[Federal Register Volume 81, Number 99 (Monday, May 23, 2016)]
[Rules and Regulations]
[Pages 32391-32552]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-11754]


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DEPARTMENT OF LABOR

Wage and Hour Division

29 CFR Part 541

RIN 1235-AA11


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

AGENCY: Wage and Hour Division, Department of Labor.

ACTION: Final rule.

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SUMMARY: The Fair Labor Standards Act (FLSA or Act) guarantees a 
minimum wage for all hours worked during the workweek and overtime 
premium pay of not less than one and one-half times the employee's 
regular rate of pay for hours worked over 40 in a workweek. While these 
protections extend to most workers, the FLSA does provide a number of 
exemptions. In this Final Rule, the Department of Labor (Department) 
revises final regulations under the FLSA implementing the exemption 
from minimum wage and overtime pay for executive, administrative, 
professional, outside sales, and computer employees. These exemptions 
are frequently referred to as the ``EAP'' or ``white collar'' 
exemptions. To be considered exempt under part 541, employees must meet 
certain minimum requirements related to their primary job duties and, 
in most instances, must be paid on a salary basis at not less than the 
minimum amounts specified in the regulations.
    In this Final Rule the Department updates the standard salary level 
and total annual compensation requirements to more effectively 
distinguish between overtime-eligible white collar employees and those 
who may be exempt, thereby making the exemption easier for employers 
and employees to understand and ensuring that the FLSA's intended 
overtime protections are fully implemented. The Department sets the 
standard salary level for exempt EAP employees at the 40th percentile 
of weekly earnings of full-time salaried workers in the lowest-wage 
Census Region. The Department also permits employers to satisfy up to 
10 percent of the standard salary requirement with nondiscretionary 
bonuses, incentive payments, and commissions, provided these forms of 
compensation are paid at least quarterly. The Department sets the total 
annual compensation requirement for an exempt Highly Compensated 
Employee (HCE) equal to the annualized weekly earnings of the 90th 
percentile of full-time salaried workers nationally. The Department 
also adds a provision to the regulations that automatically updates the 
standard salary level and HCE compensation requirements every three 
years by maintaining the earnings percentiles set in this Final Rule to 
prevent these thresholds from becoming outdated. Finally, the 
Department has not made any changes in this Final Rule to the duties 
tests for the EAP exemption.

DATES: This Final Rule is effective on December 1, 2016.

FOR FURTHER INFORMATION CONTACT: Director, Division of Regulations, 
Legislation and Interpretation, U.S. Department of Labor, Wage and Hour 
Division, Room S-3502, 200 Constitution Avenue NW., Washington, DC 
20210; telephone: (202) 693-0406 (this is not a toll-free number). 
Copies of this Final Rule may be obtained in alternative formats (Large 
Print, Braille, Audio Tape or Disc), upon request, by calling (202) 
693-0675 (this is not a toll-free number). TTY/TDD callers may dial 
toll-free 1-877-889-5627 to obtain information or request materials in 
alternative formats.
    Questions of interpretation and/or enforcement of the agency's 
regulations may be directed to the nearest Wage and Hour Division (WHD) 
district office. Locate the nearest office by calling the WHD's toll-
free help line at (866) 4US-WAGE ((866) 487-9243) between 8 a.m. and 5 
p.m. in your local time zone, or log onto WHD's Web site at http://www.dol.gov/whd/america2.htm for a nationwide listing of WHD district 
and area offices.

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Executive Summary
II. Background
    A. What the FLSA Provides
    B. Legislative History
    C. Regulatory History
    D. Overview of Existing Regulatory Requirements
    E. Presidential Memorandum
    F. The Department's Proposal
    G. Effective Date
III. Need for Rulemaking
IV. Final Regulatory Revisions
    A. Standard Salary Level
    B. Special Salary Tests
    C. Inclusion of Nondiscretionary Bonuses, Incentive Payments, 
and Commissions in the Salary Level Requirement
    D. Highly Compensated Employees
    E. Automatic Updates
    F. Duties Requirements for Exemption
V. Paperwork Reduction Act
VI. Analysis Conducted in Accordance With Executive Order 12866, 
Regulatory Planning and Review, and Executive Order 13563, Improving 
Regulation and Regulatory Review

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VII. Final Regulatory Flexibility Analysis
VIII. Unfunded Mandates Reform Act Analysis
VIIIX. Executive Order 13132, Federalism
IX. Executive Order 13175, Indian Tribal Governments
XI. Effects on Families
XII. Executive Order 13045, Protection of Children
XIII. Environmental Impact Assessment
XIV. Executive Order 13211, Energy Supply
XV. Executive Order 12630, Constitutionally Protected Property 
Rights
XVI. Executive Order 12988, Civil Justice Reform AnalysisFinal 
Amendments to Regulatory Text

I. Executive Summary

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

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effective test for exemption. In the NPRM, the Department also asked 
for the public's comments on whether nondiscretionary bonuses or 
incentive payments should count toward some portion of the required 
salary level. Finally, the Department also discussed concerns with the 
standard duties tests and sought comments on a series of questions 
regarding possible changes to the tests.
    After considering the comments, the Department has made several 
changes from the proposed rule to the Final Rule. In particular, the 
Department has modified the standard salary level to more fully account 
for the lower salaries paid in certain regions. In this Final Rule, the 
Department sets the standard salary level equal to the 40th percentile 
of earnings of full-time salaried workers in the lowest-wage Census 
Region (currently the South). This results in a salary level of $913 
per week, or $47,476 annually for a full-year worker, based on data 
from the fourth quarter of 2015.\1\ The Department believes that a 
standard salary level set at the 40th percentile of full-time salaried 
employees in the lowest-wage Census Region will accomplish the goal of 
setting a salary threshold that adequately distinguishes between 
employees who may meet the duties requirements of the EAP exemption and 
those who likely do not, without necessitating the reintroduction of a 
limit on nonexempt work, as existed under the long duties test. The 
Department sets the HCE total annual compensation level equal to the 
90th percentile of earnings of full-time salaried workers nationally 
($134,004 annually based on the fourth quarter of 2015), as we 
proposed. This increase will bring the annual compensation requirement 
in line with the level established in 2004. The Department believes 
that this will avoid the unintended exemption of large numbers of 
employees in high-wage areas--such as secretaries in New York City or 
Los Angeles--who are clearly not performing EAP duties.
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    \1\ The Bureau of Labor Statistics (BLS) estimated this value 
using Current Population Survey (CPS) data for earnings of full-time 
(defined as at least 35 hours per week) non-hourly paid employees. 
For the purpose of this rulemaking, the Department considers data 
representing compensation paid to non-hourly workers to be an 
appropriate proxy for compensation paid to salaried workers.
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    In order to prevent the salary and compensation levels from 
becoming outdated, the Department is including in the regulations a 
mechanism to automatically update the salary and compensation 
thresholds by maintaining the fixed percentiles of weekly earnings set 
in this Final Rule. In response to comments, however, the Final Rule 
provides for updates every three years rather than for annual updates 
as proposed. The first update will take effect on January 1, 2020. The 
Department believes that regularly updating the salary and compensation 
levels is the best method to ensure that these tests continue to 
provide an effective means of distinguishing between overtime-eligible 
white collar employees and those who may be bona fide EAP employees. 
Based on historical wage growth in the South, at the time of the first 
update on January 1, 2020, the standard salary level is likely to be 
approximately $984 per week ($51,168 annually for a full-year worker) 
and the HCE total annual compensation requirement is likely to be 
approximately $147,524.
    The Department also revises the regulations to permit employers for 
the first time to count nondiscretionary bonuses, incentives, and 
commissions toward up to 10 percent of the required salary level for 
the standard exemption, so long as employers pay those amounts on a 
quarterly or more frequent basis. Finally, the Department has not made 
any changes to the duties tests in this Final Rule. The majority of the 
revisions occur in Sec. Sec.  541.600, 541.601, 541.602 and new Sec.  
541.607; conforming changes were also made in Sec. Sec.  541.100, 
541.200, 541.204, 541.300, 541.400, 541.604, 541.605, and 541.709.
    In FY2017,\2\ the Department estimates there will be approximately 
159.9 million wage and salary workers in the United States, of whom we 
estimate that 22.5 million will be exempt EAP workers potentially 
affected by this Final Rule.\3\ In Year 1, FY2017, the Department 
estimates that 4.2 million currently exempt workers who earn at least 
the current weekly salary level of $455 but less than the 40th earnings 
percentile in the South ($913) would, without some intervening action 
by their employers, become entitled to minimum wage and overtime 
protection under the FLSA (Table ES1). Similarly, an estimated 65,000 
currently exempt workers who earn at least $100,000 but less than the 
annualized earnings of the 90th percentile of full-time salaried 
workers nationally ($134,004), and who meet the HCE duties test but not 
the standard duties test, may also become eligible for minimum wage and 
overtime protection. In Year 10, with triennial automatic updating of 
the salary and compensation levels, the Department projects that 5.0 
million workers will be affected by the change in the standard salary 
level test and 221,000 workers will be affected by the change in the 
HCE total annual compensation test.
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    \2\ Affected workers, costs, and transfers were estimated for 
the 2017 fiscal year (``FY2017'') because this will be the first 
year the updated salary levels will be in effect. FY2017 spans from 
October 1, 2016 to September 30, 2017.
    \3\ White collar workers not subject to the EAP salary level 
test include teachers, academic administrative personnel, 
physicians, lawyers, judges, and outside sales workers.
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    Additionally, the Department estimates that another 5.7 million 
white collar workers who are currently overtime eligible because they 
do not satisfy the EAP duties tests and who currently earn at least 
$455 per week but less than $913 per week will have their overtime 
protection strengthened in Year 1 because their status as overtime-
eligible will be clear based on the salary test alone without the need 
to examine their duties. Reducing the number of workers for whom 
employers must apply the duties test to determine exempt status 
simplifies the application of the exemption and is consistent with the 
President's directive.
    The Department quantified three direct costs to employers in this 
Final Rule: (1) Regulatory familiarization costs; (2) adjustment costs; 
and (3) managerial costs. Assuming a 7 percent discount rate, the 
Department estimates that average annualized direct employer costs will 
total $295.1 million per year (Table ES1). In addition to the direct 
costs, this Final Rule will also transfer income from employers to 
employees in the form of higher earnings. We estimate average 
annualized transfers to be $1,189.1 million. The Department also 
projects average annualized deadweight loss of $9.2 million, and notes 
that the projected deadweight loss is small in comparison to the amount 
of estimated costs.
    The change to a standard salary level based on the lowest-wage 
Census Region has decreased the salary amount from the proposal, 
resulting in a smaller number of affected workers and lower transfers 
than estimated in the NPRM. Direct costs are higher than predicted in 
the NPRM, primarily because the Department has increased its estimate 
of the number of affected workers who work some overtime. Additionally, 
in response to comments, the Department has increased estimated 
regulatory familiarization and adjustment costs in the Final Rule.
    Finally, the impacts of the Final Rule extend beyond those we have 
estimated quantitatively. The Department

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

              Table ES1--Summary of Regulatory Costs and Transfers, Standard and HCE Salary Levels
                                                [Millions 2017$]
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                                                        Future years [\a\]           Average annualized value
             Impact                   Year 1     ---------------------------------------------------------------
                                                      Year 2          Year 10      3% real rate    7% real rate
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                                            Affected Workers (1,000s)
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Standard........................           4,163           3,893           5,045  ..............  ..............
HCE.............................              65              73             217  ..............  ..............
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    Total.......................           4,228           3,965           5,261  ..............  ..............
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                                   Costs and Transfers (Millions 2017$) [\b\]
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Direct employer costs...........           677.9           208.0           284.2           288.0           295.1
Transfers [\c\].................         1,285.2           936.5         1,607.2         1,201.6         1,189.1
DWL.............................             6.4             8.7            11.1             9.3             9.2
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[\a\] Costs/transfers in years 3 through 9 are within the range bounded by the estimates for years 2 and 10.
[\b\] Costs and transfers for affected workers passing the standard and HCE tests are combined.
[\c\] This is the net transfer from employers to workers. There may also be transfers of hours and income from
  some workers to others.

II. Background

A. What the FLSA Provides

    The FLSA generally requires covered employers to pay their 
employees at least the federal minimum wage (currently $7.25 an hour) 
for all hours worked, and overtime premium pay of one and one-half 
times the employee's regular rate of pay for all hours worked over 40 
in a workweek.\4\ However, there are a number of exemptions from the 
FLSA's minimum wage and overtime requirements. Section 13(a)(1) of the 
FLSA, codified at 29 U.S.C. 213(a)(1), exempts from both minimum wage 
and overtime protection ``any employee employed in a bona fide 
executive, administrative, or professional capacity . . . or in the 
capacity of outside salesman (as such terms are defined and delimited 
from time to time by regulations of the Secretary, subject to the 
provisions of [the Administrative Procedure Act] . . .).'' The FLSA 
does not define the terms ``executive,'' ``administrative,'' 
``professional,'' or ``outside salesman.'' Pursuant to Congress' grant 
of rulemaking authority, the Department in 1938 issued the first 
regulations at part 541 defining the scope of the section 13(a)(1) 
exemptions. Because Congress explicitly delegated to the Secretary of 
Labor the power to define and delimit the specific terms of the 
exemptions through notice and comment rulemaking, regulations so issued 
have the binding effect of law. See Batterton v. Francis, 432 U.S. 416, 
425 n.9 (1977).
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    \4\ As discussed below, the Department estimates that 132.8 
million workers are subject to the FLSA and the Department's 
regulations. Most of these workers are covered by the Act's minimum 
wage and overtime pay protections.
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    The Department has consistently used our rulemaking authority to 
define and clarify the section 13(a)(1) exemptions. Since 1940, the 
implementing regulations have generally required each of three tests to 
be met for the exemptions to apply: (1) The employee must be paid a 
predetermined and fixed salary that is not subject to reduction because 
of variations in the quality or quantity of work performed (the 
``salary basis test''); (2) the amount of salary paid must meet a 
minimum specified amount (the ``salary level test''); and (3) the 
employee's job duties must primarily involve executive, administrative, 
or professional duties as defined by the regulations (the ``duties 
test'').
    Employees who meet the requirements of part 541 are exempted from 
both the Act's minimum wage and overtime pay protections. As a result, 
an employer may employ such employees for any number of hours in the 
workweek without paying the minimum hourly wage or an overtime premium. 
Some state laws have stricter exemption standards than those described 
above. The FLSA does not preempt any such stricter state standards. If 
a State establishes a higher standard than the provisions of the FLSA, 
the higher standard applies in that State. See 29 U.S.C. 218.

B. Legislative History

    Section 13(a)(1) was included in the original Act in 1938 and was 
based on provisions contained in the earlier National Industrial 
Recovery Act of 1933 (NIRA) and state law precedents. Specific 
references in the legislative history to the exemptions contained in 
section 13(a)(1) are scant. Although section 13(a)(1) exempts covered 
employees from both the FLSA's minimum wage and overtime requirements, 
its most significant impact is its removal of these employees from the 
Act's overtime protections.
    The requirement that employers pay a premium rate of pay for all 
hours worked over 40 in a workweek is grounded in two policy 
objectives. The first is to spread employment (or, in other words, 
reduce involuntary unemployment) by incentivizing employers to hire 
more employees rather than requiring existing employees to work longer 
hours. See, e.g., Davis v. J.P. Morgan Chase, 587 F.3d 529, 535 (2d 
Cir. 2009). The second policy objective is to reduce overwork and its 
detrimental effect on the health and well-being of workers. See, e.g., 
Barrentine v. Arkansas-Best Freight System, Inc., 450 U.S. 728, 739 
(1981).
    In contrast, the exemptions contained in section 13(a)(1) were 
premised on the belief that the type of work exempt employees 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 enforcement of 
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).\5\ Further,

[[Page 32395]]

the exempted workers typically earned salaries well above the minimum 
wage and were presumed to enjoy other privileges to compensate them for 
their long hours of work, setting them apart from the nonexempt workers 
entitled to overtime pay. See id.
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    \5\ Congress created the Minimum Wage Study Commission as part 
of the Fair Labor Standards Amendments of 1977. See Sec. 2(e)(1), 
Public Law 95-151, 91 Stat. 1246 (Nov. 1, 1977). This independent 
commission was tasked with examining many FLSA issues, including the 
Act's minimum wage and overtime exemptions, and issuing a report to 
the President and to Congress with the results of its study.
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    The universe of employees eligible for the section 13(a)(1) 
exemptions has fluctuated with amendments to the FLSA. Initially, 
persons employed in a ``local retailing capacity'' were exempt, but 
Congress eliminated that language from section 13(a)(1) in 1961 when 
the FLSA was expanded to cover retail and service enterprises. See 
Public Law 87-30, 75 Stat. 65 (May 5, 1961). Teachers and academic 
administrative personnel were added to the exemption when elementary 
and secondary schools were made subject to the FLSA in 1966. See Sec. 
214, Public Law 89-601, 80 Stat. 830 (Sept. 23, 1966). The Education 
Amendments of 1972 made the Equal Pay provisions, section 6(d) of the 
FLSA, expressly applicable to employees who were otherwise exempt from 
the FLSA under section 13(a)(1). See Sec. 906(b)(1), Public Law 92-318, 
86 Stat. 235 (June 23, 1972).
    A 1990 enactment expanded the EAP exemptions to include computer 
systems analysts, computer programmers, software engineers, and 
similarly skilled professional workers, including those paid on an 
hourly basis if paid at least 6\1/2\ times the minimum wage. See Sec. 
2, Public Law 101-583, 104 Stat. 2871 (Nov. 15, 1990). The compensation 
test for computer-related occupations was subsequently capped at $27.63 
an hour (6\1/2\ times the minimum wage in effect at the time) as part 
of the 1996 FLSA Amendments, when Congress enacted the new section 
13(a)(17) exemption for such computer employees. Section 13(a)(17) also 
incorporated much of the regulatory language that resulted from the 
1990 enactment. See 29 U.S.C. 213(a)(17), as added by the 1996 FLSA 
Amendments (Sec. 2105(a), Public Law 104-188, 110 Stat. 1755 (Aug. 20, 
1996)).

C. Regulatory History

    The FLSA became law on June 25, 1938, and the Department issued the 
first version of the part 541 regulations, setting forth criteria for 
exempt status under section 13(a)(1), that October. 3 FR 2518 (Oct. 20, 
1938). Following a series of public hearings, which were discussed in a 
report issued by WHD,\6\ the Department published revised regulations 
in 1940, which, among other things, added the salary basis test. 5 FR 
4077 (Oct. 15, 1940). Further hearings were convened in 1947, as 
discussed in a WHD-issued report,\7\ and the Department issued revised 
regulations in 1949, which updated the salary levels required to meet 
the salary level test for the various exemptions. 14 FR 7705 (Dec. 24, 
1949). An explanatory bulletin interpreting some of the terms used in 
the regulations was published as subpart B of part 541 in 1949. 14 FR 
7730 (Dec. 28, 1949). In 1954, the Department issued revisions to the 
regulatory interpretations of the salary basis test. 19 FR 4405 (July 
17, 1954). In 1958, based on another WHD-issued report,\8\ the 
regulations were revised to update the required salary levels. 23 FR 
8962 (Nov. 18, 1958). Additional changes, including salary level 
updates, were made to the regulations in 1961 (26 FR 8635, Sept. 15, 
1961), 1963 (28 FR 9505, Aug. 30, 1963), 1967 (32 FR 7823, May 30, 
1967), 1970 (35 FR 883, Jan. 22, 1970), 1973 (38 FR 11390, May 7, 
1973), and 1975 (40 FR 7091, Feb. 19, 1975). Revisions to increase the 
salary levels in 1981 were stayed indefinitely by the Department. 46 FR 
11972 (Feb. 12, 1981). In 1985, the Department published an Advance 
Notice of Proposed Rulemaking that reopened the comment period on the 
1981 proposal and broadened the review to all aspects of the 
regulations, including whether to increase the salary levels, but this 
rulemaking was never finalized. 50 FR 47696 (Nov. 19, 1985).
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    \6\ 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'').
    \7\ 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'').
    \8\ Report and Recommendations on Proposed Revision 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 (Mar. 3, 1958) (``Kantor 
Report'').
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    The Department revised the part 541 regulations twice in 1992. 
First, the Department created a limited exception from the salary basis 
test for public employees, permitting public employers to follow public 
sector pay and leave systems requiring partial-day deductions from pay 
for absences for personal reasons or due to illness or injury not 
covered by accrued paid leave, or due to budget-driven furloughs, 
without defeating the salary basis test required for exemption. 57 FR 
37677 (Aug. 19, 1992). The Department also implemented the 1990 law 
requiring it to promulgate regulations permitting employees in certain 
computer-related occupations to qualify as exempt under section 
13(a)(1) of the FLSA. 57 FR 46744 (Oct. 9, 1992); see Sec. 2, Public 
Law 101-583, 104 Stat. 2871 (Nov. 15, 1990).
    On March 31, 2003, the Department published a Notice of Proposed 
Rulemaking proposing significant changes to the part 541 regulations. 
68 FR 15560 (Mar. 31, 2003). On April 23, 2004, the Department issued a 
Final Rule (2004 Final Rule), which raised the salary level for the 
first time since 1975, and made other changes, some of which are 
discussed below. 69 FR 22122 (Apr. 23, 2004). Current regulations 
retain the three tests for exempt status that have been in effect since 
1940: a salary basis test, a salary level test, and a job duties test.

D. Overview of Existing Regulatory Requirements

    The regulations in part 541 contain specific criteria that define 
each category of exemption provided by section 13(a)(1) for bona fide 
executive, administrative, and professional employees (including 
teachers and academic administrative personnel), and outside sales 
employees. The regulations also define those computer employees who are 
exempt under section 13(a)(1) and section 13(a)(17). See Sec. Sec.  
541.400-.402. The employer bears the burden of establishing the 
applicability of any exemption from the FLSA's pay requirements. Job 
titles and job descriptions do not determine exempt status, nor does 
paying a salary rather than an hourly rate. To qualify for the EAP 
exemption, employees must meet certain tests regarding their job duties 
and generally must be paid on a salary basis of not less than $455 per 
week.\9\ In order for the exemption to

[[Page 32396]]

apply, an employee's specific job duties and salary must meet all the 
requirements of the Department's regulations. The duties tests differ 
for each category of exemption.
---------------------------------------------------------------------------

    \9\ Alternatively, administrative and professional employees may 
be paid on a ``fee basis.'' This occurs where an employee is paid an 
agreed sum for a single job regardless of the time required for its 
completion. See Sec.  541.605(a). Salary level test compliance for 
fee basis employees is assessed by determining whether the hourly 
rate for work performed (i.e., the fee payment divided by the number 
of hours worked) would total at least $455 per week if the employee 
worked 40 hours. See Sec.  541.605(b). Some employees, such as 
doctors and lawyers (Sec.  541.600(e)), teachers (Sec. Sec.  
541.303(d); 541.600(e)), and outside sales employees (Sec.  
541.500(c)), are not subject to a salary or fee basis test. Some, 
such as academic administrative personnel, are subject to a special, 
contingent salary level. See Sec.  541.600(c). There is also a 
separate salary level in effect for workers in American Samoa (Sec.  
541.600(a)), and a special salary test for motion picture industry 
employees (Sec.  541.709).
---------------------------------------------------------------------------

    The Department last updated the part 541 regulations in the 2004 
Final Rule. Prior to 2004, employers could assert the EAP exemption for 
employees who satisfied either a ``long'' test--which paired a more 
restrictive duties test with a lower salary level--or a ``short'' 
test--which paired less stringent duties requirements with a higher 
salary level.\10\ In the 2004 Final Rule the Department abandoned the 
concept of separate long and short tests, opting instead for one 
``standard'' test, and set the salary level under the new standard 
duties test at $455 per week for executive, administrative, and 
professional employees.
---------------------------------------------------------------------------

    \10\ From 1949 until 2004 the regulations contained both long 
and short tests for exemption.
---------------------------------------------------------------------------

    Under the current part 541 regulations, an exempt executive 
employee must be compensated on a salary basis at a rate of not less 
than $455 per week and have a primary duty of managing the enterprise 
or a department or subdivision of the enterprise. See Sec.  
541.100(a)(1)-(2). An exempt executive must also customarily and 
regularly direct the work of at least two employees and have the 
authority to hire or fire, or the employee's suggestions and 
recommendations as to the hiring, firing, or other change of status of 
employees must be given particular weight. See Sec.  541.100(a)(3)-(4).
    An exempt administrative employee must be compensated on a salary 
or fee basis at a rate of not less than $455 per week and have a 
primary duty of 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. See Sec.  541.200. An exempt 
administrative employee's primary duty must include the exercise of 
discretion and independent judgment with respect to matters of 
significance. See id.
    An exempt professional employee must be compensated on a salary or 
fee basis at a rate of not less than $455 per week and have a primary 
duty of (1) work requiring knowledge of an advanced type in a field of 
science or learning customarily acquired by prolonged, specialized, 
intellectual instruction and study, or (2) work that is original and 
creative in a recognized field of artistic endeavor, or (3) teaching in 
a school system or educational institution, or (4) work as a computer 
systems analyst, computer programmer, software engineer, or other 
similarly-skilled worker in the computer field. See Sec. Sec.  541.300; 
541.303; 541.400. An exempt professional employee must perform work 
requiring the consistent exercise of discretion and judgment, or 
requiring invention, imagination, or talent in a recognized field of 
artistic endeavor. See Sec.  541.300(a)(2). The salary requirements do 
not apply to certain licensed or certified doctors, lawyers, and 
teachers. See Sec. Sec.  541.303(d); 541.304(d).
    An exempt outside salesperson must be customarily and regularly 
engaged away from the employer's place of business and have a primary 
duty of making sales, or obtaining orders or contracts for services or 
for the use of facilities. See Sec.  541.500. There are no salary or 
fee requirements for exempt outside sales employees. See id.
    The 2004 Final Rule also created a test for exemption of highly 
compensated executive, administrative, and professional employees. 
Under the HCE exemption, employees who are paid total annual 
compensation of at least $100,000 (which must include at least $455 per 
week paid on a salary or fee basis) are exempt from the FLSA's overtime 
requirements if they customarily and regularly perform at least one of 
the exempt duties or responsibilities of an executive, administrative, 
or professional employee identified in the standard tests for 
exemption. See Sec.  541.601. The HCE exemption applies only to 
employees whose primary duty includes performing office or non-manual 
work; non-management production line workers and 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. 
See id. Finally, in the 2004 Final Rule, the Department, mindful that 
nearly 30 years had elapsed between salary level increases, and in 
response to commenter concerns that similar lapses would occur in the 
future, expressed an intent to ``update the salary levels on a more 
regular basis.'' 69 FR 22171.

E. Presidential Memorandum

    On March 13, 2014, President Obama signed a Presidential Memorandum 
directing the Department to update the regulations defining which 
``white collar'' workers are protected by the FLSA's minimum wage and 
overtime standards. See 79 FR 18737 (Apr. 3, 2014). The memorandum 
instructed the Department to look for ways to modernize and simplify 
the regulations while ensuring that the FLSA's intended overtime 
protections are fully implemented. As the President noted at the time, 
the FLSA's overtime protections are a linchpin of the middle class, and 
the failure to keep the salary level requirement for the white collar 
exemption up to date has left millions of low-paid salaried workers 
without this basic protection.\11\ The current salary level threshold 
for exemption of $455 per week, or $23,660 annually, is below the 2015 
poverty threshold for a family of four.\12\
---------------------------------------------------------------------------

    \11\ See http://www.whitehouse.gov/the-press-office/2014/03/13/fact-sheet-opportunity-all-rewarding-hard-work-strengthening-overtime-pr.
    \12\ See http://www.census.gov/hhes/www/poverty/data/threshld/index.html (the 2015 poverty threshold for a family of four with two 
related children). The 2015 poverty threshold for a family of four 
with two related people under 18 in the household is $24,036.
---------------------------------------------------------------------------

    Following issuance of the memorandum, the Department embarked on an 
extensive outreach program, meeting with over 200 organizations in 
Washington, DC and several other locations, as well as by conference 
call. A wide range of stakeholders attended the listening sessions: 
employees, employers, business associations, non-profit organizations, 
employee advocates, unions, state and local government representatives, 
tribal representatives, and small businesses. In these sessions the 
Department asked stakeholders to address, among other issues: (1) What 
is the appropriate salary level for exemption; (2) what, if any, 
changes should be made to the duties tests; and (3) how can the 
regulations be simplified.
    The stakeholders shared their concerns with various aspects of the 
current regulations, suggestions for changes, and general concerns 
about the scope of the exemption. The Department greatly appreciated 
the wide range of views that were shared during the outreach sessions. 
The information shared during those sessions informed the Department's 
NPRM.
    The Department's outreach also made clear, however, that there are 
some widespread misconceptions about overtime eligibility under the 
FLSA, some of which were echoed in the comments received on the NPRM. 
For example, many employers and employees mistakenly believe that 
payment of a salary automatically disqualifies an employee from 
entitlement to overtime compensation irrespective of the duties 
performed. Many employees are also unaware of the duties required to be 
performed in order for the exemption to apply. Additionally, many 
employers seem to mistakenly believe that newly overtime-

[[Page 32397]]

eligible employees (i.e., those earning between the current and new 
salary levels) must be converted to hourly compensation.\13\ Similarly, 
some employers erroneously believe that they are prohibited from paying 
nondiscretionary bonuses to EAP employees, given that they cannot be 
used to satisfy the salary requirement. Some employers also mistakenly 
believe that the EAP regulations limit their ability to permit white 
collar employees to work part-time or job share.\14\
---------------------------------------------------------------------------

    \13\ Such misconceptions are not new. In 1949 the Department 
noted ``the failure of some employers to realize that salary is not 
the sole test of exemption.'' Weiss Report at 8 n. 27. In 1940 the 
Department responded to the assertion that employers would convert 
overtime-eligible white collar employees to hourly pay instead of 
more secure salaries, stating: ``Without underestimating the general 
desirability of weekly or monthly salaries which enable employees to 
adjust their expenditures on the basis of an assured income (so long 
as they remain employed), there is little advantage in salaried 
employment if it serves merely as a cloak for long hours of work. 
Further, such salaried employment may well conceal excessively low 
hourly rates of pay.'' Stein Report at 7.
    \14\ As the Department has previously explained, there is no 
special salary level for EAP employees working less than full-time. 
See 69 FR 22171. Employers, however, can pay white collar employees 
working part-time or job sharing a salary of less than the required 
EAP salary threshold and will not violate the Act so long as the 
salary equals at least the minimum wage for all hours worked and the 
employee does not work more than 40 hours a week. See FLSA2008-1NA 
(Feb. 14, 2008). See also section IV.A.iv.
---------------------------------------------------------------------------

F. The Department's Proposal

    On July 6, 2015, in accordance with the Presidential Memorandum, 
the Department published a Notice of Proposed Rulemaking to propose 
revisions to the part 541 regulations. See 80 FR 38516 (July 6, 2015). 
The Department's proposal focused primarily on updating the salary and 
HCE compensation levels by proposing that the standard salary level be 
set at the 40th percentile of weekly earnings of full-time salaried 
workers, proposing to increase the HCE annual compensation requirement 
to the annualized value of the 90th percentile of weekly earnings of 
full-time salaried workers, and proposing a mechanism for automatically 
updating the salary and compensation levels going forward to ensure 
that they will continue to provide a useful and effective test for 
exemption. While the primary regulatory changes proposed were in 
Sec. Sec.  541.600 and 541.601, the Department proposed additional 
conforming changes to update references to the salary level throughout 
part 541 as well as to update the special salary provisions for 
American Samoa and the motion picture industry. In addition to these 
proposed changes, the Department also discussed whether to include 
nondiscretionary bonuses in determining whether the standard salary 
level is met and whether changes to the duties tests are warranted, but 
did not propose specific regulatory revisions on these issues.
    More than 270,000 individuals and organizations timely commented on 
the NPRM during the sixty-day comment period that ended on September 4, 
2015. The Department received comments from a broad array of 
constituencies, including small business owners, Fortune 500 
corporations, employer and industry associations, individual workers, 
worker advocacy groups, unions, non-profit organizations, law firms 
(representing both employers and employees), educational organizations 
and representatives, religious organizations, economists, Members of 
Congress, federal government agencies, state and local governments and 
representatives, tribal governments and representatives, professional 
associations, and other interested members of the public. All timely 
received comments may be viewed on the www.regulations.gov Web site, 
docket ID WHD-2015-0001.
    Several organizations' submissions included attachments from their 
individual members generally using substantively identical form 
comments: For example, AFSCME (24,122 comments), Center for American 
Progress (6,697 comments from two submissions), CREDO Action (58,927 
comments), Democracy for America (34,932 comments), Economic Policy 
Institute (72,131 comments from five submissions), Faculty Forward and 
SEIU (515 comments), Jobs with Justice (5,136 comments), Mom's Rising 
(16,114 comments from three submissions), National Partnership for 
Women and Families (21,192 comments from two submissions), National 
Restaurant Association (2,648 comments), National Women's Law Center 
(6,753 comments from two submissions), Partnership to Protect Workplace 
Opportunity (1,770 comments from five submissions), Social Security 
Works (15,575 comments), Society for Human Resource Management (827 
comments from two submissions), and others. Other organizations 
attached membership signatures to their comments. These included Care2 
(37,459 signatures), the International Franchise Association (17 
signatures), Organizing for Action (76,625 signatures), and 15 
different post-doctoral associations (560 signatures).
    Many of the comments the Department received were: (1) Very general 
statements of support or opposition; (2) personal anecdotes that did 
not address a specific aspect of the proposed changes; or (3) identical 
or nearly identical ``campaign'' comments sent in response to comment 
initiatives sponsored by various groups. A large number of commenters 
favored some change to the existing regulations, and commenters 
expressed a wide variety of views on the merits of particular aspects 
of the Department's proposal. Some commenters requested that the 
Department withdraw the proposal. Acknowledging that there are strong 
views on the issues presented in this rulemaking, the Department has 
carefully considered the timely submitted comments addressing the 
proposed changes.
    Significant issues raised in the timely received comments are 
discussed below, together with the Department's response to those 
comments and a topical discussion of the changes that have been made in 
the Final Rule and its regulatory text. The Department also received a 
number of submissions after the close of the comment period, including 
some campaign comments, from a range of commenters representing both 
employers and employees. Late comments were not considered in the 
development of this Final Rule, and are not discussed in this Final 
Rule. In instances where an organization submitted both timely and 
untimely comments, only the timely comments were considered.
    The Department received a number of comments that are beyond the 
scope of this rulemaking. These include, for example, comments asking 
the Department to issue a rule requiring employers to provide employees 
with ``clear pay stubs,'' and requesting that the Department clarify 
the definition of ``establishment'' under the exemption for seasonal 
amusement or recreational establishments. The Department does not 
address such issues in this Final Rule.
    A number of commenters asked the Department to provide guidance on 
how the FLSA applies to non-profit organizations. See, e.g., Alliance 
for Strong Families and Communities (describing ``a tremendous amount 
of confusion in the non-profit sector concerning who is currently 
covered by FLSA''); Independent Sector (stating that this rulemaking 
process has ``highlighted a lack of clarity regarding when and how the 
Fair Labor Standards Act applies to the nonprofit sector workforce''); 
Alliance of Arizona Nonprofits. Some commenters, such as CASA, asserted 
that most charitable organizations are not covered

[[Page 32398]]

enterprises under the FLSA and, as a result, this rulemaking ``will not 
reach a very sizable number of employees of not-for-profit 
organizations.'' Other commenters stated that non-profit employees may 
be individually covered because they engage in interstate commerce. A 
comment submitted on behalf of 57 professors specializing in employment 
and labor law, however, asserted that the ``overwhelming majority of 
the millions of employees excluded from FLSA coverage because their 
not-for-profit employers are not subject to enterprise coverage also 
are not subject to individual FLSA coverage,'' and Economic Policy 
Institute (EPI) asserted that non-profit employers can limit the number 
of employees covered on an individual basis by managing interstate 
commerce activity.
    The Department notes that the FLSA does not provide special rules 
for non-profit organizations or their employees, nor does this Final 
Rule. Nevertheless, we agree that it is important for such 
organizations to understand their obligations under the Act. As a 
general matter, non-profit charitable organizations are not covered 
enterprises under the FLSA unless they engage in ordinary commercial 
activities (for example, operating a gift shop). See 29 U.S.C. 203(r)-
(s), 206(a), 207(a). For a non-profit organization, enterprise coverage 
applies only to the activities performed for a business purpose; it 
does not extend to the organization's charitable activities. An 
organization that performs only charitable services, such as providing 
free food to the hungry, is not a covered enterprise; however, an 
employee of such a non-profit employer may nevertheless be covered on 
an individual basis. See 29 U.S.C. 206(a), 207(a). The FLSA covers an 
employee on an individual basis--that is, an individual is protected by 
the FLSA regardless of whether the individual works for a covered 
enterprise--if he or she engages in interstate commerce through 
activities such as making out-of-state phone calls, sending mail, or 
handling credit card transactions. This individual coverage applies 
even if the employee is not engaging in such activities for a business 
purpose. For example, if an employee regularly calls an out-of-state 
store and uses a credit card to purchase food for a non-profit that 
provides free meals for the homeless, that employee is protected by the 
FLSA on an individual basis, even though the non-profit may not be 
covered as an enterprise. WHD, however, will not assert that an 
employee who on isolated occasions spends an insubstantial amount of 
time performing such work is individually covered by the FLSA.
    The Department also refers interested stakeholders to guidance on 
the application of the FLSA to non-profit organizations available in 
WHD Fact Sheet #14A: Non-Profit Organizations and the Fair Labor 
Standards Act; \15\ see also Fact Sheet #14: Coverage Under the Fair 
Labor Standards Act (FLSA).\16\ Additional information regarding the 
applicability of the FLSA to non-profits can be found in the WHD 
Administrator's blog post.\17\ Moreover, a number of WHD Opinion 
Letters address the applicability of the FLSA to non-profits. See, 
e.g., FLSA2009-20 (Jan. 16, 2009); FLSA2008-8 (Sept. 29, 2008); 
FLSA2005-52 (Nov. 14, 2005); FLSA2005-8NA (Sept. 2, 2005); FLSA2005-
12NA (Sept. 23, 2005); FLSA2004-29NA (Nov. 30, 2004).\18\ Finally, the 
Department is issuing additional guidance for the non-profit sector in 
connection with the publication of this Final Rule.
---------------------------------------------------------------------------

    \15\ Available at: http://www.dol.gov/whd/regs/compliance/whdfs14a.pdf.
    \16\ Available at: http://www.dol.gov/whd/regs/compliance/whdfs14.pdf.
    \17\ Available at: http://blog.dol.gov/2015/08/26/non-profits-and-the-proposed-overtime-rule/.
    \18\ Available at: http://www.dol.gov/whd/opinion/flsa.htm; 
http://www.dol.gov/whd/opinion/flsana.htm.
---------------------------------------------------------------------------

    Commenters also asked for guidance on the application of the EAP 
exemption to educational institutions. See, e.g., College and 
Universities Human Resources Executives; Michigan Head Start; Savannah-
Chatham County Public School System. Preschools, elementary and 
secondary schools, and institutions of higher education are covered by 
the FLSA, and nothing in this Final Rule changes that coverage. 29 
U.S.C. 203(r)(2)(A). Employees of such institutions therefore are 
generally protected by the FLSA's minimum wage and overtime provisions; 
however, special provisions apply to many personnel at these 
institutions that make them overtime exempt.
    Although the EAP exemption expressly applies to an ``employee 
employed in the capacity of academic administrative personnel or 
teacher'' 29 U.S.C. 213(a)(1); see Sec. Sec.  541.204, .303, the salary 
level and salary basis requirements do not apply to bona fide teachers. 
Sec.  541.303(d), .600(e). Accordingly, the increase in the standard 
salary level in this Final Rule will not affect the overtime 
eligibility of bona fide teachers.
    Commenters such as the NEA asked the Department to clarify which 
workers qualify as bona fide teachers. Teachers are exempt if their 
primary duty is teaching, tutoring, instructing or lecturing in the 
activity of imparting knowledge, and if they are employed and engaged 
in this activity as a teacher in an educational establishment. Sec.  
541.303(a). An educational establishment is ``an elementary or 
secondary school system, an institution of higher education or other 
educational institution.'' \19\ Sec.  541.204(b). Teachers may include 
professors, adjunct instructors, primary and secondary school teachers, 
and teachers of skilled and semi-skilled trades and occupations. 
Preschool and kindergarten teachers may also qualify for exemption 
under the same conditions as teachers in elementary and secondary 
schools. See Fact Sheet #46: Daycare Centers and Preschools Under the 
Fair Labor Standards Act. In addition, coaches may qualify for the 
exemption if their primary duty is teaching as opposed to recruiting 
students to play sports or performing manual labor. Some commenters 
addressed other non-teaching staff. For example, CUPA-HR commented 
about workers including academic affairs counselors and advisors, 
textbook managers, and managers in food service, security, and building 
and grounds, among other employees working at colleges and 
universities. Academic administrative personnel subject to the 
exemption include: Superintendents; principals and vice-principals; 
department heads in institutions of higher education; academic 
counselors and advisors; and other employees with similar 
responsibilities. Academic administrative employees are subject to the 
salary basis requirement, but the Department notes that a special 
provision allows this requirement to be met if such employees are paid 
``on a salary basis which is at least equal to the entrance salary for 
teachers in the educational establishment by which [they are] 
employed.'' Sec.  541.204(a)(1). To the extent that this entrance 
salary is below the salary level established in this rule, academic 
administrative personnel will be exempt if their salary equals or 
exceeds the entrance salary. Employees whose work relates to general 
business operations, building management and maintenance, or the health 
of students and staff (such as lunch room managers), do not perform 
academic administrative functions. Sec.  541.204(c).
---------------------------------------------------------------------------

    \19\ For purposes of the exemption, no distinction is drawn 
between public and private schools, or between those operated for 
profit and those that are not for profit. Sec.  541.204(b).
---------------------------------------------------------------------------

    The Department also received several comments about postdoctoral 
scholars.

