits are from Table 5-2. Payrolls were adjusted from 1997 values using the CPI-
  U (1997 index = 160.5; 2002 index = 179.9). Sales revenue and Value of shipments were adjusted from 1997 using GDP Price Index (1997 index = 95.415;
  2002 index = 130.949).
First-Year Costs (in 2002 Dollars) are from Table 6-8.

Chapter 8: Estimating the Benefits
    The Department has determined that the final rule provides a 
variety of benefits to both workers and employers. Although some 
benefits can be estimated, data limitations require the Department to 
discuss other benefits only qualitatively. For example, 2.8 million 
salaried workers in blue-collar occupations who earn $155 or more and 
less than $455 per week will benefit from increased overtime protection 
because their nonexempt status, which is based on the duties tests 
under the current rules, will be guaranteed and unambiguous under the 
final rule. The final rule also makes it more difficult to exempt 
workers from overtime as executive employees. Although the final rule 
will plainly benefit workers, data limitations prevent the Department 
from estimating the dollar value of these benefits. Moreover, salaried 
workers will also benefit from more equitable treatment in disciplinary 
actions (i.e., under the current rule an employer would have to suspend 
an exempt manager for a full week for a Title VII violation in order to 
preserve the employee's exempt status even if the company's policy 
called for just a three-day suspension without pay; under the final 
rule salaried employees would lose only three days of pay).
    One of the largest benefits to workers comes from having clearer 
rules that are easier to understand and enforce. Workers will better 
know their rights and whether they are being paid correctly (instead of 
going years without knowing whether they should be paid overtime). 
Fewer workers will be unintentionally misclassified, and they will not 
have to go to court and possibly wait years to recover back pay. 
Clearer, more up-to-date rules will also help the Wage and Hour 
Division more vigorously enforce the law, ensuring that workers are 
being paid fairly and accurately. The safe harbor provision in the 
final rule will also continue to ensure that employees whose pay is 
reduced in violation of the salary basis test are made whole and will 
encourage employers to adopt and communicate employment policies 
prohibiting improper pay deductions to their workers.
    Employers will also benefit in a variety of ways from the final 
rule. As estimated in Chapter 4, the highly compensated test in the 
final rule could result in approximately 107,000 currently nonexempt 
white-collar workers earning $100,000 or more per year being converted 
to exempt salaried status. Some employers could experience a reduction 
in their payroll costs related to this change in status. However, 
neither the record in this rulemaking nor the economic literature 
provides a means for quantifying the amount of this reduction. The 
highly compensated test does not require employers to change the 
exemption status of their workers who earn $100,000 or more per year, 
so the effect of this provision is far less certain than the impact of 
the raising the salary level test. Moreover, as discussed in Chapter 4, 
there are a variety of reasons why employers might not convert the 
exemption status of these highly paid workers. These include, but are 
not limited to, the incentives to preserve an investment in human 
capital, retain institutional memory, and minimize turnover costs, as 
well as the nature of the work, tradition, and culture. Although the 
Department has tried to account for these incentives when estimating 
the number of workers who could be affected, these estimates do not 
completely account for all of the effects, particularly the market 
power of these highly skilled workers.
    As noted earlier, data limitations and the uncertainty that remains 
with the updated RIA methodology reduces the ability to precisely 
estimate the impact of the highly compensated test. Specifically, the 
RIA is based on a methodology that was originally designed to produce 
reasonable estimates of the number of exempt workers at the national 
level across all incomes. It was not designed to measure changes in 
payroll costs for a small group of workers at the very upper end of the 
income distribution. Nor can it be adapted or updated to generate these 
types of estimates without a number of simplifying assumptions that are 
inconsistent with high-wage labor

[[Page 22231]]

markets. For example, to estimate the change in payroll costs from the 
highly compensated test requires the assumption that employers would no 
longer pay a premium for overtime hours when, in fact, 63.4 percent of 
the RNs and 76.1 percent of the Pharmacists who earn $100,000 or more 
per year continue to be paid by the hour (and eligible for overtime) 
despite the fact the current regulations classify them as performing 
exempt professional duties. The Department expects that most employers 
will adjust their compensation policies in a way that maintains the 
stability of their workforce, pay structure, and output levels while 
preserving their investment in human capital, and are likely to 
continue to pay many highly compensated workers by the hour. Although 
the Department could have assumed that some portion of the overtime 
hours would not be paid, there is nothing in the record, the economic 
literature, or the WHD's enforcement experience on which to base the 
assumption.
    One benefit to employers that can be quantified based on the record 
is the benefit of having clearer rules that are easier to understand. 
Several commenters offered evidence that clearer, up-to-date rules are 
likely to reduce costly litigation. For example, Verizon noted that the 
current rule ``offers little assistance to employers * * * who have to 
make challenging exemption classification decisions in the high 
technology environment of the twenty-first century. And the importance 
of making correct exemption classification decisions has never been 
higher. In recent years, employers have increasingly found themselves 
the target of large-scale class actions with multi-million dollar 
exposures challenging various exemption classification decisions that 
were based on good faith attempts to comply with the law.'' The 
National Association of Federal Wage Hour Consultants stated, ``The 
business community has faced numerous unnecessary `class inclusion 
type' law suits in the past few years and some of these have been 
brought in part as the result of a lack of proper interpretation of 
various parts of the regulations or regulations that are difficult to 
comprehend * * * Secondly, the legal community appears likewise to have 
problems when it comes to providing guidance to its clients as 
enforcement through interpretations and litigation have rendered 
varying results.'' Finally, Edward Potter, on behalf of the Employment 
Policy Foundation (EPF) noted that ``[s]implification of rules may 
reasonably reduce the number of case filings by one-third to one-half, 
based on the error rate reductions used elsewhere in DOL's analysis.'' 
EPF also suggested that ``[c]ost savings for reduced litigation would 
include reductions in total cases filed--including both those cases 
found to have merit and those without merit.''
    Other commenters noted that the proposed rule, particularly the 
proposed administrative duties test, ``is somewhat vague and 
subjective'' and that it ``appears to invite another generation of 
court litigation to clarify the meaning of its key terms.'' For 
example, the National Association of Manufacturers stated that ``like 
the language in the current regulations, the proposed `position of 
responsibility' language is subjective, ambiguous, and, if adopted, 
could be the subject of a flood of litigation.'' And the International 
Foodservice Distributors Association noted, ``The proposal must not 
merely substitute one subjective phrase for another. If the rule is to 
succeed in its goal of providing clarity to employers, it must make 
clear the distinctions between exempt and nonexempt activity. While 
IFDA recognizes the difficulty of this task across the entire economy, 
unless it is accomplished the new rule will only result in increased 
litigation as court battles are waged to delineate key terms of the new 
rule.''
    As explained elsewhere in the preamble, the Department recognizes 
the benefit of retaining relevant portions of the current standard so 
as not to completely jettison decades of federal court decisions and 
agency opinion letters and has made significant changes to the final 
rule that are intended to clarify the existing regulation, to make the 
rule easier to understand and apply to the 21st Century workplace, and 
to better reflect existing federal case law. The Department believes 
that the final rule accomplishes these objectives and will result in 
some reduction in litigation, particularly in the long term.
    Another benefit to workers and employers is enhanced compliance 
with the FLSA. Updating Part 541 will be a catalyst for employers to 
review the exemption classifications of their workforce and will result 
in greater levels of compliance with the law. More employers will 
understand exactly what their obligations are for paying overtime. 
Fewer workers will be unintentionally misclassified, and the potential 
legal liability that employers have under the current regulation will 
be reduced. Reducing regulatory red tape and litigation costs will free 
up resources and stimulate economic growth. The updated safe harbor 
provision in the final rule encourages employers to adopt proactive 
management practices, enables them to reimburse employees for overtime 
errors, and take meaningful measures to prevent improper deductions. 
The benefit for employers of clearer rules and the safe harbor 
provision comes from the lower liquidated damage awards that are 
associated with having fewer Part 541 overtime and salary basis 
violations (see Table 8-1). These proactive management practices will 
also reduce costly and lengthy litigation expenses.
    The recent increase in large-scale class action overtime lawsuits 
in recent years illustrates the significant cost to the economy as that 
has resulted from the ambiguities in the current rule (a fact noted by 
a number of commenters such as Verizon, the National Association of 
Federal Wage Hour Consultants, and EPF). This increase in overtime 
litigation has been widely reported. For example, the Washington Post 
reported on April 10, 2004 that the number of Federal lawsuits 
involving overtime ``held steady'' at approximately 1,500 per year in 
the 1990s but increased to 3,904 in 2002 and 2,751 in 2003, and the 
National Law Journal, Vol. 26, No. 30, March 29, 2004, reported that 
since July 2001, ``wage-and-hour class actions have skyrocketed.''
    To estimate the benefit of clearer rules and the safe harbor 
provision, the Department used data from a Minimum Wage Study 
Commission report that estimated overtime violation rates by industry 
(Report of the Minimum Wage Study Commission, Volume 1, May 1981, 
p.154) and assumed that these rates still apply today. The Department 
applied these rates to the number of white-collar salaried employees 
who worked overtime, the overtime hours that they worked, and their 
estimated earnings from those hours, from the Current Population Survey 
(CPS) Outgoing Rotation Group dataset, and then reduced these estimates 
by three-quarters (based on WHD investigation experience) to account 
for the other types of overtime violations, such as off-the-clock-work 
and straight time for all hours, that occur in addition to violations 
of the ``white collar'' exemptions. The benefit estimates are derived 
from the assumption, reflected in the comments, that clarifying the 
rule and the safe harbor provision will reduce the number of Part 541 
violations. Specifically, the Department assumed that clarifying the 
rule and the safe harbor provision would reduce overtime violations by 
25 percent (the low-range estimate used in the PRIA). The actual 
calculation is: ``Total

[[Page 22232]]

Overtime x Hours for these Workers'' x ``FLSA Overtime Violation Rate'' 
x ``Share Overtime Violations - 541 Related'' x ``Reduction in 541 
Violations'' x ``Average Hourly Earnings per Worker'' x ``the overtime 
premium or 0.50'' (see Table 8-1).
    The Department currently estimates the benefits from updating and 
clarifying the Part 541 rule that are associated with reduced 
liquidated damages to be at least $252.2 million. The services industry 
is estimated to have the largest quantifiable benefits, followed by 
retail trade and the finance, insurance, and real estate industry (see 
Table 8-1). However, based on comments in the record, the Department 
believes that the estimates presented in Table 8-1 may understate the 
actual benefits of the final rule that are associated with liquidated 
damages. For example, EPF commented that ``[s]implification of rules 
may reasonably reduce the number of case filings by one-third to one-
half, based on the error rate reductions used elsewhere in DOL's [PRIA] 
analysis.'' Using EPF's one-third to one-half reduction rates instead 
of the Department's more conservative 25 percent assumption would 
increase the estimated benefits to $336.3 million to $504.5 million.
    However, liquidated damages are only one part of the costs 
associated with Part 541 litigation. There are many other significant 
benefits that cannot be quantified in this analysis because although 
there is anecdotal evidence of other Part 541 related costs, data 
limitations preclude the Department from developing other quantitative 
estimates. Thus, the estimates presented in Table 8-1 do not include 
benefits such as reduced litigation-related costs including plaintiffs' 
attorneys fees, defense costs, and court related expenses that can be 
substantial; reduced back wage liability due to the safe harbor 
provision; the lower costs associated with determining the exempt 
status of employees including conducting expensive time-and-motion 
studies and other outside human resource expenses; and improved 
management productivity from reduced WHD investigations and private 
litigation. Consequently, the Department believes that the benefits due 
to clarifying the rules and the safe harbor provision are significantly 
higher than the quantified amount of $252.2 million.

[[Page 22233]]



                                                                                Table 8-1.--Estimated Benefits of Revised FLSA Regulations at 29 CFR 541
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                          Transportation,
                                    Agricultural                                                          communication,                                            Finance,                          State and local
                                      services          Mining        Construction      Manufacturing       and Public      Wholesale trade    Retail trade      insurance, and        Services         government           Total
                                                                                                             utilities                                            real estate
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total white-collar workers who             48,761           63,989           410,010          1,988,986           794,799           861,156         1,754,428          1,445,543          2,889,213           201,997         10,458,882
 worked overtime................
Total overtime hours for these         34,395,423       66,031,880       279,597,133      1,193,109,481       471,925,654       544,699,007     1,155,081,280        872,722,033      1,772,769,183       117,693,406      6,508,024,479
 workers........................
                                 ------------------
    Average annual overtime per               705            1,032               682                600               594               633               658                604                614               583                622
     worker.....................
                                 ==================
Total annual earnings for these    $2,398,158,778   $4,509,404,749   $26,221,165,904   $143,621,959,659   $54,632,035,944   $54,371,706,153   $90,225,585,058   $105,911,687,622   $188,027,119,347   $11,904,722,482   $681,823,545,696
 workers........................
Average annual earnings per               $49,182          $70,471           $63,952            $72,209           $68,737           $63,138           $51,427            $73,268            $65,079           $58,935            $65,191
 worker.........................
                                 ------------------
    Average hourly earnings per            $17.66           $22.65            $23.16             $26.94            $25.71            $23.28            $18.78             $27.30             $24.16            $22.13             $24.12
     worker.....................
                                 ==================
FLSA overtime violation rate \1\             8.8%             3.1%              4.9%               1.5%              3.2%              5.6%              8.1%               5.3%               7.1%              0.5%               5.3%
Share overtime violations--541              25.0%            25.0%             25.0%              25.0%             25.0%             25.0%             25.0%              25.0%              25.0%             25.0%              25.0%
 related \2\....................
                                 ------------------
    Adjusted 541 violation rate.             2.2%             0.8%              1.2%               0.4%              0.8%              1.4%              2.0%               1.3%               1.8%              0.1%               1.3%
Number of 541 violations........            1,073              496             5,023              7,459             6,358            12,056            35,527             19,153             51,284               252            138,681
Reduction in 541 violations \3\.            25.0%            25.0%             25.0%              25.0%             25.0%             25.0%             25.0%              25.0%              25.0%             25.0%              25.0%
                                 ==================
    Benefit from clarifying rule       $1,670,145       $1,448,601        $9,913,431        $15,069,504       $12,132,214       $22,187,719       $54,909,560        $39,461,662        $95,032,301          $407,036      $252,232,174
     & safe harbor \4\..........
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Overtime Violation Rates from 1981 Minimum Wage Commission Report, Vol. 1.
\2\ Percentage from Wage and Hour Division enforcement experience.
\3\ This reduction is associated with clarifying the rule and the safe harbor provision.
\4\ These benefits are liquidated damages that are not incurred.


[[Page 22234]]

VII. Other Regulatory Analysis

Unfunded Mandates Reform

    The Unfunded Mandates Reform Act of 1995, 2 U.S.C. 1501, requires 
agencies to prepare a written statement that identifies the: (1) 
Authorizing legislation; (2) cost-benefit analysis; (3) macro-economic 
effects; (4) summary of state, local, and tribal government input; and 
(5) identification of reasonable alternatives and selection, or 
explanation of non-selection, of the least costly, most cost-effective 
or least burdensome alternative; for rules for which a general notice 
of proposed rulemaking was published and that include any federal 
mandate that may result in increased expenditures by state, local, and 
tribal governments, in the aggregate, or by the private sector, of $118 
million or more in any one year.
(1) Authorizing Legislation
    This rule is issued pursuant to Section 13(a)(1) of the Fair Labor 
Standards Act, 29 U.S.C. 213(a)(1). The section exempts from the FLSA's 
minimum wage and overtime pay requirements ``any employee employed in a 
bona fide executive, administrative, or professional capacity 
(including any employee employed in the capacity of academic 
administrative personnel or teacher in elementary or secondary 
schools), or in the capacity of outside salesman (as such terms are 
defined and delimited from time to time by regulations of the 
Secretary, subject to the provisions of the Administrative Procedure 
Act * * *).'' The requirements of the exemption provided by this 
section of the Act are contained in this rule, 29 CFR Part 541.
    Section 3(e) of the Fair Labor Standards Act, 29 U.S.C. 203(e) 
defines ``employee'' to include most individuals employed by a state, 
political subdivision of a state, or interstate governmental agency. 
Section 3(x) of the Fair Labor Standards Act, 29 U.S.C. 203(x), also 
defines public agencies to include the government of a state or 
political subdivision thereof, or any interstate governmental agency.
(2) Cost-Benefit Analysis
    For purposes of the Unfunded Mandates Reform Act of 1995, this rule 
includes a Federal mandate that might result in increased expenditures 
by the private sector of more than $118 million in any one year, but 
the rule will not result in increased expenditures by State, local and 
tribal governments, in the aggregate, of $118 million or more in any 
one year. Based on the Regulatory Impact Analysis (RIA), the Department 
has determined that the final rule will result in first-year costs for 
state and local governments of approximately $21 million. In subsequent 
years, the Department estimates that state and local governments may 
experience a payroll increase of as much as $10 million per year.
    The benefits accruing to state and local governments will be 
similar to those accruing to other employers. Like other employers, 
state and local governments will benefit from having clearer rules that 
are easier to understand. State and local governments will understand 
exactly what their obligations are for paying overtime. Fewer workers 
will be unintentionally misclassified, and the potential legal 
liability that employers have under the current regulation will be 
reduced. Reducing regulatory red tape and litigation costs will free up 
resources.
(3) Macro-Economic Effects
    Agencies are expected to estimate the effect of a regulation on the 
national economy, such as the effect on productivity, economic growth, 
full employment, creation of productive jobs, and international 
competitiveness of United States goods and services, if accurate 
estimates are reasonably feasible and the effect is relevant and 
material. 5 U.S.C. 1532(a)(4). However, OMB guidance on this 
requirement notes that such macro-economic effects tend to be 
measurable in nationwide econometric models only if the economic impact 
of the regulation reaches 0.25 percent to 0.5 percent of Gross Domestic 
Product, or in the range of $1.5 billion to $3.0 billion. A regulation 
with smaller aggregate effect is not likely to have a measurable impact 
in macro-economic terms unless it is highly focused on a particular 
geographic region or economic sector, which is not the case with this 
proposed rule.
    The Department's RIA estimates that the total first-year impacts on 
employers of the final rule will be approximately $1.1 billion. 
However, given OMB's guidance, the Department has determined that a 
full macro-economic analysis is not likely to show any measurable 
impact on the economy.
    The ratio of total first-year costs to private sector payrolls 
averaged 0.04 percent nationwide, the ratio of total first-year costs 
to private sector revenue averaged less than 0.01 percent nationwide, 
and the ratio of total first-year costs to private sector pre-tax 
profit averaged 0.19 percent nationwide in the private sector. The 
Department concludes that impacts of this magnitude are clearly 
affordable and will not result in significant disruptions to typical 
firms in any of the major industry sectors.
    The ratio of total first-year state and local government costs were 
less than one-hundredth of one-percent of both state and local 
government payrolls and revenue. Impacts of this magnitude will not 
result in significant disruptions to typical state and local 
governments.
(4) Summary of State, Local, and Tribal Government Input
    Many state and local public employers and employees commented on 
specific aspects of the proposed rule. These have been addressed above 
in the preamble and, where appropriate, changes have been made to the 
final rule. In addition, many of the comments from state and local 
governments concerned the ability of these entities to absorb the costs 
related to the proposed revisions. For example, the Public Sector FLSA 
Coalition stated, ``The result of adopting proposed Section 
541.100(a)(4) could be that state and local governments would be forced 
to reclassify many of their currently exempt executive managers and 
supervisors as non-exempt. This possible limitation on the use of the 
executive exemption in the public sector was apparently not 
contemplated or intended by the Department. The * * * Department's 
statements concerning the methods by which resulting increased payroll 
costs could be ameliorated by employers may be of no assistance to the 
public sector.'' The preamble to the final rule clarifies how the 
executive exemption applies in the public sector and the impact of 
section 541.100(a)(4), which requires that an employee either have 
authority to hire or fire employees or that the employee's 
recommendations regarding the change in status of other employees be 
given particular weight. The Department also added a definition of 
``particular weight.''
    The preamble of the proposed rule contains (at 68 FR 15583) a brief 
summary and history of this rule and its impact on state, local and 
tribal governments. As noted therein, Congress amended the FLSA in 1985 
following the Garcia decision to readjust how the Act would apply to 
public sector employers by allowing (1) compensatory time off in lieu 
of cash overtime pay, (2) partial overtime exemptions for police and 
fire departments, (3) the use of unpaid volunteers in certain 
circumstances, and (4) a temporary phase-in period for meeting FLSA 
compliance obligations. Garcia v. San Antonio Metropolitan

[[Page 22235]]