[[Page 32399]]

See, e.g., Association of American Medical Colleges; National 
Postdoctoral Association; UAW Local 5810. Postdoctoral scholars who do 
not have a primary duty of teaching are not considered bona fide 
teachers; these employees would generally meet the duties test for the 
learned professional exemption and would be subject to the salary basis 
and salary level tests.
    Finally, the Council on Government Relations commented that ``it is 
our understanding that the Wage and Hour Division does not assert an 
employee-employer relationship for graduate students who are 
simultaneously performing research under faculty supervision.'' The 
Department views graduate students in a graduate school engaged in 
research under the supervision of a member of the faculty and in the 
course of obtaining advanced degrees as being in an educational 
relationship and not in an employment relationship with either the 
school or of any grantor funding the research, even though the student 
may receive a stipend for performing the research. 1994 WL 1004845 
(June 28, 1994). In an effort to assist the educational sector with the 
issues addressed above, the Department is issuing additional guidance 
for this sector in connection with the publication of this Final Rule.
    Lastly, in an attempt to address concerns that the terms exempt and 
nonexempt were not sufficiently descriptive or intuitive, in the NPRM 
the Department used the terms ``overtime-protected'' and ``overtime-
eligible'' as synonyms for nonexempt, and ``not overtime-protected'' 
and ``overtime-ineligible'' as synonyms for exempt.\20\ The Department 
received very few comments on this new terminology. The Department 
believes that these new terms are less confusing to the public and 
continues to use them in this Final Rule.
---------------------------------------------------------------------------

    \20\ The Department is using the more precise term ``overtime 
exempt'' rather than ``overtime-ineligible'' in this Final Rule.
---------------------------------------------------------------------------

G. Effective Date

    The Department received a number of comments concerning the 
effective date of the Final Rule. Citing the need to reduce the burden 
of implementation, many commenters representing employers requested a 
delayed effective date following publication of the Final Rule. 
Commenters including the Fisher & Phillips law firm, the National 
Association of Independent Schools and the National Association of 
Business Officers, requested an effective date at least 120 days after 
publication as was done in the Department's 2004 rulemaking.
    Other commenters requested a longer period. The American Car Rental 
Association (ACRA), Dollar Tree, and the Retail Industry Leaders 
Association (RILA) each requested a delayed effective date of at least 
six months following publication of the Final Rule. The United States 
Chamber of Commerce (Chamber), the Food Marketing Institute (FMI), H-E-
B, Island Hospitality Management, the National Association of Landscape 
Professionals (NALP), the National Council of Chain Restaurants (NCCR), 
the National Retail Federation (NRF), and the Securities Industry and 
Financial Markets Association (SIFMA) each requested a one-year delayed 
effective date. Finally, Laff and Associates, the National Association 
for Home Care and Hospice, and American Network of Community Options 
and Resources (ANCOR), which coordinated with more than three dozen 
home health care organizations, submitted comments requesting an 
effective date at least two years following publication of the Final 
Rule, to afford states sufficient time to allocate and appropriate 
funding.
    More than 55,000 individuals submitted comments coordinated by the 
Center for American Progress, EPI, and MomsRising, requesting that the 
salary level be raised without delay. Many labor organizations and 
social justice and women's advocacy organizations, including the Center 
for Law and Social Policy, the Center for Popular Democracy, the First 
Shift Justice Project, the Institute for Women's Policy Research 
(IWPR), the Leadership Conference on Civil and Human Rights, the 
National Education Association (NEA), the National Coalition of 
Classified Education Support Employees Union, the National Urban 
League, the Public Justice Center, the United Automobile, Aerospace and 
Agricultural Implement Workers of America (UAW), Women Employed, and 
others, similarly urged the Department to implement the Final Rule as 
soon as possible.
    The Department has set an effective date of December 1, 2016 for 
the Final Rule. As several commenters noted, the Department's 2004 
Final Rule set an effective date 120 days following publication of the 
final rule. See 79 FR 22126 (April 23, 2004). Explaining that a 120-day 
effective date exceeds the 30-day minimum required under the 
Administrative Procedure Act (APA), 5 U.S.C. 553(d), and the 60 days 
mandated for a ``major rule'' under the Congressional Review Act, 5 
U.S.C. 801(a)(3)(A), we concluded at that time that ``a period of 120 
days after the date of publication will provide employers ample time to 
ensure compliance with the final regulations.'' Id. The changes 
provided in the 2004 Final Rule were more extensive and more 
complicated for employers to implement--the 2004 Final Rule included 
several significant changes: (1) A significant percentage increase in 
the salary threshold; (2) a significant reorganization of the part 541 
regulations; (3) the elimination of the short and long test structure 
that had been in place for more than 50 years and the creation of a 
single standard test; and (4) the creation of a new test for highly 
compensated employees. In light of the Department's decision not to 
make changes to the standard duties test at this time, the primary 
change in this Final Rule is the revision to the salary level test and, 
therefore, this rule will be much less complicated for employers to 
implement. Accordingly, the Department believes that the December 1, 
2016 effective date for this Final Rule (more than 180 days after 
publication) will provide ample time for employers to ensure 
compliance.
    Multiple commenters also requested a delayed enforcement period or 
some form of safe harbor following the effective date of the Final Rule 
ranging from six months to two years. See, e.g., ACRA; American 
Insurance Association and the Property Casualty Insurers Association of 
America (AIA-PCI); AT&T; Chamber; Dollar Tree; International Franchise 
Association (IFA); the Littler Mendelson law firm; RILA; the Wessels 
Sherman law firm; World Travel. Several commenters also asked the 
Department to provide compliance assistance, whether related 
specifically to the changes implemented by the Final Rule or more 
broadly to the FLSA's white collar regulations in general. See, e.g., 
Chamber; Dollar Tree; IFA; Littler Mendelson; RILA.
    The Department appreciates employer concerns regarding compliance 
and enforcement in light of this rulemaking. As explained above, the 
Department believes that the December 1, 2016 effective date will 
provide employers ample time to make any changes that are necessary to 
comply with the final regulations. The Department will also provide 
significant outreach and compliance assistance, and will issue a number 
of guidance documents in connection with the publication of this Final 
Rule.

III. Need for Rulemaking

    One of the Department's primary goals in this rulemaking is 
updating the section 13(a)(1) exemption's standard

[[Page 32400]]

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

IV. Final Regulatory Revisions

A. Standard Salary Level

i. History of the Standard Salary Level
    The FLSA became law on June 25, 1938, and the first version of part 
541, issued later that year, set a minimum salary level of $30 per week 
for exempt executive and administrative employees. See 3 FR 2518. Since 
1938, the Department has increased the salary levels seven times: in 
1940, 1949, 1958, 1963, 1970, 1975, and 2004. See Table A. While the 
Department has refined the method for calculating the salary level to 
fulfill its mandate, the purpose of the salary level requirement has 
remained consistent--to define and delimit the scope of the executive, 
administrative, and professional exemptions. See 29 U.S.C. 213(a)(1). 
The Department has long recognized that the salary paid to an employee 
is the ``best single test'' of exempt status, Stein Report at 19, and 
that the salary level test furnishes a ``completely objective and 
precise measure which is not subject to differences of opinion or 
variations in judgment.'' Weiss Report at 8-9. The Department 
reaffirmed this position in the 2004 Final Rule, explaining that the 
``salary level test is intended to help

[[Page 32401]]

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

                                   Table A--Weekly Salary Levels for Exemption
----------------------------------------------------------------------------------------------------------------
                                                                     Long test
                  Date enacted                   ------------------------------------------------   Short test
                                                     Executive    Administrative   Professional        (all)
----------------------------------------------------------------------------------------------------------------
1938............................................             $30             $30  ..............  ..............
1940............................................              30              50             $50  ..............
1949............................................              55              75              75            $100
1958............................................              80              95              95             125
1963............................................             100             100             115             150
1970............................................             125             125             140             200
1975............................................             155             155             170             250
----------------------------------------------------------------------------------------------------------------
                                                  Standard Test
----------------------------------------------------------------------------------------------------------------
2004............................................                               $455
----------------------------------------------------------------------------------------------------------------

In 1940, the Department maintained the $30 per week salary level set in 
1938 for executive employees, increased the salary level for 
administrative employees, and established a salary level for 
professional employees. The Department used salary surveys from federal 
and state government agencies, experience gained under the National 
Industrial Recovery Act, and federal government salaries to determine 
the salary level that was the ``dividing line'' between employees 
performing exempt and nonexempt work. See Stein Report at 9, 20-21, 31-
32. The Department recognized that the salary level falls within a 
continuum of salaries that overlaps the outer boundaries of exempt and 
nonexempt employees. Specifically, the Department stated:

    To make enforcement possible and to provide for equity in 
competition, a rate should be selected in each of the three 
definitions which will be reasonable in the light of average 
conditions for industry as a whole. In some instances the rate 
selected will inevitably deny exemption to a few employees who might 
not unreasonably be exempted, but, conversely, in other instances it 
will undoubtedly permit the exemption of some persons who should 
properly be entitled to the benefits of the act.

Id. at 6. Taking into account the average salary levels for employees 
in numerous industries, and the percentage of employees earning below 
these amounts, the Department set the salary level for each exemption 
slightly below the ``dividing line'' suggested by these averages.
    In 1949, the Department again looked at salary data from state and 
federal agencies, including the Bureau of Labor Statistics (BLS). The 
data reviewed included wages in small towns and low-wage industries, 
earnings of federal employees, average weekly earnings for exempt 
employees, starting salaries for college graduates, and salary ranges 
for different occupations such as bookkeepers, accountants, chemists, 
and mining engineers. See Weiss Report at 10, 14-17, 19-20. The 
Department noted that the ``salary level adopted must exclude the great 
bulk of nonexempt persons if it is to be effective.'' Id. at 18. 
Recognizing that the ``increase in wage rates and salary levels'' since 
1940 had ``gradually weakened the effectiveness of the present salary 
tests as a dividing line between exempt and nonexempt employees,'' the 
Department calculated the percentage increase in weekly earnings from 
1940 to 1949, and then adopted new salary levels ``at a figure slightly 
lower than might be indicated by the data'' in order to protect small 
businesses. Id. at 8, 14. The Department also cautioned that ``a 
dividing line cannot be drawn with great precision but can at best be 
only approximate.'' Id. at 11.
    Also in 1949, the Department established a second, less-stringent 
duties test for each exemption, but only for those employees paid at or 
above a higher ``short test'' salary level. Those paid above the higher 
salary level were exempt if they also met a ``short'' duties test, 
which lessened the duties requirements for exemption.\21\ The original, 
more thorough duties test became known as the ``long'' test, and 
remained for more than 50 years the test employers were required to 
satisfy for those employees whose salary was insufficient to meet the 
higher short test salary level. Apart from the differing salary 
requirements, the most significant difference between the short test 
and the long test was the long test's limit on the amount of time an 
exempt employee could spend on nonexempt duties while allowing the 
employer to claim the exemption. A bright-line, 20 percent cap on 
nonexempt work was instituted as part of the long duties test in 1940 
for executive and professional employees, and in 1949 for 
administrative employees.\22\ The short duties tests did not include a 
specific limit on nonexempt work.\23\ The rationale for the less 
rigorous short duties test was that employees who met the higher salary 
level were more likely to meet ``all the requirements for exemption . . 
. including the requirement with respect

[[Page 32402]]

to nonexempt work.'' Id. at 22-23. Thus, a ``short-cut test for 
exemption . . . would facilitate the administration of the regulations 
without defeating the purposes of section 13(a)(1).'' Id.
---------------------------------------------------------------------------

    \21\ These higher salary levels are presented under the ``Short 
Test'' heading in Table A.
    \22\ By statute, beginning in 1961, retail employees could spend 
up to 40 percent of their hours worked performing nonexempt work and 
still be found to meet the duties tests for the EAP exemption. See 
29 U.S.C. 213(a)(1).
    \23\ For example, the long duties test in effect from 1949 to 
2004 for administrative employees required that an exempt employee: 
(1) Have a primary duty consisting of the performance of office or 
non-manual work directly related to management policies or general 
business operations of the employer or the employer's customers; (2) 
customarily and regularly exercise discretion and independent 
judgment; (3) regularly and directly assist a proprietor or a bona 
fide executive or administrative employee, or perform under only 
general supervision work along specialized or technical lines 
requiring special training, experience, or knowledge, or execute 
under only general supervision special assignments and tasks; and 
(4) not devote more than 20 percent (or 40 percent in a retail or 
service establishment) of hours worked in the workweek to activities 
that are not directly and closely related to the performance of the 
work described above. See Sec.  541.2 (2003). By contrast, the short 
duties test in effect during the 1949 to 2004 period provided that 
an administrative employee paid at or above the short test salary 
level qualified for exemption if the employee's primary duty 
consisted of the performance of office or non-manual work directly 
related to management policies or general business operations of the 
employer or the employer's customers which includes work requiring 
the exercise of discretion and independent judgment. See id.
---------------------------------------------------------------------------

    In contrast to the Department's extensive discussion of the 
methodology for setting the long test salary level, the Department's 
rulemakings have included comparatively little discussion of the 
methodology for setting the short test levels. While the Department set 
the long test salary level based on an analysis of the defined sample, 
we set the short test salary level in relation to the long test salary, 
and the initial short test salary set in 1949 was 133 percent of the 
highest long test salary (administrative and professional). In 1958, 
the Department rejected the suggestion that the short test salary level 
should be increased by the same dollar amount that the highest long 
test salary levels were increased and instead increased the short test 
salary to maintain the ``percentage differential in relation to the 
highest [long test] salary requirement.'' See Kantor Report at 10. In 
1970, the Department adopted a ``slightly higher percentage 
differential'' between the ``basic and [short test] salary figures,'' 
than previously existed, resulting in an approximately 143 percent 
ratio between the highest long test salary level (professional) and the 
short test. 35 FR 885. From 1949 to 1975 the Department set a single 
short test salary level that applied to all categories of EAP employees 
while maintaining multiple long test salary levels that applied to the 
different categories. The ratio of the short test salary level to the 
long test salary levels ranged from approximately 130 percent to 180 
percent over this period.\24\ The existence of separate short and long 
tests remained part of the Department's regulations until 2004. See 
Table A.
---------------------------------------------------------------------------

    \24\ The smallest ratio occurred in 1963 and was between the 
long test salary requirement for professionals ($115) and the short 
test salary level ($150). The largest ratio occurred in 1949 and was 
between the long test salary requirement for executives ($55) and 
the short test salary level ($100).
---------------------------------------------------------------------------

    In setting the long test salary level in 1958, the Department 
considered data collected during 1955 WHD investigations on the 
``actual salaries paid'' to employees who ``qualified for exemption'' 
(i.e., met the applicable salary and duties tests), grouped by 
geographic region, broad industry groups, number of employees, and city 
size, and supplemented with BLS and Census data to reflect income 
increases of white collar and manufacturing employees during the period 
not covered by the Department's investigations. Kantor Report at 6. The 
Department then set the long test salary levels for exempt employees 
``at about the levels at which no more than about 10 percent of those 
in the lowest-wage region, or in the smallest size establishment group, 
or in the smallest-sized city group, or in the lowest-wage industry of 
each of the categories would fail to meet the tests.'' Id. at 6-7. In 
other words, the Department set the long test salary level so that only 
a limited number of workers performing EAP duties (about 10 percent) in 
the lowest-wage regions and industries would fail to meet the salary 
level test and therefore be overtime protected. In laying out this 
methodology, the Department echoed comments from the Weiss Report that 
the salary tests ``simplify enforcement by providing a ready method of 
screening out the obviously nonexempt employees,'' and that 
``[e]mployees that do not meet the salary test are generally also found 
not to meet the other requirements of the regulations.'' Id. at 2-3. 
The Department also noted that in our experience misclassification of 
overtime-protected employees occurs more frequently when the salary 
levels have ``become outdated by a marked upward movement of wages and 
salaries.'' Id. at 5.
    The Department followed a similar methodology when determining the 
appropriate long test salary level increase in 1963, using data 
regarding salaries paid to exempt workers collected in a 1961 WHD 
survey. See 28 FR 7002. 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. See 28 FR 7004. The professional exemption 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. See id. 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.

Id.
    The Department continued to use a similar methodology when updating 
the long test salary levels in 1970. After examining data from 1968 WHD 
investigations, 1969 BLS wage data, and information provided in a 
report issued by the Department in 1969 that included salary data for 
executive, administrative, and professional employees,\25\ the 
Department increased the long test salary level for executive employees 
to $125 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. See 35 FR 884-85. 
The Department also increased the long test salary levels for 
administrative and professional employees to $125 and $140, 
respectively.
---------------------------------------------------------------------------

    \25\ Earnings Data Pertinent to a Review of the Salary Tests for 
Executive, Administrative and Professional Employees As Defined in 
Regulations Part 541, (1969), cited in 34 FR 9935.
---------------------------------------------------------------------------

    In 1975, instead of following these prior approaches, the 
Department set the long test salary levels based on increases in the 
Consumer Price Index (CPI), although the Department adjusted the salary 
level downward ``in order to eliminate any inflationary impact.'' 40 FR 
7091. As a result of this recalibration of the 1970 levels, the long 
test salary level for the executive and administrative exemptions was 
set at $155, while the professional level was set at $170. The salary 
levels adopted were intended as interim levels ``pending the completion 
and analysis of a study by [BLS] covering a six month period in 1975,'' 
and were not meant to set a precedent for future salary level 
increases. Id. at 7091-92. Although the Department intended to revise 
the salary levels after completion of the BLS study of actual salaries 
paid to employees, the envisioned process was never completed, and the 
``interim'' salary levels remained unchanged for the next 29 years.
    As reflected in Table A, the short test salary level increased in 
tandem with the long test level throughout the various rulemakings 
since 1949. Because the short test was designed to capture only those 
white collar employees whose salary was sufficiently high to indicate a 
stronger likelihood of exempt status and thus warrant a less stringent 
duties requirement, the short

[[Page 32403]]

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

[[Page 32404]]

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

[[Page 32405]]

40th percentile of weekly earnings of full-time salaried workers, which 
currently is the South.\27\
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    \26\ See https://www.census.gov/geo/reference/gtc/gtc_census_divreg.html.
    \27\ For simplicity, in this rulemaking we refer to the lowest-
wage Census Region and the South interchangeably.
---------------------------------------------------------------------------

    In keeping with our practice, the Department relies on the most up-
to-date data available to derive the final salary level from this 
methodology. See 69 FR 22168. In the NPRM, the Department utilized 2013 
salary data for estimating the salary level resulting from the proposed 
methodology, which was current at the time the Department developed the 
proposal. In this Final Rule, we rely on salary data from the fourth 
quarter of 2015, as published by BLS, to set the salary level.\28\ 
Using this data, the Department has determined that the required 
standard salary level will be $913 per week, or $47,476 annually, based 
on the 40th percentile of weekly earnings of full-time salaried workers 
in the South. The $913 salary level that results from the methodology 
is at the low end of the historical range of short test salary levels, 
based on the historical ratios between the short and long test salary 
levels ($889-$1231). See section VI.C.iii.
---------------------------------------------------------------------------

    \28\ BLS currently publishes this data at: http://www.bls.gov/cps/research_series_earnings_nonhourly_workers.htm.
---------------------------------------------------------------------------

    White collar employees subject to the salary level test earning 
less than $913 per week will not qualify for the EAP exemption, and 
therefore will be eligible for overtime, irrespective of their job 
duties and responsibilities. Employees earning this amount or more on a 
salary or fee basis will qualify for exemption only if they meet the 
standard duties test, which is unchanged by this Final Rule. As a 
result of this increase, 4.2 million employees who meet the standard 
duties test will no longer fall within the EAP exemption and therefore 
will be overtime-protected. Additionally, 8.9 million employees paid 
between $455 and $913 per week who do not meet the standard duties 
test--5.7 million salaried white collar employees and 3.2 million 
salaried blue collar employees--will now face a lower risk of 
misclassification.
iv. Discussion of Comments
1. Proposed Increase in the Standard Salary Level
    The overwhelming majority of commenters agreed that the standard 
salary level needs to be increased, including many commenters writing 
on behalf of employers, such as the Business Roundtable, Catholic 
Charities USA, College and University Professional Association for 
Human Resources (CUPA-HR), CVS Health, the National Restaurant 
Association (NRA), and the Northeastern Retail Lumber Association. 
Multiple commenters echoed the Department's observation in the NPRM 
that the current standard salary level of $455 per week, or $23,660 
annually, is below the 2014 poverty threshold for a family of four.\29\ 
The American Federation of Labor and Congress of Industrial 
Organizations (AFL-CIO) pointed out that the current salary level is 
only slightly higher than the state minimum wage for forty hours of 
work in several states, and noted that it has long been widely 
recognized that workers whose pay is ``close to the minimum wage'' are 
``not the kind of employees Congress intended to deny overtime 
protection'' (citing Stein Report at 5). Some salaried employees 
currently classified as exempt managers commented that they earn less 
per hour than the employees they supervise.
---------------------------------------------------------------------------

    \29\ The 2015 poverty threshold for a family of four with two 
related people under 18 in the household is $24,036. Available at: 
http://www.census.gov/hhes/www/poverty/data/threshld/index.html.
---------------------------------------------------------------------------

    The Department also received multiple comments, including comments 
from the American Sustainable Business Council and the Heartland 
Alliance for Human Needs and Human Rights, expressing concern that the 
current salary level facilitates the misclassification of overtime-
eligible employees as overtime exempt. The RAND Corporation submitted a 
study estimating that 11.5 percent of salaried workers are 
misclassified as exempt--and therefore do not receive overtime 
compensation--even though their primary duty is not exempt work or they 
earn less than the current salary level, while a human resource 
professional from Florida ``estimate[d] that 40 percent of those 
employees my clients class[ify] as . . . exempt are really non-
exempt.''
    A few commenters, however, such as the National Grocers Association 
(NGA), urged the Department to maintain the current salary level of 
$455 per week. For example, the National Lumber and Building Material 
Dealers Association stated that the current salary level is appropriate 
for managers in many sectors and regions. Mutual of Omaha requested 
that the Department create a ``grandfathered exemption,'' by applying 
the current salary level to currently exempt employees.
    The Department received a significant number of comments in 
response to our proposal to set the standard salary level equal to the 
40th percentile of weekly earnings of full-time salaried employees 
nationally (estimated to be $970 per week, or $50,440 per year, in 
2016). Many commenters endorsed the proposed salary level as an 
appropriate dividing line between employees performing exempt and 
overtime-protected work, but others objected that it was either too low 
or too high. The majority of employees and commenters representing 
employees believed the proposed salary level amount was appropriate or 
should be increased, while the majority of employers and commenters 
representing them believed the salary level amount should be lower than 
the threshold the Department proposed.
    A large number of commenters supported the proposed salary level 
either by explicitly endorsing the proposed increase or supporting the 
Department's proposed rule generally. Commenters who supported the 
salary level included thousands of individual employees, writing 
independently or as part of comment campaigns, and organizations 
representing employees (such as the American Association of Retired 
Persons (AARP), the Coalition of Labor Union Women, National Council of 
La Raza, the National Domestic Workers Alliance (NDWA), the National 
Partnership for Women & Families (Partnership), Service Employees 
International Union (SEIU), the United Steel, Paper and Forestry, 
Rubber, Manufacturing, Energy, Allied Industrial and Service Workers 
International Union (USW), and many others). Some employers and human 
resource professionals also supported the proposed increase. For 
example, the owner of a hardware store in Minneapolis explained that he 
had observed ``large businesses abuse their employees for many years by 
misclassifying them as exempt from overtime,'' and stated that the 
Department's proposal would ``help bring things back in line.'' H-E-B 
stated that it pays ``competitive wages,'' and is ``supportive of 
doubling the minimum salary threshold to the proposed amount of 
$50,400,'' although it urged the Department to consider making regional 
adjustments because other retailers pay lower wages based on geographic 
differences. Some Members of Congress expressed support for the 
Department's proposal, although other Members of Congress opposed it.
    The Department received many comments from those who endorsed the 
proposal (as well as those seeking a higher salary level) asserting 
that a significant increase to the current salary level is necessary to 
effectuate Congress' intent to extend the FLSA's wage and hour 
protections broadly to most workers in the United States. See, e.g.,

[[Page 32406]]

Comment from 57 labor law professors; AFL-CIO; Equal Justice Center; 
National Employment Lawyers Association (NELA); Nichols Kaster law 
firm; SEIU. AFL-CIO stated that Congress intended the EAP exemptions to 
apply only to employees who have sufficient bargaining power such that 
they do not need the Act's protections against overwork and who perform 
work that cannot be easily spread to other workers. AFL-CIO and the EPI 
further stated that Congress knew from experience with Depression-era 
worker protection legislation that employers sometimes misclassified 
ordinary workers as managers to evade paying overtime premiums, and as 
a result, exempted only ``bona fide'' executive, administrative, and 
professional employees. The National Employment Law Project (NELP) 
commented that the Department set the salary level too low in 2004, 
especially when paired with a more lenient duties test than the prior 
long duties test. A comment submitted on behalf of 57 labor law 
professors noted that, even if the Department had paired the $455 per 
week standard salary level set in 2004 with a more rigorous duties 
test, it was still lower than necessary to achieve a threshold 
equivalent to the inflation-adjusted amount of the 1975 long test 
salary level.
    The Department agrees with commenters that a significant increase 
in the salary threshold is required to ensure the FLSA's overtime 
protections are fully implemented. The salary level test should provide 
an ``index to the `bona fide' character of the employment for which 
exemption is claimed'' and ensure that the EAP exemption ``will not 
invite evasion'' of the FLSA's minimum wage and overtime requirements 
``for large numbers of workers to whom the wage-and-hour provisions 
should apply.'' Stein Report at 19. The current salary level, however, 
is less than the 10th percentile of weekly earnings of full-time 
salaried workers both nationally and in the South. The salary 
threshold's function in differentiating exempt from nonexempt employees 
takes on greater importance, moreover, when there is only one standard 
duties test that has no limitation on the amount of nonexempt work that 
an exempt employee may perform, as has been the case since 2004. As the 
Department has long recognized, if too low a salary level accompanies a 
duties test that does not limit nonexempt work, employers may utilize 
the salary test to employ ``otherwise nonexempt employees,'' who 
perform large amounts of nonexempt work, ``for excessively long 
workweeks.'' 40 FR 7092. The Department believes that the effect of the 
2004 Final Rule's pairing of a standard duties test based on the short 
duties test (for higher paid employees) with a salary test based on the 
long test (for lower paid employees) was to exempt from overtime many 
lower paid workers who performed little EAP work and whose work was 
otherwise indistinguishable from their overtime-eligible 
colleagues.\30\ This has resulted in the inappropriate classification 
of employees as EAP exempt who pass the standard duties test but would 
have failed the long duties test. A significant increase from the 2004 
threshold is therefore necessary, not only to account for the declining 
real value of the salary threshold, but also to correct for the fact 
that the Department set the standard salary level in 2004 without 
adjusting for the elimination of the more rigorous long duties test.
---------------------------------------------------------------------------

    \30\ Jobs With Justice illustrated this phenomenon in its 
comment by recounting the experience of a store manager who was 
classified as exempt even though she made only $34,700 per year and 
regularly worked 70 hours per week, spending her time performing 
routine tasks such as ``unloading merchandise from trucks, stocking 
shelves and ringing up purchases.'' See also In re Family Dollar 
FLSA Litigation, 637 F.3d 508, 511, 516-18 (4th Cir. 2011) (holding 
that a retail manager paid $655 per week plus bonus was an exempt 
executive even though she ``devoted most of her time to doing . . . 
mundane physical activities'' such as unloading freight, stocking 
shelves, working the cash register, or sweeping the floors); Soehnle 
v. Hess Corp., 399 Fed. App'x 749, 750 (3d Cir. 2010) (holding that 
a gas station manager who was paid an annual salary of $34,000, 
worked approximately 70 hours per week, and spent 85 percent of time 
operating a cash register was an exempt executive).
---------------------------------------------------------------------------

    Many commenters (including some that believe that the proposed 
salary level is reasonable) urged the Department to choose a method 
that results in a higher salary level. The vast majority of these 
commenters, including NELA, Nichols Kaster, the Rudy, Exelrod, Zieff & 
Lowe law firm, the Texas Employment Lawyers Association, and the United 
Food and Commercial Workers International Union (UFCW), asserted that 
the Department should set the standard salary level equal to the 50th 
percentile of earnings of full-time salaried workers nationally. The 
Center for Effective Government stated that the Department should set 
the standard salary level equal to the 60th percentile of earnings of 
full-time salaried workers nationally. NELP recommended that the 
Department adjust for inflation the short test salary level adopted by 
the Department in 1975, or in the alternative, adopt a threshold of 
$1,122 per week.
    Commenters, such as the UFCW, pointed out that the Department's 
proposed salary is lower than the average historical salary ratio 
associated with the short duties test, which is the basis for the 
standard duties test. Multiple commenters noted that the proposed 
salary level covers a smaller share of all salaried workers (40 
percent) than the 1975 short test salary level, which covered 62 
percent of full-time salaried employees. See, e.g., AFL-CIO; NELA; 
Rudy, Exelrod, Zieff & Lowe. NELA stated that the 1975 short test 
salary level was 1.57 times the median wage of all full-time wage and 
salary workers, a ratio which they asserted would result in a current 
salary threshold of over $65,000 per year based on first quarter 2015 
data. EPI commented that the proposed salary level is lower than the 
short test salary levels adopted by the Department in the 1960s and 
1970s, when adjusted for inflation to 2013 dollars. EPI also asserted 
that the salary threshold should be higher than the inflation-adjusted 
amounts of short test salary levels from the past in part to account 
for the fact that management and professional salaries grew faster than 
the rate of inflation after 1970, noting that CEO pay among the top 350 
U.S. corporations was almost 11 times higher in 2014 than it was in 
1978, after adjusting for inflation. Other commenters, including USW, 
similarly cited the large growth in high-level executive pay in recent 
decades in support of the Department's proposal.
    Commenters urging a higher salary level also asserted that the 
Department's proposed salary level excludes from overtime protection 
too large a percentage of employees in traditionally nonexempt 
occupations and is too low to adequately minimize the risk of 
inappropriately classifying overtime-eligible workers as overtime 
exempt. AFL-CIO stated that the Department has previously set the long 
test salary level at an amount about 25 percent higher than the average 
starting salary for newly hired college graduates, and they asserted 
that this would yield a standard salary level of $52,000 per year. AFL-
CIO contended that the salary test must be set at a ``high enough level 
that large numbers of eligible workers are not stranded above the 
threshold.'' NELA likewise urged the Department to ``aim for a 
threshold where the number of non-exempt employees earning salaries 
above the threshold equals the number of otherwise exempt employees 
earning less than the threshold''--an amount we estimated in the NPRM 
would be roughly equal to the 50th percentile of

[[Page 32407]]

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

    \31\ See Table A2--Probability Codes by Occupation, 80 FR 38594; 
see also 80 FR 38553-54.
---------------------------------------------------------------------------

    In addition to these comments, multiple commenters noted that 
salaries may vary widely within a state or region, especially between 
rural or smaller communities and urban areas. Several commenters, 
including Columbia County, Pennsylvania, Community Transportation 
Association of the Northwest, Elk Valley Rancheria Indian Tribe, 
Jackson Lewis, the Jamestown S'Klallam Tribe, the National Board for 
Certified Counselors, the National Newspaper Association, NRF, and the 
Northern Michigan Chamber Alliance, commented that the proposed salary 
level is too high for rural areas and small communities. HR Policy 
Association stated that 14 percent of chief executives and 32 percent 
of general and operations managers in small cities and rural areas earn 
less than the salary level calculated using the proposed methodology 
and 2014 data. Commenters also compared earnings and the cost of living 
in lower-wage communities to very high wage urban areas and asserted 
that the

[[Page 32408]]

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

    \32\ The South Census Region includes Alabama, Arkansas, 
Delaware, the District of Columbia, Georgia, Florida, Kentucky, 
Louisiana, Maryland, Mississippi, North Carolina, Oklahoma, South 
Carolina, Tennessee, Texas, Virginia, and West Virginia.

 Table B--40th percentile of Earnings for Full-Time Salaried Workers by
                              Census Region
------------------------------------------------------------------------
                                                        40th percentile
                                                         of earnings of
                                                           full-time
                    Census region                       salaried workers
                                                        (in 4th quarter
                                                             2015)
------------------------------------------------------------------------
South................................................               $913
Midwest..............................................                994
Northeast............................................              1,036
West.................................................              1,050
All Census Regions...................................                972
------------------------------------------------------------------------

    This adjustment will ensure that the salary level ``is practicable 
over the broadest possible range of industries, business sizes and 
geographic regions.'' 69 FR 22171 (citing Kantor Report at 5). Setting 
the salary level equal to the weekly earnings of the 40th percentile of 
full-time salaried workers in the lowest-wage Census Region represents 
the 22nd percentile of likely exempt employees in the South, the 19th 
percentile of likely exempt employees in the Midwest, and the 16th 
percentile of likely exempt employees in both the West and the 
Northeast.\33\ The 40th percentile of full-time salaried workers in the 
South also represents the 20th percentile of likely exempt employees 
working in small establishments and the 28th percentile of likely 
exempt employees who do not live in

[[Page 32409]]

metropolitan areas.\34\ This increase from the traditional 10 percent 
of exempt employees excluded by the Kantor long test method reflects 
the shift to a salary level appropriate to the standard duties test. 
Because the long duties test included a limit on the amount of 
nonexempt work that could be performed, it could be paired with a low 
salary that excluded few employees performing EAP duties. In the 
absence of such a limitation in the duties test, it is necessary to set 
the salary level higher (resulting in the exclusion of more employees 
performing EAP duties) because the salary level must perform more of 
the screening function previously performed by the long duties test. 
Accordingly the salary level set in this Final Rule corrects for the 
mismatch in the 2004 Final Rule between a low salary threshold and a 
less rigorous duties test.
---------------------------------------------------------------------------

    \33\ The population for determining employees who are likely 
exempt under the standard duties test is limited to potentially 
affected EAP workers (i.e., white collar, salaried, not eligible for 
another non-EAP overtime exemption, and not in a named occupation) 
earning at least $455 but less than $913.
    \34\ The Department does not know which employees work for small 
businesses and therefore randomly assigns workers to small 
businesses. The number of likely exempt employees who do not live in 
metropolitan areas is based on employees who do not live in a 
Metropolitan Statistical Area.
---------------------------------------------------------------------------

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

[[Page 32410]]

longer qualify for the EAP exemption--and therefore will become 
overtime eligible--because they are paid less than the new salary 
level. See section VI.C.ii. Although the Department recognizes that an 
estimated 6.5 million white collar employees who fail the standard 
duties test will still earn at least the new salary level, these 
overtime-eligible employees will be protected by the application of the 
duties test.
    Other measures confirm the appropriateness of the new standard 
salary level. The Department has traditionally considered newly hired 
college graduates to be overtime eligible and the Final Rule salary 
level is slightly higher than the average salary for college graduates 
under 25 years old.\35\ See Weiss Report at 19. Setting the salary 
level at the 40th percentile of weekly earnings of full-time salaried 
workers in the South also places it far enough above the minimum wage 
to provide an effective means of screening out workers who should be 
overtime protected. Following each update from 1949 to 1975, the ratio 
of the short test salary level to the earnings of a full-time, 
nonexempt, minimum wage worker equaled between approximately 3.0 and 
6.25.\36\ The proposed salary level is 3.15 times full-time minimum 
wage earnings ($913/($7.25 x 40)), which is within the historical 
range.
---------------------------------------------------------------------------

    \35\ Several commenters asserting that the Department's proposed 
salary level is too high, including the American Council of 
Engineering Companies and the American Institute of Certified Public 
Accountants, suggested that increasing the salary level could lead 
employers to classify recent college graduates or junior employees 
as nonexempt. The Department has long recognized that ``college 
graduates just starting on their working careers . . . normally have 
not achieved bona fide administrative or professional status, nor 
are their salaries commensurate with those of fully trained and 
experienced professional or administrative employees.'' Weiss Report 
at 19.
    \36\ The 6.25 ratio is an outlier that was set in December 1949 
(when the short test was created) and the minimum wage increased 
from $.40 to $.75 per hour one month later (which reduced the ratio 
to 3.33). To return to the 6.25 ratio, the weekly salary level would 
have to be set at $1,812.50, which is around the 80th percentile of 
full-time salaried employees nationally.
---------------------------------------------------------------------------

    To the extent that some commenters advocated an even further 
downward adjustment to the salary level to account for low-wage regions 
and industries, the Department believes that such an adjustment would 
not be appropriate given that the Department has decided not to 
introduce a specific limitation on the performance of nonexempt work 
into the standard duties test. Moreover, we note that the standard 
salary level must be practicable in high-wage areas as well as in low-
wage ones. As we have previously stated, the salary threshold ``can be 
of little help in identifying'' bona fide EAP employees when ``large 
numbers'' of traditionally nonexempt workers in high wage areas earn in 
excess of the salary level. Weiss Report at 10. In California and New 
York, for example, 69 percent of first-line supervisors in 
construction, 51 percent of paralegals and legal assistants, and 31 
percent of secretaries and administrative assistants earn $913 or more 
per week, despite the fact that the probability of these workers 
passing the standard duties test is between 0 to 10 percent. With 
respect to commenters who expressed concern that employees performing 
the same duties will be exempt in one location and overtime protected 
in another, the Department notes that this has always been the case and 
may occur at any salary level. Lowering the salary threshold below the 
amount set in this Final Rule would result in a salary level that is 
inappropriate for traditionally nonexempt workers in high wage areas, 
especially when paired with the less rigorous standard duties test.
    The $913 salary level adopted in this Final Rule corresponds to the 
low end of the historical range of salaries for the short duties test 
on which the current standard duties test is based ($889 to $1,231). 
The Department considered the possibility of adopting a salary level 
equal to the 35th percentile of weekly earnings of full-time salaried 
employees in the South, which would yield a salary level of $842 per 
week based on fourth quarter 2015 data. However, given that this would 
result in a salary level lower than the bottom of the historical range 
of short test salary levels, based on the historical ratios between the 
short and long test salary levels, the Department determined that 
setting the salary level at the 35th percentile of the lowest-wage 
Census Region would not work effectively with the standard duties test. 
The Department also considered adopting a higher salary level within 
the historical range of short test salaries as advocated by many 
employee representatives, but we remain concerned about the adverse 
effect such a threshold might have on low-wage regions. Accordingly, 
the Department has concluded that the 40th percentile of weekly 
earnings of full-time salaried workers in the South represents the best 
dividing line between employees who are overtime eligible and those who 
may not be overtime eligible, when paired with the standard duties 
test.
    Historically the Department has looked to low-wage industries as 
well as low-wage regions in setting the long test salary and, in 2004, 
we looked specifically to the retail industry in setting the standard 
salary level.\37\ In developing this Final Rule, the Department 
examined weekly earnings of full-time salaried employees in the retail 
and restaurant industries to determine if adjustment based on these 
industries was appropriate. In the retail industry, the 40th percentile 
of full-time salaried employees nationally is $848 per week, a salary 
below the low end of the historical range of the short test salary 
($889) and therefore one that would not work effectively with the 
standard duties test. In the restaurant industry (food services and 
drinking places), the 40th percentile of full-time salaried employees 
nationally is $724 per week. This salary is not only below the low end 
of the historical short test range, but also only slightly above the 
historical average of the long test salary level 
($719).38 39 The Department therefore concluded that setting 
the salary level based on wages in these industries would require 
significant changes to the standard duties test, which commenters 
representing employers overwhelmingly opposed, see, e.g., NRF, NRA, 
FMI, and which would be inconsistent with the Department's goal of 
simplifying the exemption. The Department believes, moreover, that the 
lower salary level yielded by using the lowest-wage Census Region is 
appropriate over the range of industries, including low-wage 
industries, because it captures differences across regional labor 
markets without attempting to adjust to specific industry conditions.
---------------------------------------------------------------------------

    \37\ In the past, salaries in low-wage areas and low-wage 
industries have been closely aligned, and in 2004 salaries in the 
South and in the retail industry were similar. See 69 FR 22168 
(``[T]he 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.''). This historical parity does not 
exist at the 40th percentile of workers in the restaurant and retail 
industries, and adjusting the salary level further to account for 
wages in these industries would require changes to the standard 
duties test.
    \38\ The Department calculated the historic average of the long 
test salary level by averaging the 20 values set for the long test 
(executive, administrative, and professional) from 1938 to 1975 in 
2015 dollars. The historical average salary level for the long test 
is $719.
    \39\ The Department notes there are also significant levels of 
misclassification of overtime-eligible white collar workers as 
exempt in these industries. See section VI.C.ii.
---------------------------------------------------------------------------

    With respect to the Chamber's suggestion that the Department limit 
the data set to the three lowest-wage states in the South (for which 
the 40th percentile of weekly earnings is $784), this methodology 
yields a salary level significantly below the historical range of short 
test salary levels and for all the reasons discussed above would

[[Page 32411]]

therefore fail to work appropriately with the standard duties test. If 
the Department had instead looked to Census divisions, the West South 
Central division,\40\ which includes Louisiana and Oklahoma has a 40th 
percentile of weekly earnings of full-time salaried workers of $878, 
and the East South Central division,\41\ which includes Mississippi, 
has a 40th percentile of weekly earnings of full-time salaried workers 
of $849. Both of these would also result in a salary level that is 
lower than the bottom of the historical short test salary range and 
would thus necessitate changes to the duties test. Moreover, the 
Department believes that the best practice is to set the salary level 
based on an entire region, as we did in 2004, rather than based on a 
select and very small subset of states or on a Census division.\42\ The 
three Census divisions that make up the South Census Region have lower 
wages at the 40th percentile of weekly earnings of full-time salaried 
workers than any other Census divisions. By focusing on the lowest-wage 
Census Region--made up of the three lowest-wage Census divisions--we 
have removed the effect of the three higher earnings Census Regions on 
the salary level, ensuring the salary level is not driven by earnings 
in high- or even middle-wage regions of the country. Moreover, 
establishing the salary level based on a Census Region provides a 
sufficient data set to capture differences across regional labor 
markets and produces a salary level that is appropriate on a national 
basis.
---------------------------------------------------------------------------

    \40\ The West South Central division comprises Arkansas, 
Louisiana, Oklahoma, and Texas.
    \41\ The East South Central division comprises Alabama, 
Kentucky, Mississippi, and Tennessee.
    \42\ A number of commenters noted that the Department's proposal 
is higher than the minimum salary level necessary for an EAP 
employee to be exempt from state overtime laws in two high-wage 
states, California ($41,600 in 2016) and New York ($35,100 in 2016). 
See, e.g., Corpus Christi Chamber of Commerce; FMI; IFA; Littler 
Mendelson. The salary thresholds for the white collar exemption in 
California and New York are based on multipliers of the full-time 
equivalents of those states' minimum wages; the salary level in 
California is 2 times the state minimum wage, and the salary level 
in New York is typically 1.875 times the state minimum wage. See 
Cal. Lab. Code Sec. 515(a); N.Y. Comp. Codes R. & Regs, 12 
Sec. Sec.  142-2.1, 2.14. These multipliers are lower than the 
historical ratio of the Department's short test salary level and the 
federal minimum wage (which has never been lower than 2.98, see 80 
FR 38533), and they approximate the historical ratio between the 
Department's long test salary level and the federal minimum wage 
(which, between 1958 and 1975, ranged from 1.85 to 2.38). The 
Department believes that the salary level yielded by our 
methodology, which is 3.15 times the current federal minimum wage, 
better corresponds to the standard duties test, which--like the old 
short duties test--does not include a quantitative limit on 
nonexempt work. The Department also notes that California requires 
exempt EAP employees to spend at least 50 percent of their time 
performing their primary duty, not counting time during which 
nonexempt work is performed concurrently. See Cal. Lab. Code Sec. 
515(a), (e); see Heyen v. Safeway Inc., 157 Cal. Rptr. 3d 280, 302 
(Cal. Ct. App. 2013).
---------------------------------------------------------------------------

    The Department also declines to adopt different salary levels for 
different regions of the country or for different industries or sizes 
of businesses. The Department has always maintained a salary level 
applicable to all areas and industries. As the Department explained 
when we rejected regional salary thresholds in the 2004 Final Rule, 
adopting multiple different salary levels is not administratively 
feasible ``because of the large number of different salary levels this 
would require.'' 69 FR 22171. Furthermore, as discussed earlier, the 
Department believes the methodology adopted in this Final Rule will 
adequately account for commenters' concerns about geographic and other 
disparities by setting the salary level based on salaries in the 
lowest-wage Census Region.
    In addition to asserting that the proposed salary level is 
inappropriate for low-wage regions and industries, commenters 
requesting a lower salary level also criticized the methodology the 
Department used in our proposal, took issue with the justifications 
underpinning the proposal, and predicted that the proposed salary level 
would negatively impact employers and employees. Some commenters 
criticized the Department for using a different percentile to set the 
salary threshold than it has in the past. See, e.g., FMI; National 
Roofing Contractors Association (asserting that the ``threshold would 
extend to the 40th percentile of wage earners, up sharply from 
methodologies used when previously determining the threshold that used 
the 10th and 20th percentile'').
    Several commenters also disagreed with the Department's explanation 
that it was necessary to set a percentile that would not only reflect 
increases in nationwide salary levels since 2004, but also correct for 
the fact that the salary level set in 2004 was too low--when paired 
with a duties test based on the historical short duties test--to 
effectively screen out overtime-protected white collar employees from 
the exemption. Many of these commenters asserted that the Department 
did account for the elimination of the long duties test, by increasing 
``the percentile used from 10th to 20th.'' Littler Mendelson; see also 
AH&LA; NRF. The Chamber commented that the Department did not need to 
adjust for the elimination of the long duties test in 2004 because the 
long test salary level was so in need of updating that the long duties 
test had been effectively inoperative for many years. Finally, some 
commenters asserted that the Department improperly equates the standard 
duties test with the less rigorous short duties test. See, e.g., World 
Floor Covering Association (``DOL did not eliminate the long duty test 
and keep the short duty test in 2004. Rather, it combined the short and 
long duties tests by relaxing the strict standards under the long duty 
test and increasing duties under the short duty test.'') The Chamber 
and the Iowa Association of Business and Industry pointed out that in 
2004 the Department added to the standard executive duties test an 
additional requirement (that the employee be one who has ``the 
authority to hire or fire other employees or whose suggestions and 
recommendations'' as to these matters ``are given particular weight''), 
and the Iowa Association of Business and Industry also noted that the 
Department added a ``matters of significance'' qualification to the 
administrative standard duties test.
    The Department disagrees with these comments, and we continue to 
believe that the salary level set in 2004 was too low to effectively 
screen out from the exemption overtime-protected white collar employees 
when paired with the standard duties test. As an initial matter, we 
disagree with commenters' suggestion that the standard duties test does 
not closely approximate the historic short duties test because of minor 
differences between the two tests. In 2004, the Department described 
these differences as merely ``de minimis,'' and explained that the new 
standard duties test is ``substantially similar'' to the old short 
duties test. 69 FR 22192-93; 69 FR 22214. The key difference between 
the old short test and the old long test was that the long test imposed 
a bright-line 20 percent cap on the amount of time an exempt employee 
could spend on nonexempt duties (40 percent for employees in the retail 
or service industries). The short duties test, in contrast, did not 
impose a specific limitation on nonexempt work because the short test 
was intended to apply only to workers who earned salaries high enough 
that such a limitation was unnecessary. The standard duties test 
developed in 2004 takes the short test approach and does not 
specifically limit nonexempt work.
    When moving to a standard duties test based on the short duties 
test in 2004, the Department relied on the methodology we had 
historically used to set the long test salary threshold, with two 
changes. First, the Department set the salary level based on the 
earnings of exempt and nonexempt full-time salaried employees. In 
previous

[[Page 32412]]

rulemakings, the Department had looked only at salary data on employees 
who met the EAP exemption, who earn higher salaries on average than 
nonexempt salaried employees. See 69 FR 22166-67. Second, recognizing 
that ``employees earning a lower salary are more likely non-exempt,'' 
the Department offset the first change by making an additional 
adjustment. Id. The 2004 Final Rule set the salary level to exclude 
from exemption ``approximately the lowest 20 percent of all salaried 
employees,'' whereas previously the Department set the salary level to 
exclude ``approximately the lowest-paid 10 percent of exempt salaried 
employees.'' 69 FR 22168 (emphases added and in original); 69 FR 22166 
(emphases added). By setting the salary threshold at a higher 
percentile of a data set that included employees likely to earn lower 
salaries, the Department explained that we reached a final salary level 
that was ``very consistent with past approaches'' to setting the long 
test salary threshold. 69 FR 22167.
    Although the Department also recognized the need to make an 
additional adjustment to the long test salary level methodology because 
of the move to the standard duties test, see 69 FR 22167, the salary 
level included in the 2004 Final Rule ultimately did not do so. The 
Department indicated that the change in percentile could account for 
both the fact that the data now ``included nonexempt salaried 
employees'' and ``the proposed change from the `short' and `long' test 
structure.'' Id.; see 68 FR 15571. At the same time, however, the 
Department acknowledged that the change to the 20th percentile of 
exempt and nonexempt salaried employees produced a salary that was in 
fact roughly equivalent to the salary derived through the methodology 
previously used to set the long test salary levels. See 69 FR 22168. As 
the data tables in the 2004 Final Rule show, the $455 salary level 
excluded only 8.2 percent of likely exempt employees in the South and 
10.2 percent of likely exempt employees in retail. See 69 FR 22169, 
Table 4; see also 69 FR 22168 (``The lowest 10 percent of likely exempt 
salaried employees in the South earn just over $475 per week.'').\43\ 
Accordingly, the Department set the standard salary level using a 
methodology that yielded a result consistent with the methodology we 
had historically used to set the salary level paired with the long 
duties test, even though the new standard duties test was based on the 
short duties test. This was a methodological error, even if employers 
at the time were primarily using the less rigorous short duties test. 
The fact that the long duties test was unused because the Department 
had neglected to update the salary associated with it for 29 years does 
not mean that we did not need to account for the removal of the long 
test when the standard test was established. The Department is now 
correcting this error by setting the salary level equivalent to the 
40th, rather than the 20th, percentile of weekly earnings of full-time 
salaried workers in the lowest-wage Census Region (the South). This 
percentile results in a salary level that is at the low end of the 
historical range of short test salary levels, based on the historical 
ratios between the short and long test salary levels, but is 
appropriately higher than the historical long test salary levels. By 
making this change to our 2004 methodology, the Department better 
accounts for the fact that the standard duties test is significantly 
less rigorous than the long duties test and, therefore, the salary 
threshold must play a greater role in protecting overtime-eligible 
employees.
---------------------------------------------------------------------------

    \43\ While the 2004 method and the Kantor long test method 
produced similar salaries in 2004, the salary levels yielded by 
these methods now diverge significantly. Today, the 2004 method 
would produce a salary level of $596 per week, while using the 
Kantor long test method would result in a salary level of $684 per 
week. See section VI.C.iii. Thus, not only would using the 2004 
methodology today fail to account for elimination of the long duties 
test, it would result in a noticeably lower salary level than the 
average long test salary level between 1940 and 2004 in 2015 
dollars.
---------------------------------------------------------------------------

2. Purpose of the Salary Level Test
    Several commenters that stated that the Department's proposed 
threshold is too high asserted that the proposal alters the purpose of 
the salary test and inappropriately minimizes the role of the duties 
test by excluding from the exemption too many employees who satisfy the 
standard duties test. In support of this point, SHRM noted the 
Department's estimate that 25 percent of white collar workers subject 
to the salary level test who currently meet the duties test would be 
overtime-protected under the Department's proposed salary level. HR 
Policy Association stated that, if the salary level was set according 
to the Department's proposed methodology, 25 percent of accountants and 
auditors, 24 percent of business and financial operation managers, and 
11 percent of ``chief executives'' would not qualify for the EAP 
exemption in 2014.
    Several commenters representing employers stated that the salary 
level has historically been set at a level such that ``employees below 
it would clearly not meet any duties test,'' or would be very unlikely 
to satisfy the duties requirements. NRA; see also HR Policy 
Association; Jackson Lewis; SHRM. SHRM and others asserted that the 
proposal would for the first time set the salary level such that a 
large number of employees who satisfy the duties test would be excluded 
from the exemption, which would therefore make them overtime eligible. 
These commenters pointed to the Department's statement, when setting 
the long test salary thresholds in 1949 and 1958, that the thresholds 
should not defeat the exemption for ``any substantial number of 
individuals who could reasonably be classified for purposes of the Act 
as bona fide executive, administrative, or professional employees,'' 
and should provide a ``ready method of screening out the obviously 
exempt employees.'' Weiss Report at 8-9; Kantor Report at 2-3. 
Commenters asserted that because only those who are ``very likely to 
satisfy'' the duties tests earn salaries above the Department's 
proposed threshold, see Jackson Lewis (emphasis in comment), the 
Department has turned the historical purpose of the salary level ``on 
its head.'' See PPWO. PPWO, SHRM, and others further commented that the 
Department's proposal improperly renders the duties test superfluous 
and makes the salary level test the ``sole'' determinant of exempt 
status.
    The Chamber, FMI, and SHRM also stated that the Department lacks 
the authority to set wages for, or establish a salary level with the 
goal of, improving the conditions of executive, administrative, and 
professional employees. IFA asserted that because the Department's 
proposal makes nonexempt what IFA characterized as a significant number 
of employees who would clearly meet the duties test, the proposal 
``expands the number of employees eligible for overtime beyond what 
Congress envisioned.''
    Commenters representing employees, however, disagreed that the 
purpose of the salary level is to identify employees who are very 
likely to fail the duties tests. NELA and other commenters asserted 
that the primary purpose of the salary level is to prevent employers 
from inappropriately classifying as exempt those who are not ``bona 
fide'' executive, administrative, or professional employees. NELA noted 
that the proposed threshold is lower than the salaries of roughly 41 
percent of salaried workers who fail the duties test, according to the 
NPRM, and AFL-CIO commented that under the proposal, ``the percentage 
of overtime-

[[Page 32413]]

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

[[Page 32414]]

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

[[Page 32415]]

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

[[Page 32416]]

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

[[Page 32417]]

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

[[Page 32418]]

employees do not currently work any overtime hours. As explained in 
detail in the economic impact analysis in section VI.D.iv., we expect 
there to be relatively little change in the weekly earnings or weekly 
hours of such employees. We agree that for the remaining employees, who 
do regularly or occasionally work overtime hours, the impact of the 
rule will depend upon how their employers choose to respond, and we 
recognize there likely will be a variety of responses from which 
employers can choose. For example, employers will raise the salaries of 
some employees to the new required level; employers will reclassify 
some other employees to nonexempt status and provide minimum wage and 
overtime protections and may attempt to minimize the overall cost by 
modifying those employees' regular rates of pay and reducing their 
hours. The economic impact analysis discusses the range of possible 
outcomes. However, as explained in section VI.D.iv., based upon our 
review of the economic literature, the Department concludes that the 
most likely outcome is that affected workers who work overtime hours 
and who are reclassified to overtime-protected status on average will 
receive increased earnings, because employers will not be able to fully 
adjust their regular rate of pay to the extent necessary to provide 
only the same level of earnings. As further explained in the economic 
impact analysis, workers whose exemption status changes also will see 
their work hours decrease on average, and the extra hours will be 
spread among other workers.\46\ The Department views these outcomes as 
fully consistent with the dual purposes of the FLSA's overtime 
requirement: (1) Spreading employment by incentivizing employers to 
hire additional employees, but rewarding those employees who are 
required to work overtime with time-and-a-half pay for overtime hours; 
and (2) avoiding detrimental effects on the health and well-being of 
employees by minimizing excessive working hours.
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    \45\ The Department stated in the NPRM that 74.7 percent of all 
affected workers were Type 1 workers who did not regularly work 
overtime and did not work overtime in the survey week; therefore, we 
assumed they would not be paid an overtime premium despite becoming 
overtime protected. See 80 FR 38574. However, as explained in 
section VI.D.iv., in response to comments that the Department 
underestimated the number of affected workers who work overtime, the 
Department has now classified a share of workers who reported they 
do not usually work overtime, and did not work overtime in the 
reference week (previously identified as Type 1 workers) as Type 2 
workers who work occasional overtime. Accordingly, we now estimate 
that 60.4 percent of affected workers will not receive any overtime 
premium.
    \46\ Not all employers will choose to cover the additional hours 
by hiring new employees. Employers will balance the benefits of the 
additional hours of work against the costs of hiring workers for 
those hours. In some cases, this will result in hiring new workers; 
in other cases, employers will have incumbent workers provide those 
additional hours.
---------------------------------------------------------------------------

    The Department recognizes that these outcomes are averages and some 
employees ultimately may receive lower earnings if their employers 
reduce their hours more extensively in an effort to ensure that no 
overtime hours are worked. However, such employees will receive extra 
time off. Therefore, the Department partially concurs with the comments 
of the individual employees and employee advocates who stated that the 
overall impact of the rule would benefit employees in a variety of 
ways, whether through an increased salary, overtime earnings when they 
have to work extra hours, time off, and/or additional hours of work for 
those who were previously unemployed or underemployed.
    Some employers also asserted that employees reclassified as 
nonexempt would lose fringe benefits such as life insurance, disability 
insurance, increased vacation time, and bonuses and other incentive 
compensation that they provide only to exempt employees. The Department 
notes that employers may choose to continue to provide such benefits to 
workers who employers like ABA and IFA described as ``critically 
important''; the design and scope of such fringe benefit and incentive 
compensation programs are within the employers' control. We see no 
compelling reason why employers cannot redesign their compensation 
plans to provide such fringe benefits and bonus payments based upon, 
for example, the employees' job titles rather than based upon their 
exemption status.\47\
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    \47\ Where nondiscretionary bonuses or incentive payments are 
made to nonexempt employees, the payments must be included in the 
regular rate when calculating overtime pay. The Department's 
regulations at Sec. Sec.  778.208-.210 explain how to include such 
payments in the regular rate calculation. One way to calculate and 
pay such bonuses is as a percentage of the employee's total 
earnings. Under this method, the payment of the bonus includes the 
simultaneous payment of overtime due on the bonus payment. See Sec.  
778.210.
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    With regard to the employer claim that employees reclassified to 
overtime-protected status would lose flexibility in their schedule or 
the ability to take a few hours off when needed for personal purposes, 
the Department notes that the employees who are affected by this Final 
Rule currently earn a salary between $455 per week and $913 per week 
(or between $23,660 and $47,476 per year). The results of the General 
Social Survey \48\ research discussed in the EPI comment indicate that 
hourly-paid workers and salaried workers earning between $22,500 and 
$49,999 have little difference in workplace flexibility with regard to 
an employee's ability to modify his or her starting time or quitting 
time; a substantial increase in such flexibility is not seen until 
workers earn above $60,000. Moreover, workers paid hourly who earn 
between $40,000 and $49,999 actually reported more flexibility to take 
time off during the day than salaried workers in that pay range. Many 
of the comments the Department received from individual exempt 
employees similarly reflected a lack of current flexibility, with 
employees indicating they were routinely scheduled to work well in 
excess of 40 hours per week and also had to fill in for other employees 
who were out sick or on vacation or when positions were unfilled. 
Therefore, the Department does not believe that workers will incur the 
significant change in flexibility that some employers envisioned if the 
employer reclassifies them as nonexempt.
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    \48\ The General Social Survey, which started in 1972, is the 
largest project funded by the Sociology Program of the National 
Science Foundation. Except for the U.S. Census, it is the most 
frequently analyzed source of information in the social sciences. 
See http://www3.norc.org/GSS+Website/About+GSS/.
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    Employers also asserted that employees whose exemption status 
changes would lose the ability to work from home and outside of normal 
business hours, and they would lose the ability to attend after-hours 
training opportunities and meetings or to stay late to ``get the job 
done.'' The Department understands employers' concerns regarding the 
need to control and keep accurate records of the work hours of 
overtime-eligible employees.\49\ However, this Final Rule does not 
prohibit employers from continuing to allow such employees flexibility 
in the time and location where they work; most employees affected by 
this Final Rule are employees who employers now trust to exercise 
discretion and independent judgment with respect to matters of 
significance on behalf of the company or to supervise other employees 
and play a role in hiring, firing, and promoting other employees. 
Employers should be able to trust such valued employees to follow the 
employers' instructions regarding when, where, and for how many hours 
they may work and to accurately record their hours worked.\50\ 
Moreover, as noted

[[Page 32419]]

above, an estimated 60.4 percent of employees affected by this Final 
Rule do not work overtime hours now; the Department believes that any 
changes for this substantial portion of affected workers will be 
minimal. Further, the Department notes that most employers currently 
have both exempt and nonexempt workers and therefore have systems 
already in place for employers to track hours. Nonetheless, for those 
employees who do work overtime and who become overtime eligible, the 
employers will have to evaluate, for example, whether training and 
other activities that currently occur outside the normal work day, and 
for which employees currently receive no extra pay, should be moved to 
within the normal work day or whether they are important enough to 
warrant payment for any extra hours worked. However, because the 
Department has concluded that white collar employees earning a salary 
of less than $913 per week are not bona fide EAP workers, the 
Department concludes that if the employees perform extra work to ``get 
the job done'' they should be paid for all such time.
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    \49\ The Department included in the fall 2015 Regulatory Agenda 
our intent to publish a Request for Information seeking information 
from stakeholders on the use of electronic devices by overtime-
protected employees outside of scheduled work hours.
    \50\ The Department notes that there is no particular order or 
form of records required. See 29 CFR 516.1(a). Employers may choose 
whatever form of recordkeeping works best for their business and 
their employees. For example, employers may require their employees 
to record their hours worked; alternatively, some employers might 
decide to record the hours themselves. Where an employee works a 
fixed schedule that rarely varies, the employer may simply keep a 
record of the schedule and indicate the number of hours the worker 
actually worked only when the worker varies from the schedule 
(``exceptions reporting''). 29 CFR 516.2(c). Furthermore, the 
Department believes that most employers already maintain 
recordkeeping systems for their overtime-eligible employees and that 
these systems can accommodate newly overtime-eligible employees.
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    Regarding the employer assertion that the change in exemption 
status will harm employees because they will not be able to take time 
off without losing pay for the time away from work, the Department 
notes that employers are not required to change employees' pay basis 
from salaried to hourly simply because they are no longer exempt. 
Employers may continue to pay employees a salary, even when the 
employees are entitled to overtime pay if they work in excess of 40 
hours per week. See Sec. Sec.  778.113-.114. Moreover, even if newly 
overtime-eligible employees are converted to hourly status, employers 
are not required to dock such employees for the hours they take off. 
Therefore, employers have the authority to determine how to structure 
the pay plans of the newly overtime-eligible employees, and employers 
need not structure their pay plans in a manner that results in the 
potentially adverse effects that the employers identified.
    Finally, employers asserted that the loss of exempt status would 
have a negative impact on employees' morale. However, the Department 
believes that for most employees their feelings of importance and worth 
come not from their FLSA exemption status but from the increased pay, 
flexibility and fringe benefits that traditionally have accompanied 
exempt status, as well as from the job responsibilities they are 
assigned. None of these are incompatible with overtime protection. Many 
exempt employee commenters expressed significant concern and low morale 
regarding their current situation, and they looked forward to an 
improved situation under the new rule. Given the employers' emphasis on 
the important roles that these employees play in the success of their 
organizations, the Department anticipates that employers will strive to 
adapt to this rule in a way that minimizes the financial impact on 
their business while providing the maximum benefits, flexibility, and 
opportunities to their employees. If employers make these changes in a 
way that communicates the value they continue to place on the 
contributions of newly overtime-eligible workers, we are confident that 
employers can prevent employees from seeing their new entitlement to 
overtime protection as a demotion.
6. Impacts on Litigation
    The Department also received several comments predicting the impact 
increasing the salary level would have on litigation. Commenters 
representing employees, such as the International Association of Fire 
Fighters (IAFF), stated that increasing the threshold would more 
clearly demarcate between employees who are entitled to overtime and 
those who are not, decreasing misclassification, and therefore, 
litigation, involving the EAP exemption. According to the joint comment 
submitted by 57 labor law professors, ``the excessive importance of the 
duties test has resulted in the relatively high volume of litigation 
surrounding the exemptions and the many successful claims that have 
been asserted against employers in recent years,'' so raising the 
salary level ``will benefit employers by providing them more certainty 
and relieve them of the litigation and other costs of disputes over 
classification and misclassification.'' Weirich Consulting & Mediation 
(Weirich Consulting) commented in support of the salary level change 
because it will make it easier ``to determine more efficiently--and 
without needless litigation--whether or not particular employees are 
exempt.'' Other commenters representing employers disagreed, however, 
with Jackson Lewis, NAM, and the Wage and Hour Defense Institute 
predicting that finalizing the proposed salary level would increase 
(rather than decrease) litigation. Jackson Lewis commented that the 
duties test is the main driver of litigation over the EAP exemption, 
and ``there will be no end to litigation'' so long as employers must 
continue to apply the standard duties tests to employees earning above 
the salary threshold. Jackson Lewis and NAM further asserted that the 
rule will result in additional litigation brought by ``very 
dissatisfied'' newly overtime-protected employees. Finally, Fisher & 
Phillips commented that the ``collateral results'' of selecting a 
particular salary level, including avoiding or reducing litigation, are 
not appropriate factors for setting the salary level required for the 
EAP exemption.
    As we stated in the NPRM, the number of wage and hour lawsuits 
filed in federal courts increased substantially in the period between 
2001 and 2012, from approximately 2,000 to approximately 8,000 per 
year, with stakeholders advising the Government Accountability Office 
that one of the reasons for the increased litigation was employer 
confusion about which workers should be classified as EAP exempt. See 
80 FR 38531. Thus, these statistics support the Department's conclusion 
that the current standard salary level was not effective in 2004 at 
distinguishing between exempt and nonexempt workers and is 
substantially less effective today. Litigation under the FLSA remains 
high, with approximately 8,000 FLSA cases continuing to be filed each 
year.\51\
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    \51\ See http://www.uscourts.gov/statistics/table/c-2/statistical-tables-federal-judiciary/2014/12/31; http://www.uscourts.gov/statistics/table/c-2/federal-judicial-caseload-statistics/2015/03/31.
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    Although we did not establish the standard salary level in this 
Final Rule for the purpose of reducing litigation, we believe that 
reduced litigation will be one of the beneficial impacts of that 
increase. The salary level will once again serve as a clear and 
effective line of demarcation, thereby reducing the potential for 
misclassification and litigation. See Weiss Report at 8 (the salary 
tests prevent ``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.''). Given the new standard salary level, there will 
be 9.9 million fewer white collar employees for whom employers could be 
subject to

[[Page 32420]]

potential litigation regarding whether they meet the duties test (4.2 
million currently EAP-exempt employees who will be newly entitled to 
overtime because they earn less than the new standard salary and 5.7 
million overtime-eligible white collar employees paid between $455 and 
$913 per week whose exemption status no longer depends on the 
application of the duties test).\52\
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    \52\ The Department estimates that 732,000 of these white collar 
salaried workers are overtime-eligible but their employers do not 
recognize them as such. See section VI.C.ii.
---------------------------------------------------------------------------

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

[[Page 32421]]

implementation date, or a phase-in period for non-profits, we note that 
the Department's EAP exemption regulations have never had special rules 
for non-profit organizations; the employees of non-profits have been 
removed from minimum wage and overtime protection pursuant to the EAP 
exemptions only if they satisfied the same salary level, salary basis, 
and duties tests as other employees.
    The Department concludes that such special treatment is not 
necessary or appropriate. As the comment from the 57 labor law 
professors noted, a study of National Compensation Survey data showed 
that the average hourly wage of full-time management employees in the 
not-for-profit sector was $34.24 per hour in 2007 ($1,369 per 40-hour 
workweek), which substantially exceeds the Final Rule's required salary 
of $913 per week.\53\ The average hourly wage for such management 
workers at non-profits had increased to $38.67 by 2010 ($1,547 per 40-
hour week), which is more than 50 percent higher than the 2016 required 
standard salary.\54\ Moreover, the average hourly wages of non-profit 
employees are not uniformly lower than those of employees in other 
sectors. For example, in 2007 the average hourly wages of both full-
time business and financial operations employees and computer and 
mathematical science employees working at non-profits, $26.49 and 
$32.00 per hour, respectively, exceeded the average hourly earnings of 
such workers employed in State government.\55\ Wages of full-time 
workers in healthcare practitioner and technical occupations for non-
profits averaged $28.85 per hour in 2007, higher than those for 
employees in the same occupations in State and local governments 
($23.89 and $27.30, respectively). Similarly, the 2007 average earnings 
of registered nurses were $30.80 per hour at non-profits, higher than 
those of registered nurses at private establishments ($30.58) and at 
State and local governments ($29.60).\56\
---------------------------------------------------------------------------

    \53\ See http://www.bls.gov/opub/mlr/cwc/wages-in-the-nonprofit-sector-management-professional-and-administrative-support-occupations.pdf. The non-profit series was stopped in 2010 and the 
2007 report on management, professional and administrative support 
occupations is the most recent data available.
    \54\ See http://www.bls.gov/ncs/ncswage2010.htm (Table 33).
    \55\ See http://www.bls.gov/opub/mlr/cwc/wages-in-the-nonprofit-sector-management-professional-and-administrative-support-occupations.pdf.
    \56\ See http://www.bls.gov/opub/mlr/cwc/wages-in-the-nonprofit-sector-healthcare-personal-care-and-social-service-occupations.pdf.
---------------------------------------------------------------------------

    Based on CPS data, the Department projects that for FY 2017, the 
median weekly earnings for affected workers in non-profits will be 
$741.68 while the median weekly earnings of affected workers in the 
private sector will be $745.54. The Department recognizes however, that 
non-profit entities may have a higher share of affected workers than 
for-profit entities, but does not believe that this will unduly impact 
this sector. If all affected workers in the non-profit sector who 
regularly work overtime were increased to the new salary level this 
would increase the total amount that non-profits pay EAP workers by 0.5 
percent, compared to an increase of 0.3 percent in other sectors.\57\ 
Therefore, the Department concludes that treating non-profit employers 
differently than other employers, such as by creating a special salary 
level or an extended phase-in period is not appropriate and is not 
necessary, particularly given the fact that the Final Rule modifies the 
proposed rule by basing the standard salary level on salaries in the 
lowest-wage Census Region.
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    \57\ This is an overestimate as to both the non-profit and for-
profit sectors. As explained in section VI.D. iv., we anticipate 
employers will increase the salary level only for workers for whom 
it is less expensive to pay the updated salary level than pay 
overtime.
---------------------------------------------------------------------------

    Finally, the Department also received comments from a number of 
non-profit higher education institutions. As discussed above, some 
commenters from the higher education community also asked for guidance 
on the application of the EAP exemption to educational institutions. 
Additionally, however, several commenters expressed concern about the 
impact that the Final Rule would have on higher education, with some 
suggesting a lower salary level for educational institutions. See, 
e.g., Iowa Association of Community College Trustees; CUPA-HR; Purdue 
University; South Carolina Independent Colleges and Universities. We 
recognize that higher education is a complex and important sector in 
our economy, including a variety of both private and public 
institutions, from small community colleges to large research 
institutions.
    Commenters representing research institutions raised concerns about 
the impact of the proposed rule on postdoctoral researchers. For 
example, CUPA-HR noted that the National Institutes of Health (NIH) 
stipend levels for post-doctoral researchers are ``well below'' the 
proposed salary level and that post-doctoral researchers with less than 
five years of experience would no longer meet the salary level for 
exemption. The Department notes that the Final Rule salary level based 
on the 40th percentile in the lowest-wage Census Region addresses some 
of these concerns and results in a salary level met by the NIH FY 2016 
stipend level for post-doctoral researchers with at least three years 
of experience and is only $208 a year above the stipend level for a 
post-doctoral researcher with two years of experience.
8. Other Comments
    Like non-profit employers, other commenters, including local 
governments,\58\ Indian tribes, for-profit entities receiving 
government funding, and commenters writing on behalf of small 
businesses, asserted that they do not have the same ability as other 
employers to increase prices or reduce their profits.\59\ See, e.g., 
BFT Holding; Charlotte County Government; Jamestown S'Klallam Tribe. 
Some commenters representing these groups, as well as other commenters, 
requested special treatment for certain industries or employers. For 
example, some small businesses and commenters representing them, 
including the American Association for Enterprise Opportunity, 
California Association for Micro Enterprise Opportunity, and WIPP, 
requested an exemption for small entities from the salary level or from 
the FLSA's requirements generally. Likewise, the Gila River Indian 
Community and the Ute Mountain Ute Tribe submitted comments urging the 
Department to ``open consultation with Indian tribes on the use of a 
lower salary threshold for tribal entities'' based on ``the unique 
economic and demographic factors that tribes face.'' The Department did 
not propose special treatment for small businesses, tribal governments, 
or other entities, and did not request comment on these issues. The 
Department believes such special treatment is not necessary given that 
the Final Rule modifies the proposed rule by basing the standard salary 
level on salaries in the lowest-wage Census Region and this lower final 
salary level will provide relief for these stakeholders.
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    \58\ The Department notes that state and local governments have 
greater options for satisfying their overtime obligations than do 
private employers. In particular, under certain conditions, state or 
local government agencies may provide their employees with 
compensatory time off (comp time) instead of cash payment for 
overtime hours. The comp time must be provided at a rate of one-and-
one-half hours for each overtime hour worked. For example, if a 
newly overtime-eligible state government employee works 44 hours in 
a single workweek, he would be entitled to 6 hours of compensatory 
time off. See 29 CFR part 553.
    \59\ Comments from state and local governments and from Indian 
tribes are also addressed in section VIII.
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    Conversely, some commenters requested that the Department apply the

[[Page 32422]]

salary level test to employees who have historically not been subject 
to that test. For example, the Department received multiple comments 
from teachers, university faculty, and their representatives, asking us 
to repeal Sec.  541.303(d), which provides that the salary level 
requirement does not apply to teaching professionals. See, e.g., 
National Association for the Education of Young Children (NAEYC); NWLC; 
New Faculty Majority Foundation; SEIU. As the NAEYC acknowledged in its 
comment, this request is ``beyond the scope'' of the NPRM, which did 
not propose changes to or invite comment on Sec.  541.303(d) or on 
Sec.  541.600(e), which also provides that the salary requirement does 
not apply to teachers and certain other professionals. See also NWLC; 
SEIU. The Department notes that regardless of their salary, teachers 
qualify for the professional exemption only if they have a primary duty 
of teaching, tutoring, instructing or lecturing in the activity of 
imparting knowledge and are employed and engaged in this activity as a 
teacher in an educational establishment by which they are employed.\60\ 
See Sec.  541.303(a).
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    \60\ The National Head Start Association and several other 
commenters associated with Head Start asked the Department to 
consider adopting the position that all Head Start and Early Head 
Start facilities are ``educational establishments,'' and therefore 
that teachers at these facilities can meet the professional 
exemption. The NPRM did not propose changes to or invite comment on 
Sec.  541.303(a) or Sec.  541.204(b) (which defines ``educational 
establishment''), and the Final Rule makes no changes to these 
sections.
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    A number of comments, including a joint comment from the AIA-PCI, 
requested that the Department prorate the new salary level for part-
time employees. The Department declines this request. That employers 
currently ``can afford to pay part-time exempt employees the full 
salary required for exempt status, even if they work just 15 or 20 
hours per week,'' as Seyfarth Shaw noted in support of this request, 
merely underscores the need to significantly increase the 2004 salary 
level. The Department has never prorated the salary level for part-time 
positions, and we considered and rejected a special rule for part-time 
employees performing EAP duties in 2004. See 69 FR 22171. The 
Department continues to believe that such a rule would be difficult to 
administer, and notes that the FLSA does not define full-time 
employment or part-time employment, but leaves this matter to be 
determined by employers. Employees hired to work part time, by most 
definitions, do not work in excess of 40 hours in a workweek, and 
overtime pay is not at issue for these employees. An employer may pay a 
nonexempt employee a salary to work part time without violating the 
provisions of the FLSA so long as the salary equals at least the 
minimum wage when divided by the actual number of hours the employee 
worked. See FLSA2008-1NA (Feb. 14, 2008). Employers can meet this 
standard with a salary of as little as $145 for twenty hours of work 
per week, and $217.50 for 30 hours of work per week--far below even the 
2004 salary level.\61\
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    \61\ SIFMA noted that some employees who will not meet the 
salary threshold because they work part time, may nevertheless have 
responsibilities during certain periods (for example, tax season) 
that require them to work more than 40 hours in a week. In such 
instances, if the employee earns less than the standard salary 
level, the employee is eligible to receive overtime premium pay for 
hours worked over 40 in a week.
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    Finally, a small number of commenters, including the National 
Automobile Dealers Association, suggested that the Department should 
eliminate the salary level test entirely, so that the exempt status of 
every employee would be determined on the basis of their job duties and 
responsibilities alone. The Department has repeatedly rejected this 
approach, and we do so again in this rulemaking. The Department has 
long recognized that ``the amount of salary paid to an employee is the 
`best single test' of exempt status,'' and is the principal delimiting 
requirement preventing abuse. 69 FR 22172; Stein Report at 24. Further, 
as the Department explained in 2004, eliminating the salary test is 
contrary to the goal of simplifying the application of the exemption, 
which the President has directed us to do in this rulemaking, and would 
require a ``significant restructuring of the regulations,'' including 
the ``use of more rigid duties tests.'' 69 FR 22172.

B. Special Salary Tests

i. American Samoa
    As explained in our proposal, the Department has historically 
applied a special salary level test to employees in American Samoa 
because minimum wage rates there have remained lower than the federal 
minimum wage. See 80 FR 38534. The Fair Minimum Wage Act of 2007, as 
amended, provides that industry-specific minimum wages rates in 
American Samoa will increase by $0.40 on September 30, 2018, and 
continue to increase every three years thereafter until each equals the 
federal minimum wage. See Sec. 1, Public Law 114-61, 129 Stat. 545 
(Oct. 7, 2015). The minimum wage in American Samoa currently ranges 
from $4.58 to $5.99 an hour depending on the industry,\62\ and so the 
disparity with the federal minimum wage is expected to remain for the 
foreseeable future. Accordingly, the Department proposed to continue 
our longstanding practice of setting the special salary level test for 
employees in American Samoa at approximately 84 percent of the standard 
salary level, which would have resulted in a salary of $816 based on 
fourth quarter 2015 data for full-time salaried workers nationwide.
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    \62\ See WHD Minimum Wage Poster for American Samoa, available 
at: http://www.dol.gov/whd/minwage/AmericanSamoa/ASminwagePoster.pdf.
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    The Department received only one comment on this aspect of our 
proposal--Nichols Kaster supported the proposed increase. We conclude 
that the proposed methodology remains appropriate, and the Final Rule 
accordingly sets the special salary level for American Samoa at 84 
percent of the standard salary level set in the rule, which equals $767 
per week. The Department has revised Sec.  541.600(a) accordingly.
ii. Motion Picture Producing Industry
    The Department has permitted employers to classify as exempt 
employees in the motion picture producing industry who are paid at a 
base rate of at least $695 per week (or a proportionate amount based on 
the number of days worked), so long as they meet the duties tests for 
the EAP exemptions. See Sec.  541.709. This exception from the ``salary 
basis'' requirement was created in 1953 to address the ``peculiar 
employment conditions existing in the [motion picture] industry,'' 18 
FR 2881 (May 19, 1953), and applies, for example, when a motion picture 
industry employee works less than a full workweek and is paid a daily 
base rate that would yield at least $695 if six days were worked. See 
id. Consistent with our practice in the 2004 Final Rule, the Department 
proposed to increase the required base rate proportionally to the 
proposed increase in the standard salary level test, resulting in a 
proposed base rate of $1,404 per week (or a proportionate amount based 
on the number of days worked). This method would have resulted in a 
base rate of $1,487 based on fourth quarter 2015 data for full-time 
salaried workers nationwide.
    The Department did not receive any substantive comments on this 
subject; two commenters, Nichols Kaster and the UAW, offered general 
support for this proposal. The Final Rule adopts the methodology set 
forth in our proposal, and using the new standard salary level

[[Page 32423]]

($913) results in a base rate of $1,397 per week (or a proportionate 
amount based on the number of days worked).\63\ The Department has 
revised Sec.  541.709 to incorporate this change.
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    \63\ The Department calculated this figure by dividing the new 
salary level ($913) by the current salary level ($455), and then 
multiplying this product (rounded to the nearest hundredth) by the 
current base rate ($695). This produces a new base rate of 
$1,396.95, which we rounded to the nearest whole dollar ($1397).
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iii. Other Comments Requesting Special Salary Tests
    The Department also received approximately a dozen comments 
concerning application of the proposed salary level to Puerto Rico. 
Nearly all of these commenters urged the Department to either exempt 
Puerto Rico from the updated standard salary level requirement (thus 
keeping the salary level at $455) or to reinstate a special salary 
level test for Puerto Rico (set between the current and proposed salary 
levels).\64\ In 1949, the Department established a special salary level 
for Puerto Rico because its minimum wage rate was below the FLSA 
minimum wage. See 14 FR 7705-06 (Dec. 24, 1949); Weiss Report at 21. 
The Fair Labor Standards Amendments of 1989 removed Puerto Rico from 
the special minimum wage provisions and instead applied the section 
6(a)(1) minimum wage to Puerto Rico. See Sec. 4, Public Law 101-157, 
103 Stat. 938 (Nov. 17, 1989). This change eliminated the justification 
for maintaining a special salary test in Puerto Rico, and so in the 
2004 Final Rule we established that the standard salary level test 
applies to Puerto Rico. Puerto Rico continues to be subject to the 
section 6(a)(1) minimum wage, and the Department has consistently 
maintained a uniform salary level for all states and also for all 
territories subject to the FLSA minimum wage.
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    \64\ Commenters included the Cadillac Group of Companies, 
Caribbean Restaurants, the Puerto Rico Bankers Association, the 
Puerto Rico Chamber of Commerce, the Puerto Rico Hotel & Tourism 
Association, the Puerto Rico Manufacturers Association, the 
Secretary of Labor for Puerto Rico (the Honorable Vance Thomas), the 
Training and Labor Affairs Advisory and Human Resources 
Administration Office (OCALARH, by its Spanish acronym), one 
individual commenter, and one anonymous commenter. Two individual 
employee commenters from Puerto Rico offered general support for the 
Department's proposal.
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C. Inclusion of Nondiscretionary Bonuses, Incentive Payments, and 
Commissions in the Salary Level Requirement

    As indicated in the NPRM, the Department has consistently assessed 
compliance with the salary level test by looking only at actual salary 
or fee payments made to employees and, with the exception of the total 
annual compensation requirement for highly compensated employees, has 
not included bonus payments of any kind in this calculation. During 
stakeholder listening sessions held prior to the publication of the 
NPRM, several business representatives asked the Department to include 
nondiscretionary bonuses and incentive payments as a component of any 
revised salary level requirement. These stakeholders conveyed that 
nondiscretionary bonuses and incentive payments are an important 
component of employee compensation in many industries and stated that 
such compensation might be curtailed if the standard salary level was 
increased and employers had to shift compensation from bonuses to 
salary to satisfy the new standard salary level.
    In recognition of the increased role bonuses play in many 
compensation systems, and as part of the Department's efforts to 
modernize the overtime regulations, the Department sought comments in 
the NPRM regarding whether the regulations should permit 
nondiscretionary bonuses and incentive payments to count towards 
satisfying a portion of the standard salary level test for the 
executive, administrative, and professional exemptions.\65\ 
Specifically, the Department asked whether employers should be allowed 
to use nondiscretionary bonuses and incentive payments, paid no less 
often than monthly, to satisfy up to 10 percent of the standard salary 
level test. To ensure the integrity of the salary basis requirement, 
the Department stressed the importance of strictly limiting the amount 
of the salary requirement that could be satisfied through the payment 
of nondiscretionary bonuses and incentive pay, as well as the maximum 
time period between such payments. The Department did not propose any 
changes to how bonuses are treated under the ``total annual 
compensation'' requirement of the HCE test, and stated that we were not 
considering changing the exclusion of board, lodging, or other 
facilities from the salary calculation or expanding the salary level 
test calculation to include discretionary bonuses, payments for 
medical, disability, or life insurance, or contributions to retirement 
plans or other fringe benefits. See, e.g., 80 FR 38535-36, 38537 n.36. 
However, the Department did seek comment on the appropriateness of 
counting commissions toward the salary level requirement.
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    \65\ Promised bonuses such as those announced to employees to 
induce them to work more efficiently or to remain with the firm are 
considered non-discretionary. See 29 CFR 778.211(c). Examples 
include individual or group production bonuses, and bonuses for 
quality and accuracy of work. Incentive payments, including 
commissions, are also considered non-discretionary.
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    The requirement that exempt employees be paid on a salary basis has 
been a part of the Department's part 541 regulations since 1940. As the 
Department said at that time, ``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 or she is properly within the 
exemption. Stein Report at 26, see also id. at 19, 36. Since 1940, 
therefore, the regulations have required that an exempt EAP employee be 
paid a predetermined and fixed salary that is not subject to reduction 
because of variations in the quality or quantity of work performed. 
More recently, the Department has noted ``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.'' 
69 FR 22177. While, as the Department noted in the NPRM, employers are 
allowed to pay additional compensation beyond the required salary in 
the form of bonuses, those payments have not counted towards the 
payment of the required minimum salary level. The Department's 
discussion in the NPRM of including nondiscretionary bonus payments in 
the standard salary level was informed by our concern that permitting 
the standard salary level to be satisfied by bonus payments that 
frequently correlate to the quantity and quality of work performed 
could undermine the utility of the salary basis requirement in 
identifying bona fide EAP employees.
    The Department received a variety of comments concerning whether 
the regulations should permit nondiscretionary bonuses and incentive 
payments to satisfy a portion of the standard salary level test. 
Commenters representing employers generally supported this change as an 
improvement over the current regulations, though many objected that the 
option the Department was considering was too restrictive. Most of the 
commenters representing employees that addressed this idea opposed it 
on the grounds that it would complicate the test for exemption and 
undermine the worker protections established by the salary basis 
requirement.
    Commenters representing employers offered a range of reasons for 
generally supporting the inclusion of nondiscretionary bonuses and 
incentive

[[Page 32424]]

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

[[Page 32425]]

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

[[Page 32426]]

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

[[Page 32427]]

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

D. Highly Compensated Employees

    As noted in the NPRM, the Department's 2004 Final Rule created a 
new highly compensated exemption for certain EAP employees. Section 
541.601(a) provides that such employees are exempt if they earn at 
least $100,000 in total annual compensation and customarily and 
regularly perform any one or more of the exempt duties or 
responsibilities of an executive, administrative, or professional 
employee. Section 541.601(b)(1) states that employees must receive at 
least $455 per week on a salary or fee basis, while the remainder of 
the total annual compensation may include commissions, nondiscretionary 
bonuses, and other nondiscretionary compensation. The regulation also 
clarifies that total annual compensation does not include board, 
lodging, and other facilities, and does not include payments for 
medical insurance, life insurance, retirement plans, or other fringe 
benefits. Pursuant to Sec.  541.601(b)(2), an employer is permitted to 
make a final ``catch-up'' payment during the final pay period or within 
one month after the end of the 52-week period to bring an employee's 
compensation up to the required level. If an employee does not work for 
a full year, Sec.  541.601(b)(3) permits an employer to pay a pro rata 
portion of the required annual compensation, based upon the number of 
weeks of

[[Page 32428]]

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

    Other commenters opposed the Department's proposed increase to the 
HCE exemption's total annual compensation requirement. Tracstaffing 
opined that there ``is no compelling reason to increase the minimum 
salary level for highly compensated salaried employees.'' H-E-B 
similarly stated that ``[t]here is no public policy justification for 
paying overtime to an individual receiving a six figure annual 
income.'' SIFMA advocated ``maintaining the $100,000 threshold for the 
highly compensated test, as the `bright line' $100,000 mark furthers 
the goal of simplifying the analysis of who qualifies for the test.'' 
The Chamber, the National Lumber and Building Material Dealers 
Association, NSBA, PPWO, Seize This Day Coaching, and several other

[[Page 32429]]

commenters all similarly commented that the compensation level should 
remain the same for the HCE exemption test. The Clearing House 
Association and SIFMA commented that the HCE exemption should not have 
an associated duties test.
    The Department has considered the comments regarding the HCE test 
for exemption and revises Sec.  541.601 to set the total annual 
compensation required for the highly compensated exemption at the 
annualized weekly earnings of the 90th percentile of full-time salaried 
workers nationally as proposed ($134,004 based on the fourth quarter of 
2015). The Department disagrees with comments asserting that the HCE 
exemption compensation level should not be increased. The highly 
compensated earnings level should be set high enough to avoid the 
unintended exemption of employees who clearly are outside the scope of 
the exemptions and are entitled to the FLSA's minimum wage and overtime 
pay protections.\69\ See 69 FR 22174.
---------------------------------------------------------------------------

    \69\ As the Department has previously noted this includes 
employees such as secretaries in high-wage markets. Courts have also 
found that real estate appraisers and chief inspectors also do not 
qualify for the HCE exemption. See Boyd v. Bank of America Corp., 
109 F.Supp.3d 1273 (C.D. Ca. 2015) (real estate appraisers); Zubair 
v. EnTech Engineering P.C., 808 F.Supp.2d 592 (S.D.N.Y. 2011) (chief 
inspector who tested ``concrete and paint sample and recommended 
project improvement to the overall paint systems'').
---------------------------------------------------------------------------

    The Department notes that it has been 12 years since the HCE annual 
compensation level was set and, as with the standard salary level, the 
2004 value has eroded over time. In FY2017, approximately 20 percent of 
full-time salaried workers are projected to earn at least $100,000 
annually, about three times the share who earned that amount in 2004. 
See section VI.C.iv. In order to ensure that the HCE compensation level 
remains a meaningful and appropriate standard when matched with the 
minimal duties test, the Department is increasing the HCE compensation 
level to the annualized weekly earnings of the 90th percentile of full-
time salaried workers nationally. This level, which is generally 
consistent with the level established in the 2004 Final Rule, is an 
appropriate proxy for identifying those white collar workers who may 
qualify as bona fide EAP workers without sweeping in overtime-eligible 
workers in high-wage regions. In response to the comments from employee 
representatives suggesting the new HCE compensation level should be 
even higher, the Department does not agree that a compensation level 
higher than the 90th percentile is necessary to ensure that virtually 
every salaried white collar employee would satisfy any duties test. The 
Department notes that the value of tying the HCE compensation level to 
wage data is that it will keep the HCE compensation level in tandem 
with increases in actual wages and therefore not grow either too slowly 
or too quickly. Therefore, the Final Rule increases the total annual 
compensation requirement to the annualized weekly earnings of the 90th 
percentile of full-time salaried workers nationally, which based on 
fourth quarter of 2015 data is $134,004.\70\
---------------------------------------------------------------------------

    \70\ See www.bls.gov/cps/research_series_earnings_nonhourly_workers.htm.
---------------------------------------------------------------------------

    Additionally, the Department proposed to maintain the requirement 
that at least the standard salary amount must be paid on a salary or 
fee basis. Under the current rule, employees for whom the HCE exemption 
is claimed must receive the full standard salary amount of $455 weekly 
on a salary or fee basis. See Sec.  541.601(b). The Department proposed 
to maintain this requirement, updating the amount that must be paid on 
a salary or fee basis to the 40th percentile of weekly earnings of 
full-time salaried employees nationally. The Final Rule maintains this 
requirement, but modifies the amount of the standard salary to the 40th 
percentile of weekly earnings of full-time salaried workers in the 
lowest-wage Census Region. The Department further stated that should it 
adopt a provision in the Final Rule permitting employers to take a 
credit against the payment of the standard salary level for 
nondiscretionary bonuses, that credit would not be applicable to the 
HCE exemption. 80 FR 38537 n.36. As previously discussed in section 
IV.C., the Department received almost no comments addressing the 
exclusion of bonus payments from satisfaction of the salary requirement 
for HCE employees. The Final Rule maintains the requirement that 
employees for whom the HCE exemption is claimed must receive the 
standard weekly salary amount on a salary or fee basis and does not 
permit employers to credit nondiscretionary bonuses for up to 10 
percent of that salary payment as is permitted under this Final Rule 
under the standard salary test. Employers can already credit such 
payments toward the portion of the HCE total compensation requirement 
in excess of the standard salary level; the Department does not believe 
that allowing such payments to also satisfy a portion of the standard 
salary level for HCE employees would be appropriate.
    A few commenters requested a regional adjustment for the HCE salary 
level. The Chamber stated that the ``Department should set the highly 
compensated test using actual salary levels of exempt employees working 
in the South and in the retail sector that would meet the highly 
compensated exemption requirements.'' The Department notes that no 
regional adjustment has been made to the HCE compensation level in this 
Final Rule, just as this was not part of the 2004 Final Rule's 
determination of the compensation level required for the HCE exemption. 
The HCE exemption must use a national wage rate to effectively ensure 
that workers such as secretaries in high-wage areas, such as New York 
City and Los Angeles, are not inappropriately exempted based upon the 
HCE exemption's minimal duties test.
    The Department proposed in the NPRM to annually update the HCE 
total annual compensation requirement. As explained in greater detail 
in the automatic updating section, the Department will automatically 
update the HCE compensation level every three years, beginning on 
January 1, 2020.
    The Department did not propose any changes to the HCE duties test 
created in 2004 and makes no change to the HCE duties test in this 
Final Rule. With respect to the call by some commenters to eliminate 
the duties test for the HCE exemption, the Department notes that we 
have consistently declined to adopt a salary-only test, because our 
statutory authority is to define and delimit who is employed in a bona 
fide executive, administrative or professional capacity, and salary 
alone is not an adequate definition. In the 2004 Final Rule, the 
Department expressed our agreement with commenters ``that the Secretary 
does not have authority under the FLSA to adopt a `salary only' test 
for exemption, and reject[ed] suggestions from employer groups to do 
so,'' and further noted that ``[t]he Department has always maintained 
that the phrase `bona fide executive, administrative, or professional 
capacity' in the statute requires the performance of specific duties.'' 
See 69 FR 22173. The Department continues to require, as we did in the 
2004 Final Rule, that an employee have a primary duty that includes 
performing office or non-manual work to qualify for the HCE exemption, 
and workers such as ``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

[[Page 32430]]

matter how highly paid they might be.'' Sec.  541.601(d).
    With respect to Nichols Kaster's comment asserting that the HCE 
exemption lacks a meaningful duties test, the Department notes that 
pursuant to Sec.  541.601(a), HCE employees must customarily and 
regularly perform any one or more of the exempt duties or 
responsibilities of an executive, administrative, or professional 
employee as identified in the regulations. As noted in the 2004 Final 
Rule, 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.'' 69 FR 
22174. Therefore, ``the purpose of section 541.601 was 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.'' Id. (internal quotation marks omitted). As 
we noted in the 2004 Final Rule, the ``Department has the authority to 
adopt a more streamlined duties test for employees paid at a higher 
salary level.'' 69 FR 22173. We continue to believe that the existing 
HCE duties test is appropriate for those earning at the 90th percentile 
of full-time salaried workers, especially in light of the fact that the 
required compensation level will be routinely updated and, therefore, 
will remain a meaningful test.