Transit Authority, 469 U.S. 528 (1985). However, Congress enacted no 
special provisions for public agencies related to the section 13(a)(1) 
exemptions or the 541 regulations. As a result, the same rules for 
determining 541-exempt employees in the private sector were initially 
applied to the public sector following the 1985 amendments.
    When first confronted with the requirements of the FLSA, many state 
and local governments attempted to classify nearly all of their non-
supervisory ``white-collar'' workers as exempt administrative employees 
without regard to whether their primary duty related directly to agency 
management policies or general business operations, or whether they met 
the existing discretion and independent judgment test. In the late 
1980s, several Governors and state and local government agencies urged 
the Department to exempt many public sector classifications (including 
social workers, detectives, probation officers, and others) to avoid 
having the overtime requirements (either through increased costs or 
reduced hours of service) disrupt the level of public services they 
need to provide. In 1989, following a review of the concerns expressed, 
former Labor Secretary Elizabeth Dole responded by confirming what was 
required to meet the administrative exemption's duties test as applied 
to public sector employees, but also solicited specific input with 
accompanying rationale to support requested changes. Responses were 
limited but argued generally that government services should be 
considered unique because of the impact on health, safety, welfare or 
liberty of citizens. This, they argued, should allow exemption of 
positions in law enforcement and criminal justice, human services, 
health care and rehabilitation services, and the unemployment 
compensation systems, regardless of whether any particular employee's 
job duties included important decision-making authority on how the 
government agency is internally operated or managed. In effect, the 
suggestions essentially overlooked the focus on ``management or general 
business operations'' that has always been an essential foundation to 
the administrative employee exemption, but without explaining why that 
result was consistent with the intent of the FLSA and the exemptions 
provided by section 13(a)(1) as applied to the public sector. They also 
urged that the DOL redefine the professional exemption to recognize a 
broader contemporary use of that term in government employment, again 
without regard to the historical application of the professional 
exemption to only the recognized professions in particular fields of 
science or learning in which specialized intellectual instruction and 
specific academic training were prerequisites for entry into those 
particular professions. No supporting justifications were provided to 
explain how this broader application of the exemption would be in 
accord with the purposes of the FLSA or the exemptions in Section 
13(a)(1).
    During a growing wave of private lawsuits filed by public employees 
against their employers challenging their exempt status, a series of 
court decisions were issued that sharply limited public employers' 
ability to successfully claim exemption under the ``salary basis'' 
rule. This prompted the Department to modify the ``salary basis'' rule 
to provide specific relief to public employers based on principles of 
public accountability in a final rule establishing 29 CFR Sec.  541.5d 
issued in August 1992 (57 FR 37666; Aug. 19, 1992). Under this special 
rule, the fact that a public sector pay and leave system included 
partial-day deductions from pay for absences not covered by accrued 
paid leave became irrelevant to determining a public sector employee's 
eligibility for exemption. This particular provision was carried over 
into the Department's recent proposed rule, at Sec.  541.709 (68 FR 
15597; March 31, 2003) and is included in the final rule at Sec.  
541.710.
    Public sector employers have become less vocal over FLSA issues 
since the Department's 1992 rulemaking on the ``salary basis'' issue. 
The U.S. Supreme Court's 1997 decision in Auer v. Robbins, 519 U.S. 452 
(1997), a public sector case involving the City of St. Louis Police 
Department and disciplinary deductions from pay, may also have relieved 
many public agencies' concerns over pay-docking for discipline.
    Although public agency organizations were invited to the 
Department's stakeholder meetings in 2002 to address concerns over the 
Part 541 regulations, most did not respond to the invitations. The 
International Personnel Management Association, accompanied by the 
National Public Employers Labor Relations Association and the U.S. 
Conference of Mayors, suggested that progressive discipline systems are 
common in the public sector (some collectively bargained) and the 
``salary basis'' rule for exempt workers, which prohibits disciplinary 
deductions except for major safety rules, conflicts with such systems. 
Representatives of the Interstate Labor Standards Association (ILSA) 
submitted written views suggesting that the salary threshold be indexed 
to the current minimum wage or some multiple thereof (i.e., three times 
the minimum wage for a 40-hour workweek or $618 per week). One 
additional idea was to relate the salary levels to those of the 
supervised employees. No other input was provided.
    The proposed rule intended to clarify and thus simplify the 
exemptions' duties tests, but would continue to apply the same basic 
duties tests in both the public and private sectors. The public sector 
has been regulated under a different set of pay-docking rules since 
1992, and additional revisions included in the final rule would broaden 
permissible disciplinary deductions to include partial-week suspensions 
for infractions of certain workplace conduct rules such as sexual 
harassment and work-place violence. The Department is not persuaded, 
however, by the comments seeking a separate, less-stringent duties test 
rule applicable solely to the public sector.
    As discussed above in the RIA, the estimated first-year costs for 
state and local government are approximately $21 million, approximately 
half of which are one-time implementation costs. This $21 million 
constitutes an average of less than $250 for each of the approximately 
90,000 state and local entities. The Department considers impacts of 
this magnitude to be quite small both in absolute terms and in relation 
to payrolls and revenue.
(5) Least Burdensome Option or Explanation Required
    The Department's consideration of various options has been 
described throughout the preamble. The Department believes that it has 
chosen the least burdensome option that updates, clarifies, and 
simplifies the rule. One alternative option would have set the 
exemptions' salary level at a rate lower than $455 per week, which 
might impose lower direct payroll costs on employers, but may not 
necessarily be the most cost-effective or least burdensome alternative 
for employers. A lower salary level could result in a less effective 
``bright-line'' test that separates exempt workers from those nonexempt 
workers whom Congress intended to cover by the Act. Greater ambiguity 
regarding who is exempt and nonexempt increases the potential legal 
liability from unintentionally misclassifying workers, and thus the 
ultimate cost of the regulation.

[[Page 22236]]

Executive Order 13132 (Federalism)

    This rule will not have ``substantial direct effects on the States, 
on the relationship between the national government and the States, or 
on the distribution of power and responsibilities among the various 
levels of government.'' As noted previously, the FLSA explicitly 
applies to states, political subdivisions of states, and interstate 
governmental entities, 29 U.S.C. 203(e), (x). To the extent necessary, 
the final rule addresses effects on state and local government 
employers, including retaining the previous rule's specific exception 
to the salary basis requirement for public employees (now at section 
541.710) that was promulgated in 1992 (57 FR 37677 (August 19, 1992)) 
to address state constitutional or statutory public accountability 
requirements in the funding of state and local governments. As 
described above, the Department considers the estimated cost impacts of 
the rule on state and local governments to be quite small both in 
absolute terms and in relation to payrolls and revenues. State and 
local governments will also accrue benefits from this final rule like 
other employers in the form of clearer rules and reduced litigation.
    In addition, the FLSA specifies that employers must comply with any 
state or municipal laws, regulations or ordinances establishing a 
higher minimum wage or lower maximum work week than those established 
under the Act, 29 U.S.C. 218(a). Section 541.4 in the final regulations 
clarifies in the rule itself that state laws providing additional 
worker protections are not preempted and that employers must continue 
to comply with those laws. Consequently, under the terms of section 6 
of E.O. 13132, it has been determined that this rule does not have 
sufficient federalism implications to warrant the preparation of a 
federalism summary impact statement.

Regulatory Flexibility Act and Executive Order 13272

    The Regulatory Flexibility Act of 1980, as amended by the Small 
Business Regulatory Enforcement Fairness Act of 1996, 5 U.S.C. 601 et 
seq., requires agencies to prepare regulatory flexibility analyses, and 
make them available for public comment, when promulgating regulations 
that will have ``a significant economic impact on a substantial number 
of small entities.'' Accordingly, the following analysis assesses the 
impact of these regulations on small entities as defined by the 
applicable SBA size standards.
    In accordance with E.O. 13272, ``Proper Consideration of Small 
Entities in Agency Rulemaking,'' this rule has been reviewed to assess 
its potential impact on small businesses, small governmental 
jurisdictions, and small organizations, as provided by the Regulatory 
Flexibility Act. The Department gave the notice of proposed rulemaking 
and the initial regulatory flexibility analysis to the Chief Counsel 
for Advocacy of the Small Business Administration for review.
    The County Attorney for the County of Culpeper, Virginia, asserted 
that the DOL has never reviewed the effects of Part 541 on state and 
local governments or sought to minimize its burdens. This, according to 
the County Attorney, is a failure by the DOL to meet its obligations 
under the RFA and Executive Order 13272. This commenter cited as the 
most obvious example the ``salary basis'' test and the flood of 
litigation against public employers in the aftermath of the U.S. 
Supreme Court's 1985 decision in Garcia v. San Antonio Metropolitan 
Transit Authority, 469 U.S. 528 (1985). The County Attorney suggested 
that the Department should confer with state and local officials and 
jointly prepare proposed rules designed specifically for government 
employers that recognize the differences between urban and rural 
governments and between large and small government jurisdictions, and 
which minimize the burden on these employers while still conforming to 
Congressional intent. (The crux of this issue in the Department's view, 
of course, is how best to minimize the burden on these employers while 
still conforming to Congressional intent.)
    The Department disagrees with this comment. The Department has, in 
fact, reviewed the impact of these regulations on state and local 
governments and sought to minimize burdens on state and local 
governments and on small entities to the extent permitted by 
Congressional intent and the statutory objectives of the FLSA. A case 
simply has not been made for creating separate, less-stringent 
exemption criteria under special rules for state and local governments 
that bypass Congressional intent or the statutory objectives of the 
FLSA and the exemptions provided in section 13(a)(1).

Final Regulatory Flexibility Analysis

(1) Succinct Statement of Need For, and Objectives of, Rule
    Section 13(a)(1) of the Fair Labor Standards Act (FLSA), 29 U.S.C. 
213(a)(1), directs the Secretary of Labor to issue regulations ``from 
time to time'' (subject to the Administrative Procedure Act) to define 
and delimit the terms ``any employee employed in a bona fide executive, 
administrative, or professional capacity * * * or in the capacity of 
outside salesman * * *'' Employees who meet the specified regulatory 
criteria are completely exempt from minimum wage and overtime pay under 
the FLSA. The existing regulations require payment ``on a salary 
basis,'' at not less than specified minimum amounts, and certain 
additional tests must be met related to an employee's primary job 
duties and responsibilities. The duties tests were last modified in 
1949 and have remained essentially unchanged since. The salary levels 
required for exemption were last updated in 1975 on an interim basis. 
In 1999, the U.S. General Accounting Office reviewed these regulations 
and recommended that the Secretary of Labor comprehensively review and 
update them, and make necessary changes to better meet the needs of 
both employers and employees in the modern work place. These 
regulations were also recommended for reform in public comments 
submitted on OMB's 2001 and 2002 Reports to Congress on the Costs and 
Benefits of Regulations. The Department proposed revisions to these 
regulations in response to the concerns that have been raised over the 
years, to update, clarify and simplify them for the 21st Century 
workplace. The objectives of the revised rule are to provide clear and 
concise regulatory guidance to implement the statutory exemption, in 
plain language, to assist employers and employees in determining 
whether an employee is exempt from the FLSA as a bona fide executive, 
administrative, professional, or outside sales employee.
(2) Summary of Significant Issues Raised in Comments and Responses 
Thereto
    Many of the issues raised by small businesses in the public 
comments received on the proposed rule are described in the preamble 
above. The significant issues raised by representatives of small 
businesses and the U.S. Small Business Administration's Office of 
Advocacy (``Advocacy'') are repeated here to meet the guidelines under 
the Regulatory Flexibility Act.
    Advocacy commended the Department for its outreach to small 
entities in developing the proposed rule and encouraged those efforts 
to continue, including the development of small entity compliance 
assistance materials for the final rule. The Department will continue 
to expand its

[[Page 22237]]

available compliance assistance materials related to these regulations 
for small entities.
    Primary duty test: Small business representatives informed Advocacy 
that the proposed movement away from a percentage-of-time primary duty 
test was an important development in reducing the regulation's 
compliance burden on small businesses. Advocacy recommended that the 
Department incorporate the proposed primary duty test in the final 
rule. The final rule includes the proposed primary duty test, with 
minor and clarifying modifications.
    Salary test: Small businesses told Advocacy that, because of 
regional differences in salaries and industry characteristics, they 
will face disproportionate burdens if the Department adopts the $425 
per week minimum salary test. Advocacy stated that, in different 
regions of the country, small business employees enjoy the same or 
similar living standards with very different salaries. Further, some 
small business industries, such as retail stores and restaurants, 
operate on thin margins with labor costs constituting a significant 
portion of their expenses. Many of these small businesses rely heavily 
on small numbers of management-level employees who would no longer be 
exempt from overtime. Advocacy encouraged the Department to provide 
flexibility to small businesses under the salary test, such as lower 
minimum salary levels for small businesses, to alleviate the 
disproportionate effects. At a minimum, Advocacy urged the Department 
not to adopt a minimum salary test for small businesses above $425 per 
week.
    The National Small Business Association (NSBA) (formerly National 
Small Business United) commented in general support of the proposal and 
asserted overall that the benefits of the changes would outweigh the 
potentially negative impacts of the changes on its members. However, 
NSBA also commented that lower salary tests (both the standard tests 
and the highly compensated test) would be more desirable for small 
businesses.
    The National Federation of Independent Business (NFIB) observed 
that DOL's analysis showed two industries in which incremental payroll 
costs rise by more than two percent of pretax profit--general 
merchandise stores (SIC 53) and private educational services (SIC 82)--
when employees are reclassified according to the proposed new FLSA 
rules (based on 2001 data). NFIB suggested that any agency proffering 
rule changes that cause potential losses in small firm profits ought to 
give careful consideration to ameliorating those particular 
circumstances.
    The Department carefully considered the FLSA's statutory purposes 
and the context for its exemption of ``white-collar'' employees under 
section 13(a)(1), and studied its extensive regulatory history. 
Employees who qualify under these exemptions are exempt from the Act's 
minimum wage and overtime requirements. They are assumed to enjoy a 
certain prestige, status, and importance within their employer's 
organization commensurate with the exempt level accorded their 
position, as well as other compensatory privileges in exchange for not 
being covered by the Act. Consequently, to achieve its intended 
purpose, the salary level adopted for exemption should help to 
accurately distinguish exempt from nonexempt workers under these 
principles, and without inviting evasion of the FLSA's minimum wage and 
overtime requirements for large numbers of workers for whom the Act's 
basic protections were intended. At the same time, the level selected 
should not operate to exclude large numbers of employees whose jobs 
were intended to be within the exemption. Accordingly, in arriving at 
the salary level, the Department's methodology specifically considered 
salary levels actually being paid by small business industries (such as 
retail stores and restaurants), and in lower-wage regions (such as the 
South). Therefore, the Department concluded these commenters have not 
fully understood the true effects of the Department's methodology in 
setting the exemption's salary level.
    Although the analysis does not include precise data delineating the 
salary levels paid by small businesses to their exempt employees in 
each exemption category (due to data limitations), the Department 
applied a reasonable proxy that takes into account lower-wage 
industries that include many small businesses, specifically by looking 
to the salary levels actually being paid in the retail and service 
sectors and in the South. This approach is based on and entirely 
consistent with previous revisions of these regulations. It tries to 
approximate the lower portion of the range of prevailing salaries 
already being paid to employees intended for exemption (thus mitigating 
actual impacts in retail stores and restaurants and in lower-wage 
regions of the country). For example, when the Department revised the 
regulations in 1958, it looked at the salaries paid to exempt employees 
and set rates ``at about the levels at which no more than about 10 
percent of those in the lowest-range region, or in the smallest size 
establishment group, or in the smallest-sized city group, or in the 
lowest-wage industry of each of the categories would fail to meet the 
tests.'' In the 1958 Kantor Report (at 5-7) and the 1940 Stein Report 
(at 32), it was noted that ``* * * these figures are averages, and the 
act applies to low-wage areas and industries as well as to high-wage 
groups. Caution therefore dictates the adoption of a figure that is 
somewhat lower, though of the same general magnitude.'' Moreover, the 
1949 Weiss Report (at 11-15) stated ``To be sure, salaries vary, 
industry by industry, and in different parts of the country, and it 
undoubtedly occurs that an employee may have a high order of 
responsibility without a commensurate salary. By and large, however, if 
the salary levels are selected carefully and if they approximate the 
prevailing minimum salaries for this type of personnel and are above 
the generally prevailing levels for nonexempt occupations, they can be 
useful adjuncts in satisfying employers and employees as well as the 
Divisions as to the exempt status of the particular individuals.'' DOL 
set a salary level at that time at a ``figure slightly lower than might 
be indicated by the data'' because of concerns regarding the impact of 
the salary level increases on small businesses: ``The salary test for 
bona fide executives must not be set so high as to exclude large 
numbers of the executives of small establishments from the exemption.''
    The Department's current approach was similar, and thus already 
specifically considered the lower salary levels paid by smaller 
businesses in the retail and service sectors and in the South, which 
the data confirm pay lower wages. The Department's approach is designed 
specifically to achieve a careful and delicate balance: Mitigate the 
adverse impacts of raising the salary threshold on smaller businesses 
covered by the law while staying consistent with the objectives of the 
statute to clearly define and delimit which workers qualify for 
exemption as Congress intended, and at the same time helping to prevent 
the misclassification of obviously nonexempt employees. Adopting an 
even lower minimum salary level for small businesses, when the 
methodology has already given special consideration to lower salaries 
being paid in the retail and service sectors and in the South (two 
cohorts in which small businesses are prevalent), would result in a 
rule that fails to effectuate its statutory purposes.
    The FLSA itself does provide special treatment for small entities 
under some of its exemptions, e.g., smaller farms

[[Page 22238]]

and small newspapers are specifically exempt and enterprises with 
annual dollar volumes of business less than $500,000 per year are not 
covered under the enterprise coverage test. Small businesses that have 
as their only regular employees the owner or parent, spouse, child or 
other member of the immediate family of the owner are also specifically 
excluded from the FLSA's enterprise coverage test. However, the FLSA's 
statutory exemption for white-collar employees in section 13(a)(1) 
contains no special provision based on size of business.
    Regional and population-based salary differentials were also 
previously considered and rejected in prior revisions of these 
regulations. They were considered unworkable because they would 
increase enormously the difficulties of administration and enforcement, 
and were questionably beyond the Administrator's authority under the 
Act (perceived as comparable to setting different minimum wages for a 
class of workers that Congress specifically exempted). See 1940 Stein 
Report at 5-6 and 32. While the Department did once again reconsider 
these possible options in response to suggestions from commenters, no 
new arguments or rationales were advanced during this rulemaking that 
would overcome the same shortcomings and previously-reached 
conclusions. Setting multiple minimum salary levels according to SBA 
size standards industry-by-industry would present the same 
insurmountable challenges.
    As described under the Unfunded Mandates Reform Act section in the 
preamble of the proposed rule (see 68 FR 15584), the Department 
considered as an alternative option setting the salary level even lower 
than the proposed $425 per week and concluded that, while it might 
appear to impose lower direct payroll costs on employers, it may not 
necessarily be the most cost-effective or least burdensome alternative 
for employers. A lower salary level that is not above the generally 
prevailing levels for nonexempt occupations fails to adequately 
distinguish bona fide exempt workers from those nonexempt workers whom 
Congress intended to protect. It provides a less effective ``bright-
line'' test under the exemption, which invites misclassification. 
Greater ambiguity over who is and who is not exempt increases the 
potential legal liability for employers from unintentionally 
misclassifying workers, and thus the ultimate cost of the regulation. 
Reducing the needless ambiguity of the existing regulations is one of 
the principal objectives of the final rule. Setting the exemption 
salary level at or near the wage levels paid to large numbers of 
nonexempt workers would fail the objectives of these regulations and 
the purposes of the statute.
    The law provides considerable built-in flexibility to small 
businesses to enable them to respond to the regulations in the most 
cost-effective manner that best suits their individual needs. The FLSA 
requires that covered employers comply with its basic minimum wage and 
overtime pay requirements unless a particular exemption applies. Unless 
it chooses to do so, no employer is required to claim an exemption from 
the law or to pay an employee the salary level required for the 
``white-collar'' exemptions. The law therefore provides a measure of 
maximum flexibility to employers in this respect for meeting their 
compliance obligations.
    Employers affected by the final rule could respond in a variety of 
ways. For example, they could adhere to a 40-hour work week (by 
spreading available work to more employees, and limiting each to no 
more than 40 hours of work per week, consistent with the statutory 
objective of the FLSA's overtime requirements); pay the statutory 
overtime premiums to affected employees who work more than 40 hours per 
week; or raise exempt employees' salaries to the new level required 
under the final rule. Given the range of responses employers may take 
when confronted with paying overtime to an employee previously treated 
as exempt, and in light of the Department's methodology that 
specifically considered lower salary levels actually being paid by 
small businesses in the retail sector and in the South, the Department 
believes that it has properly considered the available options that are 
consistent with the purposes of the statute and has selected a 
regulatory approach that alleviates the perceived disproportionate 
effects that small businesses have suggested would occur under the 
rule.
    Enforcement flexibility: Advocacy noted that SBREFA requires 
Federal agencies to establish policies which reduce or waive civil 
penalties for small businesses in appropriate cases. Advocacy 
encouraged the Department to consider civil penalty flexibility where 
appropriate, noting that flexibility in dealing with small businesses 
will encourage such entities to work more closely with the Department 
to voluntarily achieve compliance. The Department's policies under the 
FLSA for reducing or waiving civil money penalties for small businesses 
under appropriate circumstances are fully consistent with SBREFA 
requirements and principles. However, there is a distinction between 
civil money penalties and statutory wages due under the FLSA. 
Violations of the FLSA's minimum wage or overtime provisions create an 
employer liability directly to its employees who were not paid their 
statutory wages due. The Department has no authority under the FLSA or 
SBREFA to reduce or waive an employer's liability to employees for 
statutory minimum wages or overtime pay legally due. The Department 
will continue to expand its compliance assistance efforts to promote 
voluntary employer compliance with these regulations, especially for 
smaller businesses.
    Small business representatives and Advocacy commented that the safe 
harbor's requirement for a pre-existing ``written policy'' may exclude 
some small businesses which do not produce written compliance materials 
in the ordinary course of their business. Understanding that the 
purpose of this requirement is to encourage regulated entities to 
better understand the law's requirements, Advocacy still believed that 
the Department should not exclude small businesses from the proposed 
safe harbor, while offering it to large businesses that are more able 
to dedicate resources to drafting comprehensive written employment 
policies. While Advocacy commended the DOL for including a safe harbor 
provision, it encouraged the Department to consider alternatives to the 
written policy requirement proposed at Sec.  541.603.
    After carefully considering all the comments on the proposal and 
pertinent case law on the current rule's ``window of correction,'' the 
Department modified the proposed rule's safe harbor requirement. The 
final rule does not require employers to adopt and communicate a 
written employment policy in order to utilize the rule's safe harbor. 
While an employer must still have a policy prohibiting improper pay 
deductions, and clearly communicate it to its employees, a written 
policy is no longer required. In addition, the clearly communicated 
policy must also now include a complaint mechanism. Communication to 
employees in some form is important so that employees will also benefit 
from this notification of their rights under the FLSA. As other 
commenters (e.g., the American Health Care Association, American 
Corporate Counsel Association, and National Association of 
Manufacturers) have stated, adopting a written policy is the best 
evidence of the employer's good faith efforts to comply. Further, this