E. Automatic Updates

    As the Department noted in the NPRM, even a well-calibrated salary 
level that is fixed becomes obsolete as wages for nonexempt workers 
increase over time. Lapses between rulemakings have resulted in EAP 
salary levels that are based on outdated salary data, and thus are ill-
equipped to help employers assess which employees are unlikely to meet 
the duties tests for the exemptions. To ensure that the salary level 
set in this rulemaking remains effective, the Department proposed to 
modernize the regulations by establishing a mechanism for automatically 
updating the standard salary test, as well as the total annual 
compensation requirement for highly compensated employees. The 
Department explained that the addition of automatic updating would 
ensure that the salary test level is based on the best available data 
(and thus remains a meaningful, bright-line test), produce more 
predictable and incremental changes in the salary required for the EAP 
exemptions, and therefore provide certainty to employers, and promote 
government efficiency.
    The Department sought comments on two alternative automatic 
updating methodologies. One method would update the threshold based on 
a fixed percentile of earnings of full-time salaried workers. The other 
method would update the threshold based on changes in the Consumer 
Price Index for All Urban Consumers (CPI-U). The Department also 
proposed to automatically update the total annual compensation 
requirement for the HCE exemption with the same method chosen to update 
the standard salary test. Regardless of the method selected, the 
Department proposed that automatic updating for both thresholds would 
occur annually, but invited comment regarding whether a different 
updating frequency would be more appropriate. Finally, the Department 
proposed to publish the updated rates at least 60 days before they take 
effect, and invited comment regarding whether the updated rates should 
take effect based on the effective date of the Final Rule, on January 
1, or on some other specified date. The Department received many 
comments in response to these proposals.
    The Final Rule establishes that the Department will automatically 
update the standard salary level test by maintaining the salary level 
at the 40th percentile of weekly earnings of full-time salaried workers 
in the lowest-wage Census Region. The Department will update the annual 
compensation requirement for highly compensated employees by 
maintaining this level at the annualized value of the 90th percentile 
of the weekly earnings of full-time salaried workers nationwide. In 
response to commenter concerns, the Department has modified the 
frequency and advance-notice elements of the updating mechanisms. The 
Final Rule establishes that automatic updates to the standard salary 
level and the HCE annual compensation requirements will occur every 
three years on the first of the year, and that the Department will 
publish the updated rates in the Federal Register at least 150 days 
before their effective date, and post the updated salary and 
compensation levels on the WHD Web site. The first automatic update 
will take effect on January 1, 2020. The automatic updating provision 
is set forth in new Sec.  541.607.
i. The Department's Legal Authority To Automatically Update the Salary 
Level
    Most commenters that addressed automatic updating focused on the 
merits of the Department's proposal, but some discussed our authority 
to automatically update the salary level.\71\ Commenters that opposed 
automatic updating discussed this issue more frequently and in much 
greater detail than those that favored the Department's proposal.
---------------------------------------------------------------------------

    \71\ Some commenters, like the Equal Employment Advisory Council 
(EEAC), addressed the Department's authority to automatically update 
the HCE compensation requirement by noting that its reservations 
regarding automatic updating of the standard salary level apply 
equally to the Department's proposal to automatically update the HCE 
exemption's threshold. We do not separately address this issue 
since, like the standard salary level, our authority to 
automatically update the HCE threshold is grounded in section 
13(a)(1), and the discussion in this section therefore applies 
equally to our adoption of a mechanism to automatically update the 
HCE total compensation requirement.
---------------------------------------------------------------------------

    Organizations representing employee interests, including AFL-CIO 
and NWLC, asserted that the Department has authority to establish an 
automatic updating mechanism through notice and comment rulemaking. 
These commenters stated that just as the Department has authority under 
29 U.S.C. 213(a)(1) to establish the salary level test, we likewise 
have authority to automatically update the salary level to ensure it 
remains effective. Several commenters emphasized that Congress has 
never limited the Department's ability to update the salary level. For 
example, EPI stated that ``Congress in 1938 gave the authority to 
define and delimit the terms `bona fide executive, administrative, or 
professional' to the Secretary of Labor and has never taken it back, 
except with respect to very particular occupations,'' and a comment 
from 57 labor law professors similarly stated that automatic updating 
is ``within [the Department's] discretion and authority'' because 
``Congress granted the agency wide discretion in implementation of the 
statutory language.'' Other commenters, including AFSCME and NELP, 
highlighted that automatic updating is consistent with the FLSA's 
purpose.
    In contrast, a number of organizations representing employer 
interests challenged the Department's authority to add an updating 
mechanism. Many of these commenters, including ABC, ALFA, CUPA-HR, NRA, 
PPWO, and Seyfarth Shaw, stated that Congress has never granted the 
Department authority to institute automatic updating, and asserted that 
section 13(a)(1)'s silence on this issue reflects that Congress did not 
intend the salary level test to be automatically updated. These and 
other commenters stressed that whereas Congress has never amended 
section 13(a)(1) to expressly include automatic updating, Congress has 
expressly authorized indexing under other

[[Page 32431]]

statutes. Many commenters, including the Chamber, CUPA-HR, and FMI, 
highlighted that Congress has never provided for automatic increases to 
the FLSA minimum wage, and the Chamber added that Congress has not 
indexed the minimum hourly wage for exempt computer employees under 
section 13(a)(17) of the FLSA, the cash wage for tipped employees under 
section 3(m) of the FLSA, or any of the FLSA's subminimum wages.
    These comments reveal disagreement about the scope of the 
Department's delegated authority under section 13(a)(1) to define and 
delimit the EAP exemptions. The Department disagrees with the position 
that section 13(a)(1)'s silence on automatic updating forecloses the 
Department from establishing an updating mechanism. While it is true 
that section 13(a)(1) does not reference automatic updating, it also 
does not reference a salary level or salary basis test, a duties test, 
or other longstanding regulatory requirements. Rather than set precise 
criteria for defining the EAP exemptions, Congress delegated that task 
to the Secretary by expressly giving the Department the broad authority 
to define and delimit who is a bona fide executive, administrative, or 
professional employee. As we explained in the NPRM, since 1938 the 
Department has used this authority to promulgate many significant 
regulatory changes to the EAP exemptions, including adding a separate 
salary level for professional employees and a separate duties test for 
administrative employees in 1940, adopting separate short and long test 
salary levels in 1949, and eliminating the long duties test and 
creating a single standard salary level test and a new HCE exemption in 
2004. These changes were all made without specific Congressional 
authorization. Despite numerous amendments to the FLSA over the past 78 
years, Congress has not altered the Department's authority to 
promulgate, update, and enforce the salary test regulations. The 
Department concludes that just as we have authority under section 
13(a)(1) to establish the salary level test, we likewise have authority 
to adopt a methodology through notice and comment rulemaking for 
automatically updating the salary level to ensure that the test remains 
effective. This interpretation is consistent with the well-settled 
principle that agencies have authority to `` `fill any gap left, 
implicitly or explicitly, by Congress.' '' Long Island Care at Home, 
Ltd. v. Coke, 551 U.S. 158, 165 (2007) (quoting Chevron, U.S.A., Inc. 
v. Natural Res. Def. Council, Inc., 467 U.S. 837,843 (1984)).
    That other statutes expressly provide for indexing does not alter 
our interpretation of the FLSA. The Department's authority to set and 
update the salary level test is based in the language of the FLSA, and 
the fact that there are indexing provisions in other statutes does not 
limit that authority. Moreover, three of the four non-indexed FLSA wage 
rates that the Chamber and other commenters referenced--the section 
6(a)(1) minimum wage, the minimum hourly wage for exempt computer 
employees under section 13(a)(17), and the cash wage for tipped 
employees under section 3(m)--are set by statute.\72\ In contrast, the 
salary level is purely a creature of regulation. Whether Congress has 
indexed statutorily-established rates within the FLSA does not inform, 
let alone undermine, the Department's authority to use notice and 
comment rulemaking to create a mechanism for keeping the regulatory 
salary level up to date.
---------------------------------------------------------------------------

    \72\ The Chamber also referenced the FLSA's subminimum wage 
rates. While the Secretary sets some subminimum wage rates, the FLSA 
establishes the existence of such rates. See, e.g., 29 U.S.C. 214(a) 
(minimum wage for learners, apprentices, and messengers).
---------------------------------------------------------------------------

    The Department also received several comments stating that 
automatic updating violates section 13(a)(1)'s mandate that the 
Secretary define and delimit the EAP exemption from ``time to time.'' 
For example, the Chamber commented that this statutory language gives 
``no indication that Congress wanted to put these regulations on auto-
pilot,'' but instead supports that ``Congress wants the Department to 
`continually revisit' the Part 541 regulations'' (emphasis in comment) 
(quoting 80 FR 38537). However, promulgating an automatic updating 
mechanism does not conflict with section 13(a)(1)'s ``time to time'' 
language. The salary level percentile adopted in this rulemaking 
reflects the Department's analysis of the appropriate line of 
demarcation between exempt and nonexempt workers; providing that this 
dividing line will continue to remain up to date over time fulfills the 
Department's obligation to ensure that only ``bona fide'' EAP workers 
qualify for exemption. Moreover, maintaining the salary level at the 
40th percentile of salaries in the lowest-wage Census Region by 
updating it every three years in no way precludes the Department from 
revisiting this methodology from ``time to time'' should cumulative 
changes in job duties, compensation practices, and other relevant 
working conditions indicate that changes to the salary level 
calculation method may be warranted.
    The Department also received several comments asserting that 
automatic updating violates the APA and section 13(a)(1)'s requirement 
that the EAP exemption be defined and delimited by regulations of the 
Secretary subject to the provisions of the APA. These commenters 
asserted, albeit on slightly different grounds, that notice and comment 
rulemaking must precede any salary level change. CUPA-HR emphasized 
that under section 13(a)(1) any updating must be done by regulation, 
and EEAC asserted that ``the FLSA exemptions have the full force and 
effect of law'' and the ``APA requires notice-and-comment rulemaking 
each time an agency issues, repeals, or amends a legislative rule.'' 
NRF stated that any increase should be ``based on an individualized 
evaluation of economic conditions rather than an automatic arbitrary 
formula,'' and several commenters stressed that the Department must 
consider prevailing conditions and provide for public comment before 
updating the salary level. See, e.g., Jackson Lewis; NAM; PPWO.
    The Department believes that automatically updating the salary 
level fully complies with the APA and section 13(a)(1). Through this 
rulemaking the Department is promulgating an automatic updating 
mechanism by regulation and in accordance with the APA's notice and 
comment requirements. The updating mechanism is not an ``arbitrary 
formula,'' but the product of an exhaustive rulemaking process that 
took into consideration the views of thousands of commenters. These 
comments raised a wide range of relevant issues, including the impact 
of an updating mechanism, and greatly influenced the content of the 
Final Rule. For example, in response to these comments (and as 
discussed in detail below) the Department adopted a fixed percentile 
approach to automatic updating, changed the updating frequency from 
annually to every three years, increased the period between announcing 
the updated salary level and the effective date of the update from 60 
days to at least 150 days, and set January 1 as the effective date for 
future salary level updates. As to commenter concerns about accounting 
for prevailing economic conditions, both the NPRM and this Final Rule 
contain detailed 10-year projections of the costs and transfers 
associated with automatic updating. See section VI.D.x.; 80 FR 38586-
89. Moreover, maintaining the

[[Page 32432]]

salary level at a fixed percentile of earnings will help ensure the 
test continues to reflect prevailing wage conditions, and does not 
preclude the Department from revising the updating mechanism in the 
future through notice and comment rulemaking if we determine that 
conditions warrant. We disagree with commenter statements that notice 
and comment rulemaking must precede every salary level update when the 
underlying salary setting methodology is unchanged and reject the 
notion that in directing the Department to define and delimit the EAP 
exemption by regulations, Congress intended to prohibit the Department 
from establishing an automatic updating mechanism through notice and 
comment rulemaking.
    Relatedly, a few commenters interpreted our NPRM statement that 
automatic updating would remove ``the need to continually revisit this 
issue through resource-intensive notice and comment rulemaking,'' 80 FR 
38537, as an attempt to impermissibly circumvent the APA. See, e.g., 
Chamber; NRA. This statement was not an attempt to sidestep the APA, 
but rather part of our explanation for seeking comment on the merit of 
using an updating mechanism to keep the salary level test current. The 
Department has dedicated considerable resources toward this rulemaking, 
including conducting extensive outreach prior to issuing the NPRM, 
drafting a comprehensive NPRM, receiving and reviewing more than 
270,000 timely comments, and drafting a Final Rule addressing these 
comments. The Department recognizes and appreciates the commenters' 
views. We disagree, however, that section 13(a)(1) or the APA prohibits 
us from establishing a mechanism to keep the salary level up to date so 
that it continues to work effectively with the duties test. Instead, we 
conclude that introducing an updating mechanism that ensures that the 
EAP exemptions remain up to date is a reasonable exercise of the 
Department's statutorily-established authority to define and delimit 
the EAP exemptions.\73\
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    \73\ This approach is consistent with the Department's approach 
taken when issuing regulations to establish required wage rates in 
other programs for which we have enforcement responsibility. See 20 
CFR 655.120 (describing method for updating adverse effect wage 
rates for H-2A visa program); 20 CFR 655.211 (using Employment Cost 
Index to update required wage for employees engaged in herding or 
the production of livestock under the H-2A program).
---------------------------------------------------------------------------

    The Department also received several comments highlighting that in 
two prior rulemakings we rejected commenter requests to automatically 
update the salary level. Specifically, some commenters raised that in 
our 1970 rulemaking we stated, in response to a comment, that automatic 
updating would ``require further study,'' 35 FR 884, and that we 
declined a similar request in 2004. See, e.g., Chamber; FMI. The 
Department acknowledged these prior statements in the NPRM. While we 
agree with commenters that our decision to institute automatic updating 
in this Final Rule departs from our 1970 and 2004 rulemakings, these 
past statements in no way foreclose our current action. The 1970 
rulemaking stated that the request to automatically update the salary 
level ``appears to have some merit, particularly since past practice 
has indicated that approximately 7 years elapse between amendment of 
the salary level requirements.'' 35 FR 884. The time between 
rulemakings has increased since 1970 (this will be the third salary 
level update in 46 years), underscoring the merit of automatic 
updating. Consistent with our earlier statement that automatic updating 
``would require further study,'' the Department has proposed the 
addition of an updating mechanism in this rulemaking and considered the 
wide-range of comments received on the issue. While in the 2004 Final 
Rule we declined to institute automatic updating and instead expressed 
our intent ``in the future to update the salary levels on a more 
regular basis, as [we] did prior to 1975,'' 69 FR 22171, our subsequent 
experience has prompted us to reexamine this matter.
    Several commenters, including IFA and Littler Mendelson, 
specifically referenced our refusal to institute inflation-based 
indexing in the 2004 Final Rule. In that rulemaking we stated, in 
response to a comment, that ``the Department has repeatedly rejected 
requests to mechanically rely on inflationary measures when setting the 
salary levels in the past because of concerns regarding the impact on 
lower-wage geographic regions and industries.'' 69 FR 22172. We then 
stated that such ``reasoning applies equally when considering automatic 
increases to the salary levels'' and that ``the Department believes 
that adopting such approaches in this rulemaking is both contrary to 
congressional intent and inappropriate.'' Id. In its comment, the 
Chamber interpreted this language as expressing our conclusion ``that 
Congress did not give the Department authority to provide automatic 
increases to the salary level'' and stated that ``the Chamber is 
unaware of any legislative or legal development that would justify [our 
purported] reversal.''
    These commenters' reading of the 2004 Final Rule is overly broad, 
as we did not conclude that the Department lacks legal authority to 
institute automatic updating. Our reference to automatic updating 
simply reflected our conclusion at that time that an inflation-based 
updating mechanism, such as one based on changes in the prices of 
consumer goods, that unduly impacts low-wage regions and industries 
would be inappropriate. As explained in the NPRM, closer examination 
reveals that concerns raised when setting a new salary level using an 
inflation index are far less problematic in the automatic updating 
context. See 80 FR 38540. For example, in the automatic updating 
context there is little risk of using an outdated salary level as a 
baseline for inflation-based adjustments, and the inability of 
inflation-based indicators to account for changes in working conditions 
is therefore less concerning. See id. Regardless, our prior concerns 
about inflation-based updating are not implicated here because the 
Department has chosen to automatically update the salary level based on 
a fixed percentile of earnings of full-time salaried workers. As 
explained in detail in section IV.A., in response to commenter concerns 
that setting the salary level using the 40th percentile of a nationwide 
data set would adversely impact low-wage regions and industries, the 
Department is setting the salary level at the 40th percentile of full-
time salaried workers in the lowest-wage Census Region, which yields a 
lower salary level that will exclude fewer employees performing EAP 
duties in low-wage regions and industries. Tying the salary level and 
updating mechanism to a fixed percentile of earnings in the lowest-wage 
Census Region squarely addresses the concern we raised in the 2004 
Final Rule, and ensures that our updating mechanism is appropriate for 
all areas and industries.
    Several commenters, including CUPA-HR and FMI, also deemed the 
Department's proposal inconsistent with our statement in the 2004 Final 
Rule that ``the Department finds nothing in the legislative or 
regulatory history that would support indexing or automatic 
increases.'' 69 FR 22171. But as explained in our proposal, the lack of 
on-point legislative history--either favoring or disfavoring automatic 
updating--is unsurprising given the origin and evolution of the salary 
level test. Congress did not set forth any criteria, such as a salary 
level test, for defining the EAP exemptions, but instead delegated that 
task to the Secretary. The Department established

[[Page 32433]]

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

    \74\ Relatively few commenters specifically addressed the 
proposal to automatically update the HCE total annual compensation 
level, and those that did generally stated that their views mirrored 
their comments on the proposal to automatically update the standard 
salary level. Accordingly, this discussion focuses on the standard 
salary level but also applies to the Department's adoption of an 
automatic updating mechanism for the HCE compensation requirement.
---------------------------------------------------------------------------

    Commenters that supported automatic updating focused primarily on 
the benefits of maintaining an up-to-date salary level. Many commenters 
agreed with the Department's proposal, stating that automatic updating 
is a transparent way to maintain an effective salary level and avoid 
the negative effects of infrequent salary level updates. For example, 
NELP stated that automatic updating ``is by far the most reasonable, 
efficient and predictable way to ensure that the standard for exemption 
remains true to the statute's intended purposes,'' AFL-CIO stated that 
a ``transparent updating process would provide greater certainty and 
predictability for employers and workers alike,'' and

[[Page 32434]]

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

[[Page 32435]]

    Some commenters worried that automatic updating would create an 
untenably high salary level that would harm low-income regions and 
industries, and small businesses. For example, Alpha Graphics stated 
that automatic updating would produce ``an inappropriately high level 
in a matter of a few years,'' and NGA stated that salary level 
increases would harm independent grocers with low profit margins 
because the updating mechanism ``would not provide the necessary 
protection for low-wage industries and geographic areas.'' See also, 
e.g., ALFA; NFIB. SHRM expressed concern that automatic updating based 
on a national salary level would not account for the fact that salaries 
in all regions and industries do not rise at the same pace, and it 
questioned whether the Department could realistically use additional 
rulemaking to correct for regional disparities that may arise in the 
future.
    Several commenters asserted that updating is problematic regardless 
of the updating method the Department chooses, with some suggesting 
that the salary level and automatic updating are incompatible concepts. 
Seyfarth Shaw stated that any updating method ``would establish an ad 
hoc, artificially-created level determined by statistical 
assumptions.'' See also Wendy's (describing the updating methods as 
``based on untested and complicated methodologies''). EEAC expressed 
concern that if the salary-setting methodology in this rulemaking 
results in an incorrect salary level (as the Department now states was 
the case in 2004) automatic updating would compound this error 
indefinitely. NACS, the Southeastern Alliance of Child Care 
Associations, and others stated that establishing an automatic updating 
mechanism is inconsistent with the Department's recognition that ``the 
line of demarcation'' provided by the salary test ``cannot be reduced 
to a standard formula.''
    As to the effect of automatic updating on salary level 
predictability, PPWO stated that ``it will be difficult, if not 
impossible, for employers and employees to determine with precision 
each year's new salary level in advance of the Department's 
pronouncement in the Federal Register,'' and AIA-PCI and the Clearing 
House Association agreed that this uncertainty is demonstrated by the 
Department's statement in the NPRM that ``the public will not be able 
to exactly replicate the weekly earnings and percentiles'' used to 
calculate the salary level, 80 FR 38528 n.24.
    The Department recognizes that our automatic updating proposal has 
elicited strong and diverse reactions from stakeholders. After review 
of submitted comments, the Department remains convinced that 
instituting an automatic updating mechanism is the best means of 
ensuring that the salary level test continues to provide an effective 
means of distinguishing between overtime-eligible white collar 
employees and those who may be bona fide EAP employees, and continues 
to work appropriately with the duties test.
    The Department shares commenters' concerns that a fixed and 
outdated salary level increases the number of low-salaried employees at 
risk of being inappropriately classified as exempt as the real value of 
the salary threshold falls, and that workers earning near the fixed 
salary level when it is set are particularly vulnerable. The Department 
also agrees with commenters that the updates to the salary level should 
reflect prevailing economic conditions. The Department's updating 
mechanism directly addresses both of these issues by ensuring that the 
salary test level is based on the best available data and reflects 
current salary conditions. As explained in more detail below, the 
Department will use the updating mechanism established under new Sec.  
541.607 to reset the salary level using the most recent BLS data on 
earnings for salaried workers. Linking the salary level to earnings 
ensures that economic changes that impact employee salaries are 
reflected in the salary level test. Also, because regular updates will 
ensure that the salary level is in step with prevailing economic 
conditions, the Department does not believe that the updating mechanism 
will lead to undue salary level increases during economic downturns or 
other inopportune times. Salary level changes will occur at regular 
intervals using a set methodology and a publicly available data source. 
This improvement to the current regulations will benefit employers and 
employees by replacing infrequent, and thus more drastic, salary level 
changes with gradual changes occurring at predictable intervals.
    The Department is committed to ensuring that the updating mechanism 
yields a salary that is appropriate for low-wage industries and 
geographic areas. As previously discussed in section IV.A.iv., in 
response to commenters' concerns, the Department is setting the salary 
level at the 40th percentile of weekly earnings of full-time salaried 
workers in the lowest-wage Census Region (currently the South). 
Commenters raised similar concerns about using a nationwide data set 
for automatic updating. The reasons that supported changing from a 
national to a regional data set in the standard salary level setting 
context apply equally in the salary updating context, and new Sec.  
541.607 accordingly incorporates this data set change.\75\ The 
Department recognizes that salaries do not change at the same rate 
nationwide, and this modification will ensure that any future increase 
in earnings will only impact the standard salary level to the extent 
that those gains are also realized by employees in the lowest-wage 
Census Region. This change will also further guard against commenter 
concerns that using a nationwide data set could lead to a standard 
salary level increase that does not reflect the prevailing economic 
climate.\76\
---------------------------------------------------------------------------

    \75\ Similarly, for the same reasons that the Department 
declines commenter requests to institute a special salary level for 
non-profit employers, we also decline to exempt non-profit employers 
from automatically updated salary levels.
    \76\ As explained in section IV.D., as in the 2004 Final Rule, 
the Department is using a nationwide data set to set the HCE 
compensation level in this rulemaking, and we will use nationwide 
data to update the HCE compensation level. The use of nationwide 
data is necessary to ensure that overtime-eligible workers in high-
wage areas are not inappropriately exempted based upon the HCE 
exemption's minimal duties test.
---------------------------------------------------------------------------

    Experience has shown that the salary level test is only a strong 
measure of exempt status if it is up to date, and that left unchanged 
the test becomes substantially less effective as wages for overtime-
protected workers increase over time. As we explained in the NPRM, 
competing regulatory priorities, overall agency workload, and the time-
intensive nature of notice and comment rulemaking have all contributed 
to the Department only having updated the salary level once since 1975 
(in 2004). In the 2004 Final Rule the Department expressed the intent 
to ``update the salary levels on a more regular basis,'' 69 FR 22171, 
yet more than a decade has passed since the last update. While some 
commenters viewed this inaction and the Department's past decision not 
to institute automatic updating as reason for withdrawing our current 
proposal, we believe this history underscores the appropriateness of 
adding an automatic updating provision to the regulations.
    Contrary to several commenters' concerns, prior Department 
statements about the salary level test in no way undermine the 
Department's decision now to incorporate an automatic updating 
mechanism into the regulations. The Department's statement that the 
``line of demarcation'' between exempt and nonexempt employees ``cannot 
be reduced to a standard formula,'' 80 FR 38527, simply reflects

[[Page 32436]]

our continued belief that no single formula can unerringly separate 
exempt and nonexempt employees, and that the salary test must therefore 
work in tandem with the duties test for the EAP exemption to function 
effectively. The salary level test remains the ``best single test'' of 
exempt status, Stein Report at 19, and the method for setting and 
updating the salary level adopted through this rulemaking represents 
the Department's best determination of the appropriate dividing line 
between exempt and nonexempt workers, when paired with the standard 
duties test. While the precise updating ``formula'' chosen--the 40th 
percentile of weekly earnings of full-time salaried workers in the 
lowest-wage Census Region--is new, the underlying methodology is 
broadly consistent with the Department's past salary setting methods, 
see section IV.A.i., and the salary setting and updating methodology 
have been promulgated through notice and comment rulemaking.
    The Department agrees with commenters that stated that automatic 
updating will increase predictability in both the frequency and size of 
salary level changes, benefiting employers and employees alike. We find 
to be unfounded comments that salary level unpredictability is evident 
from our statement that ``the public will not be able to exactly 
replicate the weekly earnings and percentiles [used to calculate the 
salary level] from the public-use files made available by BLS.'' 80 FR 
38528 n.24. This explanatory footnote addressed the public's ability to 
duplicate BLS' deciles table using the public-use data. The referenced 
discrepancy is very small, and in no way compromises the public's 
ability to estimate future salary level changes based on the trend in 
quarterly earnings data published by BLS.\77\ As discussed in the NPRM 
and above in section IV.A.iv., the Department will update the salary 
level using the deciles table for Census Regions as published by BLS, 
without modifying the data in any way or otherwise engaging in complex 
data analysis. This process is transparent, predictable, and 
straightforward.
---------------------------------------------------------------------------

    \77\ As we noted in the NPRM, to ensure the confidentiality of 
survey respondents the data in all BLS public-use files use adjusted 
weights and therefore minor discrepancies between internal BLS files 
and public-use files exist. See 80 FR 38528 n.24. This means that 
the public will be able to estimate future salary levels based on 
BLS' regularly published regional deciles, but will not be able to 
precisely recreate the salary amounts in the published deciles due 
to minor adjustments in the publically available data.
---------------------------------------------------------------------------

    The essentially ministerial act of applying the updating mechanism 
to maintain the salary level underscores why the Department does not 
share commenter concerns about resetting the salary level without 
further rulemaking. The Department agrees with commenters that past 
salary level changes have benefited from (and required) notice and 
comment rulemaking. This rulemaking is no exception, as public feedback 
was critical to finalizing the new standard salary level and the 
automatic updating mechanism. In response to public comments, the 
Department has changed the data set used for setting and updating the 
salary level, and (as discussed in greater detail below) chosen to 
update the salary using the ``fixed percentile'' approach, increased 
the period between notice of the updated salary level and its effective 
date, and changed the updating frequency. But unlike salary updates 
made up to this point, which have all involved some change to the 
salary setting methodology, salary level updates under new Sec.  
541.607 will use a fixed methodology that (through this rulemaking) has 
already been subject to notice and comment. Public feedback was 
critical to finalizing the updating mechanism, but is unnecessary when 
simply maintaining the salary level using this mechanism. Of course, 
should the Department choose to make any changes to the updating 
methodology in the future, such changes would require notice and 
comment rulemaking.\78\
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    \78\ Additionally, and as acknowledged in the NPRM, 80 FR 38522, 
the Department will consider conducting a retrospective review of 
this Final Rule at an appropriate future time. See Executive Order 
13563 (Jan. 18, 2011); see also 5 U.S.C. 610.
---------------------------------------------------------------------------

    The Department also disagrees with commenters that stated that we 
should simply reallocate agency resources as necessary to maintain an 
updated salary level. Whereas most regulations require a one-time 
expenditure of resources to promulgate, and then once issued can remain 
both unchanged and forceful for many years if not decades, without 
automatic updating the Department would have to engage in nearly 
continuous rulemaking to ensure that the salary test accurately 
reflects employee salary levels. The new automatic updating mechanism 
will enable the Department to maintain an effective and up-to-date 
salary level, while preserving our ability to revisit the underlying 
salary setting methodology through rulemaking as future conditions 
warrant. For the above reasons, the Department is finalizing our 
proposal to institute a regulatory mechanism for automatically updating 
the salary level.
    The Department received many comments expressing concern about the 
financial and administrative burden that annual updating would impose 
on employers. In particular, many commenters stated that annual 
updating would require employers to conduct a yearly ``classification 
analysis''--to assess employee exemption status and determine whether 
salary increases to preserve exempt status are warranted--and then 
incur additional costs implementing any changes. AIA-PCI; see also, 
e.g., Business Roundtable; Maryland Chamber of Commerce; PPWO. Several 
commenters described these costs in detail. For example, the Chamber's 
comment identified many common concerns:

    The annual salary increase proposed by the Department will 
require an employer to: Analyze whether business conditions allow a 
salary increase or whether they need to reclassify employees as non-
exempt; prepare new compensation plans for reclassified employees; 
develop materials to explain the reclassification to employees; 
review timekeeping and payroll systems to ensure compliance with the 
FLSA recordkeeping requirements and compliant overtime calculations; 
review or adopt new policies for the reclassified employees, 
including policies prohibiting off-the-clock work, when employees 
will be permitted to work overtime, payment for waiting time, 
training time and travel time, etc.; train the reclassified 
employees, and the managers who supervise them on recording time and 
other wage-hour topics. If the salary change is implemented as 
proposed, a large number of workers will have to be added to 
timekeeping systems. This may require server and system upgrades to 
account for the additional users. Best practices take time.

Additionally, ABA stated that automatic updating would require 
employers to consider whether to restructure the duties of newly 
nonexempt employees, and NFIB stated that it would require employers to 
annually ``reassess potential raises, bonuses, or promotions'' for 
employees. Seyfarth Shaw and others stated that the Department 
significantly underestimated the cost and time obligations associated 
with these actions.
    Multiple commenters also emphasized that annual updating would 
negatively impact employer budgets and budget planning. NALP, NGA, NRF, 
Wendy's, and others stated that not knowing employee exemption status 
from year to year would make it more difficult for employers to 
forecast costs or profit margins. CUPA-HR stated that in response to a 
survey of its members about the Department's proposal, 91 percent of 
respondents stated that automatic updating as proposed would

[[Page 32437]]

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

[[Page 32438]]

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

[[Page 32439]]

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

[[Page 32440]]

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

[[Page 32441]]

than changes in prices. As many commenters observed, a wage index 
provides the best evidence of changes in prevailing salary levels. 
While wages and prices may be correlated in the long-run, linking the 
salary level to earnings is the most direct way to ensure that the 
salary level reflects prevailing economic conditions and can thus 
fulfill its intended function. This approach is also consistent with 
the Department's longstanding practice of basing the salary requirement 
on actual salaries paid to workers. The salary level test works in 
tandem with the duties test to operate effectively, and we agree with 
the Chamber, FMI, and others that changes in job duties are more 
closely correlated with changes in wages than in prices. Similarly, 
using an earnings index for automatic updates is most consistent with 
the Department's long-held view that ``the best single test of the 
employer's good faith in attributing importance to the employee's 
service is the amount [the employer] pays for them.'' Stein Report at 
19. New Sec.  541.607 provides that automatic updates will be based on 
CPS data for the 40th percentile of earnings of full-time salaried 
workers in the country's lowest-wage Census Region. This data will be 
readily available and transparent, and at the designated percentile is 
representative of those employees who may be bona fide executive, 
administrative, or professional workers.
    Commenters that opposed the fixed percentile approach focused 
primarily on their concern that this methodology would lead to drastic 
salary level increases that would render the EAP exemptions virtually 
obsolete in certain industries and geographic areas. The linchpin of 
this ``ratcheting'' argument--and the crux of most opposition to the 
fixed percentile updating method--is the belief that employers will 
respond to an automatically updated salary level by converting newly 
nonexempt workers to hourly status, thus removing them from the data 
set of full-time salaried workers. The Department examined this issue 
closely and concludes that past experience and the comments themselves 
do not substantiate commenter concerns.
    To evaluate the likelihood that salary level increases will lead 
employers to convert affected employees to hourly pay status, the 
Department first examined historical data concerning how employers 
responded to the 2004 Final Rule's salary increase. This prior 
rulemaking raised the standard salary level to 182 percent of the short 
test salary level--from $250 to $455.\79\ As discussed in more detail 
in section VI.D.ix., if the salary level increase in 2004 led employers 
to convert significant numbers of workers to hourly status (as 
commenters assert will result from this rulemaking), then we would 
expect to see a notable increase in the share of workers earning just 
below the new threshold ($455) who are paid hourly relative to the 
share of workers earning just above the new threshold who are paid 
hourly. The Department looked at the share of full-time white collar 
workers paid on an hourly basis before and after the 2004 Final Rule 
(January-March 2004; January-March 2005) both below and above the 
standard salary level (at least $250 but less than $455 per week; at 
least $455 but less than $600 per week). The Department found that 
following the 2004 Final Rule, the share of full-time white collar 
workers being paid hourly actually decreased marginally in the group 
below the standard salary level and increased slightly in the group 
above the standard salary level. See section VI.D.ix. These results do 
not suggest that the 2004 salary level increase caused an increase in 
the share of workers paid hourly below the new threshold, and thus 
provide no evidence that salary level increases due to automatic 
updating will result in employers converting significant numbers of 
affected EAP workers to hourly pay status.\80\
---------------------------------------------------------------------------

    \79\ The 2004 Final Rule increased the salary level from the 
previous long test level of $155 per week (executive and 
administrative exemptions) or $170 per week (professional exemption) 
to $455 per week. For purposes of this analysis, the Department 
compared the increase from the short test salary level ($250 per 
week) since the long test was no longer operative due to increases 
in the minimum wage.
    \80\ To further test whether the widespread conversion to hourly 
pay status of newly nonexempt employees predicted by some commenters 
would occur, the Department also performed a similar analysis of 
increases in the state EAP salary level in California in 2007-2008 
and 2014. In 2007-2008, the results showed a decrease in the share 
of full-time white collar workers paid on an hourly basis below the 
new salary level, thus providing no evidence of a ``ratcheting'' 
effect. In 2014, the share of full-time white collar workers paid on 
an hourly basis below the salary level increased marginally, but 
this impact was not significantly different from the change in the 
rest of the U.S. and thus provides no evidence that this effect was 
caused by changes to the salary level.
---------------------------------------------------------------------------

    In addition to the lack of historical data supporting commenters' 
concerns, commenters failed to persuasively support their key 
assumption that automatically updated salary levels will lead to 
widespread conversion of employees to hourly pay status. Most of these 
commenters, including Dollar Tree, Jackson Lewis, and several others 
simply stated--without citing any supporting data--that automatic 
updating would produce this effect, with several commenters mistakenly 
contending that such a conversion to hourly status was automatic. Even 
those commenters that provided more detailed economic analyses often 
rested their views on the same faulty assumption. For example, the 
submitted Oxford Economics letter assumed ``that the lowest 40% of the 
salaried full-time wage distribution in 2016 were converted to hourly 
status.'' Some commenters predicted the impact of automatic updating on 
the salary level if a set percentage of employees were converted to 
hourly pay. For example, HR Policy Association predicted the effect if 
``the bottom 20 percent of salaried employees'' were converted to 
hourly status, and the Chamber and PPWO (quoting an article from 
Edgeworth Economics) commented on the impact if 25 percent ``of the 
full-time nonhourly workers earning less than [the 40th percentile 
salary level] were re-classified as hourly.'' But while these 
commenters stressed the purported impact of these employee conversion 
rates on the salary level, none explained why these rates are accurate 
estimates of employer responses.\81\
---------------------------------------------------------------------------

    \81\ Oxford Economics stated that its model was ``not meant as a 
literal prediction of what the new rule would mean, since some non-
exempt workers still report salaried status in the Current 
Population Survey, and since the process would be iterative.'' 
However, Oxford Economics did not attempt to quantify these other 
factors to produce a more accurate estimate.
---------------------------------------------------------------------------

    The Department believes that commenters that asserted that 
``ratcheting'' will occur have greatly overestimated the number of 
employees that employers may convert to hourly status, and the impact 
that any such conversion would have on the salary level. Some 
commenters assumed that all (or a certain percentage of all) full-time 
salaried workers earning below the salary level would be converted to 
hourly status and dropped from the data set. This assumption is plainly 
erroneous because it fails to account for whether the employees perform 
white collar work and are subject to the EAP exemption. Of the 18.6 
million full-time salaried white collar workers earning below the $913 
salary level, only 4.2 million are currently exempt and earn between 
the current and new salary levels. The remaining 14.4 million workers 
are not currently classified as exempt under the EAP exemption, and so 
there is no reason to believe that their employers will convert them to 
hourly pay status as a result of this rulemaking. Accordingly, salary 
level predictions

[[Page 32442]]

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

[[Page 32443]]

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

[[Page 32444]]

F. Duties Requirements for Exemption

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

[[Page 32445]]

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

[[Page 32446]]

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

[[Page 32447]]

not believe that the manager is in any meaningful sense able to ``make 
the decision regarding when to perform nonexempt duties'' and a close 
examination of the specific facts must be made of whether the 
employee's primary duty is, in fact, the performance of exempt work. 
Sec.  541.106(a).
    In the NPRM, the Department also sought feedback regarding whether 
additional occupation examples should be added to the regulations, and, 
if so, which specific examples would be most helpful to include. Some 
commenters, including the American Staffing Association, the Maryland 
Chamber of Commerce, and the Poarch Band of Creek Indians, agreed that 
adding new examples to the regulations would be helpful in applying the 
EAP exemption. The American Trucking Association stated that additional 
regulatory examples would be particularly useful for clarifying the 
administrative employee exemption, which many commenters asserted is 
more ambiguous than the executive or professional exemptions. A number 
of commenters offered specific suggestions of occupations they would 
like to see addressed in the regulations. See, e.g., American Staffing 
Association (staffing firm recruiters and account managers); American 
Trucking Association (truck company dispatchers); Information 
Technology Alliance for Public Sector (employees performing various 
computer-related duties); Joint Comment of Postdoctoral Associations 
and individuals (postdoctoral fellows); Printing Industries of America 
(customer service representatives). The Fraternity Executives 
Association, the International Association of Fire Chiefs, and the 
Michigan Society of Association Executives, requested regulatory 
examples relevant to associations, membership organizations and 
charitable foundations.
    ABA and several commenters representing employees, including AFL-
CIO, however, asserted that regulatory examples distract from the 
longstanding principle that job titles alone are insufficient to 
establish the exempt status of an employee. Nichols Kaster stated that 
regulatory examples of exempt occupations ``encourage employers to 
manipulate job descriptions to classify non-exempt employees as 
exempt.'' Finally, AFL-CIO and NELA each stated that including 
additional examples of generally exempt or generally nonexempt 
occupations is neither helpful nor necessary.
    Upon further consideration, the Department has decided against 
introducing any new examples to the existing regulations in this 
rulemaking. We note that the existing examples in the regulations do 
not provide categorical exemptions for certain occupations but instead 
set out typical job duties associated with specific occupations which 
if performed by an employee generally would, or generally would not, 
qualify the employee for exemption. In all instances, it is the 
application of the duties test to the specific facts of the employee's 
work that determines whether the employee satisfies the requirements 
for the EAP exemption. Although the Department received feedback on 
suggested regulatory examples from some commenters, the stakeholder 
input we received overall did not justify the introduction of any new 
examples into the EAP regulations at this time.

V. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA), 44 U.S.C. 3501 et seq., 
and its attendant regulations, 5 CFR part 1320, requires that the 
Department consider the impact of paperwork and other information 
collection burdens imposed on the public. Under the PRA, an agency may 
not collect or sponsor the collection of information, nor may it impose 
an information collection requirement unless it displays a currently 
valid Office of Management and Budget (OMB) control number. See 5 CFR 
1320.8(b)(3)(vi).
    OMB has assigned control number 1235-0018 to the Fair Labor 
Standards Act (FLSA) information collections. OMB has assigned control 
number 1235-0021 to Employment Information Form collections, which the 
Department uses to obtain information from complainants regarding FLSA 
violations. In accordance with the PRA, the Department solicited 
comments on the FLSA information collections and the Employment 
Information Form collections in the NPRM published July 6, 2015, see 80 
FR 38516, as the NPRM was expected to impact these collections. 44 
U.S.C. 3506(c)(2). The Department also submitted a contemporaneous 
request for OMB review of the proposed revisions to the FLSA 
information collections, in accordance with 44 U.S.C. 3507(d). On 
September 29, 2015, OMB issued a notice for each collection (1235-0018 
and 1235-0021) that continued the previous approval of the FLSA 
information collections and the Employment Information Form collections 
under the existing terms of clearance. OMB asked the Department to 
resubmit the information collection request upon promulgation of the 
Final Rule and after considering public comments on the proposed rule 
dated July 6, 2015.
    Circumstances Necessitating Collection: The FLSA, 29 U.S.C. 201 et 
seq., sets the federal minimum wage, overtime pay, recordkeeping and 
youth employment standards of most general application. Section 11(c) 
of the FLSA requires all employers covered by the FLSA to make, keep, 
and preserve records of employees and of wages, hours, and other 
conditions and practices of employment. An FLSA covered employer must 
maintain the records for such period of time and make such reports as 
prescribed by regulations issued by the Secretary of Labor. The 
Department has promulgated regulations at part 516 to establish the 
basic FLSA recordkeeping requirements, which are approved under OMB 
control number 1235-0018.
    FLSA section 11(a) provides that the Secretary of Labor may 
investigate and gather data regarding the wages, hours, or other 
conditions and practices of employment in any industry subject to the 
FLSA, and may enter and inspect such places and such records (and make 
such transcriptions thereof), question such employees, and investigate 
such facts, conditions, practices, or matters deemed necessary or 
appropriate to determine whether any person has violated any provision 
of the FLSA. 29 U.S.C. 211(a). The information collection approved 
under OMB control number 1235-0021 provides a method for the Wage and 
Hour Division of the U.S. Department of Labor to obtain information 
from complainants regarding alleged violations of the labor standards 
the agency administers and enforces. This Final Rule revises the 
existing information collections previously approved under OMB control 
number 1235-0018 (Records to be Kept by Employers--Fair Labor Standards 
Act) and OMB control number 1235-0021 (Employment Information Form).
    This Final Rule does not impose new information collection 
requirements; rather, burdens under existing requirements are expected 
to increase as more employees receive minimum wage and overtime 
protections due to the proposed increase in the salary level 
requirement. More specifically, the changes adopted in this Final Rule 
may cause an increase in burden on the regulated community because 
employers will have additional employees to whom certain long-
established recordkeeping requirements apply (e.g., maintaining daily 
records of hours worked by employees who are not exempt from the both 
minimum wage and overtime provisions). Additionally,

[[Page 32448]]

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

VI. Analysis Conducted In Accordance with Executive Order 12866, 
Regulatory Planning and Review, and Executive Order 13563, Improving 
Regulation and Regulatory Review

    Executive Orders 12866 and 13563 direct agencies to assess the 
costs and benefits of a regulation and to adopt a regulation only upon 
a reasoned determination that the regulation's net benefits (including 
potential economic, environmental, public health and safety effects, 
distributive impacts, and equity) justify its costs. Executive Order 
13563 emphasizes the importance of quantifying both costs and benefits, 
of reducing costs, of harmonizing rules, and of promoting flexibility.
    Under Executive Order 12866, the Office of Management and Budget 
(OMB) must determine whether a regulatory action is a ``significant

[[Page 32449]]

regulatory action,'' which includes an action that has an annual effect 
of $100 million or more on the economy. Significant regulatory actions 
are subject to review by OMB. As described below, this Final Rule is 
economically significant. Therefore, the Department has prepared a 
Regulatory Impact Analysis (RIA) \85\ in connection with this Final 
Rule as required under section 6(a)(3) of Executive Order 12866, and 
OMB has reviewed the rule.
---------------------------------------------------------------------------

    \85\ The terms ``regulatory impact analysis'' and ``economic 
impact analysis'' are used interchangeably throughout this Final 
Rule.
---------------------------------------------------------------------------

A. Introduction

i. Background
    The Fair Labor Standards Act (FLSA or Act) requires covered 
employers to: (1) Pay employees who are covered and not exempt from the 
Act's requirements not less than the federal minimum wage for all hours 
worked and overtime premium pay at a rate of not less than one and one-
half times the employee's regular rate of pay for all hours worked over 
40 in a workweek, and (2) make, keep, and preserve records of the 
persons employed by the employer and of the wages, hours, and other 
conditions and practices of employment. It is widely recognized that 
the general requirement that employers pay a premium rate of pay for 
all hours worked over 40 in a workweek is a cornerstone of the Act, 
grounded in two policy objectives. The first is to spread employment 
(or, in other words, reduce involuntary unemployment) by incentivizing 
employers to hire more employees rather than requiring existing 
employees to work longer hours. The second policy objective is to 
reduce overwork and its detrimental effect on the health and well-being 
of workers.
    The FLSA provides a number of exemptions from the Act's minimum 
wage and overtime pay provisions, including one for bona fide 
executive, administrative, and professional (EAP) employees. Such 
employees perform work that cannot easily be spread to other workers 
after 40 hours in a week and that is difficult to standardize to any 
timeframe; they also typically receive more monetary and non-monetary 
benefits than most blue collar and lower-level office workers. The 
exemption applies to employees employed in a bona fide executive, 
administrative, or professional capacity and for outside sales 
employees, as those terms are ``defined and delimited'' by the 
Department. 29 U.S.C. 213(a)(1). The Department's regulations 
implementing these ``white collar'' exemptions are codified at part 
541.
    For an employer to exclude an employee from minimum wage and 
overtime protection pursuant to the EAP exemption, the employee 
generally must meet three criteria: (1) The employee must be paid a 
predetermined and fixed salary that is not subject to reduction because 
of variations in the quality or quantity of work performed (the 
``salary basis test''); (2) the amount of salary paid must meet a 
minimum specified amount (the ``salary level test''); and (3) the 
employee's job duties must primarily involve executive, administrative, 
or professional duties as defined by the regulations (the ``duties 
test''). The Department has periodically updated the regulations 
governing these tests since the FLSA's enactment in 1938, most recently 
in 2004 when, among other revisions, the Department created the 
standard duties test and paired it with a salary level test of $455 per 
week. The Department also established an abbreviated duties test for 
highly compensated employees (HCE)--i.e., white collar workers with a 
total annual compensation of at least $100,000. To satisfy the total 
annual compensation requirement, an employee must earn at least $455 
per week on a salary or fee basis, and total annual compensation may 
also include commissions, nondiscretionary bonuses, and other 
nondiscretionary compensation.
    As a result of inflation, the real value of the standard salary and 
HCE compensation thresholds have fallen significantly since they were 
set in 2004, making them inconsistent with Congress' intent to exempt 
only ``bona fide'' EAP workers, who typically earn salaries well above 
those of any workers they may supervise and presumably enjoy other 
privileges of employment such as above average fringe benefits, greater 
job security, and better opportunities for advancement. Stein Report at 
21-22. For example, the annualized equivalent of the standard salary 
level ($23,660, or $455 per week for 52 weeks) is now below the 2015 
poverty threshold for a family of four ($24,036).\86\ Similarly, by 
October 1, 2016, approximately 20 percent of full-time salaried workers 
are projected to earn at least $100,000 annually, almost three times 
the share who earned that amount when the HCE test was created.
---------------------------------------------------------------------------

    \86\ This is the 2015 poverty threshold for a family of four 
with two related people under 18 in the household. Available at: 
http://www.census.gov/hhes/www/poverty/data/threshld/index.html.
---------------------------------------------------------------------------

    The premise behind the standard salary level test and the HCE total 
annual compensation requirement is that employers are more likely to 
pay higher salaries to workers in bona fide EAP jobs. A high salary is 
considered a measure of an employer's good faith in classifying an 
employee as exempt, because an employer is less likely to have 
misclassified a worker as exempt if he or she is paid a high wage. 
Stein Report at 5; Weiss Report at 8.
    The salary level requirement was created to identify the dividing 
line distinguishing workers who may be performing exempt duties from 
the nonexempt workers whom Congress intended to be protected by the 
FLSA's minimum wage and overtime provisions. Throughout the regulatory 
history of the FLSA, the Department has considered the salary level 
test the ``best single test'' of exempt status. Stein Report at 19. 
This bright-line test is easily observed, objective, and clear. Id.
ii. Need for Rulemaking
    The salary level test has been updated seven times since it was 
implemented in 1938. Table 1 presents the weekly salary levels 
associated with the EAP exemptions since 1938, organized by exemption 
and long/short/standard duties test.\87\
---------------------------------------------------------------------------

    \87\ From 1949 until 2004 the regulations contained two 
different tests for exemption--a long duties test for employees paid 
a lower salary, and a short duties test for employees paid at a 
higher salary level.

                            Table 1--Historical Salary Levels for the EAP Exemptions
----------------------------------------------------------------------------------------------------------------
                                                                     Long test
                  Date enacted                   ------------------------------------------------   Short test
                                                     Executive    Administrative   Professional        (all)
----------------------------------------------------------------------------------------------------------------
1938............................................             $30             $30  ..............  ..............
1940............................................              30              50             $50  ..............
1949............................................              55              75              75            $100
1958............................................              80              95              95             125

[[Page 32450]]

 
1963............................................             100             100             115             150
1970............................................             125             125             140             200
1975............................................             155             155             170             250
----------------------------------------------------------------------------------------------------------------
                                                  Standard Test
----------------------------------------------------------------------------------------------------------------
2004............................................                               $455
----------------------------------------------------------------------------------------------------------------

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

    \88\ CPI-U data available at: http://data.bls.gov/cgi-bin/cpicalc.pl.
[GRAPHIC] [TIFF OMITTED] TR23MY16.000

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

[[Page 32451]]

Census Region. The Department determined the ``lowest-wage Census 
Region'' by examining Current Population Survey (CPS) data for each 
Census Region to find the region having the lowest salary amount at the 
40th percentile of weekly earnings of full-time salaried workers, which 
currently is the South.\89\ Based on the fourth quarter of 2015 CPS 
data, the 40th percentile for the South Census Region is $913 per week. 
To bring the HCE annual compensation requirement in line with the level 
established in 2004, the Department, in this Final Rule, is setting the 
HCE total annual compensation level at the 90th percentile of 
annualized weekly earnings of full-time salaried workers nationally. 
Based on the fourth quarter of 2015 CPS data, the HCE compensation 
level is $134,004 annually.
---------------------------------------------------------------------------

    \89\ For simplicity, in this rulemaking we refer to the lowest-
wage Census Region and the South interchangeably.
---------------------------------------------------------------------------

    In addition, this Final Rule has introduced a mechanism to 
automatically update the standard salary and HCE total annual 
compensation levels every three years, with the first update taking 
effect on January 1, 2020. This triennial automatic updating will 
preserve the effectiveness of the salary level as a dividing line 
between nonexempt workers and workers who may be exempt, eliminate the 
volatility associated with previous changes in the thresholds, and 
increase certainty for employers with respect to future changes. It 
will also simplify the updating process, as the Department will simply 
publish a notice in the Federal Register with the updated salary and 
compensation thresholds at least 150 days in advance of the update, and 
post the updated salary and compensation levels on the Wage and Hour 
Division (WHD) Web site. Should the Department determine in the future 
that changes in the updating methodology may be warranted, the 
Department can engage in notice and comment rulemaking.
iii. Summary of Affected Workers, Costs, Benefits, and Transfers
    The Department estimated the number of affected workers and 
quantified costs and transfer payments associated with this Final Rule. 
To produce these estimates, the Department used data from the CPS, a 
monthly survey of 60,000 households conducted by the U.S. Census 
Bureau. Many of the data variables used in this analysis are from the 
CPS's Merged Outgoing Rotation Group (MORG) data. The impacts 
calculated by the Department in this analysis are based on FY2013-
FY2015 data projected to reflect FY2017. The Department used the same 
data available to the public to analyze the impact of this Final 
Rule.\90\ Data for FY2015 were the most recently available at the time 
of writing.\91\ However, the Department pooled three years of data in 
order to increase the sample size. Additionally, because the rulemaking 
will take effect December 1, 2016, the Department has projected the 
data to represent FY2017 as Year 1 (the fiscal year most similar to the 
first year of implementation).
---------------------------------------------------------------------------

    \90\ To ensure the confidentiality of survey respondents, data 
in the public-use files use adjusted weights and top-coded earnings.
    \91\ FY2015 includes October 1, 2014 through September 30, 2015.
---------------------------------------------------------------------------

    Some commenters, such as the United States Chamber of Commerce 
(Chamber), National Retail Federation (NRF), and the Florida Department 
of Economic Opportunity (FL DEO), expressed concern that the estimated 
impacts in the Preliminary Regulatory Impact Analysis (PRIA) are not 
replicable. To the extent that these commenters suggested that the 
entire PRIA was based on non-public data, the Department emphasizes 
that we used the non-publicly available data only for determining 
percentiles of the earnings distribution. As we noted in the NPRM, the 
public will not be able to precisely recreate the salary amounts in the 
published deciles because to ensure the confidentiality of survey 
respondents, the data in BLS public-use files use adjusted weights and 
therefore minor discrepancies between internal BLS files and public-use 
files exist. See 80 FR 38528 n.24. Some commenters also asserted that 
the methodology used in the PRIA to estimate the impact of this 
rulemaking could not be replicated because the Department did not 
sufficiently explain our analysis. The Department believes that the 
analytic methodology was thoroughly described throughout the NPRM, PRIA 
and Appendix A, 80 FR 38545-601. Nevertheless, we have provided 
additional details in this RIA to address concerns about replicability.
    The Department estimates that in FY2017, there will be 44.8 million 
white collar salaried employees who do not qualify for any other FLSA 
exemption and therefore may be affected by a change to the Department's 
part 541 regulations (Table 7). Of these workers, the Department 
estimates that 29.9 million would be exempt from the minimum wage and 
overtime pay provisions under the part 541 EAP exemptions (in the 
baseline scenario without the rule taking effect). The other 14.9 
million workers do not satisfy the duties tests for EAP exemption and/
or earn less than $455 per week (Table 7).\92\ However, of the 29.9 
million EAP-exempt workers, 7.4 million are in ``named occupations'' 
and thus need only pass the duties tests to be subject to the standard 
EAP exemptions.\93\ Therefore, these workers are not considered in the 
analysis, leaving 22.5 million EAP-exempt workers potentially affected 
by this Final Rule.
---------------------------------------------------------------------------

    \92\ Here and elsewhere in this analysis, numbers are reported 
at varying levels of aggregation, and are generally rounded to a 
single decimal point. However, calculations are performed using 
exact numbers. Therefore, some numbers may not match the reported 
total or the calculation shown due to rounding of components.
    \93\ Workers not subject to the EAP salary level test include 
teachers, academic administrative personnel, physicians, lawyers, 
judges, and outside sales workers.
---------------------------------------------------------------------------

    In Year 1, an estimated 4.2 million workers will be affected by the 
increase in the standard salary level test (Table 2). This figure 
consists of currently EAP-exempt workers subject to the salary level 
test who earn at least $455 per week but less than the 40th percentile 
of full-time salaried workers in the South ($913). Additionally, an 
estimated 65,000 workers will be affected by the increase in the HCE 
compensation test.\94\ Finally, 732,000 white collar, salaried workers 
making between $455 and $913 who do not meet the duties test are 
already overtime eligible but do not receive overtime pay because they 
are misclassified. While these workers are not ``affected'' by the 
Final Rule because their entitlement to overtime will not change, as a 
result of the change in the salary level their exemption status will be 
clear based on the salary test alone and they will no longer be 
misclassified due to misapplication of the duties test. In Year 10, 
with automatic updating,\95\ 5.0 million workers are projected to be 
affected by the change in the standard salary level test and 217,000 
workers will be affected by the change in the HCE total annual 
compensation test.
---------------------------------------------------------------------------

    \94\ In later years, earnings growth will cause some workers to 
no longer be affected in those years because their earnings will 
exceed the salary threshold. Additionally, some workers will become 
newly affected because their earnings will exceed $455 per week, and 
in the absence of this Final Rule would have lost their overtime 
protections. In order to estimate the total number of affected 
workers over time, the Department accounts for both of these 
effects. Thus, in Year 2, an estimated 4.0 million workers will be 
affected, and by Year 10, an estimated 5.3 million workers will be 
affected.
    \95\ Future automatic updates to the standard salary and HCE 
compensation level requirements will occur in Years 4, 7, and 10.

---------------------------------------------------------------------------

[[Page 32452]]

    Three direct costs to employers are quantified in this analysis: 
(1) Regulatory familiarization costs; (2) adjustment costs; and (3) 
managerial costs. Regulatory familiarization costs are the costs 
incurred to read and become familiar with the requirements of the rule. 
Adjustment costs are the costs accrued to determine workers' new 
exemption statuses, notify employees of policy changes, and update 
payroll systems. Managerial costs associated with this Final Rule occur 
because hours of workers who are newly entitled to overtime may be more 
closely scheduled and monitored to minimize or avoid overtime hours 
worked.
    The costs presented here are the combined costs for both the change 
in the standard salary level test and the HCE annual compensation level 
(these will be disaggregated in section VI.D.iii.). Total average 
annualized direct employer costs over the first 10 years are estimated 
to be $295.1 million, assuming a 7 percent discount rate; hereafter, 
unless otherwise specified, average annualized values will be presented 
using the 7 percent real discount rate (Table 2). Deadweight loss (DWL) 
is also a cost but not a direct employer cost. DWL is a function of the 
difference between the wage employers are willing to pay for the hours 
lost, and the wage workers are willing to take for those hours. In 
other words, DWL represents the decrease in total economic surplus in 
the market arising from the change in the regulation. The Department 
estimates average annualized DWL to be $9.2 million.\96\
---------------------------------------------------------------------------

    \96\ The estimate of DWL assumes the market meets the 
theoretical conditions for an efficient market in the absence of 
this intervention (e.g., all conditions of a perfectly competitive 
market hold: full information, no barriers to entry, etc.). Since 
labor markets are generally not perfectly competitive, this is 
likely an overestimate of the DWL.
---------------------------------------------------------------------------

    In addition to the costs described above, this Final Rule will also 
transfer income from employers to employees in the form of wages. The 
Department estimates average annualized transfers will be $1,189.1 
million. The majority of these transfers are attributable to the FLSA's 
overtime provision; a far smaller share is attributable to the FLSA's 
minimum wage requirement. Transfers also include additional pay to 
increase the salaries of some affected EAP workers who remain exempt.
    Employers may incur additional costs, such as hiring new workers. 
These other potential costs are discussed in section VI.D.iii. Benefits 
of this Final Rule are discussed in section VI.D.vii.

               Table 2--Summary of Regulatory Costs and Transfers, Standard and HCE Salary Levels
                                                [Millions 2017$]
----------------------------------------------------------------------------------------------------------------
                                                                  Future years \a\      Average annualized value
                                                             ---------------------------------------------------
                     Impact                         Year 1                                3% real      7% real
                                                                 Year 2      Year 10        rate         rate
----------------------------------------------------------------------------------------------------------------
                                            Affected Workers (1,000s)
----------------------------------------------------------------------------------------------------------------
Standard.......................................        4,163        3,893        5,045  ...........  ...........
HCE............................................           65           73          217  ...........  ...........
    Total......................................        4,228        3,965        5,261  ...........  ...........
----------------------------------------------------------------------------------------------------------------
                                    Costs and Transfers (Millions 2017$) \b\
----------------------------------------------------------------------------------------------------------------
Direct employer costs..........................       $677.9       $208.0       $284.2       $288.0       $295.1
Transfers \c\..................................      1,285.2        936.5      1,607.2      1,201.6      1,189.1
DWL............................................          6.4          8.7         11.1          9.3          9.2
----------------------------------------------------------------------------------------------------------------
\a\ These costs/transfers represent a range over the nine-year span.
\b\ Costs and transfers for affected workers passing the standard and HCE tests are combined.
\c\ This is the net transfer that we primarily describe as being from employers to workers. There may also be
  transfers of hours and income from some workers to others. Moreover, some of these transfers may be
  intrapersonal, for instance, higher earnings may be offset by increased hours worked for employees who remain
  overtime-exempt or may be supplemented by reduced hours for some newly overtime-protected employees.

iv. Terminology and Abbreviations
    The following terminology and abbreviations will be used throughout 
this RIA.

    Affected EAP workers: The population of potentially affected EAP 
workers who either pass the standard duties test and earn at least 
$455 but less than the new salary level of the 40th percentile of 
weekly earnings of full-time salaried workers in the lowest-wage 
Census Region (currently the South) ($913 in Year 1), or pass only 
the HCE duties test and earn at least $100,000 but less than the 
annualized earnings of the 90th percentile of full-time salaried 
workers nationally ($134,004 in Year 1). This is estimated to be 4.2 
million workers.\97\
---------------------------------------------------------------------------

    \97\ Setting the standard salary level at the 40th percentile of 
weekly earnings of full-time salaried workers in the South is 
estimated to affect 4,163,000 workers. See Table 2. The estimate is 
based on the effect of the change in overtime protection under the 
FLSA from this Final Rule. It includes workers who may currently be 
overtime-eligible under more protective state EAP laws and 
regulations, such as some workers in Alaska, California, and New 
York. Additionally, 65,000 workers are potentially affected by the 
change in the HCE exemption's total compensation level. Id. 
Accordingly, throughout this RIA we refer to the total affected 
workers as 4.2 million (4,163,000 + 65,000, rounded to the nearest 
100,000 workers).
---------------------------------------------------------------------------

    Baseline EAP exempt workers: The projected number of workers who 
would be EAP exempt in FY2017 if the rulemaking did not take effect.
    BLS: Bureau of Labor Statistics.
    CPI-U: Consumer Price Index for all urban consumers.
    CPS: Current Population Survey.
    Duties test: To be exempt from the FLSA's minimum wage and 
overtime requirements under section 13(a)(1), the employee's primary 
job duty must involve bona fide executive, administrative, or 
professional duties as defined by the regulations. The Department 
distinguishes among four such tests:
    Standard duties test: The duties test used in conjunction with 
the standard salary level test, as set in 2004 and applied to date, 
to determine eligibility for the EAP exemptions. It replaced the 
short and long tests in effect from 1949 to 2004, but its criteria 
closely follow those of the former short test.
    HCE duties test: The duties test used in conjunction with the 
HCE total annual compensation requirement, as set in 2004 and 
applied to date, to determine eligibility for the HCE exemption. It 
is much less stringent than the standard and short duties tests to 
reflect that very highly paid employees are much more likely to be 
properly classified as exempt.
    Long duties test: One of two duties tests used from 1949 until 
2004; this more restrictive duties test had a greater number of 
requirements, including a limit on the amount of nonexempt work that 
could be performed, and was used in conjunction with

[[Page 32453]]

a lower salary level to determine eligibility for the EAP exemptions 
(see Table 1).
    Short duties test: One of two duties tests used from 1949 to 
2004; this less restrictive duties test had fewer requirements, did 
not limit the amount of nonexempt work that could be performed, and 
was used in conjunction with a higher salary level to determine 
eligibility for the EAP exemptions (see Table 1).
    DWL: Deadweight loss; the loss of economic efficiency that can 
occur when the perfectly competitive equilibrium in a market for a 
good or service is not achieved.
    EAP: Executive, administrative, and professional.
    FY: Fiscal year. The federal fiscal year is from October 1 
through September 30.
    HCE: Highly compensated employee; a category of EAP exempt 
employee, established in 2004 and characterized by high earnings and 
a minimal duties test.
    Hourly wage: For the purpose of this RIA, the amount an employee 
is paid for an hour of work.
    Base hourly wage: The hourly wage excluding any overtime 
payments. Also used to express the wage rate without accounting for 
benefits.
    Implicit hourly wage: Hourly wage calculated by dividing 
reported weekly earnings by reported hours worked.
    Straight time wage: Another term for the hourly wage excluding 
any overtime payments.
    MORG: Merged Outgoing Rotation Group supplement to the CPS.
    Named occupations: Workers in named occupations are not subject 
to the salary level or salary basis tests. These occupations include 
teachers, academic administrative personnel,\98\ physicians,\99\ 
lawyers, judges,\100\ and outside sales workers.
---------------------------------------------------------------------------

    \98\ Academic administrative personnel (including admissions 
counselors and academic counselors) need to be paid either (1) the 
salary level or (2) a salary that is at least equal to the entrance 
salary for teachers in the educational establishment at which they 
are employed (see Sec.  541.204). Entrance salaries at the 
educational establishment of employment cannot be distinguished in 
the data and so this alternative is not considered (thus these 
employees were excluded from the analysis, the same as was done in 
the 2004 Final Rule).
    \99\ The term physician includes medical doctors including 
general practitioners and specialists, osteopathic physicians 
(doctors of osteopathy), podiatrists, dentists (doctors of dental 
medicine), and optometrists (doctors of optometry or with a Bachelor 
of Science in optometry). Sec.  541.304(b).
    \100\ Judges may not be considered ``employees'' under the FLSA 
definition. However, since this distinction cannot be made in the 
data, all judges are excluded (the same as was done in the 2004 
Final Rule). Including these workers in the model as FLSA employees 
would not impact the estimate of affected workers.
---------------------------------------------------------------------------

    Overtime workers: The Department distinguishes between two types 
of overtime workers.
    Occasional overtime workers: The Department uses two steps to 
identify occasional overtime workers. First, all workers who report 
they usually work 40 hours or less per week (identified with 
variable PEHRUSL1 in CPS MORG) but in the survey (or reference) week 
worked more than 40 hours (variable PEHRACT1 in CPS MORG) are 
classified as occasional overtime workers. Second, some additional 
workers who do not report usually working overtime and did not 
report working overtime in the reference week are randomly selected 
to be classified as occasional overtime workers so that the 
proportion of workers who work overtime in our sample matches the 
proportion of workers, measured using SIPP data, who work overtime 
at some point in the year.
    Regular overtime workers: Workers who report they usually work 
more than 40 hours per week (identified with variable PEHRUSL1 in 
CPS MORG).
    Pooled data for FY2013-FY2015: CPS MORG data from FY2013-FY2015 
adjusted to represent FY2015 with earnings inflated to FY2017 
dollars and sample observations weighted to reflect projected 
employment in FY2017. Pooled data were used to increase sample size.
    Potentially affected EAP workers: EAP exempt workers who are not 
in named occupations and are included in the analysis (i.e., white 
collar, salaried, not eligible for another (non-EAP) overtime pay 
exemption). This is estimated to be 22.5 million workers.
    Price elasticity of demand (with respect to wage): The 
percentage change in labor hours demanded in response to a one 
percent change in wages.
    Real dollars (2017$): Dollars adjusted using the CPI-U to 
reflect the purchasing power they would have in FY2017.
    Salary basis test: The EAP exemptions' requirement that workers 
be paid on a salary basis, that is, a pre-determined amount that 
cannot be reduced because of variations in the quality or quantity 
of the employee's work.
    Salary level test: The salary a worker must earn in order to be 
subject to the EAP exemptions. The Department distinguishes among 
four such tests:
    Standard salary level: The weekly salary level associated with 
the standard duties test that determines eligibility for the EAP 
exemptions. The standard salary level was set at $455 per week in 
the 2004 Final Rule.
    HCE compensation level: Workers who meet the standard salary 
level requirement but not the standard duties test nevertheless are 
exempt if they pass a minimal duties test and earn at least the HCE 
total annual compensation required amount. The HCE required 
compensation level was set at $100,000 per year in the 2004 Final 
Rule, of which at least $455 per week must be paid on a salary or 
fee basis.
    Short test salary level: The weekly salary level associated with 
the short duties test (eliminated in 2004).
    Long test salary level: The weekly salary level associated with 
the long duties test (eliminated in 2004).
    SIPP: Survey of Income and Program Participation.
    Workers covered by the FLSA and subject to the Department's part 
541 regulations: Includes all workers except those excluded from the 
analysis because they are not covered by the FLSA or subject to the 
Department's requirements. Excluded workers include: Members of the 
military, unpaid volunteers, the self-employed, many religious 
workers, and federal employees (with a few exceptions).\101\
---------------------------------------------------------------------------

    \101\ Employees of firms with annual revenue less than $500,000 
who are not engaged in interstate commerce are also not covered by 
the FLSA. However, these workers are not excluded from this analysis 
because the Department has no reliable way of estimating the size of 
this worker population, although the Department believes it composes 
a small percent of workers. These workers were also not excluded 
from the 2004 Final Rule.

    The Department also notes that the terms employee and worker are 
used interchangeably throughout this analysis.

B. Methodology To Determine the Number of Potentially Affected EAP 
Workers

i. Overview
    This section explains the methodology used to estimate the number 
of workers who are subject to the EAP exemptions. In this Final Rule, 
as in the 2004 Final Rule, the Department estimated the number of EAP 
exempt workers because there is no data source that identifies workers 
as EAP exempt. Employers are not required to report EAP exempt workers 
to any central agency or as part of any employee or establishment 
survey.\102\ The methodology described here is largely based on the 
approach the Department used in the 2004 Final Rule. 69 FR 22196-209. 
All tables include projected estimates for FY2017, which begins on 
October 1, 2016. Some tables also include estimates for FY2005 (the 
first full fiscal year after the most recent increase to the salary 
level was implemented) to demonstrate how the prevalence of the EAP 
exemption has changed in the 12 years since our last rulemaking. We 
note that the PRIA used calendar year 2005 whereas this Final Rule uses 
FY2005. Therefore, the numbers have changed slightly. Figure 2 
illustrates how the U.S. civilian workforce was analyzed through 
successive stages to estimate the number of potentially affected EAP 
workers.
---------------------------------------------------------------------------

    \102\ RAND recently released results from a survey conducted to 
estimate EAP exempt workers. However, this survey does not have the 
variables or sample size necessary for the Department to base the 
RIA on this analysis. These survey results were submitted by the 
authors as a comment on the proposed rule. Rohwedder, S. and Wenger, 
J.B. (2015). The Fair Labor Standards Act: Worker Misclassification 
and the Hours and Earnings Effects of Expanded Coverage. RAND Labor 
and Population.

---------------------------------------------------------------------------

[[Page 32454]]

[GRAPHIC] [TIFF OMITTED] TR23MY16.001

ii. Data
    The estimates of EAP exempt workers are based on data drawn from 
the CPS MORG, which is sponsored jointly by the U.S. Census Bureau and 
the BLS. The CPS is a large, nationally representative sample of the 
labor force. Households are surveyed for four months, excluded from the 
survey for eight months, surveyed for an additional four months, then 
permanently dropped from the sample. During the last month of each 
rotation in the sample (month 4 and month 16), employed respondents 
complete a supplementary questionnaire in addition to the regular 
survey.\103\ This supplement contains the detailed information on 
earnings necessary to estimate a worker's exemption status. Responses 
are based on the reference week, which is always the week that includes 
the 12th day of the month.
---------------------------------------------------------------------------

    \103\ This is the outgoing rotation group (ORG); however, this 
analysis uses the data merged over twelve months and thus will be 
referred to as MORG.
---------------------------------------------------------------------------

    Although the CPS is a large scale survey, administered to 60,000 
households representing the entire nation, it is still possible to have 
relatively few observations when looking at subsets of employees, such 
as exempt workers in a specific occupation employed in a specific 
industry, or workers in a specific geographic location. To increase the 
sample size, the Department pooled together three years of CPS MORG 
data (FY2013 through FY2015). Earnings for each FY2013 and FY2014 
observation were inflated to FY2015 dollars using the CPI-U, and the 
weight of each observation was adjusted so that the total number of 
potentially affected EAP workers in the pooled sample remained the same 
as the number for the FY2015 CPS MORG. Thus, the pooled CPS MORG sample 
uses roughly three times as many observations to represent the same 
total number of workers in FY2015. The additional observations allow 
the Department to better estimate certain attributes of the potentially 
affected labor force.
    Next, this pooled sample was adjusted to reflect the FY2017 economy 
by further inflating wages and sampling weights to project to FY2017. 
The Department applied two years of wage growth based on the average 
annual growth rate in median wages. The wage growth rate is calculated 
as the geometric growth rate in median wages using the historical CPS 
MORG data for occupation-industry categories from FY2006 to 
FY2014.104 105 The geometric growth rate is the constant 
annual growth rate that when compounded (applied to the first year's 
wage, then to the resulting second year's wage, etc.) yields the last 
historical year's wage. This method only depends on the value of the 
wage in the first available year and the last available year.\106\
---------------------------------------------------------------------------

    \104\ In order to maximize the number of observations used in 
calculating the median wage for each occupation-industry category, 
three years of data were pooled for each of the endpoint years. 
Specifically, data from FY2005, FY2006, and FY2007 (converted to 
FY2006 dollars) were used to calculate the FY2006 median wage and 
data from FY2013, FY2014, and FY2015 (converted to FY2014 dollars) 
were used to calculate the FY2014 median wage.
    \105\ In the NPRM only wage growth rates for exempt workers were 
used; therefore, growth was based on historical wage growth for 
exempt workers. Since the Final Rule projects all workers' earnings 
for Year 1, wage growth was estimated for all workers based on the 
historical growth rate for all workers. Additionally, for the Final 
Rule, the Department projected earnings prior to determining which 
workers are exempt, necessitating a change in the methodology.
    \106\ The geometric mean may be a flawed measure if either or 
both of those years were atypical; however, in this instance these 
values seem typical. An alternative method would be to use the time 
series of median wage data to estimate the linear trend in the 
values and continue this to project future median wages. This method 
may be preferred if either or both of the endpoint years are 
outliers, since the trend will be less influenced by them. However, 
the linear trend may be flawed if there are outliers in the interim 
years. The Department chose to use the geometric mean because 
individual year fluctuations are difficult to predict and applying 
the geometric growth rate to each year provides a better estimate of 
the long-term growth in wages.

---------------------------------------------------------------------------

[[Page 32455]]

    The geometric wage growth rate was also calculated from the BLS' 
Occupational Employment Statistics (OES) survey and used as a validity 
check.\107\ Additionally, in occupation-industry categories where the 
CPS MORG data had an insufficient number of observations to reliably 
calculate median wages, the Department used the growth rate in median 
wages calculated from the OES data.\108\ Any remaining occupation-
industry combinations without estimated median growth rates were 
assigned the median of the growth rates in median wages from the CPS 
MORG data.
---------------------------------------------------------------------------

    \107\ The OES growth measure compared median wages in the 2006 
and the 2014 OES by industry-occupation combination. The difference 
between the OES and CPS growth measures averaged 0.00173 percentage 
points, but varied by up to 15.4 percentage points, depending on the 
occupation-industry category.
    \108\ To lessen small sample bias in the estimation of the 
median growth rate, this rate was only calculated using CPS MORG 
data when these data contained at least 10 observations in each time 
period.
---------------------------------------------------------------------------

    The employment growth rate is the geometric annual growth rate 
based on the ten-year employment projection from BLS' National 
Employment Matrix (NEM) for 2014 to 2024 within an occupation-industry 
category. An alternative method is to spread the total change in the 
level of employment over the ten years evenly across years (constant 
change in the number employed). The Department believes that on average 
employment is more likely to grow at a constant percentage rate rather 
than by a constant level (a decreasing percentage rate). To account for 
employment growth, the Department applied the growth rates to the 
sample weights of the workers. This is because the Department cannot 
introduce new observations to the CPS MORG data to represent the newly 
employed.
    In addition to the calculations described above, some assumptions 
had to be made to use these data as the basis for the analysis. For 
example, the Department eliminated workers who reported that their 
weekly hours vary and provided no additional information on hours 
worked. This was done because the Department cannot estimate impacts 
for these workers since it is unknown whether they work overtime and 
therefore unknown whether there would be any need to pay for overtime 
if their status changed from exempt to nonexempt. The Department 
reweighted the rest of the sample to account for this change (i.e., to 
keep the same total employment estimates).\109\ This adjustment assumes 
that the distribution of hours worked by workers whose hours do not 
vary is representative of hours worked by workers whose hours do vary. 
The Department believes that without more information this is an 
appropriate assumption.\110\
---------------------------------------------------------------------------

    \109\ The Department also reweighted for workers reporting zero 
earnings. The Department eliminated, without reweighting, workers 
who reported usually working zero hours and working zero hours in 
the past week.
    \110\ This is justifiable because demographic and employment 
characteristics are similar across these two populations (e.g., age, 
gender, education, distribution across industries, share paid 
nonhourly). The share of all workers who stated that their hours 
vary (but provided no additional information) is 5.7 percent. To the 
extent these excluded workers are exempt, if they tend to work more 
overtime than other workers, then transfer payments, costs, and DWL 
may be underestimated. Conversely, if they work fewer overtime 
hours, then transfer payments, costs, and DWL may be overestimated.
---------------------------------------------------------------------------

iii. Number of Workers Covered by the Department's Part 541 Regulations
    To estimate the number of workers covered by the FLSA and subject 
to the Department's part 541 regulations, the Department excluded 
workers who are not protected by the FLSA or are not subject to the 
Department's regulations for a variety of reasons--for instance, they 
may not be covered by, or considered to be employees under, the FLSA. 
These workers include:
     Military personnel,
     unpaid volunteers,
     self-employed individuals,
     clergy and other religious workers, and
     federal employees (with a few exceptions described below).
    Many of these workers are excluded from the CPS MORG: Members of 
the military on active duty, unpaid volunteers, and the self-employed. 
Religious workers were excluded from the analysis after being 
identified by their occupation codes: `clergy' (Census occupational 
code 2040), `directors, religious activities and education' (2050), and 
`religious workers, all other' (2060). Most employees of the federal 
government are covered by the FLSA but are not subject to the 
Department's part 541 regulations because their entitlement to minimum 
wage and overtime pay is regulated by the Office of Personnel 
Management (OPM).\111\ See 29 U.S.C. 204(f). Exceptions exist for U.S. 
Postal Service employees, Tennessee Valley Authority employees, and 
Library of Congress employees. See 29 U.S.C. 203(e)(2)(A). These 
covered federal workers were identified and included in the analysis 
using occupation and/or industry codes.\112\ Employees of firms that 
have annual revenue of less than $500,000 and who are not engaged in 
interstate commerce are also not covered by the FLSA. The Department 
does not exclude them from the analysis because we have no reliable way 
of estimating the size of this worker population, although the 
Department believes it is a small percentage of workers. The 2004 Final 
Rule analysis similarly did not adjust for these workers.
---------------------------------------------------------------------------

    \111\ Federal workers are identified in the CPS MORG with the 
class of worker variable PEIO1COW.
    \112\ Postal Service employees were identified with the Census 
industry classification for postal service (6370). Tennessee Valley 
Authority employees were identified as federal workers employed in 
the electric power generation, transmission, and distribution 
industry (570) and in Kentucky, Tennessee, Mississippi, Alabama, 
Georgia, North Carolina, or Virginia. Library of Congress employees 
were identified as federal workers under Census industry `libraries 
and archives' (6770) and residing in Washington, DC.
---------------------------------------------------------------------------

    Table 3 presents the Department's estimates of the total number of 
workers, and the number of workers covered by the FLSA and subject to 
the Department's part 541 regulations, in FY2005 and FY2017. The 
Department projected that in FY2017 there will be 159.9 million wage 
and salary workers in the United States. Of these, in the baseline 
scenario without changes in the salary levels, 132.8 million would be 
covered by the FLSA and subject to the Department's regulations (83.0 
percent). The remaining 27.2 million workers would be excluded from 
FLSA coverage for the reasons described above and delineated in Table 
4.

[[Page 32456]]



 Table 3--Estimated Number of Workers Covered by the FLSA and Subject to the Department's Part 541 Regulations,
                                                FY2005 and FY2017
----------------------------------------------------------------------------------------------------------------
                                                                                    Subject to the Department's
                                                                     Civilian               regulations
                              Year                                  employment   -------------------------------
                                                                     (1,000s)         Number
                                                                                     (1,000s)         Percent
----------------------------------------------------------------------------------------------------------------
FY2005 \a\......................................................         141,519         122,043            86.2
FY2017..........................................................         159,914     \b\ 132,754            83.0
----------------------------------------------------------------------------------------------------------------
\a\ The PRIA provided figures from calendar year 2005, which differ slightly from the fiscal year 2005 figures
  provided in this analysis.
\b\ Estimate uses pooled data for FY2013-FY2015 projected to reflect FY2017.


  Table 4--Reason Not Subject to the Department's Part 541 Regulations,
                                 FY2017
------------------------------------------------------------------------
                                                              Number
                         Reason                              (1,000s)
------------------------------------------------------------------------
Total...................................................          27,160
Self-employed and unpaid workers \a\....................          23,607
Religious workers.......................................             550
Federal employees \b\...................................           3,005
------------------------------------------------------------------------
Note: Estimates use pooled data for FY2013-FY2015 projected to reflect
  FY2017.
\a\ Self-employed workers (both incorporated and unincorporated) and
  workers ``without pay'' are excluded from the MORG supplement. We
  assume workers ``without pay'' are ``unpaid volunteers.'' These
  workers are identified as the difference between the population of
  workers in the CPS basic data and the CPS MORG data.
\b\ Most employees of the federal government are covered by the FLSA but
  are not covered by part 541. Exceptions are for U.S. Postal Service
  employees, Tennessee Valley Authority employees, and Library of
  Congress employees.

iv. Number of Workers in the Analysis
    After limiting the analysis to workers covered by the FLSA and 
subject to the Department's part 541 regulations, several other groups 
of workers are identified and excluded from further analysis since they 
are unlikely to be affected by this Final Rule. These include:
     Blue collar workers,
     workers paid hourly, and
     workers who are exempt under certain other (non-EAP) 
exemptions.
    The Department excludes a total of 87.9 million workers from the 
analysis for one or more of these reasons, which often overlapped 
(e.g., many blue collar workers are also paid hourly). In FY2017, we 
project there will be 48.1 million blue collar workers (Table 5). These 
workers were identified in the CPS MORG data following the methodology 
from the U.S. Government Accountability Office's (GAO) 1999 white 
collar exemptions report \113\ and the Department's 2004 regulatory 
impact analysis. See 69 FR 22240-44 (Table A-1). Supervisors in 
traditionally blue collar industries are classified as white collar 
workers because their duties are generally managerial or 
administrative, and therefore they were not excluded as blue collar 
workers. The Department used the CPS MORG variable PEERNHRY to 
determine hourly status, and determined that 78.3 million workers will 
be paid on an hourly basis in FY 2017.
---------------------------------------------------------------------------

    \113\ GAO/HEHS. (1999). Fair Labor Standards Act: White Collar 
Exemptions in the Modern Work Place. GAO/HEHS-99-164, 40-41.
---------------------------------------------------------------------------

    Also excluded from further analysis were workers who are exempt 
under certain other (non-EAP) exemptions. Although some of these 
workers may also be exempt under the EAP exemptions, even if these 
workers lost their EAP exempt status they would remain exempt from the 
minimum wage and/or overtime pay provisions based on the non-EAP 
exemption, and thus were excluded from the analysis. We excluded an 
estimated 4.5 million workers, including some agricultural and 
transportation workers, from further analysis because they will be 
subject to another (non-EAP) overtime exemption. See Appendix A: 
Methodology for Estimating Exemption Status, for details on how this 
population was identified.