[[Page 22239]]

particular requirement is narrowly focused on an employer's policy 
prohibiting improper pay deductions, which includes a complaint 
mechanism, for salaried-exempt workers; it does not suggest the 
adoption of ``comprehensive written employment policies'' covering 
other matters.
    Small entity compliance guide: Advocacy noted that the Department 
has historically made compliance materials available to small 
businesses via its Web site. Advocacy encouraged the Department to 
update and revise these compliance assistance materials for small 
entity use with the new rule, as well as to distribute these materials 
to small businesses that do not have access to the Internet. The 
Department is revising all pertinent compliance assistance materials 
for small entities' use with the new rule and will distribute printed 
versions of the materials for employers that do not have access to the 
Internet. The Department has also planned a comprehensive compliance 
assistance effort on the changes in the regulations so that employers 
will better understand their compliance responsibilities and employees 
will better understand their rights under the new rules.
    The American Hotel & Lodging Association and the International 
Franchise Association both commented that, for the lodging industry, 
entities with annual receipts of less than $6 million are considered 
``small'' according to SBA size standards. They asserted that the 
FLSA's statutory exemption for firms with annual revenues less that 
$500,000 does not relieve the Department of the requirement in the 
Regulatory Flexibility Act to address the disproportionate impact on 
smaller firms. The impact of the dramatically increased salary 
threshold on an owner of a single, limited-service hotel in a rural 
area could be quite significant, they maintained, and they urged the 
Department to more carefully explore regulatory alternatives for 
reducing significant economic impact on small entities. For the reasons 
discussed more fully above, the Department disagrees that it has not 
carefully explored the available regulatory alternatives consistent 
with the purposes of the statute in ways that address the 
disproportionate impact on smaller firms. The Department believes that 
it has properly considered the available options and has selected a 
regulatory approach that appropriately considers the lower salary 
levels being paid by smaller businesses in the retail sector and in the 
South, thereby mitigating the perceived disproportionate effects that 
would otherwise occur to small businesses. In so doing, the Department 
has not, contrary to the assertions of these commenters, assumed that 
the FLSA's statutory coverage test relieves the DOL of its obligations 
under the Regulatory Flexibility Act.
(3) Number of Small Entities Covered by the Rule
    The Department based its small firm estimates on the same data 
sources used for the private sector as a whole. Based on SBA's size 
standards for small business entities, the Department estimates more 
than 5.2 million establishments impacted by the final standard are 
considered to be small businesses. These small firms employ 
approximately 38.7 million workers with an annual payroll of $940 
billion. Their total annual sales are estimated to be $5.7 trillion and 
their annual pre-tax profits are estimated to be $180 billion. 
Approximately 80 percent of the affected establishments are considered 
to be small businesses and they account for 39 percent of the 
employment, 35 percent of the payroll, 32 percent of the annual sales, 
and 31 percent of the annual pre-tax profits.
(4) Reporting, Recordkeeping and Other Compliance Requirements of the 
Rule
    Although an employer claiming an exemption from the FLSA under 29 
CFR Part 541 must be prepared to establish affirmatively that all 
required conditions for the exemption are met, this rule contains no 
reporting or recordkeeping requirements as a condition for the 
exemption. However, the recordkeeping requirements for employers 
claiming exemptions from the FLSA under 29 CFR Part 541 for particular 
employees are contained in the general FLSA recordkeeping regulations, 
applicable to all employers covered by the FLSA (codified at 29 CFR 
Part 516; see 29 CFR Sec.  516.0 and 516.3) and have been approved by 
the Office of Management and Budget Control Number 1215-0017. There are 
no other compliance requirements under the final rule.
(5) Steps Taken To Minimize Significant Impact on Small Entities 
Consistent With Objectives of Applicable Statutes
    The FLSA generally requires employers to pay covered nonexempt 
employees at least the federal minimum wage of $5.15 per hour, and 
time-and-one-half overtime premium pay for hours worked over 40 per 
week. Under the terms of the statute, Congress excluded some smaller 
businesses (those with annual revenues less than $500,000) from the 
definition of covered ``enterprises'' (although individual workers who 
are engaged in interstate commerce or who produce goods for such 
commerce may be individually covered by the FLSA). This rule clarifies 
and updates the criteria for the statutory exemption from the FLSA for 
executive, administrative, professional, and outside sales employees 
for all employers covered by the FLSA.
    The factual, policy and legal reasons for selecting the regulatory 
alternatives adopted in the final rule are set out in full detail above 
in section (2) of this Final Regulatory Flexibility Analysis and 
elsewhere in the preceding sections of the preamble discussing the 
public comments received on specific sections of the proposal and our 
responses thereto, and include the statutory objectives of the FLSA and 
the purposes of the section 13(a)(1) exemptions; the extensive 
regulatory history and procedures followed during prior updates of 
these regulations; extensive public commentary over the years on the 
current rules as recently documented by the GAO and others; available 
data for determining the scope and impact of making changes to the 
current rule; and the regulatory principles embodied in the Paperwork 
Reduction Act, the Regulatory Flexibility Act, and the various 
Executive Orders applicable to the rulemaking process.
    The Department considered a number of alternatives to the rule that 
would impact small entities. One alternative is not to change the 
existing regulations. This alternative was rejected because the 
Department has determined the existing salary tests, which have not 
been raised in more than 28 years, no longer distinguish between bona 
fide executive, administrative, and professional employees and those 
who should not be considered for exemption. Also, the duties tests, 
which were last modified in 1949, are viewed in the regulated community 
as too complicated, confusing, and outdated for the modern workplace.
    Two other alternatives are to raise the salary levels and not 
update the duties tests, or conversely to update the duties tests 
without raising the salary levels. However, the Department rejected 
these alternatives and concluded that raising the salary levels is 
necessary to reestablish a clear, relevant bright-line test between 
exempt and nonexempt workers. Moreover, the duties tests were last 
revised in 1949 and have remained essentially unchanged since that 
time, and the salary levels were last updated in 1975. The Department 
has determined that updating both the salary level and duties tests is 
necessary

[[Page 22240]]

to better meet the needs of both employees and employers in the modern 
workplace and to anticipate future workplace trends.
    Another alternative is to adjust the salary levels for the standard 
test for inflation. However, the Department has never relied solely on 
inflation adjustments to determine the appropriate salary levels, and 
has decided to continue its long-standing regulatory practice to reject 
such mechanical adjustments for inflation and base the salary levels 
for exemption on wage levels actually being paid in the economy with 
appropriate consideration given to low-wage regions and low-wage 
industries and the effects on smaller businesses, as explained above.

Assessment of the Impact on Families

    A number of commenters, including numerous individuals who 
submitted form letters, expressed concerns that the proposed rule would 
have an adverse impact on families.
    Many of these comments were based upon the erroneous assertion that 
the proposed rule would have made millions of workers exempt from 
overtime and, as a result, would have deprived families of a 
significant source of income. As discussed more fully above (see 
Chapters 2 and 4 of the RIA), many of these allegations were based upon 
misleading and inappropriate comparisons between the existing ``long'' 
duties tests and the standard tests in the final regulation. The 
``long'' duties tests, under which some employees are exempt and others 
nonexempt, have been replaced in the final rule by guaranteed overtime 
protection. Accordingly, the Department concludes that no worker who 
earns less than $455 per week will lose their overtime protection under 
the final rule.
    The Department estimates that 1.3 million white-collar workers 
earning less than $455 per week ($23,660 per year) are Part 541-exempt 
under the current rule. These workers are likely to benefit under the 
final rule in the form of increased compensation of approximately $375 
million per year in the form of either paid overtime or higher 
salaries. According to the CPS data, many of these workers are married 
women and minorities with less than a college degree. Another 5.4 
million salaried workers who earn between $155 and $455 per week will 
have their overtime protection strengthened because their protection, 
which is based on the duties tests under the current regulation, will 
be guaranteed under the final rule.
    The Department also has determined that the final rule is as 
protective as the current regulation for workers who earn between 
$23,660 and $100,000 per year. On the whole, employees will gain 
overtime protection because some revisions are more protective than the 
existing short duties tests. For example, the executive duties test in 
the final rule is more protective than the current short duties test 
and the final rule is more protective for police officers, fire 
fighters, paramedics, emergency medical technicians, and other first 
responders, and the highly compensated test does not apply to them. The 
Part 541 exemptions also do not apply to manual laborers or other non-
management blue-collar workers such as carpenters, electricians, 
mechanics, plumbers, iron workers, craftsmen, operating engineers, 
longshoremen, construction workers and laborers.
    Additionally, clearer more up-to-date rules will also help the Wage 
and Hour Division more vigorously enforce the law, ensuring that 
workers are being paid fairly and accurately. Fewer workers will be 
unintentionally misclassified; therefore they will not have to go to 
court and wait years for their back pay. This will have a positive 
impact on workers, especially low-wage, vulnerable workers and their 
families.
    An estimated 107,000 workers who earn $100,000 or more per year 
could lose their overtime protection due to the new highly compensated 
test. However, as discussed in Chapters 4 and 8 of the RIA, there are a 
variety of reasons why employers might not convert the exemption status 
of these highly paid workers. These include, but are not limited to, 
the incentives to preserve an investment in human capital, retain 
institutional memory, and minimize turnover costs, as well as the 
nature of the work, and tradition and culture. Moreover, it would be 
incorrect to assume that employers would no longer pay a premium for 
overtime hours to these workers when 63.4 percent of the RNs and 76.1 
percent of the Pharmacists who earn $100,000 or more per year continue 
to be paid by the hour (and eligible for overtime) despite the fact the 
current regulations classify them as performing exempt professional 
duties. The Department expects that most employers will adjust their 
compensation policies in a way that maintains the stability of their 
workforce, pay structure, and output levels while preserving their 
investment in human capital, and are unlikely to reduce the 
compensation of many highly paid workers, even if they could 
theoretically be made exempt under the new highly compensated tests.
    Therefore, the Department has determined that the final rule will 
have an overall positive impact on families, and: (1) Is unlikely to 
affect the stability or safety of the family, particularly the marital 
commitment; (2) has no affect on the authority and rights of parents in 
the education, nurture, and supervision of their children; (3) is 
likely to help the family perform its functions; (4) is likely to 
increase the disposable income of families and children and help reduce 
poverty; (5) can not be carried out by State or local government or by 
the family; and (6) does not establish an implicit or explicit policy 
concerning the relationship between the behavior and personal 
responsibility of youth, and the norms of society. Accordingly, this 
rule has been assessed under section 654 of the Treasury and General 
Government Appropriations Act, 1999, for its effect on family well-
being and the undersigned hereby certifies that the rule will not 
adversely affect the well-being of families.

Executive Order 13045, Protection of Children

    In accordance with Executive Order 13045, the Department has 
evaluated this rule and determined that it has no environmental health 
risk or safety risk that may disproportionately affect children.

Appendix A--Detailed Coverage Estimates

    Table A-1.--Blue-Collar Occupations That Are Most Likely Nonexempt Under the Current and Final Executive,
                                   Administrative, or Professional Exemptions
----------------------------------------------------------------------------------------------------------------
                OCC code                          Occupation title             Paid hourly         Nonhourly
----------------------------------------------------------------------------------------------------------------
403.....................................  Launderers and ironers..........                  0              3,239
404.....................................  Cooks, private household........              9,448              2,052
405.....................................  Housekeepers and butlers........              6,892              3,275
406.....................................  Child care workers, private                 265,010            213,825
                                           household.
407.....................................  Private household cleaners and              451,534            506,876
                                           servants.

[[Page 22241]]

 
416.....................................  Fire inspection and fire                     10,707              1,748
                                           prevention occupations.
417.....................................  Firefighting occupations........             98,804            129,880
418.....................................  Police and detectives, public               301,015            250,539
                                           service.
423.....................................  Sheriffs, bailiffs, and other                72,306             72,512
                                           law enforcement officers.
424.....................................  Correctional institution                    171,867            129,503
                                           officers.
425.....................................  Crossing guards.................             30,947              4,612
426.....................................  Guards and police, except public            681,655            134,843
                                           service.
427.....................................  Protective service occupations,              86,808              9,192
                                           not elsewhere classified
                                           (n.e.c.).
434.....................................  Bartenders......................            272,490             37,341
435.....................................  Waiters and waitresses..........          1,289,086            144,701
436.....................................  Cooks...........................          1,821,259            251,916
438.....................................  Food counter, fountain and                  394,989              8,887
                                           related occupations.
439.....................................  Kitchen workers, food                       309,683             26,521
                                           preparation.
443.....................................  Waiters'/waitresses' assistants.            617,109             56,396
444.....................................  Miscellaneous food preparation              582,667             56,533
                                           occupations.
445.....................................  Dental assistants...............            176,900             31,036
446.....................................  Health aides, except nursing....            300,666             45,918
447.....................................  Nursing aides, orderlies, and             1,905,597            254,413
                                           attendants.
449.....................................  Maids and housemen..............            548,780             71,577
453.....................................  Janitors and cleaners...........          1,616,839            404,414
454.....................................  Elevator operators..............              5,635                771
455.....................................  Pest control occupations........             30,692             24,887
457.....................................  Barbers.........................             12,811             25,388
458.....................................  Hairdressers and cosmetologists.            214,791            330,329
459.....................................  Attendants, amusement and                   210,873             33,786
                                           recreation facilities.
461.....................................  Guides..........................             23,487              8,556
462.....................................  Ushers..........................             34,419              3,724
463.....................................  Public transportation attendants             79,221             43,725
464.....................................  Baggage porters and bellhops....             38,447              3,765
465.....................................  Welfare service aides...........             78,519             28,057
466.....................................  Family child care providers.....              7,676             13,031
467.....................................  Early childhood teacher's                   400,055            105,253
                                           assistants.
468.....................................  Child care workers, n.e.c.......            164,678             45,236
469.....................................  Personal service occupations,               167,870             61,095
                                           n.e.c..
473.....................................  Farmers, except horticultural...              1,233                304
479.....................................  Farm workers....................             19,370              3,883
483.....................................  Marine life cultivation workers.                767                  0
484.....................................  Nursery workers.................              6,319                119
486.....................................  Groundskeepers and gardeners,               628,009            163,202
                                           except farm.
487.....................................  Animal caretakers, except farm..             83,895             21,766
488.....................................  Grader and sorter, agricultural              38,938              5,673
                                           products.
489.....................................  Inspectors, agricultural                      1,946              1,214
                                           products.
495.....................................  Forestry workers, except logging              3,992              1,752
496.....................................  Timber cutting and logging                   22,039             12,078
                                           occupations.
497.....................................  Captains and other officers,                    819              1,761
                                           fishing vessels.
498.....................................  Fishers.........................              4,933             15,923
505.....................................  Automobile mechanics............            295,415            167,163
506.....................................  Auto mechanic apprentices.......              2,215                  0
507.....................................  Bus, truck, and stationary                  193,638             37,272
                                           engine mechanics.
508.....................................  Aircraft engine mechanics.......             25,871              7,301
509.....................................  Small engine repairers..........             32,026              8,790
514.....................................  Automobile body and related                  95,820             49,978
                                           repairers.
515.....................................  Aircraft mechanics, except                   10,919                652
                                           engine.
516.....................................  Heavy equipment mechanics.......            134,978             25,158
517.....................................  Farm equipment mechanics........             22,825              5,604
518.....................................  Industrial machinery repairers..            373,093             56,377
519.....................................  Machinery maintenance                        13,041              1,085
                                           occupations.
523.....................................  Electronic repairers,                       133,521             34,011
                                           communications & industrial
                                           equip.
525.....................................  Data processing equipment                   152,554            105,323
                                           repairers.
526.....................................  Household appliance and power                22,840              5,872
                                           tool repairers.
527.....................................  Telephone line installers and                32,469              7,938
                                           repairers.
529.....................................  Telephone installers and                    177,639             49,190
                                           repairers.
533.....................................  Misc electrical and electronic               62,529              9,374
                                           equipment repairers.
534.....................................  Heating, air conditioning, and              240,044             44,067
                                           refrigeration mechanics.
535.....................................  Camera, watch, and musical                   12,339              4,306
                                           instrument repairers.
536.....................................  Locksmiths and safe repairers...             12,211              3,458
538.....................................  Office machine repairers........             30,822             14,624
539.....................................  Mechanical controls and valve                15,324                713
                                           repairers.
543.....................................  Elevator installers and                      19,960              6,189
                                           repairers.
544.....................................  Millwrights.....................             57,777              4,543
547.....................................  Specified mechanics and                     300,199             87,967
                                           repairers, n.e.c..

[[Page 22242]]

 
549.....................................  Not specified mechanics and                 222,588             64,692
                                           repairers.
563.....................................  Brickmasons and stonemasons.....            142,889             28,805
564.....................................  Brickmason and stonemason                        75                  0
                                           apprentices.
565.....................................  Tile setters, hard and soft.....             46,051             24,579
566.....................................  Carpet installers...............             48,699             33,509
567.....................................  Carpenters......................            912,769            201,178
569.....................................  Carpenter apprentices...........              8,875                  0
573.....................................  Drywall installers..............             85,860             28,609
575.....................................  Electricians....................            597,557            113,341
576.....................................  Electrician apprentices.........             43,746              1,183
577.....................................  Electrical power installers and              98,532             16,873
                                           repairers.
579.....................................  Painters, construction and                  333,738             75,698
                                           maintenance.
583.....................................  Paperhangers....................              4,407              1,037
584.....................................  Plasterers......................             32,335             10,035
585.....................................  Plumbers, pipefitters, and                  371,718             72,324
                                           steamfitters.
587.....................................  Plumber, pipefitter, and                     13,377                  0
                                           steamfitter apprentices.
588.....................................  Concrete and terrazzo finishers.             81,316             12,391
589.....................................  Glaziers........................             33,148              5,472
593.....................................  Insulation workers..............             46,275              5,649
594.....................................  Paving, surfacing, and tamping                9,194                 80
                                           equipment operators.
595.....................................  Roofers.........................            129,010             21,411
596.....................................  Sheetmetal duct installers......             39,013              1,057
597.....................................  Structural metal workers........             61,917              1,904
598.....................................  Drillers, earth.................              9,141              1,776
599.....................................  Construction trades, n.e.c......            187,340             39,904
614.....................................  Drillers, oil well..............             17,924              3,243
615.....................................  Explosives workers..............              3,178              1,183
616.....................................  Mining machine operators........             22,315              4,121
617.....................................  Mining occupations, n.e.c.......             19,104              3,636
634.....................................  Tool and die makers.............             80,616             12,172
635.....................................  Tool and die maker apprentices..              2,859                  0
636.....................................  Precision assemblers, metal.....             23,659              1,136
637.....................................  Machinists......................            386,873             51,058
643.....................................  Boilermakers....................             19,509                776
644.....................................  Precision grinders, filers, and               8,516              1,707
                                           tool sharpeners.
645.....................................  Patternmakers and model makers,               4,683                  0
                                           metal.
646.....................................  Lay-out workers.................              5,255                635
647.....................................  Precious stones and metals                   29,041              6,328
                                           workers.
649.....................................  Engravers, metal................              7,338              1,551
653.....................................  Sheet metal workers.............             92,387             15,576
654.....................................  Sheet metal worker apprentices..              1,381                  0
656.....................................  Patternmakers and model makers,                 839                  0
                                           wood.
657.....................................  Cabinet makers and bench                     44,767              7,285
                                           carpenters.
658.....................................  Furniture and wood finishers....             13,123              3,757
659.....................................  Misc precision woodworkers......                  0                725
666.....................................  Dressmakers.....................             36,301              7,723
667.....................................  Tailors.........................             12,153             15,389
668.....................................  Upholsterers....................             28,643             12,756
669.....................................  Shoe repairers..................              2,501              2,396
674.....................................  Misc precision apparel and                    1,800              4,664
                                           fabric workers.
675.....................................  Hand molders and shapers, except             12,376              2,561
                                           jewelers.
676.....................................  Patternmakers, lay-out workers,               3,466              1,486
                                           and cutters.
677.....................................  Optical goods workers...........             56,957             12,550
678.....................................  Dental laboratory and medical                39,047             14,883
                                           appliance technicians.
679.....................................  Bookbinders.....................             21,558                823
683.....................................  Electrical/electronic equipment             195,790             26,801
                                           assemblers.
684.....................................  MIsc precision workers, n.e.c...             20,615              2,864
686.....................................  Butchers and meat cutters.......            186,712             22,176
687.....................................  Bakers..........................            106,414             20,607
688.....................................  Food batchmakers................             52,048                808
689.....................................  Inspectors, testers, and graders            105,805             45,156
693.....................................  Adjusters and calibrators.......              2,428              1,243
694.....................................  Water and sewage treatment plant             67,078             14,568
                                           operators.
695.....................................  Power plant operators...........             33,157              9,373
696.....................................  Stationary engineers............             89,271             36,207
699.....................................  Miscellaneous plant and system               31,904              6,416
                                           operators.
703.....................................  Set-up operators, lathe and                  10,097                  0
                                           turning machine.
704.....................................  Operators, lathe and turning                 20,200                725
                                           machine.
705.....................................  Milling and planing machine                   5,203                754
                                           operators.
706.....................................  Punching and stamping press                  65,301              1,990
                                           machine operators.
707.....................................  Rolling machine operators.......              6,821              1,090

[[Page 22243]]

 
708.....................................  Drilling and boring machine                   6,431                  0
                                           operators.
709.....................................  Grinding, abrading, buffing, &               78,620              8,005
                                           polishing machine operators.
713.....................................  Forging machine operators.......             12,998                  0
714.....................................  Numerical control machine                    31,734              1,992
                                           operators.
715.....................................  Misc metal plastic stone & glass             24,559              1,398
                                           working mach operators.
717.....................................  Fabricating machine operators,               10,165              2,159
                                           n.e.c..
719.....................................  Molding and casting machine                  77,105              5,147
                                           operators.
723.....................................  Metal plating machine operators.             17,160              1,108
724.....................................  Heat treating equipment                       9,526                688
                                           operators.
725.....................................  Misc metal and plastic                       19,318                209
                                           processing machine operators.
726.....................................  Wood lathe, routing, and planing              6,929                  0
                                           machine operators.
727.....................................  Sawing machine operators........             65,134              5,919
728.....................................  Shaping and joining machine                   3,918                  0
                                           operators.
729.....................................  Nailing and tacking machine                     830                  0
                                           operators.
733.....................................  Miscellaneous woodworking                    19,125              2,170
                                           machine operators.
734.....................................  Printing press operators........            212,969             40,073
735.....................................  Photoengravers and lithographers             21,890                  0
736.....................................  Typesetters and compositors.....             10,799              7,777
737.....................................  Miscellaneous printing machine               25,667              5,677
                                           operators.
738.....................................  Winding and twisting machine                 35,208                  0
                                           operators.
739.....................................  Knitting, looping, taping, and               28,864              1,849
                                           weaving machine operators.
743.....................................  Textile cutting machine                       7,841              2,060
                                           operators.
744.....................................  Textile sewing machine operators            263,639             62,550
745.....................................  Shoe machine operators..........              7,011              1,163
747.....................................  Pressing machine operators......             62,228             10,349
748.....................................  Laundering and dry cleaning                 153,071             26,466
                                           machine operators.
749.....................................  Miscellaneous textile machine                27,920              1,030
                                           operators.
753.....................................  Cementing and gluing machine                 18,824                  0
                                           operators.
754.....................................  Packaging and filling machine               245,604             17,916
                                           operators.
755.....................................  Extruding and forming machine                25,335              2,570
                                           operators.
756.....................................  Mixing and blending machine                  95,832              6,349
                                           operators.
757.....................................  Separating, filtering, and                   55,133             12,234
                                           clarifying machine operators.
758.....................................  Compressing and compacting                   16,170              1,115
                                           machine operators.
759.....................................  Painting and paint spraying                 117,753             12,971
                                           machine operators.
763.....................................  Roasting and baking machine                   1,670                  0
                                           operators, food.
764.....................................  Washing, cleaning, and pickling               7,693                  0
                                           machine operators.
765.....................................  Folding machine operators.......              9,730              1,081
766.....................................  Furnace, kiln, and oven                      41,021              4,617
                                           operators, except food.
768.....................................  Crushing and grinding machine                33,990              3,233
                                           operators.
769.....................................  Slicing and cutting machine                 121,141              8,195
                                           operators.
773.....................................  Motion picture projectionists...              8,832                  0
774.....................................  Photographic process machine                 74,174             13,386
                                           operators.
777.....................................  Miscellaneous machine operators,            882,925             76,713
                                           n.e.c..
779.....................................  Machine operators, not specified            329,240             39,598
783.....................................  Welders and cutters.............            416,948             30,243
784.....................................  Solderers and brazers...........             11,415                  0
785.....................................  Assemblers......................            940,542            110,419
786.....................................  Hand cutting and trimming                     6,998                  0
                                           occupations.
787.....................................  Hand molding, casting, and                   12,481              1,496
                                           forming occupations.
789.....................................  Hand painting, coating, and                  18,227                  0
                                           decorating occupations.
793.....................................  Hand engraving and printing                   5,887                309
                                           occupations.
795.....................................  Miscellaneous hand working                   34,894             15,860
                                           occupations.
796.....................................  Production inspectors, checkers,            377,166             63,000
                                           and examiners.
797.....................................  Production testers..............             42,433              7,419
798.....................................  Production samplers and weighers              2,789                466
799.....................................  Graders and sorters, except                 103,271             11,534
                                           agricultural.
804.....................................  Truck drivers...................          1,257,626            361,681
806.....................................  Driver-sales workers............             57,728             70,691
808.....................................  Bus drivers.....................            451,774            134,867
809.....................................  Taxicab drivers and chauffeurs..            140,630            121,002
813.....................................  Parking lot attendants..........             43,783              6,349
814.....................................  Motor transportation                          6,029                536
                                           occupations, n.e.c..
823.....................................  Railroad conductors and                           0                 98
                                           yardmasters.
824.....................................  Locomotive operating occupations             16,157                789
825.....................................  Railroad brake, signal, and                   1,977                  0
                                           switch operators.
828.....................................  Ship captains and mates, except               3,014              3,098
                                           fishing boats.
829.....................................  Sailors and deckhands...........                644                762
833.....................................  Marine engineers................                144                147
834.....................................  Bridge, lock, and lighthouse                    836                803
                                           tenders.
844.....................................  Operating engineers.............            207,133             41,129
845.....................................  Longshore equipment operators...              2,950                  0

[[Page 22244]]

 
848.....................................  Hoist and winch operators.......             14,914                923
849.....................................  Crane and tower operators.......             59,531              7,474
853.....................................  Excavating and loading machine               72,226              5,875
                                           operators.
855.....................................  Grader, dozer, and scraper                   40,091              5,440
                                           operators.
856.....................................  Industrial truck and tractor                493,407             43,160
                                           equipment operators.
859.....................................  Misc material moving equipment               56,887              6,768
                                           operators.
865.....................................  Helpers, mechanics, and                      25,150              3,270
                                           repairers.
866.....................................  Helpers, construction trades....            107,065              6,016
867.....................................  Helpers, surveyor...............              3,080                791
868.....................................  Helpers, extractive occupations.              4,282                  0
869.....................................  Construction laborers...........            842,685            148,765
874.....................................  Production helpers..............             60,632              3,457
875.....................................  Garbage collectors..............             38,478             12,855
876.....................................  Stevedores......................             10,544              2,342
877.....................................  Stock handlers and baggers......          1,022,741             57,619
878.....................................  Machine feeders and offbearers..             57,112              1,302
883.....................................  Freight, stock, and material                637,494             73,143
                                           handlers, n.e.c..
885.....................................  Garage and service station                  153,955             13,631
                                           related occupations.
887.....................................  Vehicle washers and equipment               255,171             25,212
                                           cleaners.
888.....................................  Hand packers and packagers......            366,936             23,410
889.....................................  Laborers, except construction...          1,066,097            123,495
                                                                           --------------------
                                          Total...........................         35,208,824          7,621,800
----------------------------------------------------------------------------------------------------------------
Note: Some numbers may not add due to rounding.
Source: CONSAD and the U.S. Department of Labor.


  Table A-2.--Number of FLSA Covered Workers in White-collar Occupation That Are Subject to the Part 541 Salary
                                                   Level Test
----------------------------------------------------------------------------------------------------------------
                                                                   Exempt status    Hourly paid      Salaried
              OCC code                     Occupation title          code (1)         workers         workers
----------------------------------------------------------------------------------------------------------------
4..................................  Chief executives & general                1           6,437          16,284
                                      administrators, public
                                      admin.
5..................................  Administrators & officials,               1         133,691         275,701
                                      public administration.
6..................................  Administrators, protective                1          16,367          33,128
                                      services.
7..................................  Financial managers.........               1         119,763         625,039
8..................................  Personnel & labor relations               1          30,326         180,553
                                      managers.
9..................................  Purchasing managers........               1          29,311         102,247
13.................................  Managers, marketing,                      1          83,850         605,262
                                      advertising, & public
                                      relations.
14.................................  Admin, education & related                1          45,618          85,111
                                      fields.
15.................................  Managers, medicine & health               1         278,599         498,011
17.................................  Managers, food serving &                  3         423,699         706,689
                                      lodging establishments.
18.................................  Managers, properties & real               3         114,633         308,022
                                      estate.
19.................................  Funeral directors..........               2          10,388          32,306
21.................................  Managers, service                         1         188,874         479,990
                                      organizations, n.e.c. (2).
22.................................  Managers & administrators,                1       1,203,610       4,778,194
                                      n.e.c..
23.................................  Accountants & auditors.....               1         443,659       1,020,879
24.................................  Underwriters...............               1          35,944          59,503
25.................................  Other financial officers...               2         163,865         591,312
26.................................  Management analysts........               2          62,981         244,104
27.................................  Personnel, training, &                    2         202,064         365,268
                                      labor relations
                                      specialists.
28.................................  Purchasing agents & buyers,               2           4,155           4,800
                                      farm products.
29.................................  Buyers, wholesale & retail                2         105,708         105,447
                                      trade except farm products.
33.................................  Purchase agents & buyers,                 2          83,157         126,564
                                      n.e.c..
34.................................  Business & promotion agents               2           4,849          30,822
35.................................  Construction inspectors....               3          36,718          28,236
36.................................  Inspectors & compliance                   3          64,857         109,744
                                      officers, except
                                      construction.
37.................................  Management related                        2         249,125         223,981
                                      occupations, n.e.c..
43.................................  Architects.................               1          29,545         106,161
44.................................  Aerospace engineers........               1          17,473          55,016
45.................................  Metallurgical & materials                 1           5,286          16,242
                                      engineers.
46.................................  Mining engineers...........               1           1,077           4,528
47.................................  Petroleum engineers........               1             666          12,768
48.................................  Chemical engineers.........               1           9,965          67,074
49.................................  Nuclear engineers..........               1           1,607             828
53.................................  Civil engineers............               1          67,305         155,453
54.................................  Agricultural engineers.....               1             350           1,408
55.................................  Engineers, electrical &                   1         115,616         499,179
                                      electronic.
56.................................  Engineers, industrial......               1          55,812         169,410
57.................................  Engineers, mechanical......               1          54,395         229,289

[[Page 22245]]

 
58.................................  Marine & naval architects..               1           3,943           7,187
59.................................  Engineers, n.e.c...........               1          59,412         204,684
63.................................  Surveyors & mapping                       2           8,286           6,771
                                      scientists.
64.................................  Computer systems analysts &               1         300,404       1,182,634
                                      scientists.
65.................................  Operations & systems                      1          70,749         154,890
                                      researchers & analysts.
66.................................  Actuaries..................               1               0          15,038
67.................................  Statisticians..............               1           4,485          18,483
68.................................  Mathematical scientists,                  1               0           3,314
                                      n.e.c..
69.................................  Physicists & astronomers...               1           2,128          14,535
73.................................  Chemists, except                          1          23,469          95,037
                                      biochemists.
74.................................  Atmospheric & space                       1           2,031           3,595
                                      scientists.
75.................................  Geologists & geodesists....               1           7,934          30,534
76.................................  Physical scientists, n.e.c.               1          11,719          24,178
77.................................  Agricultural & food                       1          10,103          20,486
                                      scientists.
78.................................  Biological & life                         1          18,383          67,745
                                      scientists.
79.................................  Forestry & conservation                   1           2,742           9,085
                                      scientists.
83.................................  Medical scientists.........               1          18,769          54,452
84.................................  Physicians.................               1               0               0
85.................................  Dentists...................               1               0               0
86.................................  Veterinarians..............               1           1,037          16,267
87.................................  Optometrists...............               1               0               0
88.................................  Podiatrists................               1               0               0
89.................................  Health diagnosing                         1               0               0
                                      practitioners, n.e.c..
95.................................  Registered nurses..........               1       1,627,489         567,191
96.................................  Pharmacists................               1         122,210          78,029
97.................................  Dietitians.................               3          45,172          23,771
98.................................  Respiratory therapists.....               3          75,024          22,684
99.................................  Occupational therapists....               3          33,605          32,130
103................................  Physical therapists........               2          80,964          72,325
104................................  Speech therapists..........               2          29,295          77,446
105................................  Therapists, n.e.c..........               2          46,667          43,329
106................................  Physicians' assistants.....               1          53,420          34,053
113................................  Earth, environmental, &                   1               0               0
                                      marine science teachers.
114................................  Biological science teachers               1               0               0
115................................  Chemistry teachers.........               1               0               0
116................................  Physics teachers...........               1               0               0
117................................  Natural science teachers,                 1               0             719
                                      n.e.c..
118................................  Psychology teachers........               1               0             580
119................................  Economics teachers.........               1               0               0
123................................  History teachers...........               1               0               0
124................................  Political science teachers.               1               0               0
125................................  Sociology teachers.........               1               0               0
126................................  Social science teachers,                  1               0               0
                                      n.e.c..
127................................  Engineering teachers.......               1               0               0
128................................  Math. science teachers.....               1               0               0
129................................  Computer science teachers..               1               0             840
133................................  Medical science teachers...               1               0               0
134................................  Health specialties teachers               1               0               0
135................................  Business, commerce, &                     1               0               0
                                      marketing teachers.
136................................  Agriculture & forestry                    1               0               0
                                      teachers.
137................................  Art, drama, & music                       1               0               0
                                      teachers.
138................................  Physical education teachers               1               0               0
139................................  Education teachers.........               1               0               0
143................................  English teachers...........               1               0           1,221
144................................  Foreign language teachers..               1               0               0
145................................  Law teachers...............               1               0               0
146................................  Social work teachers.......               1               0               0
147................................  Theology teachers..........               1               0               0
148................................  Trade & industrial teachers               1               0               0
153................................  Teachers, postsecondary,                  1               0               0
                                      n.e.c..
154................................  Postsecondary teachers,                   1           1,230           5,885
                                      subject not specified.
155................................  Teachers, prekindergarten &               2         270,615          90,593
                                      kindergarten.
156................................  Teachers, elementary school               1               0               0
157................................  Teachers, secondary school.               1               0               0
158................................  Teachers, special education               1           5,755           9,028
159................................  Teachers, n.e.c............               1         356,988         334,426
163................................  Counselors, Educational &                 2          15,448          30,107
                                      Vocational.
164................................  Librarians.................               1          83,000         111,753
165................................  Archivists & curators......               1           9,744          14,922
166................................  Economists.................               2          24,240          72,828

[[Page 22246]]

 
167................................  Psychologists..............               1          65,812         129,335
168................................  Sociologists...............               2               0             384
169................................  Social scientists, n.e.c...               2          11,574          14,821
173................................  Urban planners.............               2           3,676          11,002
174................................  Social workers.............               3         338,352         460,604
175................................  Recreation workers.........               3          94,737          34,825
178................................  Lawyers & Judges...........               1               0               0
183................................  Authors....................               2          16,392          35,455
184................................  Technical writers..........               3          19,907          37,555
185................................  Designers..................               1         246,100         297,869
186................................  Musicians & composers......               1          14,771          79,138
187................................  Actors & directors.........               1          27,520          83,834
188................................  Painters, sculptors, craft-               1          70,319          42,485
                                      artists, & artist
                                      printmakers.
189................................  Photographers..............               1          65,293          36,661
193................................  Dancers....................               1           8,941          15,053
194................................  Artists, performers, &                    1          41,483          37,539
                                      related workers, n.e.c..
195................................  Editors & reporters........               3          91,740         166,068
197................................  Public relations                          3          45,106         126,849
                                      specialists.
198................................  Announcers.................               2          13,544          21,290
199................................  Athletes...................               4          27,688          48,316
203................................  Clinical laboratory                       3         296,794          63,229
                                      technologists &
                                      technicians.
204................................  Dental hygienists..........               3          92,852          35,461
205................................  Health record technologists               3          17,001           3,783
                                      & technicians.
206................................  Radiologic technicians.....               3         140,955          30,201
207................................  Licensed practical nurses..               3         325,853          45,359
208................................  Health technologists &                    3         632,527         108,100
                                      technicians, n.e.c..
213................................  Electrical & electronic                   4         249,019         140,988
                                      technicians.
214................................  Industrial engineering                    4           5,952             765
                                      technicians.
215................................  Mechanical engineering                    4          11,789           5,626
                                      technicians.
216................................  Engineering technicians,                  4         129,531          51,567
                                      n.e.c..
217................................  Drafting occupations.......               4         148,837          76,029
218................................  Surveying & mapping                       4          40,315          12,458
                                      technicians.
223................................  Biological technicians.....               4          88,414          36,733
224................................  Chemical technicians.......               4          49,811          13,038
225................................  Science technicians, n.e.c.               4          71,249          23,561
226................................  Airplane pilots &                         4           5,647          11,943
                                      navigators.
227................................  Air traffic controllers....               4           3,037           7,013
228................................  Broadcast equipment                       4          24,496          20,545
                                      operators.
229................................  Computer programmers.......               2         122,757         421,040
233................................  Tool programmers, numerical               4           6,099           2,917
                                      control.
234................................  Legal assistants...........               4         144,284         210,917
235................................  Technicians, n.e.c.........               4          54,139          60,414
243................................  Supervisors & Proprietors,                2       1,323,873       2,148,481
                                      Sales Occupations.
253................................  Insurance sales occupations               2         101,531         346,959
254................................  Real estate sales                         3          55,261         423,875
                                      occupations.
255................................  Securities & financial                    2          61,157         396,030
                                      services sales occupations.
256................................  Advertising & related sales               2          42,796         126,558
                                      occupations.
257................................  Sales occupations, other                  3         261,085         416,743
                                      business services.
258................................  Sales engineers............               3           2,475          31,762
259................................  Sales representatives,                    3         294,010       1,099,707
                                      mining, manufact, &
                                      wholesale.
263................................  Sales workers, motor                      4          30,391          33,687
                                      vehicles & boats.
264................................  Sales workers, apparel.....               4         336,383          37,347
265................................  Sales workers, shoes.......               4          79,014          12,018
266................................  Sales workers, furniture &                4          85,411          89,456
                                      home furnishings.
267................................  Sales workers, radio, Tv,                 4         198,369         115,694
                                      hi-fi, & appliances.
268................................  Sales workers, hardware &                 4         201,525          79,240
                                      building supplies.
269................................  Sales workers, parts.......               4          78,297          35,749
274................................  Sales workers, other                      4       1,107,970         243,311
                                      commodities.
275................................  Sales counter clerks.......               4         140,467          29,730
276................................  Cashiers...................               4       2,703,603         190,465
277................................  Street & door-to-door sales               4               0               0
                                      workers.
278................................  News vendors...............               4          36,633          52,989
283................................  Demonstrators, promoters &                4          62,402           8,814
                                      models, sales.
284................................  Auctioneers................               4           1,003           3,083
285................................  Sales support occupations,                4          10,446           9,115
                                      n.e.c..
303................................  Supervisors, general office               1         160,230         212,649
304................................  Supervisors, computer                     1           3,280          12,961
                                      equipment operators.
305................................  Supervisors, financial                    1          44,084          61,890
                                      records processing.
306................................  Chief communications                      1           2,343           3,105
                                      operators.
307................................  Supervisors, distribution,                1          74,454          84,487
                                      scheduling, & adjusting
                                      clerks.