        Table 5--Estimated Number of Workers Covered by the FLSA and Subject to the Department's Part 541 Regulations, FY2005 and FY2017 (1,000s)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                              Reason excluded \b\
                                                Subject to  Workers  in    Excluded  -------------------------------------------------------------------
                     Year                       DOL's Part      the          from                                         Another exemption \c\
                                                 541 Reg.     analysis     analysis   Blue collar     Hourly   -----------------------------------------
                                                                \a\                      workers     workers    Agriculture  Transportation     Other
--------------------------------------------------------------------------------------------------------------------------------------------------------
FY2005.......................................      122,043       39,447       82,595       45,889       73,813          778          1,911           967
FY2017.......................................      132,754       44,845       87,909       48,119       78,310          902          1,912         1,691
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: FY2017 estimates use pooled data for FY2013-FY2015 projected to reflect FY2017.
\a\ Wage and salary workers who are white collar, salaried, and not eligible for another (non-EAP) overtime exemption.
\b\ Numbers do not add to total due to overlap.
\c\ Eligible for another (non-EAP) overtime pay exemption.

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

[[Page 32457]]

FLSA exemptions: Section 13(b)(1), section 13(b)(2), section 13(b)(3), 
section 13(b)(6), or section 13(b)(10). This methodology is the same as 
in the 2004 Final Rule and is explained in Appendix A. The Department 
excluded 902,000 agricultural workers and 1.9 million transportation 
workers from the analysis. In addition, the Department excluded another 
1.7 million workers who fall within one or more of multiple FLSA 
minimum wage and overtime exemptions and are detailed in Appendix A. 
However, of these 1.7 million workers, all but 25,600 are either blue 
collar or hourly and thus the impact of excluding these workers is 
negligible.
---------------------------------------------------------------------------

    \114\ In the 2004 Final Rule all workers in agricultural 
industries were excluded. 69 FR 22197. Here only workers also in 
select occupations were excluded since not all workers in 
agricultural industries qualify for the agricultural overtime pay 
exemptions. See Appendix A. This method better approximates the true 
number of exempt agricultural workers and provides a more 
conservative--i.e., greater--estimate of the number of affected 
workers.
---------------------------------------------------------------------------

v. Number of Potentially Affected EAP Workers
    After excluding workers not subject to the Department's FLSA 
regulations and workers who are unlikely to be affected by this Final 
Rule (i.e., blue collar workers, workers paid hourly, workers who are 
subject to another (non-EAP) overtime exemption), the Department 
estimated there would be 44.8 million salaried white collar workers for 
whom employers might claim either the standard EAP exemption or the HCE 
exemption. To be exempt under the standard EAP test the employee must:
     Be paid a predetermined and fixed salary that is not 
subject to reduction because of variations in the quality or quantity 
of work performed (the salary basis test); 115, 116
---------------------------------------------------------------------------

    \115\ Hourly computer employees who earn at least $27.63 per 
hour and perform certain duties are exempt under section 13(a)(17) 
of the FLSA. These workers are considered part of the EAP exemptions 
but were excluded from the analysis because they are paid hourly and 
will not be affected by this Final Rule (these workers were 
similarly excluded in the 2004 analysis). Salaried computer workers 
are exempt if they meet the salary and duties tests applicable to 
the EAP exemptions, and are included in the analysis since they will 
be impacted by this Final Rule.
    \116\ Additionally, administrative and professional employees 
may be paid on a fee basis, as opposed to a salary basis, at a rate 
of at least the amount specified by the Department in the 
regulations. Payment on a ``fee basis'' occurs where an employee is 
paid an agreed sum for a single job regardless of the time required 
for its completion. Sec.  541.605(a). Salary level test compliance 
for fee basis employees is assessed by determining whether the 
hourly rate for work performed (i.e., the fee payment divided by the 
number of hours worked) would total at least $455 per week if the 
employee worked 40 hours. Sec.  541.605(b). However, the CPS MORG 
does not identify workers paid on a fee basis (only hourly or 
nonhourly). Thus in the analysis, workers paid on a fee basis are 
considered with nonhourly workers and consequently classified as 
``salaried'' (as was done in the 2004 Final Rule).
---------------------------------------------------------------------------

     earn at least a designated salary amount; the salary level 
has been set at $455 per week since 2004 (the salary level test); and
     perform work activities that primarily involve executive, 
administrative, or professional duties as defined by the regulations 
(the duties test).
    The 2004 Final Rule's HCE test requires the employee to pass the 
same standard salary basis and salary level tests. However, the HCE 
duties test is much less restrictive than the standard duties test, and 
the employee must earn at least $100,000 in total annual compensation, 
including at least $455 per week paid on a salary or fee basis, while 
the balance may be paid as nondiscretionary bonuses and commissions.
Salary Basis
    As discussed above, the Department included only nonhourly workers 
in the analysis using the CPS variable PEERNHRY, which identifies 
workers as either hourly or nonhourly. For the purpose of this 
rulemaking, the Department considers data representing compensation 
paid to nonhourly workers to be an appropriate proxy for compensation 
paid to salaried workers. The Department notes that we made the same 
assumption regarding nonhourly workers in the 2004 Final Rule. See 69 
FR 22197. Several commenters asserted that the Department's use of the 
CPS variable PEERNHRY to indicate whether a worker is salaried is 
inappropriate. For example, the NRF included an analysis it 
commissioned from Oxford Economics, which stated that this variable is 
inappropriate because all workers who earn under $455 a week (and are 
therefore nonexempt) will report that they are ``paid at an hourly 
rate.'' The Department believes this is an entirely unwarranted 
assumption: exempt status is not a prerequisite for being salaried; 
salaried status is a prerequisite for being exempt (the salary basis 
test). Millions of workers--white and blue collar alike--are salaried 
despite being nonexempt, including 3.2 million white-collar workers who 
reported earning less than $455 per week in the CPS. See 80 FR 38522 
(noting the ``widespread misconception[ ]'' that ``payment of a salary 
automatically disqualifies an employee from entitlement to overtime 
compensation.'')
    Some commenters, such as the Chamber and the National Association 
of Convenience Stores (NACS), expressed concern that the Department is 
using ``nonhourly'' workers to approximate ``salaried'' workers, even 
though this may include workers who are paid on a piece-rate, a day-
rate, or largely on bonuses or commissions. The Panel Study of Income 
Dynamics (PSID) provides additional information on how nonhourly 
workers are paid. In the PSID, respondents are asked how they are paid 
on their main job and are asked for more detail if their response is 
other than salaried or hourly. Possible responses include piecework, 
commission, self-employed/farmer/profits, and by the job/day/mile. The 
Department analyzed the PSID data and found that relatively few 
nonhourly workers were paid by methods other than salaried. The 
Department is not aware of any statistically robust source that more 
closely reflects salary as defined in our regulations, and the 
commenters did not identify any such source.
Salary Level
    Weekly earnings are available in the CPS MORG data, which allowed 
the Department to estimate how many nonhourly workers pass the salary 
level tests.\117\ The Fisher & Phillips law firm, Jackson Lewis law 
firm, NACS, and the Clearing House Association (Clearing House) 
commented that CPS earnings data may be inappropriate because the data 
includes overtime pay, commissions, or tips. The Department notes that 
employers may factor into an employee's salary a premium for expected 
overtime hours worked. To the extent they do so, that premium would be 
reflected in the data. Similarly, the Department believes tips will be 
an uncommon form of payment for these workers since tips are uncommon 
for white-collar workers. Lastly, the Department believes that 
commissions make up a relatively small share of earnings among 
nonhourly employees.\118\ In any event, as discussed earlier in section 
IV.C., the Department has adopted a change to the salary basis test in 
this Final Rule that will newly

[[Page 32458]]

allow employers to satisfy as much as 10 percent of the standard salary 
level requirement for employees who meet the standard duties test 
through the payment of nondiscretionary bonuses, incentive payments, 
and commissions.
---------------------------------------------------------------------------

    \117\ The CPS MORG variable PRERNWA, which measures weekly 
earnings, is used to identify weekly salary. The CPS variable 
includes all nondiscretionary bonuses and commissions, which do not 
count toward the standard salary level under the current regulations 
but may be used to satisfy up to 10 percent of the new standard 
salary level when this Final Rule takes effect. This discrepancy 
between the earnings variable used and the FLSA definition of salary 
may cause a slight overestimate of the number of workers estimated 
to meet the standard test. Additionally, because the variable 
includes earnings across all jobs, this could bias upward workers' 
earnings on a given job. However, the Department believes this bias 
is small because only 4.2 percent of salaried, white collar workers 
hold multiple jobs.
    \118\ In the PSID, relatively few nonhourly workers were paid by 
commission. Additionally, according to the BLS Employment Cost Index 
(ECI), about 5 percent of the private workforce is incentive-paid 
workers (incentive pay is defined as payment that relates earnings 
to actual individual or group production). See: http://www.bls.gov/opub/mlr/cwc/the-effect-of-incentive-pay-on-rates-of-change-in-wages-and-salaries.pdf.
---------------------------------------------------------------------------

    NACS also asserted that the CPS MORG earnings data are unreliable 
because they ``are self-reported and are therefore not subject to 
verification.'' The Department acknowledges that the CPS, like all 
surveys, involves some measurement error. However, based on the 
literature measuring error in CPS earnings data, the Department 
believes that measurement error should not significantly bias its 
results.\119\
---------------------------------------------------------------------------

    \119\ For example, researchers have found that worker and 
employer reported earnings correlate 0.90 percent or higher. Bound, 
J., Brown, C., Mathiowetz, N. Measurement error in survey data. In 
Handbook of Econometrics; Heckman, J.J., Leamer, E.E., Eds.; North-
Holland: Amsterdam, The Netherlands, V, 3705-3843.
---------------------------------------------------------------------------

Duties
    The CPS MORG data do not capture information about job duties, and 
at the time of writing the NPRM, there were no data available on the 
prevalence of EAP exempt workers. Due to this data limitation, the 
Department used occupational titles, combined with probability 
estimates of passing the duties test by occupational title, to estimate 
the number of workers passing the duties test. This methodology is very 
similar to the methodology used in the 2004 rulemaking, and was the 
best available data and methodology. To determine whether a worker met 
the duties test, the Department used an analysis performed by WHD in 
1998 in response to a request from the GAO. Because WHD enforces the 
FLSA's overtime requirements and regularly assesses workers' exempt 
status, WHD's representatives were uniquely qualified to provide the 
analysis. The analysis was used in both the GAO's 1999 white collar 
exemptions report \120\ and the Department's 2004 regulatory impact 
analysis. See 69 FR 22198.
---------------------------------------------------------------------------

    \120\ GAO/HEHS. (1999). Fair Labor Standards Act: White Collar 
Exemptions in the Modern Work Place. GAO/HEHS-99-164, 40-41.
---------------------------------------------------------------------------

    WHD's representatives examined 499 occupational codes, excluding 
nine that were not relevant to the analysis for various reasons (one 
code was assigned to unemployed persons whose last job was in the Armed 
Forces, some codes were assigned to workers who are not FLSA covered, 
others had no observations). Of the remaining occupational codes, WHD's 
representatives determined that 251 occupational codes likely included 
EAP exempt workers and assigned one of four probability codes 
reflecting the estimated likelihood, expressed as ranges, that a worker 
in a specific occupation would perform duties required to meet the EAP 
duties tests. The Department supplemented this analysis in the 2004 
Final Rule regulatory impact analysis when the HCE exemption was 
introduced. The Department modified the four probability codes for 
highly paid workers based upon our analysis of the provisions of the 
highly compensated test relative to the standard duties test (Table 6). 
To illustrate, WHD representatives assigned exempt probability code 4 
to the occupation ``first-line supervisors/managers of construction 
trades and extraction workers'' (Census code 6200), which indicates 
that a worker in this occupation has a 0 and 10 percent likelihood of 
meeting the standard EAP duties test. However, if that worker earns at 
least $100,000 annually, he or she has a 15 percent probability of 
passing the shorter HCE duties test.
    The occupations identified in GAO's 1999 report and used by the 
Department in the 2004 Final Rule map to an earlier occupational 
classification scheme (the 1990 Census occupational codes). Therefore, 
for this Final Rule, the Department used an occupational crosswalk to 
map the previous occupational codes to the 2002 Census occupational 
codes which are used in the CPS MORG 2002 through 2010 data, and to the 
2010 Census occupational codes which are used in the CPS MORG FY2013 
through FY2015 data.\121\ If a new occupation comprises more than one 
previous occupation, then the new occupation's probability code is the 
weighted average of the previous occupations' probability codes, 
rounded to the closest probability code.
---------------------------------------------------------------------------

    \121\ References to occupational codes in this analysis refer to 
the 2002 Census occupational codes. Crosswalks and methodology 
available at: http://www.census.gov/people/io/methodology/.

                         Table 6--Probability Worker in Category Passes the Duties Test
----------------------------------------------------------------------------------------------------------------
                                                       The Standard EAP test               The HCE test
                                                 ---------------------------------------------------------------
                Probability code                    Lower bound     Upper bound     Lower bound     Upper bound
                                                        (%)             (%)             (%)             (%)
----------------------------------------------------------------------------------------------------------------
0...............................................               0               0               0               0
1...............................................              90             100             100             100
2...............................................              50              90              94              96
3...............................................              10              50            58.4              60
4...............................................               0              10              15              15
----------------------------------------------------------------------------------------------------------------

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

[[Page 32459]]

and the occupation's exempt probability category using a gamma 
distribution.\123\ Based on these revised probabilities, each worker 
was assigned exempt or nonexempt status based on a random draw from a 
binomial distribution using the worker's revised probability as the 
probability of success. Thus, if this method is applied to ten workers 
who each have a 60 percent probability of being exempt, six workers 
would be expected to be designated as exempt.\124\ However, which 
particular workers are designated as exempt may vary with each set of 
ten random draws. For details see Appendix A.
---------------------------------------------------------------------------

    \122\ For the standard exemption, the relationship between 
earnings and exemption status is not linear and is better 
represented with a gamma distribution. For the HCE exemption, the 
relationship between earnings and exemption can be well represented 
with a linear function because the relationship is linear at high 
salary levels (as determined by the Department in the 2004 Final 
Rule). Therefore, the gamma model and the linear model would produce 
similar results. See 69 FR 22204-08, 22215-16.
    \123\ The gamma distribution was chosen because, during the 2004 
revision, this non-linear distribution best fit the data compared to 
the other non-linear distributions considered (i.e., normal and 
lognormal). A gamma distribution is a general type of statistical 
distribution that is based on two parameters that control the scale 
(alpha) and shape (in this context, called the rate parameter, 
beta).
    \124\ A binominal distribution is frequently used for a 
dichotomous variable where there are two possible outcomes; for 
example, whether one owns a home (outcome of 1) or does not own a 
home (outcome of 0). Taking a random draw from a binomial 
distribution results in either a zero or a one based on a 
probability of ``success'' (outcome of 1). This methodology assigns 
exempt status to the appropriate share of workers without biasing 
the results with manual assignment.
---------------------------------------------------------------------------

    The Chamber attached to its comment an Oxford Economic analysis 
commissioned by the NRF, which also submitted the analysis, asserting 
that that CPS data may not be appropriate to determine how many workers 
are EAP exempt, and specifically how many pass the duties test. The 
Oxford Economics analysis contends that occupational titles in the CPS 
are less accurate than the OES survey, a BLS-published data set based 
on employer surveys, because the occupational titles in the CPS are 
self-reported, while occupational titles in the OES survey are reported 
by firms, and are therefore better suited to obtain information on 
actual occupations. Oxford Economics asserts in their Appendix A that 
there is title-inflation in the CPS data, which would imply that the 
Department's number of affected workers was overestimated. Similarly, 
the Chamber described the CPS job title information as based on 
``brief, limited individual verbal responses.''
    The Department acknowledges that an establishment survey (like the 
OES) may more accurately reflect the occupational titles applied to 
workers by individual employers; however, we note that businesses, like 
workers, may also have an incentive to inflate or deflate occupational 
titles. In addition, Oxford Economics and the Chamber overstate the 
presumed weaknesses of the CPS occupation classification. When the CPS 
reports occupation codes, occupation is generally determined from the 
initial, in-person, in-depth interview with the respondent, and the 
interviewer is directed to determine the respondent's duties and 
responsibilities, not merely accept the occupational title at face 
value; Census coders then assign the occupation code based on the 
interview.
    Moreover, there are important shortcomings of the OES, which made 
it an inappropriate data source for the Department's purposes. First, 
the OES data do not include individual level data. For example, 
earnings are not disaggregated by respondent; only select decile 
estimates are presented. This does not allow estimation of the number 
of workers earning at least $455.\125\ Second, the OES does not provide 
information on hours worked. In order to estimate costs and transfers 
using OES data, Oxford Economics had to apply estimates of hours worked 
from the CPS data to the OES data. This requires mapping CPS 
occupational titles to OES occupational titles, and therefore does not 
avoid use of the titles Oxford Economics finds inadequate. The 
Department believes the direct information on earnings and hours worked 
from CPS is more germane to the analysis than some potential inaccuracy 
in occupational titles, and will result in a more accurate analysis 
than trying to map worker characteristics such as data on hours worked 
by earnings from CPS to the OES. Finally, even if there are slight 
discrepancies in occupational titles, a review of the occupational 
titles in Appendix A of this RIA will show that closely related 
occupational titles are generally assigned the same probability of 
exemption (for example, different types of engineers are all classified 
as probability code 1; and cashiers and counter and rental clerks are 
both classified as probability code 4).
---------------------------------------------------------------------------

    \125\ Oxford Economics made assumptions to estimate the number 
of workers earning at least $455 per week. The firm chose to include 
or exclude all workers in an occupation based on whether ``the 
threshold wage was below the 10th percentile or above the 90th 
percentile respectively.'' See Appendix A: Detailed Methodology 
Description, at 32, available at https://nrf.com/sites/default/files/Documents/retail%20library/Rethinking-Overtime-Appendices.pdf.
---------------------------------------------------------------------------

    The Chamber expressed concern that the probability codes used to 
determine the share of workers in an occupation who are EAP exempt are 
17 years old and therefore out of date. Similarly, the Economic Policy 
Institute (EPI) commented that we underestimated the number of exempt 
workers for this reason. The Department acknowledges these codes were 
developed in 1998 for use by the GAO in its study of the part 541 
exemptions, but we believe the probability codes continue to accurately 
estimate exemption status given the fact that the standard duties test 
is not substantively different from the former short duties tests 
reflected in the codes.\126\ The Department looked at O*NET \127\ to 
determine the extent to which the 1998 probability codes reflected 
occupational duties today. The Department's review of O*NET verified 
the continued appropriateness of the 1998 probability codes.
---------------------------------------------------------------------------

    \126\ The Chamber additionally expressed concern about the use 
of proxy respondents in the CPS. To check whether proxy respondents 
may cause biased results, the Department excluded proxy responses 
from the data and found that the share of potentially affected 
workers who are affected by the rulemaking remains very similar (it 
drops from 18.8 percent (see section VI.D.ii.) to 18.1 percent).
    \127\ The O*NET database contains hundreds of standardized and 
occupation-specific descriptions. See www.onetcenter.org.
---------------------------------------------------------------------------

    The Partnership to Protect Workplace Opportunity (PPWO) cited an 
Edgeworth Economics article asserting that the probability codes are 
inappropriate because there is evidence that the relationship between 
salaries and job duties assumed by the Department is not valid. The 
article provides the following example: ``the median pay of 
`Occupational Therapists' is more than twice as high as the median pay 
of `First Line Supervisors/Managers of Retail Sales Workers,' yet the 
DOL places `Occupational Therapists' in the 10 to 50 percent category 
for managerial and professional duties, while 50 to 90 percent of the 
positions in `First Line Supervisors/Managers of Retail Sales Workers' 
were determined to include managerial and professional duties.'' 
However, this criticism is not valid since the positive relationship 
between salary levels and passing the duties test was assumed within 
probability code categories, not between probability code categories. 
The probability codes only reflect the likelihood within an occupation 
of passing the duties test, not the probability of being exempt.
Potentially Affected Exempt EAP Workers
    The Department estimated that of the 44.8 million salaried white 
collar workers considered in the analysis, 29.9 million qualified for 
the EAP exemptions under the current regulations (Table 7). However, 
some of these workers were excluded from further analysis because they 
would not be affected by the Final Rule. This excluded group contains 
workers in named occupations who are not required to pass the salary 
requirements

[[Page 32460]]

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

    \128\ Some commenters asserted it is inappropriate to exclude 
these named occupations from the impact analysis, but not from the 
data set used to derive the salary level. These workers were 
included in the earnings distribution used to set the salary level 
because it achieves a sample that is more representative of EAP 
salary levels throughout the economy (see section IV.A.iv.).

   Table 7--Estimated Percentages of EAP Exempt Workers in Named Occupations, Prior to Rulemaking, FY2005 and
                                                     FY2017
----------------------------------------------------------------------------------------------------------------
                                                                                  EAP Exempt  in     % of EAP
                                                    Workers in      EAP Exempt         named         exempt in
                      Year                         the analysis     (millions)      occupations        named
                                                  (millions) \a\                  (millions) \b\    occupations
----------------------------------------------------------------------------------------------------------------
FY2005..........................................            39.4            24.9             6.4            25.9
FY2017..........................................            44.8            29.9             7.4            24.8
----------------------------------------------------------------------------------------------------------------
Note: FY2017 estimates use pooled data for FY2013-FY2015 projected to reflect FY2017.
\a\ Wage and salary workers who are white collar, salaried, and not eligible for another (non-EAP) overtime
  exemption.
\b\ Workers not subject to a salary level test include teachers, academic administrative personnel, physicians,
  lawyers, judges, and outside sales workers.

    In response to the NPRM, the FL DEO conducted their own analysis of 
the number of Florida workers potentially affected by the proposed rule 
and asserted that the Department's analysis in the NPRM overestimates 
``by 195,000 the number of Florida workers who will qualify for 
overtime.'' The Department's NPRM estimated that 370,000 workers would 
be affected in Florida whereas the FL DEO estimated 175,100.\129\ 
However, FL DEO did not provide details explaining how they arrived at 
their lower number so the Department has no way to judge the validity 
of their analysis or to update our own analysis to incorporate any 
methodological improvements that may exist in the FL DEO study.
---------------------------------------------------------------------------

    \129\ State level data was not included in the NPRM analysis, 
but was posted at the time of the NPRM publication and is available 
at: https://www.whitehouse.gov/sites/default/files/docs/ot_state_by_state_fact_sheet.pdf.
---------------------------------------------------------------------------

    There are three groups of workers who qualify for the EAP 
exemptions: (1) Those passing only the standard EAP test (i.e., passing 
the standard duties test, the salary basis test, and the standard 
salary level test but not passing the HCE total annual compensation 
requirement); (2) those passing only the HCE test (i.e., passing the 
HCE duties test, the salary basis test, and the HCE total annual 
compensation requirement but not passing the standard duties test); and 
(3) those passing all requirements of both the standard and HCE tests. 
Based on analysis of the occupational codes and CPS earnings data, the 
Department has concluded that in FY2017, in the baseline scenario where 
the rule does not change, of the 22.5 million potentially affected EAP 
workers, approximately 15.4 million will pass only the standard EAP 
test, 7.0 million will pass both the standard and the HCE tests, and 
approximately 100,000 will pass only the HCE test (Table 8). When 
impacts are discussed in section VI.D., workers who pass both tests 
will be considered with those who pass only the standard EAP test 
because the standard salary level test is lower (i.e., the worker may 
continue to pass the standard salary level test even if he or she no 
longer passes the HCE total annual compensation requirement).

 Table 8--Estimated Number of Workers Exempt Under the EAP Exemptions by Test Type, Prior to Rulemaking, FY2005
                                                   and FY2017
----------------------------------------------------------------------------------------------------------------
                                                           Potentially affected EAP workers  (millions)
                                                 ---------------------------------------------------------------
                      Year                                         Pass standard     Pass both    Pass HCE  test
                                                       Total         test only         tests           only
----------------------------------------------------------------------------------------------------------------
FY2005..........................................            18.4            15.8             2.6            0.04
FY2017..........................................            22.5            15.4             7.0            0.10
----------------------------------------------------------------------------------------------------------------
Note: FY2017 estimates use pooled data for FY2013-FY2015 projected to reflect FY2017.


[[Page 32461]]

C. Determining the Revised Salary and Compensation Levels

    The Final Rule sets the EAP standard salary level at the 40th 
percentile of the weekly earnings distribution of full-time salaried 
workers in the lowest-wage Census Region (currently the South) and sets 
the HCE total annual compensation requirement equal to the annual 
earnings equivalent of the 90th percentile of the weekly earnings 
distribution of full-time salaried workers nationally.\130\ These 
methods were chosen in part because they generate salary levels that 
(1) appropriately distinguish between workers who are eligible for 
overtime and those who may be EAP exempt; (2) are easy to calculate and 
thus easy to replicate, creating transparency through simplicity; and 
(3) are predictable. The Department believes that the standard salary 
level set using the methodology established in this rulemaking allows 
for reliance on the current standard duties test without necessitating 
a return to the more detailed long duties test. Additionally, the 
Department believes this salary level will not result in an 
unacceptably high risk that employees performing bona fide EAP duties 
will become entitled to overtime protection by virtue of the salary 
test.
---------------------------------------------------------------------------

    \130\ On a quarterly basis, BLS publishes a table of deciles of 
the weekly wages of full-time nonhourly workers, calculated using 
CPS data, which employers can use to help anticipate the likely 
amount of automatically updated salary levels. See http://www.bls.gov/cps/research_series_earnings_nonhourly_workers.htm.
---------------------------------------------------------------------------

    In the NPRM, the Department proposed setting the EAP standard 
salary level at the 40th percentile of the weekly earnings distribution 
of full-time salaried workers nationally. In response to commenters' 
concerns that the proposed salary level would disqualify too many bona 
fide EAP employees in low-wage areas and industries, the Department 
limited the distribution to workers in the lowest-wage Census Region.
i. Methodology for the Standard Salary Level and Comparison to Past 
Methodologies
    The Department in this rulemaking is setting the standard salary 
level at the 40th percentile of weekly earnings of full-time salaried 
workers in the lowest-wage Census Region (currently the South). This 
methodology differs somewhat from previous revisions to the salary 
levels but the general concept holds: Define a relevant population of 
workers, estimate an earnings distribution for that population, then 
set a salary level that corresponds to a designated percentile of that 
distribution in order for the salary to serve as a meaningful line of 
demarcation between those Congress intended to protect and those who 
may qualify for exemption. The salary setting methodology adopted in 
this Final Rule continues the evolution of the Department's approach. 
Where the methodology differs from past methodologies, the Department 
believes the changes are an improvement. A comparison of this new 
method with methods from past rulemakings, and the reasons for 
selecting the new method are detailed in the rest of this section.
    As discussed in section IV.A., the historical methodologies used to 
revise the EAP salary levels have varied somewhat across the seven 
updates to the salary level test since it was implemented in 1938. To 
guide the determination of the salary level, the Department considered 
methodologies used previously to revise the EAP salary levels. In 
particular, the Department focused on the 1958 revisions and the most 
recent revisions in 2004. The 1958 methodology is particularly 
instructive in that it synthesized previous approaches to setting the 
long-test salary level, and the basic structures it adopted have been a 
touchstone to setting the long test salary level in subsequent 
rulemakings (with the exception of 1975).
    In 1958, the Department updated the salary levels based on a 1958 
Report and Recommendations on Proposed Revision of Regulations, Part 
541, by Harry S. Kantor (Kantor Report). To determine the revised 
salary levels the Department looked at data collected during WHD 
investigations on actual salaries paid to exempt EAP employees, grouped 
by geographic region, industry groups, number of employees, and size of 
city. The Department then set the long test salary levels so that no 
more than about 10 percent of exempt EAP employees in the lowest-wage 
region, lowest-wage industry, smallest establishment group, or smallest 
city group would fail to meet the test. Kantor Report at 6-
7.131 132 The Department then set the short test salary 
level in relation to, and significantly higher than, the long test 
salary levels. This methodology is referred to as the Kantor method, 
and the Department followed a similar methodology in setting the salary 
levels in 1963 and 1970.
---------------------------------------------------------------------------

    \131\ The Kantor long test method was based on an analysis of a 
survey of exempt workers as determined by investigations conducted 
by WHD. Subsequent analyses, including both the 2004 rulemaking and 
this Final Rule, have estimated exempt status using multiple data 
sources.
    \132\ Because the salary level test is likely to have the 
largest impact on the low-wage segments of the economy (e.g., low-
wage regions and industries), salaries in those segments were 
selected as the basis for the required salary level under the Kantor 
long test method.
---------------------------------------------------------------------------

    A significant change in 2004 from the long test Kantor method was 
that the Department used the salaries of both exempt and nonexempt 
full-time salaried workers in the South and the retail industry to 
determine the required salary level (hereafter referred to as the 2004 
method), rather than the salaries of exempt workers only. However, 
because the salaries of exempt workers on average are higher than the 
salaries of all full-time salaried workers, the Department selected a 
higher earnings percentile when setting the required salary. Based on 
the Department's 2004 analysis, the 20th percentile of earnings for 
exempt and nonexempt full-time salaried workers in the South and retail 
achieved a result very similar to the 10th percentile for workers in 
the lowest-wage regions and industries who were estimated to be exempt. 
See 69 FR 22169.
    In the current rulemaking, the Department replicated the Kantor 
long test method and the 2004 method to evaluate and compare them to 
the chosen salary level.\133\ Although the Department was able to 
replicate the 1958 and 2004 methods reasonably well, we could not 
completely replicate those methods due to changes in data availability, 
occupation classification systems, and incomplete documentation. In 
general, there are four steps in the process:
---------------------------------------------------------------------------

    \133\ The Department followed the same methodology used in the 
2004 Final Rule for estimating the Kantor long test method with 
minor adjustments. In an attempt to more accurately estimate the 
Kantor long test method, for example, this analysis included non-
MSAs as a low-wage sector as Kantor did but the 2004 revisions did 
not.
---------------------------------------------------------------------------

    1. Identify workers likely to be members of the population of 
interest.
    2. Further narrow the population of interest by distinguishing the 
sub-population employed in low-wage categories.
    3. Estimate the distribution of earnings for these workers.
    4. Identify the salary level that is equal to a pre-determined 
percentile of the distribution.
    The population of workers considered for purposes of setting the 
salary level depends on whether the 2004 method or the Kantor long test 
method is used. In replicating both methods, the Department limited the 
population to workers subject to the FLSA and covered by the 
Department's part 541 provisions, and excluded exempt EAP workers in 
named occupations, and those exempt under another (non-EAP) exemption. 
For the 2004 method, the

[[Page 32462]]

Department further limited the population to full-time salaried 
workers, and for the Kantor long test method further limited the 
population of interest by only including those workers determined as 
likely to be EAP exempt (see more detailed methodology in section VI.C. 
and Appendix A).
    In the 2004 Final Rule, the Department identified two low-wage 
categories: The South (low-wage geographic region), and the retail 
industry (low-wage industry). In the current rulemaking, the Department 
identified low-wage categories by comparing average weekly earnings 
across categories for the populations of workers used in the Kantor 
long test method and the 2004 method. The South was determined to be 
the lowest-wage Census Region and was used for the 2004 method; 
however, the Department chose to use a more detailed geographical 
break-down for the Kantor long test method to reflect the geographic 
categories Kantor used. Therefore, for the Kantor long test method the 
East South Central Census Division is considered the lowest-wage 
geographical area.\134\ The Department used three low-wage industries: 
Leisure and hospitality, other services, and public 
administration.\135\ The Department also considered non-MSAs as a low-
wage sector in the Kantor long test method. The 2004 revision did not 
consider population density but the Kantor long test method examined 
earnings across population size groups. In conclusion, for this 
analysis the 2004 method looks at workers in the South and the three 
low-wage industries, whereas the Kantor long test method looks at 
workers in the East South Central Division, non-MSAs, and the three 
low-wage industries.
---------------------------------------------------------------------------

    \134\ The East South Central Division is a subset of the South 
and includes Alabama, Kentucky, Mississippi, and Tennessee. If the 
South is used instead, the resulting salary levels would increase 
slightly.
    \135\ In the NPRM, the Department found that the industry with 
the lowest mean weekly earnings depends on whether the Kantor long 
test method or the 2004 method's population was used. Therefore, 
three industries were considered low-wage. For the Final Rule, the 
``other services'' industry was consistently the lowest-wage 
industry. However, the Department continues to use all three low-
wage industries for consistency and because these three continue to 
be the three lowest-wage industries.
---------------------------------------------------------------------------

    Next, the Department estimated the distributions of weekly earnings 
of two populations: (1) Workers who are in at least one of the low-wage 
categories and in the Kantor population (likely exempt workers), and 
(2) workers who are in at least one of the low-wage categories and in 
the 2004 population (full-time salaried workers). From these 
distributions, alternate salary levels were identified based on pre-
determined percentiles. For the Kantor long test method, the salary 
level for the long duties test is identified based on the 10th 
percentile of weekly earnings for likely EAP exempt workers, while the 
2004 method salary level is identified based on the 20th percentile of 
weekly earnings for both exempt and nonexempt salaried workers. Using 
2015 quarter 3 CPS MORG data, the Kantor long test method resulted in a 
salary level of $684 per week, and the 2004 method resulted in a salary 
level of $596 per week.\136\ Table 9 presents the distributions of 
weekly earnings used to estimate the salary levels under the method 
used in this Final Rule, the NPRM method, the 2004 method, and the 
Kantor long test method.
---------------------------------------------------------------------------

    \136\ Quarter 3 was used instead of quarter 4, which was used 
for the distribution of all full-time salaried workers, because at 
the time the analysis was conducted this was the most recently 
available data.

                                                         Table 9--Weekly Earnings Distributions
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                        Weekly  earnings                                           Annual earnings a
                                   ---------------------------------------------------------------------------------------------------------------------
                                     Full-time salaried 2015Q4                                 Full-time salaried 2015Q4 b
            Percentile                           b               2004 Method    Kantor Long  ------------------------------  2004 Method    Kantor Long
                                   ----------------------------  2015Q3 \c\     Test Method                                  2015Q3 \c\     Test Method
                                        South      Nationally                    2015Q3 d          South       Nationally                    2015Q3 d
--------------------------------------------------------------------------------------------------------------------------------------------------------
10................................          $479          $509          $429            $684         $24,908       $26,468       $22,319         $35,560
20................................           633           692           596             817          32,916        35,984        31,015          42,491
30................................           768           838           726             949          39,936        43,576        37,749          49,332
40................................           913           972           844           1,110          47,476        50,544        43,878          57,739
50................................         1,054         1,146           988           1,259          54,808        59,592        51,381          65,451
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ Weekly earnings multiplied by 52.
\b\ BLS. Available at: http://www.bls.gov/cps/research_series_earnings_nonhourly_workers.htm.
\c\ Full-time salaried workers in the South or employed in a low-wage industry (excludes workers not subject to the FLSA, not subject to the salary
  level test, and in agriculture or transportation). Quarter 3 was used instead of Q4 because at the time of the analysis this was the most recently
  available data.
\d\ Salaried, white collar workers who earn at least $455 per week, pass the EAP duties test, and either live in the East South Central Division or a
  non-MSA or are employed in a low-wage industry (excludes workers not subject to FLSA, not subject to the salary level test, and in agriculture or
  transportation). Quarter 3 was used instead of Q4 because at the time of the analysis this was the most recently available data.

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

[[Page 32463]]

discussed previously, however, there will always be white collar 
overtime-eligible employees who are paid above the salary threshold. A 
low salary level increases the number of these employees. The necessity 
of applying the duties test to these overtime-protected employees 
consumes employer resources, may result in misclassification (which 
imposes additional costs to employers and society in the form of 
litigation), and is an indicator of the effectiveness of the salary 
level. Similarly, there will always be employees performing bona fide 
EAP duties who are paid below the salary threshold; the inability of 
employers to claim the EAP exemption for these employees is also an 
indicator of the effectiveness of the salary level. Selecting the 
standard salary level will inevitably affect the number of workers 
falling into each of these two categories.
1. Correcting for the Elimination of the Long Duties Test
    The Kantor long test method sought to minimize the number of white 
collar employees who pass the long duties test but were excluded from 
the exemption by the salary threshold and therefore set the salary 
level at the bottom 10 percent of earnings of exempt EAP employees in 
low-wage regions and industries so as to prevent ``disqualifying any 
substantial number of such employees.'' Kantor Report at 5. This method 
was based on the long/short test structure, in which employees paid at 
lower salary levels were protected by significantly more rigorous 
duties requirements than are part of the current standard duties test. 
This approach, however, does not sufficiently take into account the 
inefficiencies of applying the duties test to large numbers of 
overtime-eligible white collar employees and the possibility of 
misclassification of those employees as exempt.
    As discussed in section IV.A., for many decades the long duties 
test--which limited the amount of time an exempt employee could spend 
on nonexempt duties and was paired with a lower salary level--existed 
in tandem with a short duties test--which did not contain a specific 
limit on the amount of nonexempt work and was paired with a 
significantly higher salary level. In 2004, the Department eliminated 
the long and short duties tests and created the new standard duties 
test, based on the short duties test. The creation of a single standard 
test that did not limit nonexempt work caused new uncertainty as to 
what salary level is sufficient to ensure that employees intended to be 
overtime-protected are not subject to inappropriate classification as 
exempt, while minimizing the number of employees disqualified from the 
exemption even though their primary duty is EAP exempt work.
    In the Final Rule, the Department corrects for the elimination of 
the long duties test and sets a salary level that works in tandem with 
the standard duties test to appropriately classify white collar workers 
as entitled to minimum wage and overtime protection or potentially 
exempt. Thus, while the standard salary level set by the Department is 
higher than the level the Kantor long test or 2004 methods would 
generate, it is set at the low end of the range of the historical short 
test levels, based on the ratios between the short test and long test 
levels, and much lower than the historical average for the short test. 
Between 1949 and 2003, the ratio of the short to long salary tests 
ranged from approximately 130 percent to 180 percent. The low end of 
this range would result in a salary level of $889; the high end would 
result in a salary of $1,231 (measured in FY2015 dollars). The short 
salary level updates between 1949 and 2003 averaged $1,100 per week 
(measured in FY2015 dollars).\137\ At the 40th percentile of weekly 
earnings of full-time workers in the South, 9.9 million white collar 
employees would no longer be subject to the standard duties test (4.2 
million currently EAP exempt employees who would be newly entitled to 
overtime protection due to the increase in the salary threshold and 5.7 
million overtime eligible white collar employees who are paid between 
$455 and $913 per week whose exemption status would no longer depend on 
the application of the duties test). As discussed in section IV.A.iv., 
the Department believes that many of the workers who will no longer be 
exempt are currently inappropriately classified because of the mismatch 
between the standard duties test and the standard salary level. The 
final salary threshold will therefore more efficiently distinguish 
between employees who may meet the duties requirement of the EAP 
exemption and those who do not, without necessitating a return to the 
more detailed long duties test.
---------------------------------------------------------------------------

    \137\ This is the average of the values of the short test salary 
level inflated to 2015 dollars.
---------------------------------------------------------------------------

2. Appropriately Distinguishing Overtime-Eligible White Collar Workers 
and Those Who May Be EAP Exempt
    The revised salary level also reduces the likelihood of workers 
being misclassified as exempt from overtime pay, providing an 
additional measure of the effectiveness of the salary level as a 
bright-line test delineating exempt and nonexempt workers. In the NPRM, 
the Department estimated that 13.5 percent of overtime-eligible white 
collar workers earning between the current salary level and the 
proposed salary level were misclassified. 80 FR 38559.
    The Department updated our estimate of potential misclassification 
based on the salary level set in this Final Rule. The Department's 
analysis of misclassification draws on CPS data and looked at workers 
who are white collar, salaried, subject to the FLSA and covered by part 
541 regulations, earn at least $455 but less than $913 per week, and 
fail the duties test. Because only workers who work overtime may 
receive overtime pay, when determining the share of workers who are 
misclassified the sample was limited to those who usually work 
overtime.\138\ Workers were considered misclassified if they did not 
receive overtime pay.\139\ The Department estimates that 12.8 percent 
of workers in this analysis who usually work overtime do not receive 
overtime compensation and are therefore misclassified as exempt. 
Applying this estimate to the sample of white collar salaried workers 
who fail the duties test and earn at least $455 but less than $913, the 
Department estimates that there are approximately 732,000 white collar 
salaried workers earning at least $455 but less than $913 who are 
overtime-eligible but whose employers do not recognize them as 
such.\140\ These employees' entitlement to overtime pay will now be 
abundantly evident.
---------------------------------------------------------------------------

    \138\ We have excluded workers who are in named occupations or 
are exempt under another non-EAP exemption.
    \139\ Overtime pay status was based on worker responses to the 
CPS MORG question concerning whether they receive overtime pay, 
tips, or commissions at their job (``PEERNUOT'' variable).
    \140\ The Department applies the misclassification estimate 
derived here to both the group of workers who usually work more than 
40 hours and to those who do not.
---------------------------------------------------------------------------

    Table 10 provides estimates of the extent of misclassification of 
workers as exempt among first-line supervisors/managers in a variety of 
industries using the same method of looking at white collar salaried 
employees who fail the duties test and who report working more than 40 
hours a week but do not report receiving overtime compensation.\141\ 
The Department's analysis found that 41 percent of first-line 
supervisors/managers of food

[[Page 32464]]

preparation and serving workers, and 35 percent of first-line 
supervisors/managers of retail sales workers are misclassified.
---------------------------------------------------------------------------

    \141\ The occupational category of first-line supervisors and 
managers illustrates the concept across a range of industries. This 
category of workers may be susceptible to potential 
misclassification because they are the first level of management 
above overtime-protected line workers.
---------------------------------------------------------------------------

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

Table 10--Estimates of Misclassification among First-Line Supervisors and Managers Covered by the Final Rule Who
                                      Earn at Least $455 and Less than $913
----------------------------------------------------------------------------------------------------------------
                                                               Overtime eligible
                                                                salaried workers
                                                                who earn between    Percent who       Percent
          First-line supervisors/manager occupations              $455 and $913    usually work    misclassified
                                                                    per week       >40 hours \a\        \b\
                                                                    (1,000s)
----------------------------------------------------------------------------------------------------------------
Total........................................................              5,697            15.0            12.8
----------------------------------------------------------------------------------------------------------------
                                    First-line supervisors/managers of . . .
----------------------------------------------------------------------------------------------------------------
Retail sales workers.........................................              208.5            39.9            34.6
Non-retail sales workers.....................................               66.0            32.6            27.5
Production and operating workers.............................               62.4            26.3            24.0
Construction trades and extraction workers...................               58.5            19.9            19.0
Food preparation and serving workers.........................               55.5            44.9            41.0
Housekeeping and janitorial workers..........................               35.0            22.0            17.2
Mechanics, installers, and repairers.........................               28.9            29.2            27.6
Office and administrative support workers....................               26.9            14.0            13.1
Personal service workers.....................................               21.0            31.5            24.3
Landscaping, lawn service, and grounds keeping workers.......               17.4            29.3            26.0
----------------------------------------------------------------------------------------------------------------
Source: CPS extract. Workers who are white collar, salaried, subject to the FLSA and covered by the part 541
  regulations, earn at least $455 but less than $913 per week, and fail the duties test.
\a\ Percent of overtime eligible salaried workers who usually work more than 40 hours per week. This differs
  from the 40 percent of all workers who work more than 40 hours in a week at least once per year because it
  only includes overtime eligible workers and excludes occasional overtime workers.
\b\ Share of respondents who report usually working more than 40 hours per week and do not report that they
  ``usually receive overtime pay, tips, or commissions.''