[[Page 22247]]

 
308................................  Computer operators.........               4         183,860          97,773
309................................  Peripheral equipment                      4           4,681               0
                                      operators.
313................................  Secretaries................               4       1,320,713         779,365
314................................  Stenographers..............               4          64,749          43,868
315................................  Typists....................               4         342,925         182,082
316................................  Interviewers...............               4         109,971          38,015
317................................  Hotel clerks...............               4         115,438          15,670
318................................  Transportation ticket &                   4         134,226          83,940
                                      reservation agents.
319................................  Receptionists..............               4         843,415         174,717
323................................  Information clerks, n.e.c..               4         310,301         101,956
325................................  Classified-ad clerks.......               4           1,394             912
326................................  Correspondence clerks......               4           4,826           3,215
327................................  Order clerks...............               4         212,118          68,155
328................................  Personnel clerks, except                  4          43,039          15,127
                                      payroll & timekeeping.
329................................  Library clerks.............               4         107,372          19,863
335................................  File clerks................               4         234,692          48,289
336................................  Records clerks.............               4         136,166          59,547
337................................  Bookkeepers, accounting, &                4         845,993         456,374
                                      auditing clerks.
338................................  Payroll & timekeeping                     4         106,358          54,940
                                      clerks.
339................................  Billing clerks.............               4         152,019          52,185
343................................  Cost & rate clerks.........               4          33,709          15,380
344................................  Billing, posting, &                       4         120,303          32,171
                                      calculating machine
                                      operators.
345................................  Duplicating machine                       4          25,214           3,785
                                      operators.
346................................  Mail preparing & paper                    4           2,978           1,311
                                      handling machine operators.
347................................  Office mach. operators,                   4          12,459           6,940
                                      n.e.c..
348................................  Telephone operators........               4          99,426          19,448
353................................  Communications equipment                  4          14,637           5,031
                                      operators, n.e.c..
354................................  Postal clerks, except mail                4         224,732          50,333
                                      carriers.
355................................  Mail carriers, postal                     4         250,642          85,477
                                      service.
356................................  Mail clerks, except postal                4         124,113          20,708
                                      service.
357................................  Messengers.................               4          98,258          25,407
359................................  Dispatchers................               4         172,039          76,155
363................................  Production coordinators....               4         118,886          97,632
364................................  Traffic, shipping, &                      4         537,884          66,810
                                      receiving clerks.
365................................  Stock & inventory clerks...               4         345,187          77,301
366................................  Meter readers..............               4          38,823           7,657
368................................  Weighers, measurers,                      4          41,663           2,906
                                      checkers, & samplers.
373................................  Expediters.................               4         268,885          37,551
374................................  Material recording,                       4           9,301           2,445
                                      scheduling, & distrib.
                                      clerks, n.e.c..
375................................  Insurance adjusters,                      2         249,632         242,454
                                      examiners, & investigators.
376................................  Investigators & adjusters,                2         733,381         337,862
                                      except insurance.
377................................  Eligibility clerks, social                4          57,835          29,759
                                      welfare.
378................................  Bill & account collectors..               4         159,577          47,047
379................................  General office clerks......               4         558,808         196,513
383................................  Bank tellers...............               4         389,140          73,812
384................................  Proofreaders...............               4          10,630           1,213
385................................  Data-entry keyers..........               4         420,358         137,486
386................................  Statistical clerks.........               4          71,842          23,091
387................................  Teachers' aides............               4         538,233         254,634
389................................  Administrative support                    4         590,574         390,186
                                      occupations, n.e.c..
413................................  Supervisors, firefighting &               3          17,820          26,194
                                      fire prevention
                                      occupations.
414................................  Supervisors, police &                     3          55,659          58,505
                                      detectives.
415................................  Supervisors, guards........               4          38,215          22,766
433................................  Supervisors, food                         3         415,710          75,847
                                      preparation & service
                                      occupations.
448................................  Supervisors, cleaning &                   4         121,660          55,974
                                      building service workers.
456................................  Supervisors, personal                     4          43,608          28,049
                                      service occupations.
475................................  Managers, farms, except                   3           1,640           1,184
                                      horticultural.
476................................  Managers, horticultural                   3           4,224             125
                                      specialty farms.
477................................  Supervisors, farm workers..               4             734               0
485................................  Supervisors, related                      4          54,229          39,120
                                      agricultural occupations.
494................................  Supervisors, forestry &                   4           2,794           6,109
                                      logging workers.
503................................  Supervisors, mechanics &                  3          91,019         123,140
                                      repairers.
553................................  Supervisors, brickmasons,                 4           1,204           1,260
                                      stonemasons, & tile
                                      setters.
554................................  Supervisors, carpenters &                 4          12,875           1,646
                                      related workers.
555................................  Supervisors, electricians &               4          20,131           9,715
                                      power transmission
                                      installers.
556................................  Supervisors, painters,                    4           7,584           4,577
                                      paperhangers, & plasterers.
557................................  Supervisors, plumbers,                    4          15,965             573
                                      pipefitters, &
                                      steamfitters.
558................................  Supervisors, construction,                4         297,676         183,104
                                      n.e.c..
613................................  Supervisors, extractive                   3          13,961          16,199
                                      occupations.
628................................  Supervisors, production                   3         542,035         431,574
                                      occupations.

[[Page 22248]]

 
803................................  Supervisors, motor vehicle                4          37,310          55,345
                                      operators.
843................................  Supervisors, material                     4           6,006           1,054
                                      moving equipment operators.
864................................  Supervisors, handlers,                    4           7,992           5,735
                                      equip cleaners, &
                                      laborers, n.e.c..
                                    ------------------------------
                                     Total......................  ..............      32,694,067     31,686,296
----------------------------------------------------------------------------------------------------------------
(1) See Table 3-2.
(2) Not elsewhere classified (n.e.c.)
Note: Some numbers may not add due to rounding.
Source: CONSAD and the U.S. Department of Labor.


                        Table A-3.--Number of Exempt and Nonexempt White-Collar Salaried Workers Who Earn More Than $155 per Week
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                           Exempt status    Subject to         Total
                    OCC code                                Occupational title                code\1\      salary tests      nonexempt     Total exempt
--------------------------------------------------------------------------------------------------------------------------------------------------------
4..............................................  Chief executives and general                          1          14,668             716          13,952
                                                  administrators, public admin.
5..............................................  Administrators & officials, public                    1         269,143          16,033         253,110
                                                  administration.
6..............................................  Administrators, protective services....               1          32,316           1,666          30,650
7..............................................  Financial managers.....................               1         623,191          28,750         594,441
8..............................................  Personnel & labor relations managers...               1         180,553           8,868         171,685
9..............................................  Purchasing managers....................               1         102,247           4,269          97,978
13.............................................  Managers, marketing, advertising, &                   1         602,720          24,853         577,867
                                                  public relations.
14.............................................  Admin, education & related fields......               1          83,791           6,004          77,788
15.............................................  Managers, medicine & health............               1         491,118          28,208         462,910
17.............................................  Managers, food serving & lodging                      3         685,704         497,115         188,589
                                                  establishments.
18.............................................  Managers, properties & real estate.....               3         287,864         203,605          84,259
19.............................................  Funeral directors......................               2          29,867           8,024          21,843
21.............................................  Managers, service organizations,                      1         469,483          28,098         441,385
                                                  n.e.c.(2).
22.............................................  Managers & administrators, n.e.c.......               1       4,727,919         201,405       4,526,514
23.............................................  Accountants & auditors.................               1       1,007,059          56,089         950,970
24.............................................  Underwriters...........................               1          59,503           3,536          55,967
25.............................................  Other financial officers...............               2         582,440         153,454         428,986
26.............................................  Management analysts....................               2         237,587          56,734         180,853
27.............................................  Personnel, training, & labor relations                2         359,471         104,951         254,520
                                                  specialists.
28.............................................  Purchasing agents & buyers, farm                      2           4,800           1,149           3,651
                                                  products.
29.............................................  Buyers, wholesale & retail trade except               2         103,738          30,285          73,453
                                                  farm products.
33.............................................  Purchase agents & buyers, n.e.c........               2         125,570          39,014          86,556
34.............................................  Business & promotion agents............               2          30,822           9,936          20,886
35.............................................  Construction inspectors................               3          27,939          19,074           8,865
36.............................................  Inspectors & compliance officers,                     3         107,722          71,768          35,954
                                                  except construction.
37.............................................  Management related occupations, n.e.c..               2         220,371          76,347         144,024
43.............................................  Architects.............................               1         106,161           5,138         101,023
44.............................................  Aerospace engineers....................               1          55,015           1,669          53,346
45.............................................  Metallurgical & materials engineers....               1          16,242             613          15,629
46.............................................  Mining engineers.......................               1           4,528             137           4,391
47.............................................  Petroleum engineers....................               1          12,768             503          12,265
48.............................................  Chemical engineers.....................               1          67,075           2,168          64,907
49.............................................  Nuclear engineers......................               1             828              65             763
53.............................................  Civil engineers........................               1         155,242           6,787         148,455
54.............................................  Agricultural engineers.................               1           1,408              60           1,348
55.............................................  Engineers, electrical & electronic.....               1         496,379          18,953         477,426
56.............................................  Engineers, industrial..................               1         169,410           7,803         161,607
57.............................................  Engineers, mechanical..................               1         229,289           9,176         220,113
58.............................................  Marine & naval architects..............               1           7,187             418           6,769
59.............................................  Engineers, n.e.c.......................               1         204,685           9,158         195,527
63.............................................  Surveyors & mapping scientists.........               2           6,771           1,920           4,851
64.............................................  Computer systems analysts & scientists.               1       1,176,238          50,415       1,125,823
65.............................................  Operations & systems researchers &                    1         153,985           7,753         146,232
                                                  analysts.
66.............................................  Actuaries..............................               1          15,038             573          14,465
67.............................................  Statisticians..........................               1          17,607             909          16,698
68.............................................  Mathematical scientists, n.e.c.........               1           3,315             170           3,145
69.............................................  Physicists & astronomers...............               1          14,534             375          14,159
73.............................................  Chemists, except biochemists...........               1          94,243           4,316          89,927
74.............................................  Atmospheric & space scientists.........               1           3,294             150           3,144
75.............................................  Geologists & geodesists................               1          30,535           1,624          28,911
76.............................................  Physical scientists, n.e.c.............               1          24,178           1,301          22,877
77.............................................  Agricultural & food scientists.........               1          19,592           1,097          18,495
78.............................................  Biological & life scientists...........               1          67,745           3,638          64,107

[[Page 22249]]

 
79.............................................  Forestry & conservation scientists.....               1           9,086             521           8,565
83.............................................  Medical scientists.....................               1          53,678           2,817          50,861
84.............................................  Physicians.............................               1               0               0               0
85.............................................  Dentists...............................               1               0               0               0
86.............................................  Veterinarians..........................               1          16,267             925          15,342
87.............................................  Optometrists...........................               1               0               0               0
88.............................................  Podiatrists............................               1               0               0               0
89.............................................  Health diagnosing practitioners, n.e.c.               1               0               0               0
95.............................................  Registered nurses......................               1         555,307          33,950         521,357
96.............................................  Pharmacists............................               1          78,029           3,413          74,616
97.............................................  Dietitians.............................               3          19,933          14,570           5,363
98.............................................  Respiratory therapists.................               3          22,683          16,353           6,330
99.............................................  Occupational therapists................               3          30,448          20,984           9,464
103............................................  Physical therapists....................               2          71,231          19,999          51,232
104............................................  Speech therapists......................               2          75,935          23,298          52,637
105............................................  Therapists, n.e.c......................               2          42,330          14,038          28,292
106............................................  Physicians' assistants.................               1          33,962           1,714          32,248
113............................................  Earth, environmental, & marine science                1               0               0               0
                                                  teachers.
114............................................  Biological science teachers............               1               0               0               0
115............................................  Chemistry teachers.....................               1               0               0               0
116............................................  Physics teachers.......................               1               0               0               0
117............................................  Natural science teachers, n.e.c........               1             719              53             666
118............................................  Psychology teachers....................               1             579              23             556
119............................................  Economics teachers.....................               1               0               0               0
123............................................  History teachers.......................               1               0               0               0
124............................................  Political science teachers.............               1               0               0               0
125............................................  Sociology teachers.....................               1               0               0               0
126............................................  Social science teachers, n.e.c.........               1               0               0               0
127............................................  Engineering teachers...................               1               0               0               0
128............................................  Math. science teachers.................               1               0               0               0
129............................................  Computer science teachers..............               1             840              78             762
133............................................  Medical science teachers...............               1               0               0               0
134............................................  Health specialties teachers............               1               0               0               0
135............................................  Business, commerce, & marketing                       1               0               0               0
                                                  teachers.
136............................................  Agriculture & forestry teachers........               1               0               0               0
137............................................  Art, drama, & music teachers...........               1               0               0               0
138............................................  Physical education teachers............               1               0               0               0
139............................................  Education teachers.....................               1               0               0               0
143............................................  English teachers.......................               1           1,221             112           1,109
144............................................  Foreign language teachers..............               1               0               0               0
145............................................  Law teachers...........................               1               0               0               0
146............................................  Social work teachers...................               1               0               0               0
147............................................  Theology teachers......................               1               0               0               0
148............................................  Trade & industrial teachers............               1               0               0               0
153............................................  Teachers, postsecondary, n.e.c.........               1               0               0               0
154............................................  Postsecondary teachers, subject not                   1           5,076             267           4,809
                                                  specified.
155............................................  Teachers, prekindergarten &                           2          76,066          30,609          45,457
                                                  kindergarten.
156............................................  Teachers, elementary school............               1               0               0               0
157............................................  Teachers, secondary school.............               1               0               0               0
158............................................  Teachers, special education............               1           9,028             687           8,341
159............................................  Teachers, n.e.c........................               1         310,873          20,692         290,181
163............................................  Counselors, Educational & Vocational...               2          27,863           8,566          19,297
164............................................  Librarians.............................               1         107,389           6,701         100,688
165............................................  Archivists & curators..................               1          14,923             843          14,080
166............................................  Economists.............................               2          70,746          19,706          51,040
167............................................  Psychologists..........................               1         128,495           7,890         120,605
168............................................  Sociologists...........................               2             384              64             320
169............................................  Social scientists, n.e.c...............               2          14,053           4,105           9,948
173............................................  Urban planners.........................               2          11,002           2,952           8,050
174............................................  Social workers.........................               3         451,756         334,732         117,024
175............................................  Recreation workers.....................               3          32,037          25,091           6,946
178............................................  Lawyers & Judges.......................               1               0               0               0
183............................................  Authors................................               2          34,782          10,031          24,751
184............................................  Technical writers......................               3          37,555          24,974          12,581
185............................................  Designers..............................               1         288,719          17,193         271,526
186............................................  Musicians & composers..................               1          56,491           4,179          52,312
187............................................  Actors & directors.....................               1          79,236           4,050          75,186
188............................................  Painters, sculptors, craft-artists, &                 1          41,755           2,804          38,951
                                                  artist printmakers.
189............................................  Photographers..........................               1          34,892           2,523          32,369
193............................................  Dancers................................               1          13,353           1,170          12,183

[[Page 22250]]

 
194............................................  Artists, performers, & related workers,               1          34,090           2,557          31,533
                                                  n.e.c..
195............................................  Editors & reporters....................               3         157,150         108,308          48,842
197............................................  Public relations specialists...........               3         123,346          85,253          38,093
198............................................  Announcers.............................               2          20,866           7,653          13,213
199............................................  Athletes...............................               4          42,674          40,167           2,507
203............................................  Clinical laboratory technologists &                   3          61,577          45,016          16,561
                                                  technicians.
204............................................  Dental hygienists......................               3          35,460          25,944           9,516
205............................................  Health record technologists &                         3           3,784           2,745           1,039
                                                  technicians.
206............................................  Radiologic technicians.................               3          28,006          20,200           7,806
207............................................  Licensed practical nurses..............               3          43,258          33,490           9,768
208............................................  Health technologists & technicians,                   3         106,209          82,319          23,890
                                                  n.e.c..
213............................................  Electrical & electronic technicians....               4         138,664         128,529          10,135
214............................................  Industrial engineering technicians.....               4             765             694              71
215............................................  Mechanical engineering technicians.....               4           5,626           5,186             440
216............................................  Engineering technicians, n.e.c.........               4          51,567          48,131           3,436
217............................................  Drafting occupations...................               4          75,759          70,934           4,825
218............................................  Surveying & mapping technicians........               4          12,459          11,812             647
223............................................  Biological technicians.................               4          36,520          34,477           2,043
224............................................  Chemical technicians...................               4          13,038          12,151             887
225............................................  Science technicians, n.e.c.............               4          22,813          21,248           1,565
226............................................  Airplane pilots & navigators...........               4          11,942          10,899           1,043
227............................................  Air traffic controllers................               4           7,013           6,476             537
228............................................  Broadcast equipment operators..........               4          17,606          16,514           1,092
229............................................  Computer programmers...................               2         419,594         106,640         312,954
233............................................  Tool programmers, numerical control....               4           2,917           2,818              99
234............................................  Legal assistants.......................               4         210,484         197,927          12,557
235............................................  Technicians, n.e.c.....................               4          58,809          54,794           4,015
243............................................  Supervisors & Proprietors, Sales                      2       2,110,973         639,504       1,471,469
                                                  Occupations.
253............................................  Insurance sales occupations............               2         338,111         104,906         233,205
254............................................  Real estate sales occupations..........               3         397,214         274,422         122,792
255............................................  Securities & financial services sales                 2         389,500          94,325         295,175
                                                  occupations.
256............................................  Advertising & related sales occupations               2         124,299          38,599          85,700
257............................................  Sales occupations, other business                     3         406,506         274,454         132,052
                                                  services.
258............................................  Sales engineers........................               3          31,762          19,486          12,276
259............................................  Sales representatives, mining,                        3       1,083,546         719,374         364,172
                                                  manufact, & wholesale.
263............................................  Sales workers, motor vehicles & boats..               4          33,687          31,744           1,943
264............................................  Sales workers, apparel.................               4          32,719          31,061           1,658
265............................................  Sales workers, shoes...................               4          10,726          10,400             326
266............................................  Sales workers, furniture & home                       4          81,247          76,908           4,339
                                                  furnishings.
267............................................  Sales workers, radio, Tv, hi-fi, &                    4         110,822         103,629           7,193
                                                  appliances.
268............................................  Sales workers, hardware & building                    4          76,624          71,853           4,771
                                                  supplies.
269............................................  Sales workers, parts...................               4          34,874          32,885           1,989
274............................................  Sales workers, other commodities.......               4         218,581         206,150          12,431
275............................................  Sales counter clerks...................               4          26,317          24,997           1,320
276............................................  Cashiers...............................               4         166,023         159,718           6,305
277............................................  Street & door-to-door sales workers....               4               0               0               0
278............................................  News vendors...........................               4          31,236          30,207           1,029
283............................................  Demonstrators, promoters & models,                    4           4,717           4,385             332
                                                  sales.
284............................................  Auctioneers............................               4           3,083           2,863             220
285............................................  Sales support occupations, n.e.c.......               4           5,922           5,641             281
303............................................  Supervisors, general office............               1         209,218          15,033         194,185
304............................................  Supervisors, computer equipment                       1          12,650             761          11,889
                                                  operators.
305............................................  Supervisors, financial records                        1          61,890           3,713          58,177
                                                  processing.
306............................................  Chief communications operators.........               1           3,105             200           2,905
307............................................  Supervisors, distribution, scheduling,                1          82,713           5,465          77,248
                                                  & adjusting clerks.
308............................................  Computer operators.....................               4          95,419          89,818           5,601
309............................................  Peripheral equipment operators.........               4               0               0               0
313............................................  Secretaries............................               4         732,456         700,875          31,581
314............................................  Stenographers..........................               4          41,427          39,303           2,124
315............................................  Typists................................               4         173,573         165,891           7,682
316............................................  Interviewers...........................               4          34,809          33,181           1,628
317............................................  Hotel clerks...........................               4          15,560          14,859             701
318............................................  Transportation ticket & reservation                   4          83,940          79,540           4,400
                                                  agents.
319............................................  Receptionists..........................               4         159,035         152,899           6,136
323............................................  Information clerks, n.e.c..............               4          91,913          88,119           3,794
325............................................  Classified-ad clerks...................               4             912             894              18
326............................................  Correspondence clerks..................               4           3,215           3,000             215
327............................................  Order clerks...........................               4          66,907          63,590           3,317
328............................................  Personnel clerks, except payroll &                    4          15,127          14,429             698
                                                  timekeeping.
329............................................  Library clerks.........................               4          19,863          18,989             874

[[Page 22251]]

 
335............................................  File clerks............................               4          43,795          42,138           1,657
336............................................  Records clerks.........................               4          55,612          52,888           2,724
337............................................  Bookkeepers, accounting, & auditing                   4         418,533         400,568          17,965
                                                  clerks.
338............................................  Payroll & timekeeping clerks...........               4          52,725          50,180           2,545
339............................................  Billing clerks.........................               4          51,114          48,834           2,280
343............................................  Cost & rate clerks.....................               4          15,380          14,589             791
344............................................  Billing, posting, & calculating machine               4          32,171          30,724           1,447
                                                  operators.
345............................................  Duplicating machine operators..........               4           3,479           3,249             230
346............................................  Mail preparing & paper handling machine               4           1,310           1,277              33
                                                  operators.
347............................................  Office mach. operators, n.e.c..........               4           6,940           6,656             284
348............................................  Telephone operators....................               4          18,620          17,753             867
353............................................  Communications equipment operators,                   4           5,030           4,854             176
                                                  n.e.c..
354............................................  Postal clerks, except mail carriers....               4          48,045          45,012           3,033
355............................................  Mail carriers, postal service..........               4          83,867          78,774           5,093
356............................................  Mail clerks, except postal service.....               4          20,309          19,526             783
357............................................  Messengers.............................               4          19,617          18,875             742
359............................................  Dispatchers............................               4          76,155          72,302           3,853
363............................................  Production coordinators................               4          96,876          91,080           5,796
364............................................  Traffic, shipping, & receiving clerks..               4          64,564          61,118           3,446
365............................................  Stock & inventory clerks...............               4          74,641          70,701           3,940
366............................................  Meter readers..........................               4           7,657           7,253             404
368............................................  Weighers, measurers, checkers, &                      4           2,610           2,453             157
                                                  samplers.
373............................................  Expediters.............................               4          36,606          34,866           1,740
374............................................  Material recording, scheduling, &                     4           2,445           2,256             189
                                                  distrib. clerks, n.e.c..
375............................................  Insurance adjusters, examiners, &                     2         241,764          80,980         160,784
                                                  investigators.
376............................................  Investigators & adjusters, except                     2         331,895         120,907         210,988
                                                  insurance.
377............................................  Eligibility clerks, social welfare.....               4          28,952          27,659           1,293
378............................................  Bill & account collectors..............               4          47,047          44,833           2,214
379............................................  General office clerks..................               4         184,737         176,255           8,482
383............................................  Bank tellers...........................               4          69,136          66,580           2,556
384............................................  Proofreaders...........................               4           1,213           1,126              87
385............................................  Data-entry keyers......................               4         130,882         124,925           5,957
386............................................  Statistical clerks.....................               4          22,689          21,461           1,228
387............................................  Teachers' aides........................               4         233,796         227,718           6,078
389............................................  Administrative support occupations,                   4         376,525         355,756          20,769
                                                  n.e.c..
413............................................  Supervisors, firefighting & fire                      3          26,194          16,772           9,422
                                                  prevention occupations.
414............................................  Supervisors, police & detectives.......               3          58,504          40,386          18,118
415............................................  Supervisors, guards....................               4          22,766          21,276           1,490
433............................................  Supervisors, food preparation & service               3          70,106          55,774          14,332
                                                  occupations.
448............................................  Supervisors, cleaning & building                      4          54,408          51,853           2,555
                                                  service workers.
456............................................  Supervisors, personal service                         4          26,864          25,548           1,316
                                                  occupations.
475............................................  Managers, farms, except horticultural..               3           1,184             874             310
476............................................  Managers, horticultural specialty farms               3             125             107              18
477............................................  Supervisors, farm workers..............               4               0               0               0
485............................................  Supervisors, related agricultural                     4          38,427          36,355           2,072
                                                  occupations.
494............................................  Supervisors, forestry & logging workers               4           5,291           5,050             241
503............................................  Supervisors, mechanics & repairers.....               3         121,639          83,730          37,909
553............................................  Supervisors, brickmasons, stonemasons,                4           1,260           1,229              31
                                                  & tile setters.
554............................................  Supervisors, carpenters & related                     4           1,646           1,505             141
                                                  workers.
555............................................  Supervisors, electricians & power                     4           9,715           8,922             793
                                                  trans. installers.
556............................................  Supervisors, painters, paperhangers, &                4           4,577           4,224             353
                                                  plasterers.
557............................................  Supervisors, plumbers, pipefitters, &                 4             573             532              41
                                                  steamfitters.
558............................................  Supervisors, construction, n.e.c.......               4         182,003         169,694          12,309
613............................................  Supervisors, extractive occupations....               3          16,199          10,366           5,833
628............................................  Supervisors, production occupations....               3         429,007         294,158         134,849
803............................................  Supervisors, motor vehicle operators...               4          55,346          52,412           2,934
843............................................  Supervisors, material moving equipment                4           1,054             993              61
                                                  operators.
864............................................  Supervisors, handlers, equip cleaners,                4           5,736           5,449             287
                                                  & laborers, n.e.c..
                                                 Total..................................  ..............      30,883,198      11,443,807     19,439,391
--------------------------------------------------------------------------------------------------------------------------------------------------------
(1) See Table 3-2.
(2) Not elsewhere classified (n.e.c.)
Note: Some numbers may not add due to rounding.
Source: CONSAD and the U.S. Department of Labor.