    Since the NPRM was published, RAND has conducted a survey to 
identify the number of workers who may be misclassified as EAP exempt. 
The survey, a special module to the American Life Panel, asks 
respondents (1) hours worked, (2) whether they are paid on an hourly or 
salary basis, (3) their typical earnings, (4) whether they perform 
certain job responsibilities that are treated as proxies for whether 
they would justify exempt status, and (5) whether they receive any 
overtime pay. Using these data, Susann Rohwedder and Jeffrey B. Wenger 
\142\ found ``11.5 percent of salaried workers were classified as 
exempt by their employer although they did not meet the criteria for 
being so.'' Using RAND's estimate of the rate of misclassification 
(11.5 percent), at the new salary level, the Department estimates that 
approximately 1.8 million salaried workers earning between $455 and 
$913 per week who fail the standard duties test are currently 
misclassified as exempt.\143\
---------------------------------------------------------------------------

    \142\ Rohwedder, S. and Wenger, J.B. (2015). The Fair Labor 
Standards Act: Worker Misclassification and the Hours and Earnings 
Effects of Expanded Coverage. RAND Labor and Population.
    \143\ The number of misclassified workers estimated based on the 
RAND research cannot be directly compared to the Department's 
estimates because of differences in data, methodology, and 
assumptions. Although it is impossible to reconcile the two 
different approaches without further information, by calculating 
misclassified workers as a percent of all salaried workers in its 
sample, RAND uses a larger denominator than the Department. If 
calculated on a more directly comparable basis, the Department 
expects the RAND estimate of the misclassification rate would still 
be higher than the Department's estimate.
---------------------------------------------------------------------------

    The Department also assessed the impact of the standard salary 
level as a bright-line test for EAP exemption by examining: (1) The 
number of salaried white collar workers who pass the standard salary 
level test but not the duties test and (2) the number of salaried white 
collar workers who pass the standard duties test but not the salary 
level test.\144\ This first group is equivalent to the number of 
salaried white collar workers who are eligible for overtime pay because 
they do not pass the standard EAP duties test, but earn above a 
specific salary level. The second group is the number of salaried white 
collar workers who satisfy the standard duties test but earn less than 
a specific standard salary level. The Department makes this assessment 
at the current salary level ($455) and the final salary level ($913), 
while holding all other factors determining exempt status constant 
(e.g., not considering whether the duties test is correctly applied or 
potential employer response to the change in the salary level test). 
Examining the impact of the salary threshold in isolation from the 
application of the duties test or employer adjustments to pay or hours 
does not provide a complete picture of the impact of a new salary 
threshold. It does, however, allow the Department to evaluate the 
effectiveness of the salary level in protecting overtime-eligible white 
collar employees without unduly excluding from the exemption employees 
performing EAP duties.
---------------------------------------------------------------------------

    \144\ These populations are limited to salaried, white collar 
workers subject to the FLSA and the Department's part 541 
regulations, and not eligible for another (non-EAP) exemption, not 
in a named occupation, and not HCE only.
---------------------------------------------------------------------------

    As a benchmark, the Department estimates that at the current 
standard salary threshold, there are 12.2 million salaried white collar 
workers who fail the standard duties test and are therefore overtime 
eligible, but earn at least the $455 threshold, while there are only 
838,000 salaried white collar

[[Page 32465]]

workers who pass the standard duties test but earn less than the $455 
level. Thus the number of salaried white collar workers who pass the 
current salary threshold test but not the duties test is nearly 15 
times the number of salaried white collar workers who pass the duties 
test but are paid below the salary threshold. This underscores the 
large number of overtime-eligible workers for whom employers must 
perform a duties analysis, and who may be at risk of misclassification 
as EAP exempt. At a salary threshold equal to the 40th percentile of 
full-time salaried workers in the South ($913), the number of overtime-
eligible salaried white collar workers who would earn at least the 
threshold but do not pass the duties test would be reduced almost in 
half to 6.5 million (approximately 47 percent of all white collar 
salaried employees who fail the duties test). At a salary level of 
$913, the number of salaried white collar workers who would pass the 
standard duties test but earn less than the salary level would increase 
to 5.0 million (approximately 22 percent of all white collar salaried 
employees who pass the standard duties test). While this number is 
higher than the number of such employees under the Kantor long test 
method (approximately 10 percent), it includes employees who would have 
been overtime-eligible because they would not have passed the more 
rigorous long duties test, which had a cap on the percentage of time an 
employee could spend on nonexempt duties, and therefore were not 
included under that approach. Further, the number of salaried white 
collar workers who pass the new salary threshold test but not the 
duties test (6.5 million) is 31 percent higher than the number of 
salaried white collar workers who pass the duties test but are paid 
below the salary threshold (5.0 million).
    Figure 3: Percentage of White Collar Salaried Workers by Earnings 
and Duties Test Status for National, Highest-Wage, and Lowest-Wage 
Regions
[GRAPHIC] [TIFF OMITTED] TR23MY16.002

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

[[Page 32466]]

previously performed by the long duties test.
---------------------------------------------------------------------------

    \145\ Of employees who are paid on a salary basis of at least 
$455 per week and meet the standard duties test, approximately 81 
percent earn at least the new level of $913 per week. Conversely, 
among overtime-eligible salaried white collar employees earning at 
least $455 per week, approximately 47 percent earn less than the new 
salary level.
---------------------------------------------------------------------------

    At the current salary level (far left of Figure 3), there is a very 
large gap between salaried white collar workers who are overtime 
eligible but earn at least the threshold (about 87 percent of all 
salaried white collar workers who fail the duties test are paid at 
least $455 per week) and salaried white collar workers who pass the 
standard duties test but do not meet the current salary level (about 4 
percent of all salaried white collar workers who pass the duties test 
are paid less than $455 per week). At the salary level of the 40th 
percentile of weekly earnings of full-time salaried workers in the 
South ($913 per week), the percentage of overtime-eligible salaried 
white collar workers who earn above the threshold (and thus would be at 
risk of misclassification) still remains higher than the percentage of 
salaried white collar workers who pass the duties test but earn less 
than the salary threshold (and would become overtime protected).\146\ 
The salary threshold would have to be considerably higher (at a weekly 
salary level of approximately $1,100) before the percentage of salaried 
white collar workers who earn less than the threshold but pass the 
duties test would equal the percentage who are overtime eligible but 
earn at least the salary threshold. While some commenters favored 
setting the salary level at this intersection point, the Department 
concludes that the resulting salary level would unduly impact low-wage 
regions and industries.
---------------------------------------------------------------------------

    \146\ Approximately 47 percent of white collar salaried workers 
who do not pass the duties test earn at least the new salary level 
($913 per week). Conversely, approximately 22 percent of employees 
who pass the standard duties test earn less than the new salary 
level.
---------------------------------------------------------------------------

    The Department has also looked at the impact of the new salary 
level on these two groups of workers in low-wage (East South Central) 
and high-wage (Pacific) Census divisions in addition to 
nationally.\147\ For the East South Central Census division, the salary 
level at which the percentages of the two groups are about equal is 
approximately $995 per week, while in the Pacific Census division, the 
salary at which the percentages of the two groups are equal is 
approximately $1,217 per week. The Department's new salary level of the 
40th percentile of weekly earnings of full-time salaried workers in the 
lowest-wage Census Region ($913 per week) falls below the estimate for 
the East South Central division. This further supports that the 
Department's change in the Final Rule to the lowest-wage Census Region 
establishes a salary level that is appropriate for classifying workers 
as entitled to minimum wage and overtime pay or potentially exempt in 
even the lowest wage areas.
---------------------------------------------------------------------------

    \147\ Of the nine Census divisions, the East South Central and 
Pacific divisions correspond to the divisions with the lowest and 
highest earnings using the Kantor long test method. The East South 
Central includes Alabama, Kentucky, Mississippi, and Tennessee. The 
Pacific includes Alaska, California, Hawaii, Oregon, and Washington.
---------------------------------------------------------------------------

3. Simplicity and Transparency
    The method of basing the standard salary threshold on a particular 
percentile of weekly earnings of full-time salaried employees in the 
lowest-wage Census Region involves less estimation than previous 
updates, making it easier to implement, less prone to error, and more 
transparent than before. The method reduces computation by simplifying 
the classification of workers to just two criteria: wage or salaried, 
and full-time or part-time. Application of the Kantor long test method, 
in particular, would involve significant work to replicate since one 
would need to identify likely EAP exempt workers, a process which 
requires applying the standard duties test to determine the population 
of workers used in the earnings distribution. In addition, both the 
Kantor long test and 2004 methods exclude workers not subject to the 
FLSA, not subject to the salary level test, or in agriculture or 
transportation. The method adopted in this Final Rule is easier for 
stakeholders to replicate and understand because the standard duties 
test does not need to be applied to determine the population of workers 
used in the earnings distribution.
    International Foodservice Distributors Association, IABI, and 
others criticized the Department for not restricting the CPS sample to 
workers subject to the part 541 regulations or subject to the salary 
level test. As explained in section IV.A.iv., the Department believes 
these white collar professionals are part of the universe of executive, 
administrative, and professional employees who Congress intended to 
exempt from the FLSA's minimum wage and overtime requirements and 
including them in the data set achieves a sample that is more 
representative of EAP salary levels throughout the economy.
4. Consistency and Predictability
    A method that produces very different salary levels in consecutive 
years may reduce confidence that the salary levels in any given year 
are optimal. The growth rate using the Kantor long test method varies 
across years. The primary reason for this is because the Kantor long 
test method--or any other method that limits the data set to currently 
exempt workers--uses the value of the current salary level test to 
identify the population of workers from which the earnings distribution 
is determined. Therefore, the Kantor long test method limits the pool 
of workers in the sample used to set the salary level to those who meet 
the currently required salary level, while the 2004 method and the new 
method implemented in this Final Rule do not exclude workers with 
salaries below the current salary level. Since FY2004, the salary 
levels that would have been generated by the Kantor method increased by 
3.6 percent on average annually.\148\ Conversely, since FY2004, the 
40th percentile of earnings of full-time salaried workers in the South 
has increased by an average of 2.4 percent annually. Similarly, the 
salary levels that would have been generated by the 2004 method 
(keeping low-wage sectors constant) increased 2.5 percent annually on 
average. This explains why the salary levels generated by the Kantor 
long test method and the 2004 method have diverged significantly since 
2004 (in the third quarter of 2015, Kantor = $684; 2004 = $596).
---------------------------------------------------------------------------

    \148\ Values calculated using geometric growth rates and 
starting in FY2004, the last time the salary level was increased.
---------------------------------------------------------------------------

    For example, in 2003 the Kantor long test method's population of 
interest was limited to workers earning at least $155 per week (the 
1975 long test salary level); in this Final Rule the Kantor long test 
method's population was restricted to workers earning at least $455 per 
week. Therefore the population considered in the Kantor long test 
method changes each time the salary level is changed. The Department's 
Final Rule, like the 2004 method, considers all full-time salaried 
workers and does not limit the pool to only those workers who meet the 
current salary level test, thus avoiding this potential shortcoming of 
the Kantor long test method.
iii. Standard Salary Levels With Alternative Methodologies
    When assessing the standard salary level, the Department evaluated 
several alternatives in addition to the level chosen. This section 
presents the alternative salary levels considered and the bases for 
identifying those alternative levels. While commenters proposed other 
methods for calculating the salary level, the Department determined 
that these alternatives remained the best comparators for evaluating 
the chosen salary level methodology. As shown in Table 11, the 
alternative salary levels evaluated are:

[[Page 32467]]

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

        Table 11--Standard Salary Level and Alternatives, FY2017
------------------------------------------------------------------------
                                                     Total increase \a\
          Alternative               Salary level   ---------------------
                                 (weekly/annually)      $          %
------------------------------------------------------------------------
Alt. #1: Inflate 2004 level \b\       $570/$29,640        115       25.3
Alt. #2: 2004 method \c\.......         596/31,015        141       31.1
Alt. #3: Kantor long test \c\..         684/35,568        229       50.3
Final Rule method (40th                 913/47,476        458      100.7
 percentile of full-time
 salaried workers in lowest-
 wage Census Region)...........
Alt. #4: 40th percentile of             972/50,544        517      113.6
 full-time salaried workers
 nationally....................
Alt. #5: Kantor short test \c\.       1,019/52,984        564      123.9
Alt. #6: Inflate 1975 short           1,100/57,205        645      141.8
 test level \b\................
------------------------------------------------------------------------
\a\ Change between salary level or alternative and the salary level set
  in 2004 ($455 per week).
\b\ Value in FY2015$. Inflated using CPI-U to FY2015$ (most recent data
  available).
\c\ Data for 2015, quarter 3.

    Alternative 1 inflates the 2004 standard salary level ($455) to 
FY2015 dollars using the CPI-U. This produces a salary level of $570 
per week. As noted above, the 2004 method sets the standard salary 
level at approximately the 20th percentile of full-time salaried 
workers in the South and retail industry. Alternative 2 applies this 
methodology to more recent data (quarter 3 of 2015), resulting in a 
salary level of $596 per week. Alternative 3 produces the salary level 
using the Kantor method for the long duties test, resulting in a level 
of $684 per week. As we explain earlier in the preamble, the Department 
rejected the use of these alternatives because they pair a salary level 
appropriate for use with the long duties test with a duties test 
appropriate for use with the short test salary.
    Alternative 4 sets the standard salary equal to the 40th percentile 
of weekly earnings of all full-time salaried workers nationally. This 
is the approach that the Department proposed in the NPRM. This 
alternative uses the same methodology as this Final Rule--setting the 
salary level at the 40th percentile of earnings--but uses a data set 
including full-time salaried workers nationwide instead of limiting the 
population to the lowest-wage Census Region. The 40th percentile of 
earnings of all full-time salaried workers nationally, in the fourth 
quarter of 2015, is $972. As discussed in more detail in section 
IV.A.iv., the Department declined to adopt this method in response to 
commenters' concerns that the proposed salary level could 
disproportionately impact workers in low-wage regions and industries by 
inappropriately excluding from exemption too many workers who meet the 
duties test.
    Alternative 5 (Kantor short test) is also based on the Kantor 
method but, whereas alternative 3 generates the salary level associated 
with the long duties test, alternative 5 generates a level more closely 
resembling the salary associated with the short duties test, which the 
Department set as a function of the Kantor long test. In the 2004 Final 
Rule, the Department replaced the structure of separate short and long 
duties tests with a single standard duties test based on the less 
restrictive short duties test, which had historically been paired with 
a higher salary level test. However, the Department set the standard 
salary level in 2004 at a level that was equivalent to the Kantor long 
test salary level, which was associated with the long duties test and 
limited the amount of nonexempt work that the employee could perform. 
In alternative 5, the Department therefore considered revising the 
standard salary level to approximate the short test salary that better 
matches the standard duties test. On average, the salary levels set in 
1949 through 1975 were 149 percent higher for the short test than the 
long test. Therefore, the Department inflated the Kantor estimate of 
$684 by 149 percent, which generated a short salary level equivalent of 
$1,019 per week.\149\ While the Department used the average difference 
between the Kantor short and long tests for this alternative, the ratio 
of the short to long salary tests ranged from approximately 130 percent 
to 180 percent between 1949 and 2004. The low end of this range would 
result in a weekly salary of $889; the high end would result in a 
salary of $1,231. The Department rejected the use of the Kantor short 
test, as explained in this preamble, because we concluded that a 
standard salary level of $1,019 per week might exclude from exemption 
too many bona fide EAP workers in certain regions or industries.
---------------------------------------------------------------------------

    \149\ The Department estimated the average historic ratio of 149 
percent as the simple average of the fifteen historical ratios of 
the short duties salary level to the long duties salary level 
(salary levels were set in 5 years and in each year the salary level 
varied between the three exemptions: executive, administrative, and 
professional). If the Department had weighted the average ratio 
based on the length of time the historic salary levels were in 
effect, this would have yielded an average historic ratio of 152 
percent and a salary level of $1,039.
---------------------------------------------------------------------------

    Alternative 6 inflates the 1975 short duties test salary level to 
$1,100 per week in FY2015 dollars. Similar to alternative 5, the 
Department rejected the use of a short test salary level due to the 
concern that it might exclude from exemption too many bona fide EAP 
workers in certain regions or industries.
    Section VI.D. details the transfers, costs, and benefits of the new 
salary level and the above alternatives. A comparison of the costs and 
benefits supports the Department's decision to set the standard salary 
level of the 40th percentile of weekly earnings of all full-time 
salaried workers in the South ($913 per week).
iv. Methodology for the HCE Total Annual Compensation Level and 
Alternative Methods
    The Department sets the HCE compensation level equal to the annual 
equivalent of the 90th percentile of the

[[Page 32468]]

distribution of earnings of all full-time salaried workers nationally. 
BLS calculated the salary level from the CPS MORG data by limiting the 
population to nonhourly workers who work full-time (i.e., at least 35 
hours per week) and determining the 90th percentile of the resulting 
weighted weekly earnings distribution. The 90th percentile of weekly 
earnings in the fourth quarter of 2015 was $2,577. This was then 
multiplied by 52 to determine the annual earnings equivalent 
($134,004). This method uses a percentile towards the top of the 
nationwide earnings distribution to reflect the minimal duties criteria 
associated with the highly compensated employee exemption.
    The Department also evaluated the following alternative HCE 
compensation levels:
     HCE alternative 1: Leave the HCE compensation level 
unchanged at $100,000 per year.
     HCE alternative 2: Inflate the 2004 level using CPI-U to 
$125,320 per year in FY2015 dollars.
     HCE alternative 3: Set the HCE compensation level at 
$149,894 per year, which is approximately the annualized level of 
weekly earnings exceeded by 6.3 percent of full-time salaried workers. 
This is the same percent of such workers that exceeded the HCE 
compensation level in 2004. See 69 FR 22169.
    The Department continues to believe that HCE alternative 1 is 
inappropriate because leaving the HCE compensation level unchanged at 
$100,000 per year would ignore more than 10 years of wage growth. In 
FY2017, approximately 20 percent of full-time salaried workers are 
projected to earn at least $100,000 annually, more than three times the 
share who earned that amount in the 2004 Final Rule analysis. HCE 
alternative 2 uses the CPI-U to inflate the value set in 2004 instead 
of using the higher wage growth over that time period, and therefore 
the Department does not believe this alternative accurately reflects 
wage growth since 2004. Finally, HCE alternative 3 would set the annual 
compensation level at $149,894. The Department believes this 
compensation level would be too high to provide a meaningful 
alternative test for exemption. Thus, the Department concludes that 
adjusting the HCE total annual compensation to reflect the 90th 
percentile of earnings of full-time salaried workers nationwide 
($134,004) strikes the appropriate balance.

D. Impacts of Revised Salary and Compensation Level Test Values

i. Overview and Summary of Quantified Impacts
    The impacts of increasing the EAP salary and compensation levels 
will depend on how employers respond. Employer response is expected to 
vary by the characteristics of the affected EAP workers. For workers 
who usually work 40 hours a week or less, the Department assumes that 
employers will reclassify these affected EAP workers as overtime-
eligible and will pay them the same weekly earnings for the same number 
of hours worked. While these employees will become overtime eligible, 
employers can continue to pay their current salaries and will not need 
to make any adjustments as long as the employees' hours do not exceed 
40 hours in a workweek. For affected EAP employees who work overtime, 
employers may: (1) Pay the required overtime premium for the current 
number of overtime hours based upon the current implicit regular rate 
of pay; (2) reduce or eliminate overtime hours; (3) reduce the regular 
rate of pay so total weekly earnings and hours do not change after 
overtime is paid; (4) increase employees' salaries to the new salary 
level; or (5) use some combination of these responses. Transfers from 
employers to employees and between employees, direct employer costs, 
and DWL depend on how employers respond to the Final Rule.
    In order to increase the sample size and the reliability and 
granularity of results in this analysis, the Department used three 
years (FY2013-FY2015) of CPS MORG data to represent the FY2015 labor 
market. Monetary values in FY2013 and FY2014 were inflated to FY2015 
dollars and the sample was reweighted to reflect the population of 
potentially affected workers in FY2015. Afterwards, this pooled sample 
was adjusted to reflect the FY2017 economy by further inflating wages 
and sampling weights to match projections for FY2017. See section 
VI.B.ii.
    Table 12 presents the projected impact on affected workers, costs, 
transfers, and DWL associated with increasing the standard EAP salary 
level from $455 per week to the 40th earnings percentile of full-time 
salaried workers in the South, $913 per week; increasing the HCE 
compensation level from $100,000 to the 90th earnings percentile of 
full-time salaried workers nationally, $134,004 annually; and updating 
both of these levels triennially. The Department estimated that the 
direct employer costs of this Final Rule will total $677.9 million in 
the first year, with average annualized direct costs of $295.1 million 
per year over 10 years. In addition to these direct costs, this Final 
Rule will also transfer income from employers to employees. Year 1 
transfers will equal $1,285.2 million, with average annualized 
transfers estimated at $1,189.1 million per year over 10 years. 
Finally, the 10-year average annualized DWL was estimated to be $9.2 
million. Potential employer costs due to reduced profits and additional 
hiring were not quantified but are discussed in section VI.D.iii. 
Benefits were also not quantified but are discussed in section 
VI.D.vii.

    Table 12--Summary of Affected Workers and Regulatory Costs and Transfers, Standard and HCE Salary Levels
----------------------------------------------------------------------------------------------------------------
                                                                  Future years \b\      Average annualized value
                                                             ---------------------------------------------------
                   Impact \a\                       Year 1                                3% real      7% real
                                                                 Year 2      Year 10        rate         rate
----------------------------------------------------------------------------------------------------------------
                                            Affected Workers (1000s)
----------------------------------------------------------------------------------------------------------------
Standard.......................................        4,163        3,893        5,045  ...........  ...........
HCE............................................           65           73          217  ...........  ...........
----------------------------------------------------------------------------------------------------------------
    Total......................................        4,228        3,965        5,261  ...........  ...........
----------------------------------------------------------------------------------------------------------------
                                    Direct Employer Costs (Millions FY2017$)
----------------------------------------------------------------------------------------------------------------
Regulatory familiarization \c\.................       $272.5         $0.0        $23.1        $37.6        $42.4
Adjustment \d\.................................        191.4          1.5          5.9         25.4         29.0

[[Page 32469]]

 
Managerial.....................................        214.0        206.6        255.1        225.0        223.6
----------------------------------------------------------------------------------------------------------------
    Total direct costs \e\.....................        677.9        208.0        284.2        288.0        295.1
----------------------------------------------------------------------------------------------------------------
                            Transfers from Employers to Workers (Millions FY2017) \f\
----------------------------------------------------------------------------------------------------------------
Due to minimum wage............................        $34.3        $28.5        $17.8        $23.2        $23.8
Due to overtime pay............................      1,250.8        907.9      1,589.4      1,178.5      1,165.3
----------------------------------------------------------------------------------------------------------------
    Total transfers \e\........................      1,285.2        936.5      1,607.2      1,201.6      1,189.1
----------------------------------------------------------------------------------------------------------------
                                            DWL (Millions FY2017) \g\
----------------------------------------------------------------------------------------------------------------
DWL............................................          6.4          8.7         11.1          9.3          9.2
----------------------------------------------------------------------------------------------------------------
\a\ Additional costs and benefits of the rule that could not be quantified or monetized are discussed in the
  text.
\b\ These costs/transfers represent a range over the nine-year span.
\c\ Regulatory familiarization costs occur only in years when the salary levels are updated (Years 1, 4, 7, and
  10).
\d\ Adjustment costs occur in all years when there are newly affected workers, including years when the salary
  level is not updated. Adjustment costs may occur in years without updated salary levels because some workers'
  projected earnings are estimated using negative earnings growth.
\e\ Components may not add to total due to rounding.
\f\ This is the net transfer that we primarily describe as being from employers to workers. There may also be
  transfers between workers. Moreover, some of these transfers may be intrapersonal (for instance, higher
  earnings may be offset by increased hours worked for employees who remain overtime-exempt or may be
  supplemented by reduced hours for some newly overtime-protected employees).
\g\ DWL was estimated based on the aggregate impact of both the minimum wage and overtime pay provisions. Since
  the transfer associated with the minimum wage is negligible compared to the transfer associated with overtime
  pay, the vast majority of this cost is attributed to the overtime pay provision.

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

[[Page 32470]]

[GRAPHIC] [TIFF OMITTED] TR23MY16.003

    Table 13 presents the number of affected EAP workers, the mean 
number of overtime hours they work per week, and their average weekly 
earnings. The 4.2 million workers affected by the increase in the 
standard salary level average 1.4 hours of overtime per week and earn 
an average of $734 per week. The average number of overtime hours is 
low because most of these workers (3.3 million) do not usually work 
overtime.\150\ However, the estimated 825,000 affected workers who 
regularly work overtime average 11.1 hours of overtime per week. The 
65,000 EAP workers affected by the change in the HCE annual 
compensation level average 5.5 hours of overtime per week and earn an 
average of $2,181 per week ($113,389 per year).
---------------------------------------------------------------------------

    \150\ That is, workers who report they usually work 40 hours or 
less per week (identified with variable PEHRUSL1 in CPS MORG).
---------------------------------------------------------------------------

    Although most affected EAP workers who typically do not work 
overtime might experience little or no change in their daily work 
routine, those who regularly work overtime may experience significant 
changes. The Department expects that workers who routinely work some 
overtime or who earn less than the minimum wage are most likely to be 
tangibly impacted by the revised standard salary level.\151\ Employers 
might respond by: Reclassifying such employees to nonexempt status 
(either paying at least the hourly minimum wage and a premium for any 
overtime hours, or its salary equivalent with half-time paid for any 
overtime hours); reducing workers' regular wage rates (provided that 
the reduced rates still exceed the minimum wage); increasing the 
employees' salary to the salary level; reducing or eliminating overtime 
hours; or using some combination of these responses.
---------------------------------------------------------------------------

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

         Table 13--Number of Affected EAP Workers, Mean Overtime Hours, and Mean Weekly Earnings, FY2017
----------------------------------------------------------------------------------------------------------------
                                                     Affected EAP workers \a\
                                                 --------------------------------  Mean overtime    Mean usual
           Type of affected EAP worker                Number                           hours          weekly
                                                     (1,000s)       % of total                       earnings
----------------------------------------------------------------------------------------------------------------
                                              Standard Salary Level
----------------------------------------------------------------------------------------------------------------
All affected EAP workers........................           4,163             100             1.4            $734
Earn less than the minimum wage \b\.............              11             0.3            29.3             551
Regularly work overtime.........................             825            19.8            11.1             744
CPS occasionally work overtime \c\..............             150             3.6             8.5             727
----------------------------------------------------------------------------------------------------------------
                                             HCE Compensation Level
----------------------------------------------------------------------------------------------------------------
All affected EAP workers........................              65             100             5.5          $2,181
Earn less than the minimum wage \b\.............  ..............  ..............  ..............  ..............
Regularly work overtime.........................              30            45.8            12.3           2,153
CPS occasionally work overtime \c\..............               3             4.2             8.5           2,309
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for FY2013-FY2015 projected to reflect FY2017.
\a\ Estimated number of workers exempt under the EAP exemptions who would be entitled to overtime protection
  under the updated salary levels (if their weekly earnings do not increase to the new salary levels).
\b\ The applicable minimum wage is the higher of the federal minimum wage and the state minimum wage. HCE
  workers will not be impacted by the minimum wage provision. These workers all regularly work overtime and are
  also included in that row.
\c\ Workers who do not usually work overtime but did in the CPS reference week. Mean overtime hours are actual
  overtime hours in the reference week. Other workers may occasionally work overtime in other weeks. These
  workers are identified later when we define Type 2 workers.


[[Page 32471]]

    The Department considered two types of overtime workers in this 
analysis: regular overtime workers and occasional overtime 
workers.\152\ Regular overtime workers typically worked more than 40 
hours per week. Occasional overtime workers typically worked 40 hours 
or less per week, but they worked more than 40 hours in the week they 
were surveyed. The Department considers these two populations 
separately in the analysis because labor market responses to overtime 
pay requirements may differ for these two types of workers.
---------------------------------------------------------------------------

    \152\ Regular overtime workers were identified in the CPS MORG 
with variable PEHRUSL1. Occasional overtime workers were identified 
with variables PEHRUSL1 and PEHRACT1. As described in section 
VI.D.iv., some workers who are not observed working overtime in the 
reference week are assumed to be occasional overtime workers. This 
analysis therefore accounts for workers who work overtime at some 
point in the year, although they did not work overtime in the 
reference week.
---------------------------------------------------------------------------

    In a representative week, an estimated 152,000 occasional overtime 
workers will be affected by either the standard salary level or the HCE 
total annual compensation level increase (3.6 percent of all affected 
EAP workers; this number does not match Table 13 due to rounding). They 
averaged 8.5 hours of overtime in weeks when they work at least some 
overtime. This group represents the number of workers with occasional 
overtime hours in the week the CPS MORG survey was conducted. In other 
weeks, these specific individuals may not work overtime but other 
workers, who did not work overtime in the survey week, may work 
overtime. Because the survey week is a representative week, the 
Department believes the prevalence of occasional overtime in the survey 
week, and the characteristics of these workers, is representative of 
other weeks (even though a different group of workers would be 
identified as occasional overtime workers in a different week).\153\
---------------------------------------------------------------------------

    \153\ The Department cannot identify which of the workers in the 
CPS sample work occasional overtime in a week other than the 
reference week.
---------------------------------------------------------------------------

2. Characteristics of Affected EAP Workers
    In this section the Department examines the characteristics of 
affected EAP workers. Table 14 presents the distribution of affected 
workers across industries and occupations. The industry with the most 
affected EAP workers was education and health services (956,000 
affected workers). Other industries where a large number of workers are 
expected to be affected are professional and business services 
(704,000), financial activities (571,000), and wholesale and retail 
trade (562,000). The industries with the largest share of potentially 
affected workers who are affected are ``other services'' (30 percent) 
and leisure and hospitality (30 percent). Impacts by industry are 
considered in section VI.D.v.
    The management, business, and financial occupation category 
accounted for the most affected EAP workers by occupation (1.8 
million). A large number of workers are expected to be affected in the 
professional and related occupations category (1.4 million). The 
occupations with the largest share of potentially affected workers who 
are expected to be affected are farming, fishing, and forestry (63 
percent),\154\ office and administrative support (39 percent), and 
services (37 percent).
---------------------------------------------------------------------------

    \154\ There are only 33,000 potentially affected workers in the 
farming, fishing, and forestry industry. Although a large share of 
potentially affected workers may be affected in this industry, many 
of these workers are exempt under another non-EAP exemption, and 
therefore their entitlement to overtime will not change.
---------------------------------------------------------------------------

    Some commenters expressed concern about the impacts of the rule on 
non-profits organizations. The Department found that workers in non-
profits are somewhat more likely to be affected by the rulemaking; 25 
percent of potentially affected workers in private non-profits are 
affected compared to 18 percent in private for-profit firms.

    Table 14--Estimated Number of Exempt Workers With the Current and Updated Salary Levels, by Industry and
                                               Occupation, FY2017
----------------------------------------------------------------------------------------------------------------
                                                                                                    Affected as
                                      Workers       Potentially                                      share of
 Industry/occupation/non-profit     subject to     affected EAP    Not-affected      Affected       potentially
                                       FLSA           workers     (millions) \b\  (millions) \c\     affected
                                    (millions)    (millions) \a\                                     (percent)
----------------------------------------------------------------------------------------------------------------
Total...........................          132.75           22.51           18.29            4.23              19
----------------------------------------------------------------------------------------------------------------
                                                   By Industry
----------------------------------------------------------------------------------------------------------------
Agriculture, forestry, fishing,             1.12            0.03            0.03            0.01              16
 & hunting......................
Mining..........................            1.04            0.23            0.21            0.02              10
Construction....................            7.41            0.80            0.67            0.13              16
Manufacturing...................           14.82            3.26            2.89            0.36              11
Wholesale & retail trade........           19.03            2.46            1.90            0.56              23
Transportation & utilities......            6.95            0.79            0.65            0.13              17
Information.....................            2.86            0.95            0.78            0.17              18
Financial activities............            9.21            3.43            2.86            0.57              17
Professional & business services           14.22            4.64            3.94            0.70              15
Education & health services.....           32.95            3.73            2.77            0.96              26
Leisure & hospitality...........           12.58            0.78            0.54            0.23              30
Other services..................            5.36            0.58            0.40            0.18              30
Public administration...........            5.19            0.85            0.65            0.20              24
----------------------------------------------------------------------------------------------------------------
                                                  By Occupation
----------------------------------------------------------------------------------------------------------------
Management, business, &                    19.18           11.36            9.52            1.84              16
 financial......................
Professional & related..........           30.30            7.66            6.31            1.35              18
Services........................           23.61            0.20            0.13            0.08              37
Sales and related...............           13.72            2.16            1.60            0.56              26
Office & administrative support.           17.82            0.94            0.57            0.37              39
Farming, fishing, & forestry....            0.84            0.00            0.00            0.00              63
Construction & extraction.......            6.16            0.03            0.02            0.01              21

[[Page 32472]]

 
Installation, maintenance, &                4.63            0.04            0.03            0.01              15
 repair.........................
Production......................            8.31            0.08            0.07            0.01              17
Transportation & material moving            8.20            0.03            0.02            0.01              24
----------------------------------------------------------------------------------------------------------------
                                       By Non-Profit and Government Status
----------------------------------------------------------------------------------------------------------------
Non-profit, private \d\.........            9.12            1.81            1.35            0.46              25
For profit, private.............          105.08           18.80           15.49            3.31              18
Government (state, local, and              18.55            1.91            1.45            0.46              24
 federal).......................
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for FY2013-FY2015 projected to reflect FY2017.
\a\ Workers who are white collar, salaried, not eligible for another (non-EAP) overtime exemption, and not in a
  named occupation.
\b\ Workers who continue to be exempt after the increases in the salary levels (assuming affected workers'
  weekly earnings do not increase to the new salary level).
\c\ Estimated number of workers exempt under the EAP exemptions who would be entitled to overtime protection
  under the updated salary levels (if their weekly earnings do not increase to the new salary levels).
\d\ As discussed in section VI.B.iii, estimates of workers subject to the FLSA do not exclude workers employed
  by enterprises that do not meet the enterprise coverage requirements because there is no reliable way of
  estimating this population. The estimates also do not exclude workers at non-covered enterprises who are not
  individually covered (because the estimates assume all workers are employed by covered entities). Although not
  excluding workers who work for non-covered enterprises would only impact a small percentage of workers
  generally, it may have a larger impact (and result in a larger overestimate) for workers in non-profits
  because when determining enterprise coverage only revenue derived from business operations, not charitable
  activities, are included.

    Table 15 presents the distribution of affected workers based on 
Census Regions and divisions, and MSA status. The region with the most 
affected workers is the South (1.7 million). However, as a share of 
potentially affected workers in the region, the South is not unduly 
affected relative to other regions (22 percent are affected compared 
with 16 to 19 percent in other regions). Impacts by region are 
considered in section VI.D.v. Although the vast majority of affected 
EAP workers resided in MSAs (3.8 of 4.2 million, or 89 percent), this 
largely reflects the fact that 86.7 percent of all workers reside in 
metropolitan areas.\155\
---------------------------------------------------------------------------

    \155\ Identified with CPS MORG variable GTMETSTA.
---------------------------------------------------------------------------

    Employers in low-wage industries, regions, and non-metropolitan 
areas may perceive a greater impact due to the lower wages and salaries 
typically paid in those areas and industries. The Department believes 
the salary level adopted in this Final Rule (which we have adjusted 
downward from the amount proposed in the NPRM to account for these low-
wage areas) is appropriate. In addition, the vast majority of 
potentially affected workers reside in metropolitan areas and do not 
work in low-wage industries, and workers in low-wage regions are not 
unduly affected relative to other regions.

  Table 15--Estimated Number of Potentially Affected EAP Workers With the Current and Updated Salary Levels, by
                                    Region, Division, and MSA Status, FY2017
----------------------------------------------------------------------------------------------------------------
                                                                                                    Affected as
                                      Workers       Potentially                                      share of
  Region/division/metropolitan      subject to     affected EAP    Not-affected      Affected       potentially
             status                    FLSA           workers     (millions) \b\  (millions) \c\     affected
                                    (millions)    (millions) \a\                                     (percent)
----------------------------------------------------------------------------------------------------------------
Total...........................          132.75           22.51           18.29            4.23              19
----------------------------------------------------------------------------------------------------------------
                                               By Region/Division
----------------------------------------------------------------------------------------------------------------
Northeast.......................           24.77            4.80            4.02            0.79              16
    New England.................            6.69            1.36            1.17            0.19              14
    Middle Atlantic.............           18.08            3.44            2.84            0.59              17
Midwest.........................           29.53            4.73            3.84            0.88              19
    East North Central..........           19.97            3.17            2.58            0.58              18
    West North Central..........            9.56            1.56            1.26            0.30              19
South...........................           48.21            7.84            6.10            1.74              22
    South Atlantic..............           25.02            4.47            3.51            0.95              21
    East South Central..........            7.23            0.94            0.69            0.25              27
    West South Central..........           15.96            2.44            1.90            0.53              22
West............................           30.25            5.15            4.32            0.82              16
    Mountain....................            9.48            1.51            1.22            0.29              19
    Pacific.....................           20.76            3.64            3.10            0.53              15
----------------------------------------------------------------------------------------------------------------

[[Page 32473]]

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

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

                                Table 16--Summary of Year 1 Direct Employer Costs
                                                   [Millions]
----------------------------------------------------------------------------------------------------------------
                                                                                        HCE
                      Direct employer costs                          Standard      Compensation        Total
                                                                   salary level        level
----------------------------------------------------------------------------------------------------------------
Regulatory familiarization \a\..................................  ..............  ..............          $272.5
Adjustment......................................................          $188.5            $2.9           191.4
Managerial......................................................           208.6             5.5           214.0
Total direct costs..............................................           397.0             8.4           677.9
----------------------------------------------------------------------------------------------------------------
\a\ Regulatory familiarization costs are assessed jointly for the change in the standard salary level and the
  HCE compensation level.

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

[[Page 32474]]

know the distribution of affected EAP workers across firms and so an 
average cost per establishment is used.
    In the NPRM, the Department requested that commenters provide data 
if possible on the costs of regulatory familiarization, and a few 
commenters provided estimates based on personal judgments or responses 
by members. While the information provided may reflect the experiences 
of individual commenters, the information does not provide a basis for 
the Department to revise its estimate of time required for regulatory 
familiarization. The Department continues to believe that our estimate 
of one hour per establishment in the NPRM is a reasonable average that 
accounts for some businesses requiring more time while other businesses 
require less time.
    To estimate the total regulatory familiarization costs, three 
pieces of information must be estimated: (1) A wage level for the 
employees reviewing the rule; (2) the number of hours employees spend 
reviewing the rule; and (3) the number of establishments employing 
workers. The Department's analysis assumes that mid-level human 
resource workers with a median wage of $24.86 per hour will review the 
Final Rule.\156\ Assuming benefits are paid at a rate of 46 percent of 
the base wage and one hour of time is required for regulatory 
familiarization, the average cost per establishment is $36.22.\157\ The 
number of establishments with paid employees was 7.52 million.\158\ 
Regulatory familiarization costs in Year 1 were estimated to be $272.5 
million ($36.22 per hour x 1 hour x 7.52 million establishments).\159\ 
Regulatory familiarization costs in future years are discussed in 
section VI.D.x.
---------------------------------------------------------------------------

    \156\ We calculated this wage as the projected median wage in 
the CPS for workers with the Census 2010 occupations ``human 
resources workers'' (0630); ``compensation, benefits, and job 
analysis specialists'' (0640); and ``training and development 
specialists'' (0650) in FY2013-FY2015, projected to FY2017. The 
Department determined these occupations include most of the workers 
who would conduct these tasks. Bureau of Labor Statistics, U.S. 
Department of Labor, Occupational Outlook Handbook, 2014-15 Edition. 
These are the same occupation classifications used in the NPRM but 
updated to reflect the Census 2010 occupational classification.
    \157\ The benefits-earnings ratio is derived from the BLS' 
Employer Costs for Employee Compensation data using variables 
CMU1020000000000D and CMU1030000000000D. This fringe benefit rate 
includes some fixed costs such as health insurance. The Department 
believes that the overhead costs associated with for this rule are 
small because existing systems maintained by employers to track 
currently hourly employees can be used for newly overtime eligible 
workers. However, acknowledging that there might be additional 
overhead costs, as a sensitivity analysis of results, we calculate 
the impact of more significant overhead costs by including an 
overhead rate of 17 percent. This rate has been used by the 
Environmental Protection Agency (EPA) in its final rules (see for 
example, EPA Electronic Reporting under the Toxic Substances Control 
Act Final Rule, Supporting & Related Material), and is based upon a 
Chemical Manufacturers Association study. An overhead rate from 
chemical manufacturing may not be appropriate for all industries, so 
there may be substantial uncertainty concerning the estimates based 
on this illustrative example. Using an overhead rate of 17 percent 
would increase total costs (including regulatory familiarization 
costs, adjustment costs, and managerial costs) by from $677.9 
million in Year 1 to $757.0 million, or 11.7 percent. For the 
reasons stated above, the Department believes this estimate 
overestimates the additional costs arising from overhead costs while 
recognizing that there is not one uniform approach to estimating the 
marginal cost of labor.
    \158\ Data for 2012 were the most recent available at the time 
of writing. Survey of U.S. Businesses 2012. Available at: https://www.census.gov/econ/susb/. Also included in the number of 
establishments incurring regulatory familiarization costs are the 
90,106 state and local governments reported in the 2012 Census of 
Governments: Employment Summary Report. Available at: http://www2.census.gov/govs/cog/g12_org.pdf.
    \159\ As previously noted, the Department chose to use the 
number of establishments rather than the number of firms to provide 
a more conservative estimate of the regulatory familiarization cost. 
Using the number of firms, 5.82 million, would result in a reduced 
regulatory familiarization cost estimate of $210.7 million in Year 
1.
---------------------------------------------------------------------------

Wage Rate
    The Department estimated in the NPRM that one hour of regulatory 
familiarization time costs $34.19 based on the wage for a mid-level 
human resources worker adjusted to include benefits. We follow the same 
approach in this RIA; however, due to growth in wages, the wage rate 
used in the Final Rule is $36.22. The Chamber asserted that time spent 
on regulatory familiarization will generally be conducted by a manager 
with a base wage better approximated at $60 per hour, multiplied by a 
mark-up of 3.3 to cover indirect overhead and support.\160\ The 
National Association of Landscape Professionals (NALP) commented that 
92 percent of the members it surveyed believe the wage rate should be 
``be more like $51.00 to $68.00 per hour.'' \161\ The Department 
believes that we have utilized an appropriate wage rate; we similarly 
used wage rates for human resources specialists in the 2004 Final Rule 
(using a low to high range of such rates, depending upon employer size, 
rather than a single mid-level wage rate as we do currently). 69 FR 
22222-24. Although higher paid managers may be briefed on the rule, we 
expect in general that mid-level human resource specialists will be the 
individuals primarily responsible for becoming familiar with the new 
rule. Moreover, this wage estimate is an average across all firms, some 
of which will pay higher rates and others lower rates.
---------------------------------------------------------------------------

    \160\ The Chamber also incorrectly stated that the Department 
used the wage for a ``human resources office administrative clerk;'' 
the Department actually used wages for ``human resources, training, 
and labor relations specialists.''
    \161\ NALP believes both time and hourly cost are 
underestimated. It is not clear whether the amount cited is the 
hourly wage rate members believe is appropriate or the total cost 
across more than one hour of time.
---------------------------------------------------------------------------

Time Requirement
    In the NPRM, the Department estimated each establishment will, on 
average, spend one hour on regulatory familiarization. Firms with more 
affected EAP workers will likely spend more time reviewing the 
regulation than firms with fewer or no affected EAP workers. No data 
were identified from which to estimate in the NPRM the amount of time 
required to review the regulation, and the Department requested that 
commenters provide data if possible. The Department did not receive any 
reliable data from commenters, although some commenters suggested 
different amounts of time based on their personal judgment or surveys 
they conducted. The American Hotel and Lodging Association (AH&LA), the 
National Roofing Contractors Association, NRF and others commented that 
regulatory familiarization will take longer than one hour, with some 
stating that several individuals in each of their establishments will 
need to read and familiarize themselves with the new rule. AH&LA 
estimated it will take at least four hours per establishment to become 
familiar with the Final Rule. The Chamber commented that an average of 
6 hours of time is appropriate because: ``For the very smallest 
establishments a familiarization time of one to two hours may be 
possible, but for larger establishments the number of labor hours may 
amount to hundreds or more.''
    The Department believes these commenters significantly overestimate 
the time necessary for regulatory familiarization. The EAP exemptions 
have been in existence in one form or another since 1938, and were 
updated as recently as 2004. While the 2004 rulemaking promulgated a 
host of changes, including revisions to the duties test, the most 
significant change promulgated in this rulemaking is setting a new 
standard salary level for exempt workers, and updating that salary 
level every three years. The Department believes that, on average, one 
hour is sufficient to time to read about and understand, for example, 
the change in the standard salary level from $455 to $913 per week, and 
we note that the regulatory text changes comprise only a few pages.