[[Page 22252]]


  Table A-4.--Number of White-Collar Salaried Workers Earning at Least
 $155 but Less Than $455 per Week Who Will Most Likely Gain Compensation
                          Under the Final Rule
------------------------------------------------------------------------
                                                       Number of exempt
           OCC code               Occupation title          workers
------------------------------------------------------------------------
4............................  Chief executives &                    734
                                general
                                administrators,
                                public admin.
5............................  Administrators &                   21,133
                                officials, public
                                administration.
6............................  Administrators,                     2,666
                                protective services.
7............................  Financial managers...              31,190
8............................  Personnel & labor                   7,436
                                relations managers.
9............................  Purchasing managers..               1,881
13...........................  Managers, marketing,               24,677
                                advertising, &
                                public relations.
14...........................  Admin, education &                 17,564
                                related fields.
15...........................  Managers, medicine &               45,404
                                health.
17...........................  Managers, food                     16,070
                                serving & lodging
                                establishments.
18...........................  Managers, properties                7,086
                                & real estate.
19...........................  Funeral directors....                 912
21...........................  Managers, service                  45,865
                                organizations,
                                n.e.c. (*).
22...........................  Managers &                        203,179
                                administrators,
                                n.e.c..
23...........................  Accountants &                      51,848
                                auditors.
24...........................  Underwriters.........               4,624
25                             Other financial                    21,432
                                officers.
26...........................  Management analysts..               3,997
27...........................  Personnel, training,               12,066
                                & labor relations
                                specialists.
29...........................  Buyers, wholesale &                 4,393
                                retail trade except
                                farm products.
33...........................  Purchase agents &                   5,287
                                buyers, n.e.c..
34...........................  Business & promotion                2,611
                                agents.
36...........................  Inspectors &                          541
                                compliance officers,
                                except construction.
37...........................  Management related                 14,795
                                occupations, n.e.c..
                               Other Executive,                      468
                                Administrative, &
                                Managerial Occ's.
43...........................  Architects...........               2,303
44...........................  Aerospace engineers..               1,107
45...........................  Metallurgical &                       629
                                materials engineers.
48...........................  Chemical engineers...                 500
53...........................  Civil engineers......               2,929
55...........................  Engineers, electrical              14,205
                                & electronic.
56...........................  Engineers, industrial               2,699
57...........................  Engineers, mechanical               5,691
59...........................  Engineers, n.e.c.....               6,233
64...........................  Computer systems                   36,784
                                analysts &
                                scientists.
65...........................  Operations & systems                8,087
                                researchers &
                                analysts.
67...........................  Statisticians........               1,445
68...........................  Mathematical                          934
                                scientists, n.e.c..
73...........................  Chemists, except                    4,740
                                biochemists.
75...........................  Geologists &                          672
                                geodesists.
76...........................  Physical scientists,                  790
                                n.e.c..
77...........................  Agricultural & food                 1,405
                                scientists.
78...........................  Biological & life                   4,710
                                scientists.
83...........................  Medical scientists...               3,669
86...........................  Veterinarians........                 594
95...........................  Registered nurses....              48,506
96...........................  Pharmacists..........               4,541
97...........................  Dietitians...........                 561
103..........................  Physical therapists..               1,875
104..........................  Speech therapists....               1,183
105..........................  Therapists, n.e.c....               4,420
106..........................  Physicians'                         1,592
                                assistants.
143..........................  English teachers.....               1,109
155..........................  Teachers,                          19,966
                                prekindergarten &
                                kindergarten.
158..........................  Teachers, special                     768
                                education.
159..........................  Teachers, n.e.c......              48,451
163..........................  Counselors,                         1,719
                                Educational &
                                Vocational.
164..........................  Librarians...........               7,439
166..........................  Economists...........               2,167
167..........................  Psychologists........              13,839
169..........................  Social scientists,                    990
                                n.e.c..
174..........................  Social workers.......               8,776
175..........................  Recreation workers...               1,632
183..........................  Authors..............               1,829
185..........................  Designers............              32,399
186..........................  Musicians & composers              19,399
187..........................  Actors & directors...               8,568
188..........................  Painters, sculptors,                4,895
                                craft-artists, &
                                artist printmakers.
189..........................  Photographers........               8,397
193..........................  Dancers..............               6,811

[[Page 22253]]

 
194..........................  Artists, performers,                9,974
                                & related workers,
                                n.e.c..
195..........................  Editors & reporters..               1,830
197..........................  Public relations                    1,172
                                specialists.
198..........................  Announcers...........               2,822
                               Other Professional                  2,754
                                Specialty Occ's (1).
203..........................  Clinical laboratory                 1,199
                                technologists &
                                technicians.
204..........................  Dental hygienists....                 752
206..........................  Radiologic                            619
                                technicians.
207..........................  Licensed practical                  1,245
                                nurses.
208..........................  Health technologists                5,563
                                & technicians,
                                n.e.c..
229..........................  Computer programmers.              12,603
                               Other Technicians &                 1,551
                                Related Support
                                Occ's (2).
243..........................  Supervisors &                     143,856
                                Proprietors, Sales
                                Occupations.
253..........................  Insurance sales                    29,218
                                occupations.
254..........................  Real estate sales                   8,715
                                occupations.
255..........................  Securities &                       12,588
                                financial services
                                sales occupations.
256..........................  Advertising & related               9,836
                                sales occupations.
257..........................  Sales occupations,                  7,263
                                other business
                                services.
259..........................  Sales                              13,161
                                representatives,
                                mining, manufact, &
                                wholesale.
274..........................  Sales workers, other                  954
                                commodities.
276..........................  Cashiers.............               1,107
                               Other Sales Occ's (3)               2,342
303..........................  Supervisors, general               27,243
                                office.
305..........................  Supervisors,                        1,870
                                financial records
                                processing.
307..........................  Supervisors,                       10,172
                                distribution,
                                scheduling, &
                                adjusting clerks.
313..........................  Secretaries..........               4,825
315..........................  Typists..............                 874
319..........................  Receptionists........               1,220
323..........................  Information clerks,                   727
                                n.e.c..
337..........................  Bookkeepers,                        2,685
                                accounting, &
                                auditing clerks.
375..........................  Insurance adjusters,               16,705
                                examiners, &
                                investigators.
376..........................  Investigators &                    36,422
                                adjusters, except
                                insurance.
379..........................  General office clerks               1,095
383..........................  Bank tellers.........                 688
385..........................  Data-entry keyers....                 749
387..........................  Teachers' aides......               2,203
389..........................  Administrative                      1,387
                                support occupations,
                                n.e.c..
                               Other Administrative                5,969
                                Support Occ's (4).
628..........................  Supervisors,                        4,334
                                production
                                occupations.
433..........................  Supervisors, food                   3,664
                                preparation &
                                service occupations.
503..........................  Supervisors,                        1,424
                                mechanics &
                                repairers.
414..........................  Supervisors, police &               1,144
                                detectives.
                               All Other White-                    1,514
                                Collar Occ's (5).
                                                     -------------------
                               Total................          1,297,855
------------------------------------------------------------------------
(*) Not elsewhere classified (n.e.c.)
(1) All of the occupations included in this group have less than 500
  workers who will become nonexempt such as Urban Planners, Nuclear
  Engineers, Actuaries, and Archivists.
(2) All of the occupations included in this group have less than 500
  workers who will become nonexempt such as Legal Assistants, Drafting
  Occ's, Electrical Technicians, Engineering Technicians, and Biological
  Technicians.
(3) All of the occupations included in this group have less than 500
  workers who will become nonexempt such as Sales Workers Furniture,
  Sales Workers Radio TV, Sales Engineers, Sales Workers Hardware, and
  News Vendors.
(4) All of the occupations included in this group have less than 450
  workers who will become nonexempt such as Order Clerks, Computer
  Operators, Dispatchers, Transportation Ticket Agents, Stock Clerks,
  Stenographers, and Billing Clerks.
(5) All of the occupations included in this group have less than 400
  workers who will become nonexempt such as supervisors for cleaning &
  building service, construction, motor vehicle operators, and
  extractive occupations.
Note: Some numbers may not add due to rounding.
Source: CONSAD and the U.S. Department of Labor.


          Table A-5.--Number of Exempt White-Collar Salaried Workers Under the Highly Compensated Test
----------------------------------------------------------------------------------------------------------------
                                                                                   Total exempt    Newly exempt
                                                                   Total exempt    under highly    under highly
              OCC code                    Occupational title      under standard    compensated     compensated
                                                                    duties test        test            test
----------------------------------------------------------------------------------------------------------------
17.................................  Managers, food serving &             15,163          18,195           3,031
                                      lodging establishments.
18.................................  Managers, properties & real          12,993          15,599           2,606
                                      estate.
22.................................  Managers & administrators,          751,160         752,900           1,740
                                      n.e.c. (*).
25.................................  Other financial officers...          58,462          62,303           3,841
26.................................  Management analysts........          28,086          29,883           1,797

[[Page 22254]]

 
27.................................  Personnel, training, &               19,012          20,239           1,227
                                      labor relations
                                      specialists.
                                     Other Executive,                    358,867         361,087           2,216
                                      Administrative, &
                                      Managerial Occ's.
174................................  Social workers.............           3,747           4,492             745
195................................  Editors & reporters........           5,305           6,369           1,064
197................................  Public relations                      2,979           3,571             592
                                      specialists.
                                     Other Professional                  247,644         250,238           2,600
                                      Specialty Occ's (2).
                                     Technicians & Related                 2,858           4,011           1,151
                                      Support Occ's (3).
243................................  Supervisors & Proprietors,          122,665         130,626           7,961
                                      Sales Occupations.
253................................  Insurance sales occupations          26,647          28,365           1,719
254................................  Real estate sales                    17,449          20,945           3,496
                                      occupations.
255................................  Securities & financial               72,297          77,083           4,786
                                      services sales occupations.
257................................  Sales occupations, other             19,824          23,767           3,943
                                      business services.
258................................  Sales engineers............           3,232           3,866             633
259................................  Sales representatives,               40,365          48,394           8,029
                                      mining, manufact, &
                                      wholesale.
                                     Other Sales Occ's (4)......           9,865          11,711           1,847
                                     Administrative Support               18,332          20,554           2,102
                                      Occ's (5).
628................................  Supervisors, production               6,444           7,724           1,281
                                      occupations.
                                     All Other White-Collar                4,642           5,813           1,170
                                      Occ's (6).
 
----------------------------------------------------------------------------------------------------------------
 (*) Not elsewhere classified (n.e.c.).
 (1) Computer system analysts and scientists (occupation 64), registered nurses (occupation 95), pharmacists
  (occupation 96) and computer programmers (occupation 229) were removed from the analysis (see Section 4-3).
 (2) All of the occupations included in this group have less than 300 workers who could become exempt such as
  Dietitians, Athletes, Economists and Electrical Engineers.
 (3) All of the occupations included in this group have less than 350 workers who could become exempt such as
  Legal Assistants, Electrical Technicians, Engineering Technicians and Airplane Pilots.
 (4) All of the occupations included in this group have less than 500 workers who could become exempt such as
  Advertising & Related Sales and Sales Workers Radio TV.
 (5) All of the occupations included in this group have less than 400 workers who could become exempt such as
  supervisory Investigators & Adjusters, Administrative Support Occ's, and Secretaries.
 (6) All of the occupations included in this group have less than 300 workers who could become exempt such as
  supervisors for mechanics & repairers, and extractive occupations.
 Note: Some numbers may not add due to rounding.
 Source: CONSAD Research Corporation and U.S. Department of Labor.


Table A-6.--Number of White-Collar Paid Hourly Workers Who Could Become Exempt Under the Highly Compensated Test
----------------------------------------------------------------------------------------------------------------
                                                                                                     Estimated
                                                                                   Total number     number who
                                                                                  of paid hourly   could become
                  OCC code                            Occupational title              workers      exempt under
                                                                                    earning at        highly
                                                                                  least $100,000    compensated
                                                                                     per year          test
----------------------------------------------------------------------------------------------------------------
5..........................................  Administrators & officials, public            2,035             814
                                              administration.
6..........................................  Administrators, protective services           1,949             779
7..........................................  Financial managers.................           2,576           1,031
13.........................................  Managers, marketing, advertising, &           1,309             523
                                              public relations.
15.........................................  Managers, medicine & health........           3,471           1,388
21.........................................  Managers, service organizations,              3,591           1,436
                                              n.e.c. (*).
22.........................................  Managers & administrators, n.e.c...          36,487          14,595
23.........................................  Accountants & auditors.............           6,737           2,695
26.........................................  Management analysts................           4,879             976
                                             Other Executive, Administrative, &            9,031           1,875
                                              Managerial Occ's.
43.........................................  Architects.........................           1,379             552
44.........................................  Aerospace engineers................           1,657             663
55.........................................  Engineers, electrical & electronic.           5,762           2,305
56.........................................  Engineers, industrial..............           4,168           1,667
57.........................................  Engineers, mechanical..............           1,726             690
59.........................................  Engineers, n.e.c...................           1,889             756
65.........................................  Operations & systems researchers &            1,639             656
                                              analysts.
76.........................................  Physical scientists, n.e.c.........           1,542             617
156........................................  Teachers, elementary school........           1,724             689
185........................................  Designers..........................           3,826           1,531
188........................................  Painters, sculptors, craft-artists,           2,401             960
                                              & artist printmakers.
                                             Other Professional Specialty Occ's           18,048           4,099
                                              (2).
                                             Technicians & Related Support Occ's          19,294           1,231
                                              (3).

[[Page 22255]]

 
243........................................  Supervisors & Proprietors, Sales              9,522           1,904
                                              Occupations.
                                             Other Sales Occ's (4)..............          12,125           1,170
                                             Administrative Support Occ's (5)...          11,618             631
                                             All Other White-Collar Occ's (6)...          12,002             829
                                                                                 -----------------
                                             Total..............................         182,387         47,062
----------------------------------------------------------------------------------------------------------------
 (*) Not elsewhere classified (n.e.c.).
(1) Computer system analysts and scientists (occupation 64), registered nurses (occupation 95), pharmacists
  (occupation 96) and computer programmers (occupation 229) were removed from the analysis (see Section 4-3).
 (2) All of the occupations included in this group have less than 350 workers who could become exempt such as
  Actors & Directors, Nuclear Engineers, Chemical Engineers, Civil Engineers, Medical Scientists, etc.
 (3) All of the occupations included in this group have less than 300 workers who could become exempt such as
  Health Technologists, Clinical Laboratory Technologists, Airplane Pilots, etc.
 (4) All of the occupations included in this group have less than 450 workers who could become exempt such as
  Sales Representatives for Mining & Manufacturing, Advertising & Related Sales, etc.
 (5) All of the occupations included in this group have less than 150 workers who could become exempt such as
  supervisory Secretaries and Mail Carriers for the Postal Service.
 (6) All of the occupations included in this group have less than 300 workers who could become exempt such as
  supervisors for construction, production, and extractive occupations.
 Note: Some numbers may not add due to rounding.
 Source: CONSAD and the U.S. Department of Labor.

Appendix B

Analysis of the 2003 Current Population Survey Outgoing Rotation Group 
Data

    The Department conducted an analysis of the recently released 
2003 Current Population Survey (CPS) Outgoing Rotation Group data to 
determine if the updated data would have an impact on the 
conclusions reached in the regulatory impact analysis (RIA) using 
the 2002 data. Although it is not possible to completely update the 
RIA due to the significant changes made to the CPS in 2003, the 
following analysis indicates that using the 2003 data would not 
alter the Department's determination of the salary level test nor 
would using the 2003 data have a significant impact on the RIA 
conclusions.

Impact of the Changes to the CPS

    In 2003, the industry and occupation classifications used in the 
CPS were significantly revised. The industry classification for 
workers was changed from the 1987 Standard Industrial Classification 
(SIC) system to the 2002 North American Industry Classification 
System (NAICS). Using the 2003 CPS data would require updating the 
data used to develop the profiles in Chapter 5 of the RIA, the cost 
estimates presented in Chapter 6 that are based upon the number of 
establishments in each industry, and the assessment of the impacts 
presented in Chapter 7. These revisions would also require a 
complicated conversion of the Dunn and Bradstreet profit data from 
the SIC system it uses to the NAICS system.
    In 2003, the CPS changed its occupational classification of 
workers from the 1990 Standard Occupational Classification (SOC) 
system to the 2000 SOC system used in the 2000 Census. The 
significant changes that were made to the 2000 SOC make comparisons 
between 2002 CPS occupational categories and 2003 categories very 
difficult. The U.S. Census Bureau warns that ``you cannot compare 
the categories directly across the two years. The wording of the 
categories is different, and, even when the words appear to be the 
same, the definitions of the categories are sometimes different.'' 
(U.S. Census Bureau, ``Instructions for Creating 1990-2000 
Occupation Crosswalks, Using the Occupation Crosswalk 
Template,''April 30, 2003) The Census Bureau also notes that 
although ``different crosswalks could be created based on many 
different variables, including geography, sex, and race * * * the 
crosswalk for occupational distributions is likely different in New 
York compared to Kansas, and for men compared to women. To create 
many different crosswalks depending on all characteristics, however, 
would require a very large sample controlled for all these 
variables. Neither financial nor human resources were available to 
create and analyze such a large sample.''
    The baseline estimates of the number of currently exempt and 
nonexempt workers (presented in Chapter 3) as well as the changes in 
the exemption status of workers resulting from the final rule 
(presented in Chapter 4) were based upon the exemption probability 
determinations made by the Wage and Hour Division staff in response 
to the GAO request in 1998 (see Chapter 3). These exemption 
probabilities were directly tied to the definitions of the 1990 SOC 
categories used in the 2002 CPS (and prior years) and not the 
definitions of the 2000 SOC categories used in the 2003 CPS. 
Further, many of the costs developed in Chapter 6 of the RIA were 
also developed on the basis of these determinations, particularly 
the determination of the occupations considered white-collar and 
blue-collar. After reviewing the 1990 SOC categories and the 2000 
SOC categories, the Department has determined that it is not 
possible to accurately map the exemption probabilities developed for 
the 1990 SOC categories to the 2000 SOC categories, particularly 
given the Census Bureau warnings. Many of the 1990 categories are 
mapped to several 2000 categories and many of 2000 categories are 
mapped to several 1990 categories, and as noted above many of the 
underlying definitions have changed. There is also an increase in 
the number of management and service-related occupations; an 
increase in occupations formerly called ``professional'' and 
``technical,'' especially healthcare and computer-related 
occupations; and a decrease in the number of clerical, maintenance, 
and production occupations.
    Although it is theoretically possible to develop a schema to 
apportion the probabilities developed for the 1990 SOC categories to 
the 2000 SOC categories, the Department has determined that doing so 
could significantly distort the WHD exemption probability 
determinations for many occupations in the 2003 CPS. For example, 
the probability exemptions for engineering and science technicians 
in the 2002 CPS range from zero to 10 percent. However, these 1990 
CPS categories, that each have the lowest exemption probability 
(zero to 10 percent), would be mapped to computer specialists, 
architects, life and physical scientists, and art and design 
workers, among others that may or may not have a higher exemption 
probability. Simply apportioning the probabilities without 
completely understanding the definitions underlying the new 
occupation categories could lead to erroneous results. Moreover, 
because some of the definitions of the 2000 SOC categories are 
different than the 1990 categories it is not certain that an 
accurate exemption probability crosswalk could be developed.

[[Page 22256]]

    Therefore, the Department determined that, given the judgments 
needed to apportion the probabilities used for the 1990 SOC 
categories, it would be more precise to develop an entirely new set 
of probabilities for the 2000 SOC categories before using them. The 
Department also concluded, however, that developing an entire new 
set of probabilities at this stage of the rulemaking would not be 
appropriate, because the resulting estimates would not have had the 
benefit of review by GAO and others. Thus, the Department concluded 
that the 2003 CPS should not be used in the RIA and has only 
compared descriptive statistics from the 2003 CPS to the 2002 CPS in 
this Appendix. This comparison, however, strongly suggests that the 
quantitative and qualitative conclusions reached in the RIA using 
the 2002 CPS data are still valid.

Estimated Number of Workers Covered by the FLSA

    The 2003 CPS data estimates a total employment level of 137.7 
million compared to 134.3 million in the RIA using the 2002 CPS 
data. As noted in the RIA, most of the difference (2.2 million, or 
64.7 percent) is due to using weights adjusted for the 2000 Census 
counts in the 2003 CPS, and using weights based on the 1990 Census 
in the 2002 CPS does not significantly affect the accuracy or 
quality of the results. The remaining difference (1.2 million or 
35.3 percent) is due to employment growth as the economy expanded.
    Following the procedure discussed in Chapter 3 of the RIA, the 
Department excluded workers who are specifically exempt from the 
FLSA's overtime provisions. A description of each group excluded, 
along with the specific CPS categories and codes used are presented 
in Table B-1. A total of 21.2 million workers were excluded compared 
to 19.5 million in the RIA using the 2002 CPS data.

                         Table B-1.--Workers Exempt from the FLSA's Overtime Provisions
----------------------------------------------------------------------------------------------------------------
                                                                                                      Number of
                   Occupation                                    CPS categories/codes                  workers
                                                                                                      (1,000's)
----------------------------------------------------------------------------------------------------------------
Self-Employed or Unpaid Volunteers..............  (PEIO1COW = 6, 7 & 8) and not (PEIO1OCD = 2040,         13,974
                                                   2050 & 2060).
Clergy and Religious............................  (PEIO1OCD = 2040, 2050 & 2060) not in (PEIO1COW =          555
                                                   1).
Employees of Carriers...........................  .................................................  ...........
Rail............................................  (PEIO1OCD = 9240, 9200, 9260 & 9230) in (PEIO1ICD          101
                                                   = 6080 & 6290).
Highway.........................................  (PEIO1OCD = 7110, 7200, 7210, 7220 & 9130) in            1,323
                                                   (PEIO1ICD = 6170 & 6370).
Sea.............................................  (PEIO1OCD = 9310, 9300, 9520 & 9330) in (PEIO1ICD           30
                                                   = 6090 & 6280).
Air.............................................  (PEIO1OCD = 9030, 7140 & 6070....................          147
Agriculture.....................................  (PEIO1ICD = 170 & 180)...........................        1,879
Partsmen, Salesmen & Mechanics at Auto Dealers..  (PEIO1OCD = 4700, 4760, 4850, 4750, 7110, 7200,            830
                                                   7210, 7220, 7150 & 7160) in (PEIO1ICD = 4670).
Federal Employees (Not postal, TVA and LC)......  (PEIO1COW = 1) not in (PEIO1ICD = 6370), not in          2,381
                                                   ((PEIO1ICD = 570) in (GESTFIPS = 21, 47, 28, 01,
                                                   13, 37 & 51)), and not in ((PEIO1ICD = 6770) in
                                                   (GESTFIPS = 11)).
                                                                                                    ------------
    Total.......................................  .................................................      21,222
----------------------------------------------------------------------------------------------------------------
Note: Equivalent to Table 3-1 and associated text in the RIA.
Source: U.S. Department of Labor.

    After excluding the workers in occupations exempt from the 
FLSA's overtime provisions 116.5 million workers remain compared to 
an estimated 114.8 million using the 2002 CPS data (see Table B-2). 
In 2003, there were 70.3 million paid hourly workers and 46.2 
million salaried workers compared to 69.0 million paid hourly 
workers and 45.8 million salaried workers in 2002. The difference 
between the total numbers of salaried employees is just 0.9 percent.

       Table B-2.--Estimated Number of Workers Covered by the FLSA
------------------------------------------------------------------------
                                           Number of workers (1,000's)
                  Year                  --------------------------------
                                           Hourly     Salary     Total
------------------------------------------------------------------------
2002...................................     68,982     45,784    114,765
2003...................................     70,300     46,202   116,514
------------------------------------------------------------------------
Source: U.S. Department of Labor.
PEERNHRY = 1 for Hourly Workers and 2 for Salaried.

Estimated Number of Workers Subject to the Part 541 Salary Test

    The Department also developed estimates of the number of workers 
subject to the Part 541 salary level tests using the 2003 CPS data. 
As was done in Chapter 3 of the RIA, the Department excluded workers 
in occupations not subject to the salary tests. Table B-3 presents a 
description of each group excluded, along with the specific codes 
used. In 2003, there were 7.6 million workers were covered by the 
FLSA's overtime provisions but not subject to the salary level test, 
the same number that was estimated in the RIA using 2002 CPS data.

                    Table B-3.--Workers Not subject to the Part 541 Salary Level Test in 2003
----------------------------------------------------------------------------------------------------------------
                                                                                                      Number of
                   Occupation                                         CPS codes                        workers
                                                                                                      (1,000's)
----------------------------------------------------------------------------------------------------------------
Teachers & Academic Administrative Personnel in   (PEIO1OCD = 230, 2000, 2200, 2300, 2310, 2320,           6,157
 Education Establishments.                         2330, 2340 & 2550) in (PEIO1ICD = 7860 & 7870).
Doctors.........................................  (PEIO1OCD = 3060, 3010, 3040, 3120 & 3260).......          643
Lawyers & Judges................................  (PEIO1OCD = 2100 & 2110).........................          632
Street & Door-to-Door Sales.....................  (PEIO1OCD = 4950)................................          151
                                                 ----------------------------------------------------
    Total.......................................  .................................................       7,583
----------------------------------------------------------------------------------------------------------------
Note: Equivalent to Table 3-3 and the associated text in the RIA.
Source: U.S. Department of Labor.


[[Page 22257]]

    In 2003, 108.9 million workers were covered by the FLSA's 
overtime provisions and subject to the salary level test compared to 
107.2 million workers in 2002 (see Table B-4). In 2003, 69.2 million 
of these workers were paid by the hour and 39.7 million were 
salaried employees compared to 67.9 million paid hourly workers and 
39.3 million salaried workers in 2002.

 Table B-4.--Estimated Number of Workers Covered by the FLSA and Subject
                        to the Salary Level Test
------------------------------------------------------------------------
                                           Number of Workers (1,000's)
                  Year                  --------------------------------
                                           Hourly     Salary     Total
------------------------------------------------------------------------
2002...................................     67,903     39,308    107,211
2003...................................     69,247     39,683   108,930
------------------------------------------------------------------------
Source: U.S. Department of Labor.

    The distribution of workers by income who are covered by the 
FLSA and subject to the Part 541 salary level tests in 2002 and 2003 
are presented in tables B-5 and B-6. Based upon the 2003 CPS data, 
the Department estimates that 6.7 million salaried workers who earn 
between $155 and $455 per week would have their overtime protection 
strengthened by raising the salary level test in the final rule. 
This is similar to the 6.7 million based on the 2002 CPS data that 
was estimated in the RIA. Therefore, the Department concludes that 
using the 2003 CPS data would not change its estimate of the number 
of salaried workers who earn between $155 and $455 per week who will 
have their overtime protection strengthened by the final rule.
    Based upon the 2003 CPS data, the Department estimates there are 
2.9 million workers who earn $1,923 or more per week compared to 2.7 
million in 2002. Most of the difference, 82.5 percent, is from the 
increase in salaried workers, the vast majority of whom (as 
estimated in the RIA) are probably exempt under the current 
regulation. However, it is not possible to estimate the number of 
exempt and nonexempt workers because of the changes to the 
occupation categories discussed above.

    Table B-5.--Workers Subject to the 541 Salary Level Tests in 2002
------------------------------------------------------------------------
                                         Covered workers (1,000's)
         Weekly earnings          --------------------------------------
                                      Hourly       Salary       Total
------------------------------------------------------------------------
Less than $155...................        7,700        1,767        9,467
$155 to $454.99..................       31,351        6,749       38,100
$455 to $1,923.07................       28,506       28,472       56,978
$1,923.08 or more................          345        2,321        2,666
                                  --------------
    Total........................       67,902       39,309     107,211
------------------------------------------------------------------------
Source: U.S. Department of Labor.


    Table B-6.--Workers Subject to the 541 Salary Level Tests in 2003
------------------------------------------------------------------------
                                         Covered workers (1,000's)
         Weekly earnings          --------------------------------------
                                      Hourly       Salary       Total
------------------------------------------------------------------------
Less than $155...................        7,470        1,537        9,007
$155 to $454.99..................       30,920        6,692       37,612
$455 to $1,923.07................       30,463       28,902       59,365
$1,923.08 or more................          394        2,552        2,946
                                  --------------
Total............................       69,247       39,683     108,930
------------------------------------------------------------------------
Source: U.S. Department of Labor.

The 2003 CPS Data and the Salary Level Test

    As discussed in the preamble, the Department based its 
determination of the $455 weekly salary level requirement in the 
Part 541 duties tests, in part, on preamble Tables 3, 4 and 5. 
Although it is not possible to update preamble Table 4 (Likely 
Exempt Workers) because of the changes to the occupation categories 
(see discussion above), updates of the other two tables using the 
2003 CPS data are presented below.
    Although the median weekly earnings for all full-time salary 
workers covered by the overtime provisions of the FLSA increased 
from $800 in 2002 to $808 in 2003, Table B-7 suggests that salaries 
declined in retail in 2003 compared to 2002. The 20th percentile in 
retail was just under $450 in 2003 (see Table B-7) compared to $455 
in 2002 (see Preamble Table 3). Thus, the choice of the $455 salary 
level is valid whether it is based upon the 2002 or the 2003 CPS 
data. The Department also notes that the lack of salary growth in 
retail appears to be consistent with many of the comments that were 
received on behalf of small businesses and summarized in the 
preamble (see the Regulatory Flexibility Analysis).

Summary

    Although it is not possible to completely update the RIA due to 
the significant changes made to the occupation categories that were 
used in the 2002 CPS, an analysis of descriptive statistics from the 
2003 CPS indicates that using the 2003 data would not alter the 
Department's determination of the salary level test nor would using 
the 2003 data have a significant impact on the RIA conclusions. The 
number of workers, 6.7 million, who earn between $155 and $455 per 
week and will have their overtime protection strengthened by the 
final rule is unchanged using the 2003 data, and the number of 
workers who earn more than $100,000 per year and could have their 
exemption status changed is not significantly higher.

[[Page 22258]]



                      Table B-7.--Full-Time Salaried Employees Covered by the FLSA in 2003
----------------------------------------------------------------------------------------------------------------
                  Earnings                                                Percentile
----------------------------------------------------------------------------------------------------------------
        Weekly                 Annual                  All                   South                 Retail
----------------------------------------------------------------------------------------------------------------
             $155                 $8,060                    1.5                    1.4                    2.2
              255                 13,260                    4.1                    4.6                    5.9
              355                 18,460                    9.2                   10.8                   12.2
              380                 19,760                   10.1                   11.9                   13.5
              405                 21,060                   12.8                   15.1                   17.4
              425                 22,100                   13.8                   16.3                   18.5
              450                 23,400                   15.2                   18.0                   20.3
              455                 23,660                   15.3                   18.0                   20.3
              460                 23,920                   15.4                   18.1                   20.4
              465                 24,180                   16.6                   19.5                   21.9
              470                 24,440                   16.7                   19.5                   22.0
              475                 24,700                   16.8                   19.7                   22.2
              480                 24,960                   17.3                   20.2                   22.8
              485                 25,220                   18.2                   21.3                   24.2
              490                 25,480                   18.3                   21.4                   24.4
              495                 25,740                   18.4                   21.5                   24.4
              500                 26,000                   20.5                   23.8                   27.3
              550                 28,600                   23.6                   27.7                   30.6
              600                 31,200                   29.7                   35.0                   37.5
              650                 33,800                   33.3                   39.2                   41.9
              700                 36,400                   39.2                   45.6                   49.5
              750                 39,000                   43.0                   50.1                   52.9
              800                 41,600                   48.2                   55.1                   58.8
              850                 44,200                   51.8                   58.5                   61.9
              900                 46,800                   55.8                   62.3                   66.1
              950                 49,400                   58.6                   64.9                   68.2
            1,000                 52,000                   64.4                   70.4                   74.3
            1,100                 57,200                   68.8                   74.3                   77.6
            1,200                 62,400                   74.2                   79.1                   81.9
            1,300                 67,600                   77.6                   82.0                   84.5
            1,400                 72,800                   81.2                   84.8                   86.7
            1,500                 78,000                   84.4                   87.5                   89.1
            1,600                 83,200                   86.7                   89.3                   90.6
            1,700                 88,400                   88.3                   90.7                   92.0
            1,800                 93,600                   90.0                   92.0                   93.3
            1,900                 98,800                   91.1                   92.8                   93.8
            1,925                100,100                   92.8                   94.2                   95.2
            1,950                101,400                   92.9                   94.3                   95.2
            1,975                102,700                   93.0                   94.3                   95.5
            2,000                104,000                   93.3                   94.5                   95.7
            2,100                109,200                   93.8                   94.9                   96.3
            2,200                114,400                   94.6                   95.6                   96.6
            2,300                119,600                   94.9                   95.8                   97.3
            2,400                124,800                   95.8                   96.5                   97.8
            2,500                130,000                   96.6                   97.2                 100.0
----------------------------------------------------------------------------------------------------------------
Note: Equivalent to Table 3 in the Preamble.
Source: U.S. Department of Labor.


                        Table B-8.--Full-Time Hourly Workers Covered by the FLSA in 2003
----------------------------------------------------------------------------------------------------------------
                  Earnings                                                Percentile
----------------------------------------------------------------------------------------------------------------
        Weekly                 Annual                  All                   South                 Retail
----------------------------------------------------------------------------------------------------------------
             $155                 $8,060                    1.1                    1.2                    1.8
              255                 13,260                    6.8                    8.6                   12.1
              355                 18,460                   23.8                   28.1                   38.3
              380                 19,760                   29.2                   34.2                   45.1
              405                 21,060                   36.1                   41.7                   52.6
              425                 22,100                   38.9                   44.7                   55.6
              450                 23,400                   43.4                   49.5                   60.4
              455                 23,660                   43.8                   49.8                   60.8
              460                 23,920                   44.6                   50.6                   61.7
              465                 24,180                   45.2                   51.3                   62.3
              470                 24,440                   45.6                   51.8                   62.8
              475                 24,700                   46.0                   52.2                   63.2
              480                 24,960                   49.0                   55.3                   66.2
              485                 25,220                   49.5                   55.8                   66.8
              490                 25,480                   50.0                   56.4                   67.1
              495                 25,740                   50.4                   56.8                   67.5

[[Page 22259]]

 
              500                 26,000                   52.2                   58.7                   69.1
              550                 28,600                   58.2                   64.5                   74.6
              600                 31,200                   66.1                   71.6                   81.2
              650                 33,800                   70.2                   75.3                   84.4
              700                 36,400                   74.7                   79.3                   87.5
              750                 39,000                   78.0                   82.1                   89.4
              800                 41,600                   82.0                   85.7                   91.9
              850                 44,200                   84.3                   87.5                   93.2
              900                 46,800                   86.6                   89.5                   94.3
              950                 49,400                   88.2                   90.9                   95.2
            1,000                 52,000                   90.7                   93.0                   96.3
            1,100                 57,200                   93.1                   94.9                   97.2
            1,200                 62,400                   95.1                   96.3                   98.1
            1,300                 67,600                   96.3                   97.1                   98.5
            1,400                 72,800                   97.2                   97.8                   98.9
            1,500                 78,000                   97.9                   98.4                   99.1
            1,600                 83,200                   98.4                   98.8                   99.2
            1,700                 88,400                   98.7                   99.0                   99.4
            1,800                 93,600                   99.0                   99.2                   99.6
            1,900                 98,800                   99.1                   99.3                   99.6
            1,925                100,100                   99.2                   99.4                   99.6
            1,950                101,400                   99.3                   99.4                   99.6
            1,975                102,700                   99.3                   99.4                   99.6
            2,000                104,000                   99.3                   99.4                   99.7
            2,100                109,200                   99.4                   99.5                   99.7
            2,200                114,400                   99.5                   99.6                   99.8
            2,300                119,600                   99.6                   99.6                   99.8
            2,400                124,800                   99.7                   99.7                   99.8
            2,500                130,000                   99.7                   99.7                  99.8
----------------------------------------------------------------------------------------------------------------
Note: Equivalent to Table 5 in the Preamble.
Source: U.S. Department of Labor.

Appendix C--List of References

    Report of the Minimum Wage Study Commission, Volume 1, May 1981
    Office of Management and Budget, ``Reports to Congress on the 
Costs and Benefits of Regulations'', 2001 and 2002.
    ``Executive, Administrative, Professional * * * Outside 
Salesman'' Redefined, Wage and Hour Division, U.S. Department of 
Labor, Report and Recommendations of the Presiding Officer (Harold 
Stein) at Hearings Preliminary to Redefinition (Oct. 10, 1940) 
(``Stein Report'').
    Report and Recommendations on Proposed Revisions of Regulations, 
Part 541, by Harry Weiss, Presiding Officer, Wage and Hour and 
Public Contracts Divisions, U.S. Department of Labor (June 30, 1949) 
(``Weiss Report'').
    Report and Recommendations on Proposed Revisions of Regulations, 
Part 541, Under the Fair Labor Standards Act, by Harry S. Kantor, 
Presiding Officer, Wage and Hour and Public Contracts Divisions, 
U.S. Department of Labor (March 3, 1958) (``Kantor Report'').
    U.S. General Accounting Office, Fair Labor Standards Act: White-
Collar Exemptions in the Modern Work Place, Report to the 
Subcommittee on Workforce Protections, Committee on Education and 
the Workforce, U.S. House of Representatives, GAO/HEHS-99-164, 
September 30, 1999.
    Cohen, Malcom S. and Donal R. Grimes, ``The `New Economy' and 
Its Impact on Executive, Administrative and Professional Exemptions 
to the Fair Labor Standards Act (FLSA),'' prepared for the 
University of Tennessee under a contract with the U.S. Department of 
Labor, Employment Standards Administration, Wage and Hour Division. 
Ann Arbor, MI: Employment Research Corporation, January 2001.
    CONSAD Research Corporation, ``Final Report, Economic Analysis 
of the Proposed and Alternative Rules for the Fair Labor Standards 
Act (FLSA) Regulations at 29 CFR 541,'' February 10, 2003.
    U.S. Department of Labor, Employment Standards Administration, 
Wage and Hour Division, Opinion Letter, WH-363, November 10, 1975 
(opinion letter regarding dental hygienists).
    U.S. Department of Labor, Employment Standards Administration, 
Wage and Hour Division, Field Operations Handbook, http://
www.dol.gov/esa/whd/foh/index.htm
    U.S. Department of Labor, Bureau of Labor Statistics and U.S. 
Department of Commerce, Bureau of the Census, 2002 Current 
Population Survey (CPS) Outgoing Rotation Group http://
www.bls.census.gov/cps/cpsmain.htm
    U.S. Department of Commerce, Bureau of the Census Web site, CPS 
Appendix, http://www.census.gov/apsd/techdoc/cps/sep97/det-occ.html
    U.S. Department of Commerce, Bureau of the Census (USDOC, 
2001a), 1997 Economic Census: Comparative Statistics, http://
www.census.gov/epcd/ec97sic/index.htmldownload
    U.S. Department of Commerce, Bureau of the Census (USDOC, 1999), 
1997 County Business Patterns.
    U.S. Department of the Treasury, Internal Revenue Service (IRS, 
2000), Corporate Tax Returns for Active Corporations for 1997.
    U.S. Postal Service (USPS, 1997), 1997 Annual Report.
    U.S. Department of Labor, Bureau of Labor Statistics, 1998 
Standard Occupational Classification (SOC) system, http://
www.bls.gov/soc/home.htm
    O*NET, the Occupational Information Network, http://
www.onetcenter.org/whatsnew.html
    U.S. Small Business Administration, Table of Small Business Size 
Standards, http://www.sba.gov/size/indextableofsize.html
    U.S. Department of Commerce, Bureau of Census (USDOC, 2002a), 
1997 Census of Governments.
    U.S. Department of Commerce, Bureau of Census (USDOC, 2002c), 
State and Local Government Employment and Payroll Data (Revised June 
2001), by State and Function: March 1999.
    U.S. Department of Commerce, Bureau of Census (USDOC, 2002c), 
State and Local Government Finances, by Level of Government and by 
State: 1999-2000.
    U.S. Department of Labor, Bureau of Labor Statistics, National 
Compensation Survey.
    U.S. Department of Commerce (2002), Statistics of U.S. 
Businesses 1996.
    U.S. Department of Labor, Bureau of Labor Statistics, Work 
Experience of the Population in 2002, Press Release.
    Dun & Bradstreet (D&B, 2001a), National Profile of Businesses 
Database for Fiscal Year 2000.

[[Page 22260]]

    Dun & Bradstreet (D&B, 2001b), Industry Norms and Key Business 
Ratios for Fiscal Year 2000/2001.
    Dun & Bradstreet (D&B, 2002), Industry Norms and Key Business 
Ratios for Fiscal Year 2001/2002.
    Bell and Hart; ``Unpaid Work''; Economica, 66: 271-290, 1999
    Bell, Hart, Hubler, and Schwerdt, ``Paid and Unpaid Overtime 
Working in Germany and the UK,'' IZA Discussion Paper Number 133, 
Bonn, Germany: The Institute for the Study of Labor, March 2000,
    Lena M. Bottos and Christopher J. Fusco; ``Competitive Pay 
Policy'; SPHR 2002; Salary.com, Inc.

List of Subjects in 29 CFR Part 541

    Labor, Minimum wages, Overtime pay, Salaries, Teachers, Wages.

    Signed at Washington, DC, this 16th day of April 2004.
Victoria A. Lipnic,
Assistant Secretary for Employment Standards.
Tammy D. McCutchen,
Administrator, Wage and Hour Division.

0
For the reasons set forth above, 29 CFR part 541 is revised to read as 
follows:

PART 541--DEFINING AND DELIMITING THE EXEMPTIONS FOR EXECUTIVE, 
ADMINISTRATIVE, PROFESSIONAL, COMPUTER AND OUTSIDE SALES EMPLOYEES

Subpart A--General Regulations
Sec.
541.0 Introductory statement.
541.1 Terms used in regulations.
541.2 Job titles insufficient.
541.3 Scope of the section 13(a)(1) exemptions.
541.4 Other laws and collective bargaining agreements.
Subpart B--Executive Employees
541.100 General rule for executive employees.
541.101 Business owner.
541.102 Management.
541.103 Department or subdivision.
541.104 Two or more other employees.
541.105 Particular weight.
541.106 Concurrent duties.
Subpart C--Administrative Employees
541.200 General rule for administrative employees.
541.201 Directly related to management or general business 
operations.
541.202 Discretion and independent judgment.
541.203 Administrative exemption examples.
541.204 Educational establishments.
Subpart D--Professional Employees
541.300 General rule for professional employees.
541.301 Learned professionals.
541.302 Creative professionals.
541.303 Teachers.
541.304 Practice of law or medicine.
Subpart E--Computer Employees
541.400 General rule for computer employees.
541.401 Computer manufacture and repair.
541.402 Executive and administrative computer employees.
Subpart F--Outside Sales Employees
541.500 General rule for outside sales employees.
541.501 Making sales or obtaining orders.
541.502 Away from employer's place of business.
541.503 Promotion work.
541.504 Drivers who sell.
Subpart G--Salary Requirements
541.600 Amount of salary required.
541.601 Highly compensated employees.
541.602 Salary basis.
541.603 Effect of improper deductions from salary.
541.604 Minimum guarantee plus extras.
541.605 Fee basis.
541.606 Board, lodging or other facilities.
Subpart H--Definitions And Miscellaneous Provisions
541.700 Primary duty.
541.701 Customarily and regularly.
541.702 Exempt and nonexempt work.
541.703 Directly and closely related.
541.704 Use of manuals.
541.705 Trainees.
541.706 Emergencies.
541.707 Occasional tasks.
541.708 Combination exemptions.
541.709 Motion picture producing industry.
541.710 Employees of public agencies.

    Authority: 29 U.S.C. 213; Public Law 101-583, 104 Stat. 2871; 
Reorganization Plan No. 6 of 1950 (3 CFR 1945-53 Comp. p. 1004); 
Secretary's Order No. 4-2001 (66 FR 29656).

Subpart A--General Regulations


Sec.  541.0  Introductory statement.

    (a) Section 13(a)(1) of the Fair Labor Standards Act, as amended, 
provides an exemption from the Act's minimum wage and overtime 
requirements for any employee employed in a bona fide executive, 
administrative, or professional capacity (including any employee 
employed in the capacity of academic administrative personnel or 
teacher in elementary or secondary schools), or in the capacity of an 
outside sales employee, as such terms are defined and delimited from 
time to time by regulations of the Secretary, subject to the provisions 
of the Administrative Procedure Act. Section 13(a)(17) of the Act 
provides an exemption from the minimum wage and overtime requirements 
for computer systems analysts, computer programmers, software 
engineers, and other similarly skilled computer employees.
    (b) The requirements for these exemptions are contained in this 
part as follows: executive employees, subpart B; administrative 
employees, subpart C; professional employees, subpart D; computer 
employees, subpart E; outside sales employees, subpart F. Subpart G 
contains regulations regarding salary requirements applicable to most 
of the exemptions, including salary levels and the salary basis test. 
Subpart G also contains a provision for exempting certain highly 
compensated employees. Subpart H contains definitions and other 
miscellaneous provisions applicable to all or several of the 
exemptions.
    (c) Effective July 1, 1972, the Fair Labor Standards Act was 
amended to include within the protection of the equal pay provisions 
those employees exempt from the minimum wage and overtime pay 
provisions as bona fide executive, administrative, and professional 
employees (including any employee employed in the capacity of academic 
administrative personnel or teacher in elementary or secondary 
schools), or in the capacity of an outside sales employee under section 
13(a)(1) of the Act. The equal pay provisions in section 6(d) of the 
Fair Labor Standards Act are administered and enforced by the United 
States Equal Employment Opportunity Commission.


Sec.  541.1  Terms used in regulations.

    Act means the Fair Labor Standards Act of 1938, as amended.
    Administrator means the Administrator of the Wage and Hour 
Division, United States Department of Labor. The Secretary of Labor has 
delegated to the Administrator the functions vested in the Secretary 
under sections 13(a)(1) and 13(a)(17) of the Fair Labor Standards Act.


Sec.  541.2  Job titles insufficient.

    A job title alone is insufficient to establish the exempt status of 
an employee. The exempt or nonexempt status of any particular employee 
must be determined on the basis of whether the employee's salary and 
duties meet the requirements of the regulations in this part.


Sec.  541.3  Scope of the section 13(a)(1) exemptions.

    (a) The section 13(a)(1) exemptions and the regulations in this 
part do not apply to manual laborers or other ``blue collar'' workers 
who perform work involving repetitive operations with their hands, 
physical skill and energy. Such nonexempt ``blue collar'' employees 
gain the skills and knowledge required for performance of their routine 
manual and physical work through apprenticeships and on-the-job 
training, not through the prolonged

[[Page 22261]]

course of specialized intellectual instruction required for exempt 
learned professional employees such as medical doctors, architects and 
archeologists. Thus, for example, non-management production-line 
employees and non-management employees in maintenance, construction and 
similar occupations such as carpenters, electricians, mechanics, 
plumbers, iron workers, craftsmen, operating engineers, longshoremen, 
construction workers and laborers are entitled to minimum wage and 
overtime premium pay under the Fair Labor Standards Act, and are not 
exempt under the regulations in this part no matter how highly paid 
they might be.
    (b)(1) The section 13(a)(1) exemptions and the regulations in this 
part also do not apply to police officers, detectives, deputy sheriffs, 
state troopers, highway patrol officers, investigators, inspectors, 
correctional officers, parole or probation officers, park rangers, fire 
fighters, paramedics, emergency medical technicians, ambulance 
personnel, rescue workers, hazardous materials workers and similar 
employees, regardless of rank or pay level, who perform work such as 
preventing, controlling or extinguishing fires of any type; rescuing 
fire, crime or accident victims; preventing or detecting crimes; 
conducting investigations or inspections for violations of law; 
performing surveillance; pursuing, restraining and apprehending 
suspects; detaining or supervising suspected and convicted criminals, 
including those on probation or parole; interviewing witnesses; 
interrogating and fingerprinting suspects; preparing investigative 
reports; or other similar work.
    (2) Such employees do not qualify as exempt executive employees 
because their primary duty is not management of the enterprise in which 
the employee is employed or a customarily recognized department or 
subdivision thereof as required under Sec.  541.100. Thus, for example, 
a police officer or fire fighter whose primary duty is to investigate 
crimes or fight fires is not exempt under section 13(a)(1) of the Act 
merely because the police officer or fire fighter also directs the work 
of other employees in the conduct of an investigation or fighting a 
fire.
    (3) Such employees do not qualify as exempt administrative 
employees because their primary duty is not the performance of work 
directly related to the management or general business operations of 
the employer or the employer's customers as required under Sec.  
541.200.
    (4) Such employees do not qualify as exempt professionals because 
their primary duty is not the performance of work requiring knowledge 
of an advanced type in a field of science or learning customarily 
acquired by a prolonged course of specialized intellectual instruction 
or the performance of work requiring invention, imagination, 
originality or talent in a recognized field of artistic or creative 
endeavor as required under Sec.  541.300. Although some police 
officers, fire fighters, paramedics, emergency medical technicians and 
similar employees have college degrees, a specialized academic degree 
is not a standard prerequisite for employment in such occupations.


Sec.  541.4  Other laws and collective bargaining agreements.

    The Fair Labor Standards Act provides minimum standards that may be 
exceeded, but cannot be waived or reduced. Employers must comply, for 
example, with any Federal, State or municipal laws, regulations or 
ordinances establishing a higher minimum wage or lower maximum workweek 
than those established under the Act. Similarly, employers, on their 
own initiative or under a collective bargaining agreement with a labor 
union, are not precluded by the Act from providing a wage higher than 
the statutory minimum, a shorter workweek than the statutory maximum, 
or a higher overtime premium (double time, for example) than provided 
by the Act. While collective bargaining agreements cannot waive or 
reduce the Act's protections, nothing in the Act or the regulations in 
this part relieves employers from their contractual obligations under 
collective bargaining agreements.

Subpart B--Executive Employees


Sec.  541.100  General rule for executive employees.

    (a) The term ``employee employed in a bona fide executive 
capacity'' in section 13(a)(1) of the Act shall mean any employee:
    (1) Compensated on a salary basis at a rate of not less than $455 
per week (or $380 per week, if employed in American Samoa by employers 
other than the Federal Government), exclusive of board, lodging or 
other facilities;
    (2) Whose primary duty is management of the enterprise in which the 
employee is employed or of a customarily recognized department or 
subdivision thereof;
    (3) Who customarily and regularly directs the work of two or more 
other employees; and
    (4) Who has the authority to hire or fire other employees or whose 
suggestions and recommendations as to the hiring, firing, advancement, 
promotion or any other change of status of other employees are given 
particular weight.
    (b) The phrase ``salary basis'' is defined at Sec.  541.602; 
``board, lodging or other facilities'' is defined at Sec.  541.606; 
``primary duty'' is defined at Sec.  541.700; and ``customarily and 
regularly'' is defined at Sec.  541.701.


Sec.  541.101  Business owner.

    The term ``employee employed in a bona fide executive capacity'' in 
section 13(a)(1) of the Act also includes any employee who owns at 
least a bona fide 20-percent equity interest in the enterprise in which 
the employee is employed, regardless of whether the business is a 
corporate or other type of organization, and who is actively engaged in 
its management. The term ``management'' is defined in Sec.  541.102. 
The requirements of Subpart G (salary requirements) of this part do not 
apply to the business owners described in this section.


Sec.  541.102  Management.

    Generally, ``management'' includes, but is not limited to, 
activities such as interviewing, selecting, and training of employees; 
setting and adjusting their rates of pay and hours of work; directing 
the work of employees; maintaining production or sales records for use 
in supervision or control; appraising employees' productivity and 
efficiency for the purpose of recommending promotions or other changes 
in status; handling employee complaints and grievances; disciplining 
employees; planning the work; determining the techniques to be used; 
apportioning the work among the employees; determining the type of 
materials, supplies, machinery, equipment or tools to be used or 
merchandise to be bought, stocked and sold; controlling the flow and 
distribution of materials or merchandise and supplies; providing for 
the safety and security of the employees or the property; planning and 
controlling the budget; and monitoring or implementing legal compliance 
measures.


Sec.  541.103  Department or subdivision.

    (a) The phrase ``a customarily recognized department or 
subdivision'' is intended to distinguish between a mere collection of 
employees assigned from time to time to a specific job or series of 
jobs and a unit with permanent status and function. A customarily 
recognized department or subdivision must have a permanent status and a 
continuing function. For example, a

[[Page 22262]]

large employer's human resources department might have subdivisions for 
labor relations, pensions and other benefits, equal employment 
opportunity, and personnel management, each of which has a permanent 
status and function.
    (b) When an enterprise has more than one establishment, the 
employee in charge of each establishment may be considered in charge of 
a recognized subdivision of the enterprise.
    (c) A recognized department or subdivision need not be physically 
within the employer's establishment and may move from place to place. 
The mere fact that the employee works in more than one location does 
not invalidate the exemption if other factors show that the employee is 
actually in charge of a recognized unit with a continuing function in 
the organization.
    (d) Continuity of the same subordinate personnel is not essential 
to the existence of a recognized unit with a continuing function. An 
otherwise exempt employee will not lose the exemption merely because 
the employee draws and supervises workers from a pool or supervises a 
team of workers drawn from other recognized units, if other factors are 
present that indicate that the employee is in charge of a recognized 
unit with a continuing function.


Sec.  541.104  Two or more other employees.

    (a) To qualify as an exempt executive under Sec.  541.100, the 
employee must customarily and regularly direct the work of two or more 
other employees. The phrase ``two or more other employees'' means two 
full-time employees or their equivalent. One full-time and two half-
time employees, for example, are equivalent to two full-time employees. 
Four half-time employees are also equivalent.
    (b) The supervision can be distributed among two, three or more 
employees, but each such employee must customarily and regularly direct 
the work of two or more other full-time employees or the equivalent. 
Thus, for example, a department with five full-time nonexempt workers 
may have up to two exempt supervisors if each such supervisor 
customarily and regularly directs the work of two of those workers.
    (c) An employee who merely assists the manager of a particular 
department and supervises two or more employees only in the actual 
manager's absence does not meet this requirement.
    (d) Hours worked by an employee cannot be credited more than once 
for different executives. Thus, a shared responsibility for the 
supervision of the same two employees in the same department does not 
satisfy this requirement. However, a full-time employee who works four 
hours for one supervisor and four hours for a different supervisor, for 
example, can be credited as a half-time employee for both supervisors.


Sec.  541.105  Particular weight.

    To determine whether an employee's suggestions and recommendations 
are given ``particular weight,'' factors to be considered include, but 
are not limited to, whether it is part of the employee's job duties to 
make such suggestions and recommendations; the frequency with which 
such suggestions and recommendations are made or requested; and the 
frequency with which the employee's suggestions and recommendations are 
relied upon. Generally, an executive's suggestions and recommendations 
must pertain to employees whom the executive customarily and regularly 
directs. It does not include an occasional suggestion with regard to 
the change in status of a co-worker. An employee's suggestions and 
recommendations may still be deemed to have ``particular weight'' even 
if a higher level manager's recommendation has more importance and even 
if the employee does not have authority to make the ultimate decision 
as to the employee's change in status.


Sec.  541.106  Concurrent duties.

    (a) Concurrent performance of exempt and nonexempt work does not 
disqualify an employee from the executive exemption if the requirements 
of Sec.  541.100 are otherwise met. Whether an employee meets the 
requirements of Sec.  541.100 when the employee performs concurrent 
duties is determined on a case-by-case basis and based on the factors 
set forth in Sec.  541.700. Generally, exempt executives make the 
decision regarding when to perform nonexempt duties and remain 
responsible for the success or failure of business operations under 
their management while performing the nonexempt work. In contrast, the 
nonexempt employee generally is directed by a supervisor to perform the 
exempt work or performs the exempt work for defined time periods. An 
employee whose primary duty is ordinary production work or routine, 
recurrent or repetitive tasks cannot qualify for exemption as an 
executive.
    (b) For example, an assistant manager in a retail establishment may 
perform work such as serving customers, cooking food, stocking shelves 
and cleaning the establishment, but performance of such nonexempt work 
does not preclude the exemption if the assistant manager's primary duty 
is management. An assistant manager can supervise employees and serve 
customers at the same time without losing the exemption. An exempt 
employee can also simultaneously direct the work of other employees and 
stock shelves.
    (c) In contrast, a relief supervisor or working supervisor whose 
primary duty is performing nonexempt work on the production line in a 
manufacturing plant does not become exempt merely because the nonexempt 
production line employee occasionally has some responsibility for 
directing the work of other nonexempt production line employees when, 
for example, the exempt supervisor is unavailable. Similarly, an 
employee whose primary duty is to work as an electrician is not an 
exempt executive even if the employee also directs the work of other 
employees on the job site, orders parts and materials for the job, and 
handles requests from the prime contractor.

Subpart C--Administrative Employees


Sec.  541.200  General rule for administrative employees.

    (a) The term ``employee employed in a bona fide administrative 
capacity'' in section 13(a)(1) of the Act shall mean any employee:
    (1) Compensated on a salary or fee basis at a rate of not less than 
$455 per week (or $380 per week, if employed in American Samoa by 
employers other than the Federal Government), exclusive of board, 
lodging or other facilities;
    (2) Whose primary duty is the performance of office or non-manual 
work directly related to the management or general business operations 
of the employer or the employer's customers; and
    (3) Whose primary duty includes the exercise of discretion and 
independent judgment with respect to matters of significance.
    (b) The term ``salary basis'' is defined at Sec.  541.602; ``fee 
basis'' is defined at Sec.  541.605; ``board, lodging or other 
facilities'' is defined at Sec.  541.606; and ``primary duty'' is 
defined at Sec.  541.700.


Sec.  541.201  Directly related to management or general business 
operations.

    (a) To qualify for the administrative exemption, an employee's 
primary duty must be the performance of work directly related to the 
management or general business operations of the employer or the 
employer's customers. The phrase ``directly related to the management 
or general business operations'' refers to the type of work

[[Page 22263]]

performed by the employee. To meet this requirement, an employee must 
perform work directly related to assisting with the running or 
servicing of the business, as distinguished, for example, from working 
on a manufacturing production line or selling a product in a retail or 
service establishment.
    (b) Work directly related to management or general business 
operations includes, but is not limited to, work in functional areas 
such as tax; finance; accounting; budgeting; auditing; insurance; 
quality control; purchasing; procurement; advertising; marketing; 
research; safety and health; personnel management; human resources; 
employee benefits; labor relations; public relations, government 
relations; computer network, internet and database administration; 
legal and regulatory compliance; and similar activities. Some of these 
activities may be performed by employees who also would qualify for 
another exemption.
    (c) An employee may qualify for the administrative exemption if the 
employee's primary duty is the performance of work directly related to 
the management or general business operations of the employer's 
customers. Thus, for example, employees acting as advisers or 
consultants to their employer's clients or customers (as tax experts or 
financial consultants, for example) may be exempt.


Sec.  541.202  Discretion and independent judgment.

    (a) To qualify for the administrative exemption, an employee's 
primary duty must include the exercise of discretion and independent 
judgment with respect to matters of significance. In general, the 
exercise of discretion and independent judgment involves the comparison 
and the evaluation of possible courses of conduct, and acting or making 
a decision after the various possibilities have been considered. The 
term ``matters of significance'' refers to the level of importance or 
consequence of the work performed.
    (b) The phrase ``discretion and independent judgment'' must be 
applied in the light of all the facts involved in the particular 
employment situation in which the question arises. Factors to consider 
when determining whether an employee exercises discretion and 
independent judgment with respect to matters of significance include, 
but are not limited to: whether the employee has authority to 
formulate, affect, interpret, or implement management policies or 
operating practices; whether the employee carries out major assignments 
in conducting the operations of the business; whether the employee 
performs work that affects business operations to a substantial degree, 
even if the employee's assignments are related to operation of a 
particular segment of the business; whether the employee has authority 
to commit the employer in matters that have significant financial 
impact; whether the employee has authority to waive or deviate from 
established policies and procedures without prior approval; whether the 
employee has authority to negotiate and bind the company on significant 
matters; whether the employee provides consultation or expert advice to 
management; whether the employee is involved in planning long- or 
short-term business objectives; whether the employee investigates and 
resolves matters of significance on behalf of management; and whether 
the employee represents the company in handling complaints, arbitrating 
disputes or resolving grievances.
    (c) The exercise of discretion and independent judgment implies 
that the employee has authority to make an independent choice, free 
from immediate