[[Page 32475]]

Recurrence
    The Chamber criticized the Department for failing to estimate 
regulatory familiarization costs occurring after the first year, 
commenting that regulatory familiarization costs would repeat with each 
automatic update to the salary level. Upon further consideration, the 
Department agrees there will be some regulatory familiarization costs 
in future years when the salary level is updated (e.g., 2020, 2023, 
2026). However, because subsequent updates will use the same method 
adopted in this Final Rule, and this rule informs stakeholders that the 
salary and compensation levels will be updated every three years, there 
is little additional regulatory change with which employers will have 
to familiarize themselves. Accordingly, the Department has added 5 
minutes per establishment of regulatory familiarization time to access 
and read the published salary levels in future years when the salary 
and compensation levels are automatically updated (see projected costs 
in section VI.D.x.).
3. Adjustment Costs
    Changes in the standard salary and HCE compensation levels will 
impose direct costs on firms by requiring them to re-determine the 
exemption status of employees, update and adapt overtime policies, 
notify employees of policy changes, and adjust their payroll systems. 
The Department believes the size of these costs will depend on the 
number of affected EAP workers and will occur in any year when 
exemption status is changed for any workers. To estimate adjustment 
costs three pieces of information must be estimated: (1) A wage level 
for the employees making the adjustments; (2) the amount of time spent 
making the adjustments; and (3) the estimated number of newly affected 
EAP workers. The Department again estimated that the average wage with 
benefits for human resources, training, and labor relations specialists 
is $36.22 per hour (as explained above). No applicable data were 
identified from which to estimate the amount of time required to make 
these adjustments.\162\ However, in response to comments claiming that 
the Department underestimated the adjustment time, for this Final Rule, 
the Department increased the time from one hour to 75 minutes per 
affected worker. The estimated number of affected EAP workers in Year 1 
is 4.2 million (as discussed in section VI.D.ii.). Therefore, total 
Year 1 adjustment costs were estimated to equal $191.4 million ($36.22 
x 1.25 hours x 4.2 million workers).
---------------------------------------------------------------------------

    \162\ Costs stated in the 2004 Final Rule were considered, but 
because that revision included changes to the duties test, the cost 
estimates are not directly applicable; in addition, the 2004 Final 
Rule did not separately account for managerial costs.
---------------------------------------------------------------------------

    Adjustment costs may be partially offset by a reduction in the cost 
to employers of determining employees' exempt status. Currently, to 
determine whether an employee is exempt firms must apply the duties 
test to salaried workers who earn at least $455 per week. Following 
this rulemaking, firms will no longer be required to apply the 
potentially time-consuming duties test to employees earning less than 
the updated salary level. This will be a clear cost savings to 
employers for employees who do not pass the duties test and earn at 
least $455 per week but less than the updated salary level. The 
Department did not estimate the potential size of this cost savings.
Wage Rate
    The Chamber commented that a more appropriate wage rate would be 
$200 per hour, based on a manager's wage of around $60 per hour, 
multiplied by a mark-up (or loaded) rate of 3.3 to cover indirect 
overhead and support. The Department believes its use of the occupation 
of ``human resources, training, and labor relations specialists'' and 
corresponding wage rate appropriately reflects the occupational 
classification and wage rate on average for the individuals who will 
re-determine the exemption status of employees, update and adapt 
overtime policies, notify employees of policy changes, and adjust their 
payroll systems. The Department recognizes that in some businesses, 
more senior staff will conduct at least portions of this work, while in 
other businesses, more junior staff may perform at least a portion of 
this work. Therefore, the Department continues to rely on its use of 
the ``human resources, training, and labor relations specialists'' and 
corresponding wage rate to reflect the average costs to businesses 
impacted by this Final Rule. The Department also disagrees with the 
mark-up rate suggested by the Chamber, because an additional 75 minutes 
of time will have little-to-no effect on the cost of overhead and 
support services. No other commenters provided alternative wage rates.
Time Requirement
    To estimate adjustment costs, the Department assumed in the NPRM 
that each establishment will, on average, spend one hour of time per 
affected worker to make adjustments required because of this 
rulemaking. 80 FR 38566. The Department requested that commenters 
provide any applicable data concerning this issue, but no applicable 
data were identified from which to estimate the amount of time required 
to make these adjustments. The Department believes that commenters that 
did address adjustment costs significantly overestimated the time 
necessary for making appropriate workplace adjustments. However, the 
Department agrees that some increase is warranted, and thus increased 
the estimated average adjustment time to 75 minutes per affected 
worker.
    Based on feedback from their members, AH&LA and Island Hospitality 
Management estimated that employers will need approximately four to 
seven hours per affected employee. The National Council of Chain 
Restaurants (NCCR) stated that ``[e]mployers have told NCCR that the 
approximate time needed to make such adjustments will be 3-4 hours per 
employee,'' and NRF reported that its members ``estimate it would take 
at least three to four hours per affected employee to make applicable 
adjustments.'' The American Insurance Association and the Property 
Casualty Insurers Association of America (AIA-PCI) asserted that 
adjustments will require more time than the Department estimated 
because employers will not make adjustments in response to the rule 
``in a vacuum; legal, HR, and operations all will need to be involved 
to assess risk, determine value, and ultimately decide whether a 
position, or classification, or part of a classification should be 
reclassified to non-exempt as a result of the Department's salary level 
increase.'' New Castle Hotels & Resorts similarly stated that a 
``hotel's GM and HR as well as the Department Head and the effected 
manager would all need to be involved together with payroll.'' AIA-PCI 
also asserted that in many cases, information technology systems 
``cannot be configured to accommodate exempt and non-exempt employees 
in the same job classification,'' and thus additional time will be 
required to reconfigure these systems.
    A report by Oxford Economics, submitted by NRF and referenced by 
other commenters, estimated the ``transitional costs'' associated with 
this rule.\163\ The tasks covered by Oxford

[[Page 32476]]

Economics' transition cost measure include: ``identifying which 
employees ought to have salaries adjusted and then making and 
communicating that adjustment''; ``converting a salaried employee to an 
hourly rate and then adding that employee to the time tracking system 
(already in use for existing hourly employees)''; disruptions to normal 
business operations; time for ``HR personnel [to] communicate and 
implement the change''; time for additional IT support for time-
tracking system; costs associated with the added complexity of managing 
and scheduling people's time; and costs associated with ``establishing 
an hourly rate (lower than existing base salary) that is calculated so 
that overall compensation (including new overtime payments) will leave 
current total compensation unchanged.'' These costs appear to be 
roughly comparable to the Department's adjustment cost category, 
although with some inclusion of costs the Department categorized as 
managerial costs. However, Oxford Economics also included costs 
associated with converting newly nonexempt workers from salaried to 
hourly status, which the Department recognizes is a choice some 
employers may make in responding to this rule, but is not a requirement 
of the regulation. Oxford Economics estimated Year 1 transactional 
costs of $648 million in the retail and restaurant industry if the 
salary level were set at $808 per week, and $874 million if the salary 
level were set at $984 per week. These costs for the retail and 
restaurant industry alone are roughly 4 to 5.5 times larger than our 
NPRM estimate for all industries ($160.1 million based on a $921 salary 
level in Year 1). The Department has evaluated Oxford Economics' 
analysis and determined that this discrepancy is due in part to Oxford 
Economics' estimation of the time requirement for adjustment.\164\
---------------------------------------------------------------------------

    \163\ Oxford Economics. (2015). Rethinking Overtime: How 
Increasing Overtime Exemption Thresholds Will Affect The Retail And 
Restaurant Industries. Two additional documents produced by Oxford 
Economics were also included by some commenters: Letter dated July 
17, 2015 that updates the estimates provided in the ``Rethinking 
Overtime'' paper in light of the Department's proposal; and a letter 
dated August 18, 2015 that examines states' prevailing wage levels 
and the Department's automatic updating proposal.
    \164\ Although Oxford Economics' Table A2 reports some values 
they used to calculate transactional costs, the report NRF submitted 
to the record does not explain why they chose these values, nor does 
it describe in detail the source for these values, other than noting 
that it obtained information from ``interviews with industry 
experts.'' Therefore, the Department could not easily assess the 
reasonableness of these estimates. See https://nrf.com/sites/default/files/Documents/retail%20library/Rethinking-Overtime-Appendices.pdf.
---------------------------------------------------------------------------

    Oxford Economics assumed that adjustment costs for Type 1 workers 
(those who do not work overtime) are zero, and that each worker who 
receives a pay increase to the new salary level in order to remain 
exempt (Oxford Economics' equivalent to Type 4 workers) requires 1/
1000th of a human resource employee full time equivalent; this equates 
to approximately 2.1 hours of time per affected worker (i.e., 2,080 FTE 
hours/1,000).\165\ These per worker cost estimates are comparable to 
the Department's cost estimates. However, for employees reclassified as 
nonexempt as a result of the rulemaking, Oxford Economics appears to 
estimate that transitioning these workers will require 34.7 hours per 
worker for ``group 2'' workers and 10.4 hours per worker for ``group 
3'' workers.\166\ These workers appear to be very roughly comparable to 
the Department's Type 2 and 3 workers, but with much more extreme 
assumptions concerning how employers will respond (e.g., all overtime 
hours will be eliminated instead of reduced as the Department expects). 
Oxford Economics defines ``group 2'' workers as those who ``will have 
their hourly wage rate set in such a way that their total compensation 
remains unchanged,'' and ``group 3'' workers as those who will ``see 
their hours cut to 38 per week, with their salary cut proportionally.''
---------------------------------------------------------------------------

    \165\ As detailed in section VI.D.iv., the Department concludes 
that employers will respond to the Final Rule differently for 
different categories of workers, depending upon whether they work 
overtime and the nature of the overtime. The Department has divided 
workers into four categories, based upon the nature of any overtime 
work. Type 1 workers do not work overtime; Type 2 workers work 
occasional overtime (some on a regular basis and some on an 
unpredictable basis): Type 3 workers regularly work overtime; and 
Type 4 workers regularly work overtime and will earn sufficient 
wages after the Final Rule is implemented that employers will 
increase their salaries to the new level.
    \166\ Oxford Economics also estimated costs related to changing 
computer systems. This discussion focuses on Human Resources costs.
---------------------------------------------------------------------------

    The Department believes Oxford Economics' estimates of the time 
requirement for adjusting Type 2 and 3 (Oxford Economics' ``group 2'' 
and ``group 3'') workers are too high. It is unreasonable to expect, 
for example, that it will take a human resource worker 34.7 hours 
(almost an entire workweek) to reclassify each Type 2 worker as 
nonexempt, and possibly adjust his or her implicit hourly wage rate so 
the total compensation remains unchanged. As we stated above, in this 
Final Rule, the Department estimates an average of 75 minutes of 
adjustment time per affected worker. However, employers will need to 
exert minimal effort to determine the change in status of perhaps 60 
percent of affected workers (e.g., the majority of affected workers who 
work no overtime). Thus, we assume that the average of 75 minutes per 
worker is concentrated on the subset of employees requiring more 
analysis to make a decision. If, for example, we allocate 0.5 hours per 
Type 1 worker and 50 percent of Type 2 workers (i.e., workers whose 
hours and base wage rates do not change), then that still leaves 3.0 
hours per worker for the remaining 50 percent of Type 2 workers, and 
all Type 3 and Type 4 workers. Finally, larger firms are likely to 
experience economies of scale in evaluating affected workers; a 
decision on how to treat a worker with specific characteristics (e.g., 
earnings, hours, duties) is likely to be applicable to multiple 
workers.
    With respect to the concern raised by AIA-PCI about reconfiguring 
information technology systems to include both exempt and overtime-
protected workers, the Department notes that most organizations 
affected by the rule already employ overtime-eligible workers and have 
in place payroll systems and personnel practices (e.g., requiring 
advance authorization for overtime hours) so that additional costs 
associated with the rule should be relatively small in the short 
run.\167\
---------------------------------------------------------------------------

    \167\ The Department notes that no particular form or order of 
records is required and employers may choose how to record hours 
worked for overtime-eligible employees. For example where an 
employee works a fixed schedule that rarely varies, the employer may 
simply keep a record of the schedule and indicate the number of 
hours the worker actually worked only when the worker varies from 
the schedule. This is sometimes referred to as exceptions reporting. 
29 CFR 516.2(c).
---------------------------------------------------------------------------

Recurrence
    The Chamber also expressed concern the Department underestimated 
projected adjustment costs associated with automatic updating, stating 
that employers would incur significant adjustment costs in years the 
salary is automatically updated, even if subsequent salary level 
changes affect fewer workers than the initial increase (to $913). 
Similarly, PPWO stated that the Department's cost projections did not 
account for the fact that ``compliance review activities that take 
place in Year 1 will be repeated on an annual basis, for different 
groups of employees that fall below the new salary minimum.'' See also 
North Dakota Bankers Association (the Department should recognize that 
future salary updates require time to determine whether an employee 
should be classified as exempt or nonexempt, not just time to reprogram 
the payroll). Contrary to these comments, the Department's estimated 
adjustment costs include costs in all years for newly affected workers. 
The Department limits adjustment costs in projected years to newly 
affected workers because there is

[[Page 32477]]

no need to ``adjust'' for workers who are already overtime eligible 
(due to a prior adjustment of the EAP salary level) when the salary 
level is updated again.
4. Managerial Costs
    If employers reclassify employees as overtime eligible due to the 
changes in the salary levels, then firms may incur ongoing managerial 
costs associated with this Final Rule because the employer may schedule 
and more closely monitor an employee's hours to minimize or avoid 
working overtime-eligible employees more than 40 hours in a week. For 
example, the manager of a reclassified worker may have to assess 
whether the marginal benefit of scheduling the worker for more than 40 
hours exceeds the marginal cost of paying the overtime premium. 
Additionally, the manager may have to spend more time monitoring the 
employee's work and productivity since the marginal cost of employing 
the worker per hour has increased. Unlike regulatory familiarization 
and adjustment costs, which occur primarily in Year 1 and to a much 
lesser extent in years when the salary is automatically updated, 
managerial costs are incurred more uniformly every year.
    Because there was little precedent or data to aid in evaluating 
these costs, the Department examined several sources to estimate costs. 
First, prior part 541 rulemakings were reviewed to determine whether 
managerial costs were estimated. No estimates were found. This cost was 
not quantified for the 2004 rulemaking. Second, a literature review was 
conducted in an effort to identify information to help guide the cost 
estimates; again, no estimates were found. The Department also 
requested data from the public applicable to this cost estimate; 
however, as discussed below, the Department received no time estimates 
that seemed more appropriate than the estimates used in the NPRM.
    Based on commenters' concerns, discussed below, that managerial 
costs are applicable to more workers than were included in the NPRM, 
the Department expanded the number of workers for whom employers 
experience additional managerial costs (section VI.D.iv.) As in the 
NPRM, managerial costs are applied to workers who are reclassified as 
overtime-protected and who either regularly work overtime or 
occasionally work overtime but on a regular basis. For the Final Rule, 
however, the Department expanded its count of the number of workers who 
occasionally work regular overtime (defined later as half of Type 2 
workers) by assuming that some Type 1 workers (who report that they do 
not work overtime) will actually work overtime during some week of the 
year. Therefore, the number of workers for whom we apply managerial 
costs increased from 808,000 using the NPRM methodology to 1.2 million 
using the Final Rule methodology.
    To provide a sense of the potential magnitude of these costs, the 
Department estimated these costs assuming that management spends an 
additional five minutes per week scheduling and monitoring each 
affected worker expected to be reclassified as overtime eligible as a 
result of this rule, and whose hours are adjusted (1.2 million affected 
EAP workers as calculated in section VI.D.iv.). As will be discussed in 
detail below, most affected workers do not currently work overtime, and 
there is no reason to expect their hours worked to change when their 
status changes from exempt to nonexempt. Similarly, employers are 
likely to find that it is less costly to give some workers a raise in 
order to maintain their exempt status. For both these groups of 
workers, management will have little or no need to increase their 
monitoring of hours worked. Under these assumptions, the additional 
managerial hours worked per week were estimated to be 97,300 hours ((5 
minutes/60 minutes) x 1.2 million workers).
    The median hourly wage in FY2017 for a manager is estimated to be 
$29.04 and benefits are estimated to be paid at a rate of 46 percent of 
the base wage, which totals $42.31 per hour.168 169 
Multiplying the additional 97,300 weekly managerial hours by the hourly 
wage of $42.31 and 52 weeks per year, the Year 1 managerial costs were 
estimated to total $208.6 million due to this rule. Although the exact 
magnitude would vary with the number of affected EAP workers each year, 
managerial costs would be incurred annually.
---------------------------------------------------------------------------

    \168\ Calculated as the projected median wage in the CPS for 
workers in management occupations (excluding chief executives) in 
FY2013-FY2015, projected to FY2017.
    \169\ The adjustment ratio is derived from the BLS' Employer 
Costs for Employee Compensation data using variables 
CMU1020000000000D and CMU1030000000000D.
---------------------------------------------------------------------------

Additional Investment
    Some commenters, such as the National Grocers Association and the 
National Association of Area Agencies on Aging asserted that managerial 
costs will be higher than the Department estimated because some 
employers may need to purchase new systems or hire additional personnel 
to monitor hours. However, the Department believes that most companies 
already manage a mix of exempt and nonexempt employees, and already 
have policies and recordkeeping systems in place for nonexempt 
employees. Thus, they are unlikely to need to purchase systems or hire 
additional monitoring personnel as a result of this rulemaking. 
Moreover, no particular form or order of records is required and 
employers may choose whatever form of recordkeeping works best for 
their business and their employees. For example, where an employee 
works a fixed schedule that rarely varies, the employer may simply keep 
a record of the schedule and indicate the number of hours the worker 
actually worked only when the worker varies from the schedule 
(``exceptions reporting''). 29 CFR 516.2(c). Because simple 
recordkeeping systems, such as exceptions reporting systems for workers 
on a fixed schedule, are permissible, costs may be minimal.
Time Requirement
    Several commenters asserted that scheduling and monitoring newly 
overtime eligible workers will require more time than the Department 
assumes. One human resource manager commented that the time required 
will ``be closer to 15 minutes than 5,'' and AH&LA stated that its 
members believe these costs ``will be closer to 25 minutes to an hour a 
week.'' NCCR stated that it received feedback from employers in the 
restaurant industry who estimated that managerial costs will range from 
one to three hours per week. NRF similarly states that its members 
estimated that managerial costs would range from one to three hours per 
week.
    The Department believes these commenters' estimates are excessive. 
For example, 75 percent of currently exempt employees who work overtime 
average less than 10 hours of overtime per week. Assuming a newly 
nonexempt employee averages 10 hours of overtime per week, then based 
on NCCR's estimate, a manager would spend from 6 minutes to 18 minutes 
monitoring for each hour of overtime worked by that employee. The 
Department believes this estimate is unrealistically high. We also note 
that commenters did not submit any data supporting their 15 minute and 
25 minute estimates. Furthermore, we recognize that employers routinely 
apply efficiencies in their operations, and see no reason why they will 
not do so with regard to scheduling as well.
Wage Rate
    The Chamber recommended that the Department use the mean wage 
rather than the median to calculate hourly managerial costs, and also 
asserted that

[[Page 32478]]

the wage should include all loaded overhead cost. However, the mean and 
median wages for managers are very similar in the CPS data ($32.71 
versus $29.04, respectively), so using the mean wage will not result in 
substantially different estimated costs. Furthermore, if the 
distribution of wages is skewed (as demonstrated here by a mean wage 
larger than the median wage), the median value is more representative 
of the wage most firms will pay. The Department does not believe it is 
appropriate to use all overhead costs in estimating a marginal cost 
increase because the relevant cost is the marginal value of the cost of 
labor, which is much smaller than the loaded overhead cost. Most 
overhead costs are largely fixed and unaffected if an employee works an 
incremental hour. For example, accounting and administrative staff are 
unlikely to work more time; building rent, heat and electricity are 
unlikely to change if a supervisor or human resource staff person works 
an incremental hour. However, acknowledging that there might be some 
overhead costs, we include a sensitivity analysis providing an upper 
bound cost estimate.\170\
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    \170\ As a sensitivity analysis of results, we calculate the 
impact of more significant overhead costs by including an overhead 
rate of 17 percent. This rate has been used by the EPA in its final 
rules (see for example, EPA Electronic Reporting under the Toxic 
Substances Control Act Final Rule, Supporting & Related Material), 
and is based upon a Chemical Manufacturers Association study. An 
overhead rate from chemical manufacturing may not be appropriate for 
all industries, so there may be substantial uncertainty concerning 
the estimates based on this illustrative example. Using an overhead 
rate of 17 percent would increase total costs (including regulatory 
familiarization costs, adjustment costs, and managerial costs) by 
from $677.9 million in Year 1 to $757.0 million, or 11.7 percent. 
For the reasons stated above, the Department believes this estimate 
overestimates the additional costs arising from overhead costs while 
recognizing that there is not one uniform approach to estimating the 
marginal cost of labor.
---------------------------------------------------------------------------

Number of Affected Workers
    The Chamber also asserted that managerial costs should apply to all 
affected workers whose status changes, not just those who regularly 
work overtime, because ``even those who usually work only 40 hours will 
require additional management schedule monitoring to ensure that their 
hours do not go higher.'' The Department believes that although some 
companies may closely monitor hours for workers who usually do not work 
overtime, many companies do not. Many companies simply prohibit 
overtime without express approval and/or assign workers to a set weekly 
schedule of hours; in such firms monitoring costs for these newly 
nonexempt workers who usually do not work overtime should be 
negligible. Furthermore, without additional information, it is 
impossible to determine the prevalence of the more strenuous form of 
managerial oversight described by the Chamber. However, we did increase 
the number of workers for whom managerial costs are estimated to 
include more occasional overtime workers, as discussed above.
5. Other Potential Costs
    In addition to the costs discussed above, there may be additional 
costs that have not been quantified. In the NPRM we identified these 
potential costs to include reduced profits and hiring costs. See 80 FR 
38578-80. Commenters addressed a variety of other potential costs.
Reduced Scheduling Flexibility
    Some commenters, such as the ASAE, Thombert, Inc., Applied 
Measurement Professionals; and Alaska USA Federal Credit Union, 
asserted that exempt workers enjoy more scheduling flexibility claiming 
that their hours generally are not monitored, and thus this rulemaking 
will impose costs on newly overtime-eligible workers by (for example) 
limiting their ability to adjust their schedule to meet personal and 
family obligations. Other commenters suggested that the rulemaking 
would impose costs on employers because they will lose flexibility to 
schedule employees. For example, TRANSITIONS for the Developmentally 
Disabled commented that ``[h]aving managers that can work those 
urgencies and emergencies, then giving them time off later to make up 
for those extra hours, helps our managers manage the business without 
us paying expensive overtime or having someone without managerial 
skills deal with those situations'' (emphasis in comment).
    The Final Rule does not necessitate that employers reduce 
scheduling flexibility. Employers can continue to offer flexible 
schedules and require workers to monitor their own hours and to follow 
the employers' timekeeping rules. Additionally, some exempt workers 
already monitor their hours for billing purposes. For these reasons, 
and because there is little data or literature on these costs, the 
Department does not quantify potential costs regarding scheduling 
flexibility to either employees or employers. Moreover, the limited 
literature available suggests that if there is a reduction in 
flexibility for employees, it would not be as large as commenters 
suggested. A study by Lonnie Golden,\171\ referenced by the National 
Employment Law Project (NELP), found using data from the General Social 
Survey (GSS) that ``[i]n general, salaried workers at the lower (less 
than $50,000) income levels don't have noticeably greater levels of 
work flexibility that they would `lose' if they became more like their 
hourly counterparts.''
---------------------------------------------------------------------------

    \171\ Golden, L. (2014). Flexibility and Overtime Among Hourly 
and Salaried Workers. Economic Policy Institute.
---------------------------------------------------------------------------

Reclassification to Overtime Eligible Status
    Some commenters asserted that the rulemaking will negatively affect 
the morale of employees reclassified as overtime eligible.\172\ For 
example, WorldatWork stated that 79 percent of survey respondents said 
the proposed rule would have a negative effect on the reclassified 
employees' morale, as exemption classification is a perceived measure 
of status desired by employees, and Kimball Midwest similarly commented 
that ``many of the young professionals that we employ would view being 
reclassified to nonexempt as a demotion and an insult to their 
professional and social status in the workplace.'' The Department 
believes that for most employees their feelings of importance and worth 
come not from their FLSA exemption status, but from the increased pay, 
flexibility, fringe benefits, and job responsibilities that 
traditionally have accompanied exempt status, and that these factors 
are not incompatible with overtime eligibility.
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    \172\ The Department notes that to the extent that such negative 
effects are attributable to the employer converting the employee to 
hourly pay status, employers can avoid this consequence by 
continuing to pay overtime-eligible employees a salary and pay 
overtime when the employee works more than 40 hours in the workweek.
---------------------------------------------------------------------------

    However, if the worker does prefer to be salaried rather than 
hourly, then this change may impact the worker. The likelihood of this 
impact occurring depends on the costs to employers and benefits to 
employees of being salaried. Research has shown that salaried workers 
(who are not synonymous with exempt workers, but whose status is 
correlated with exempt status) are more likely than hourly workers to 
receive benefits such as paid vacation time and health insurance,\173\ 
are more satisfied with their benefits,\174\ and that when employer 
demand for labor decreases,

[[Page 32479]]

hourly workers tend to see their hours cut before salaried workers, 
making earnings for hourly workers less predictable.\175\ However, this 
literature generally does not control for differences between salaried 
and hourly workers such as education, job title, or earnings; 
therefore, this correlation is not necessarily attributable to hourly 
status.
---------------------------------------------------------------------------

    \173\ Lambert, S. J. (2007). Making a Difference for Hourly 
Employees. In A. Booth, & A. C. Crouter, Work-Life Policies that 
Make a Real Difference for Individuals, Families, and Communities. 
Washington, DC: Urban Institute Press.
    \174\ Balkin, D. B., & Griffeth, R. W. (1993). The Determinants 
of Employee Benefits Satisfaction. Journal of Business and 
Psychology, 7(3), 323-339.
    \175\ Lambert, S. J., & Henly, J. R. (2009). Scheduling in 
Hourly Jobs: Promising Practices for the Twenty-First Century 
Economy. The Mobility Agenda. Lambert, S. J. (2007). Making a 
Difference for Hourly Employees. In A. Booth, & A. C. Crouter, Work-
Life Policies that Make a Real Difference for Individuals, Families, 
and Communities. Washington, DC: Urban Institute Press.
---------------------------------------------------------------------------

    Some evidence suggests that it is more costly for the employer to 
employ a salaried worker than an hourly worker. If true, employers may 
choose to accompany the change in exemption status with a change to the 
employee's method of pay, from salary to an hourly basis, since there 
is no longer as great an incentive to classify the worker as 
salaried.\176\
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    \176\ There is not requirement that overtime eligible employees 
be paid on an hourly basis. Paying such employees a salary is 
appropriate so long as the employee receives overtime pay for 
working more than 40 hours in the workweek. See Sec. Sec.  
778.113-.114.
---------------------------------------------------------------------------

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

[[Page 32480]]

expect this rulemaking to have a significant effect on prices. The 
Department projects that, on average, costs and transfers make up less 
than 0.03 percent of payroll and less than 0.01 percent of revenues, 
although for specific industries and firms this percentage may be 
larger. Therefore, the Department expects that any potential change in 
prices will be modest. Further, any significant price increases, would 
generally not represent a separate category of impacts relative to 
those estimated in the RIA; rather, price increases (where they occur) 
are the channel through which consumers, rather than employers or 
employees, bear rule-induced costs (including transfers).\177\
---------------------------------------------------------------------------

    \177\ The deadweight loss associated with price increases is 
appropriately categorized as a cost, but it is discussed in detail 
in in section VI.D.vi because the methodology whereby it is 
estimated is more clearly explained as a follow-up to the transfers 
methodology.
---------------------------------------------------------------------------

Foreign Competition
    Some commenters expressed concern that the rulemaking will hurt the 
United States' ability to compete in the international market. See, 
e.g, Jackson Lewis; NACCO Industries; National Association of 
Manufacturers; National Association of Wholesale Distributors; 
Precision Machined Products Association. The Department does not 
believe this is a serious concern due to the small ratio of employer 
costs and transfers to revenues.
Substitution of Capital
    Some commenters, such as the National Parking Association and the 
National Beer Wholesalers Association, asserted that, by increasing the 
marginal cost of labor, the rule will lead companies to automate their 
business operations and substitute capital for labor. The Department 
believes that it is unlikely that employees performing jobs that can be 
easily automated will satisfy the duties test, and that any such effect 
would be negligible due to the small ratio of employer costs and 
transfer payments to operating revenue.
Wage Compression and Spillover Effects
    Several commenters stated that employers may increase the wages of 
workers currently paid just above the new threshold to maintain a 
distribution of wages, and some asserted that the Department failed to 
account for this effort to avoid salary compression in our economic 
analysis. See, e.g., Cornerstone Credit Union League; First Premier 
Bank; HMR Acquisition Company; International Franchise Association; 
PPWO; Seyfarth Shaw law firm; Tulsa Regional Chamber. The Department 
did not consider salary compression in the NPRM because data are not 
available to estimate this effect. For the same reason, we decline to 
consider this cost in the analysis accompanying this Final Rule.
Substitution of Part-Time Jobs in Place of Full-Time Jobs
    Some commenters stated that firms will reduce the number of full-
time positions and replace them with part-time positions to limit 
overtime payments. See, e.g., Associated General Contractors of America 
(AGC); National Newspaper Association; SnowSports Industries of 
America. These commenters assume that rather than cutting the hours of 
a worker who works 60 hours per week to 40 hours and hiring a part-time 
employee to work the remaining 20 hours (which would potentially reduce 
unemployment), employers will create part-time positions at the expense 
of full-time employment.
    As an initial matter, an employer will have an incentive to make 
these adjustments only if the cost of paying overtime is greater than 
the costs associated with hiring another worker. Further, although the 
Department acknowledges the possibility that firms may reduce the 
number of full-time positions and replace them with part-time 
positions, on net the Department believes the benefits of additional 
jobs (i.e., external margins) will outweigh any detriment of reduction 
in hours for current employees (i.e., internal margins), although the 
Department cannot quantify this effect. Due to data limitations the 
Department has not estimated transfers between workers. We note, 
however, that most of the estimates submitted by commenters of large 
costs, transfers, and employment impacts rely implicitly on the 
assumption that employers make no adjustment to the rulemaking except 
to pay the overtime premium. This lack of employer response is 
contradicted by quantitative analysis of employer behavior (see 
Barkume,\178\ for example), and by the employer comments on this 
rulemaking. Employers will adjust to the rule by adjusting base pay for 
newly nonexempt employees, as well as in other ways. After accounting 
for employer adjustments, the costs and transfers resulting from the 
rule are small relative to payroll and revenues, as are the projected 
reductions in employee hours, and the likelihood of large scale impacts 
on employment appears to be small.
---------------------------------------------------------------------------

    \178\ Barkume, A. (2010). The Structure of Labor Costs with 
Overtime Work in U.S. Jobs. Industrial and Labor Relations Review, 
64(1), 128-142.
---------------------------------------------------------------------------

    Conversely, other commenters, such as the International Food 
Service Distributors Association, expressed concern that employers 
would eliminate part-time positions ``where the employees value the 
flexibility.'' See also CUPA-HR. The Department believes it is unlikely 
that an employer will eliminate part-time positions simply because the 
workers become eligible for overtime, as an employer will not have to 
pay workers employed for less than 40 hours per week the overtime 
premium even if they are newly entitled to overtime pay.
    Finally, the Home Loan and Investment Company and other commenters 
also asserted that some workers who currently hold only one job will 
need to take a second job to supplement their now reduced hours. This 
would reduce workers' utility since juggling two jobs is more difficult 
than holding one job, even if the total hours are the same. To address 
this concern, the Department looked at the effect of the 2004 
rulemaking on the probability of multiple job holding. The 2004 
rulemaking increased the salary level required to be eligible for 
exemption from $250 per week (short test salary level) to $455 
(standard test salary level).\179\ To estimate the effect of this 
update on the share of full-time, white collar workers holding multiple 
jobs, the Department conducted a difference-in-differences (DD) 
analysis. This analysis allows the identification of any potential 
regulatory impact, while controlling for time trends and a broad range 
of other relevant factors (education, occupation, industry, geographic 
location, etc.). The Department compared January-March 2004 to January-
March 2005 \180\ and compared workers earning between $250 and $455 and 
those earning at least $455 but less than $600. The Department found no 
statistically significant change in workers' probability of holding 
multiple jobs before and after the 2004 Final Rule took effect.\181\ 
However, a caveat should be noted about interpreting this result as an 
indication that the Final Rule will not lead to an increase in the 
holding of multiple jobs. This rule is estimated to

[[Page 32481]]

affect approximately three times as many workers as the 2004 rule (for 
which the Department estimated 1.3 million affected workers), and 
factors that could not be controlled for in the analysis of the 2004 
rule may lead to a different outcome based on this rule.
---------------------------------------------------------------------------

    \179\ The 2004 Final Rule increased the salary level from the 
previous long test level of $155 per week (executive and 
administrative exemptions) or $170 per week (professional exemption) 
to $455 per week. For purposes of this analysis, the Department 
compared the increase from the short test salary level ($250 per 
week) since the long test was no longer operative due to increases 
in the minimum wage.
    \180\ The 2004 Final Rule was published April 23, 2004 and went 
into effect August 23, 2004.

    \181\ The difference-in-differences model used to examine 
whether the share of workers holding multiple jobs increased as a 
result of the 2004 rule can be written as
[GRAPHIC] [TIFF OMITTED] TR23MY16.004

where Mi is equal to 1 if worker i is has more than one 
job and 0 otherwise, Ti is equal to 1 if worker i earns 
at least $250 but less than $455 and 0 if he earns between $455 and 
$600, Pi is equal to 1 for the post-change period (Jan.-
Mar. 2005) and 0 for the pre-change period (Jan.-Mar. 2004), and 
Ci is a set of worker-specific controls (age, education, 
gender, race, ethnicity, occupation, industry, state of residence, 
working overtime, whether paid hourly or salaried). The model was 
estimated using a probit regression. The relevant marginal effect is 
-0.009 (i.e., the amount the likelihood of multiple job holding 
changes post rulemaking for workers earning between $250 and $455 
per week relative to the change for workers earning between $455 and 
$600), with a standard deviation of 0.006. Thus, while the point 
estimate shows a decrease in the probability of multiple job holding 
for affected workers after the 2004 Final Rule took effect, the 
finding is not statistically significant at conventional thresholds 
for significance. The Department also used a difference-in-
difference-in-differences model to examine whether the share of 
workers holding multiple jobs increased as a result of the 
California's increase in the salary threshold from $540 to $640 
between 2006 and 2008 and from $640 to $720 between 2014 and 2015. 
That model can be written as
[GRAPHIC] [TIFF OMITTED] TR23MY16.005

where Mi is equal to 1 if worker i has multiple jobs and 
0 otherwise, Ti is equal to 1 if worker i earns between 
the old threshold and the new threshold and 0 if he earns just above 
the new threshold, Pi is equal to 1 for the post-change 
period and 0 for the pre-change period, Si is equal to 1 
if worker i is in California and 0 if she is in other states where 
the salary level was not increased, and Ci is the same 
set of worker-specific controls used in the DD analysis. The model 
was estimated using a probit regression. For the change between 2006 
and 2008, the relevant marginal effect is -0.025 with a standard 
deviation of 0.004, and for the change between 2014 and 2015, the 
relevant marginal effect is 0.042 with a standard deviation of 
0.018. Thus we observe a statistically significant (at conventional 
thresholds) increase in the share of workers holding multiple jobs 
in one period but a statistically significant (at conventional 
thresholds) decrease in the other.
Reduced Profits
    Some commenters, including an HR consultant, a small business 
owner, and a commenter from the restaurant industry, expressed concern 
that establishments with small profit margins may lose money or go out 
of business. The increase in workers' earnings resulting from the 
revised salary level is a transfer of income from firms to workers, not 
a cost, and is thus neutral concerning its primary effect on welfare. 
However, there are potential secondary effects (both costs and 
benefits) of the transfer due to the potential difference in the 
marginal utility of income and the marginal propensity to consume or 
save between workers and business owners. Thus, the Department 
acknowledges that profits may be reduced due to increased employer 
costs and transfer payments as a result of this rule, although some of 
these costs and transfers may be offset by making payroll adjustments 
or the profit consequences of costs and transfers partially mitigated 
through increased prices.\182\ The Department notes that firms have a 
broad array of approaches for adjusting to the rulemaking: Firms that 
face robust demand may be able to increase product prices and may make 
smaller adjustments to base wages or overtime hours; firms that have 
little ability to raise prices may have to make more substantial 
changes to wages or other variables. Further, because costs and 
transfers are on average small relative to payroll and revenues, the 
Department does not expect this rulemaking to have a significant effect 
on profits. Additionally, increased payroll may lead to increased 
consumer spending which may translate into higher profits, offsetting 
part of the initial reduction in profits. Two business owners who 
commented separately in support of the Department's proposal cited an 
increase in sales as a likely consequence of this rulemaking.
---------------------------------------------------------------------------

    \182\ As shown below, because costs and transfers generally 
compose less than one percent of revenues, the Department expects 
any such price increases to be minor.
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Hiring Costs
    One of Congress' goals in enacting the FLSA in 1938 was to spread 
employment to a greater number of workers by effectively raising the 
wages of employees working more than 40 hours per week. To the extent 
that firms respond to an update to the salary level test by reducing 
overtime, they may do so by spreading hours to other workers, 
including: Current workers employed for less than 40 hours per week by 
that employer, current workers who retain their exempt status, and 
newly hired workers. If new workers are hired to absorb these 
transferred hours, then the associated hiring costs are a cost of this 
Final Rule.
iv. Transfers
1. Overview
    Transfer payments occur when income is redistributed from one party 
to another. The Department has quantified two possible transfers from 
employers to employees likely to result from this update to the salary 
level tests: (1) Transfers to ensure compliance with the FLSA minimum 
wage provision; and (2) transfers to ensure compliance with the FLSA 
overtime pay provision. Transfers in Year 1 to workers from employers 
due to the minimum wage provision were estimated to be $34.3 million. 
The increase in the HCE compensation level does not affect minimum wage 
transfers because workers eligible for the HCE exemption earn well 
above the minimum wage. Transfers to employees from employers due to 
the overtime pay provision were estimated to be $1,250.8 million, 
$1,152.3 million of which is from the increased standard salary level, 
while the remainder is attributable to the increased HCE compensation 
level.

[[Page 32482]]

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

                                Table 17--Summary of Year 1 Regulatory Transfers
                                                   [Millions]
----------------------------------------------------------------------------------------------------------------
                                                                                        HCE
               Transfer from employers to workers                    Standard      Compensation        Total
                                                                   salary level        level
----------------------------------------------------------------------------------------------------------------
Due to minimum wage.............................................           $34.3            $0.0           $34.3
Due to overtime pay.............................................         1,152.3            98.5         1,250.8
                                                                 -----------------------------------------------
    Total transfers.............................................         1,186.6            98.5         1,285.2
----------------------------------------------------------------------------------------------------------------

    Because the overtime premium depends on the base wage, the 
estimates of minimum wage transfers and overtime transfers are linked. 
This can be considered a two-step approach. The Department first 
identified affected EAP workers with an implicit regular hourly wage 
lower than the minimum wage, and then calculated the wage increase 
necessary to reach the minimum wage. The implicit regular rate of pay 
is calculated as usual weekly earnings divided by usual weekly hours 
worked. For those employees whose implicit regular rate of pay is below 
the minimum wage, the overtime premium was based on the minimum wage as 
the regular rate of pay.
2. Transfers Due to the Minimum Wage Provision
    Transfers from employers to workers to ensure compliance with the 
higher of the federal or applicable state minimum wage are small 
compared to the transfers attributed to overtime pay and are only 
associated with the change in the standard salary level. For purposes 
of this analysis, the hourly rate of pay is calculated as usual weekly 
earnings divided by usual weekly hours worked. In addition to earning 
below the federal or state minimum wage, this set of workers also works 
many hours per week. To demonstrate, in order to earn less than the 
federal minimum wage of $7.25 per hour, but at least $455 per week, 
these workers must regularly work significant amounts of overtime 
(since $455/$7.25 = 62.8 hours). The applicable minimum wage is the 
higher of the federal minimum wage and the state minimum wage as of 
January 2016. Most affected EAP workers already receive at least the 
minimum wage; an estimated 11,200 affected EAP workers (less than 0.3 
percent of all affected EAP workers) currently earn an implicit hourly 
rate of pay less than the minimum wage. The Department estimated 
transfers due to payment of the minimum wage by calculating the change 
in earnings if wages rose to the minimum wage for workers who become 
nonexempt and thus would have to be paid at least the minimum 
wage.\183\
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    \183\ Because these workers' hourly wages will be set at the 
minimum wage after this Final Rule, their employers will not be able 
to adjust their wages downward to offset part of the cost of paying 
the overtime pay premium (which will be discussed in the following 
section). Therefore, these workers will generally receive larger 
transfers attributed to the overtime pay provision than other 
workers.
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    In response to an increase in the regular rate of pay to the 
minimum wage, employers may reduce the workers' hours, which must be 
considered when estimating transfers attributed to payment of the 
minimum wage to newly overtime-eligible workers. In theory, because the 
quantity of labor hours demanded is inversely related to wages, a 
higher mandated wage could result in fewer hours of labor demanded. 
However, the weight of the empirical evidence finds that increases in 
the minimum wage have caused little or no significant job loss.\184\ 
Thus, in the case of this regulation, the Department believes that any 
disemployment effect due to the minimum wage provision would be 
negligible. This is partially due to the small number of workers 
affected by this provision. The Department estimates the potential 
disemployment effects (i.e., the estimated reduction in hours) of the 
transfer attributed to the minimum wage by multiplying the percent 
change in the regular rate of pay by a labor demand elasticity of -
0.075.\185\
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    \184\ Belman, D., and P.J. Wolfson (2014). What Does the Minimum 
Wage Do? Kalamazoo, MI: W.E. Upjohn Institute for Employment 
Research. Dube, A., T.W. Lester, and M. Reich. (2010). Minimum Wage 
Effects Across State Borders: Estimates Using Contiguous Counties. 
The Review of Economics and Statistics, 92(4), 945-964. Schmitt, J. 
(2013). Why Does the Minimum Wage Have No Discernible Effect on 
Employment? Center for Economic and Policy Research.
    \185\ This is based on the estimated impact of a change in the 
minimum wage from $7.25 to $9.00 per hour on the employment of 
teenagers from the Congressional Budget Office. (2014). The Effects 
of a Minimum Wage Increase on Employment and Family Income. While an 
elasticity estimate for adult workers would be more appropriate, the 
report stated that the elasticity for adults was ``about one-third 
of the elasticity'' for teenagers, without providing a specific 
value. In addition, the literature for adults is more limited. The 
size of the estimated reduction in hours is thus likely to be an 
upper bound.
---------------------------------------------------------------------------

    At the new standard salary level ($913 per week), the Department 
estimates that 11,200 affected EAP workers will on average see an 
hourly wage increase of $0.91, work 0.7 fewer hours per week, and 
receive an increase in weekly earnings of $59.10 as a result of 
coverage by the minimum wage provisions (Table 18). The total change in 
weekly earnings due to the payment of the minimum wage was estimated to 
be $660,300 per week ($59.10 x 11,200) or $34.3 million in Year 1.

   Table 18--Minimum Wage Only: Mean Hourly Wages, Usual Overtime Hours, and Weekly Earnings for Affected EAP
                                                 Workers, FY2017
----------------------------------------------------------------------------------------------------------------
                                                                                                   Total weekly
                                                    Hourly wage    Usual weekly    Usual weekly      transfer
                                                        \a\            hours         earnings        (1,000s)
----------------------------------------------------------------------------------------------------------------
Before Final Rule...............................           $8.13            69.3          $551.2  ..............
After Final Rule................................            9.04            68.6           610.3  ..............

[[Page 32483]]

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

    Modeling employer adjustments for these workers is a two-step 
process. First, employers adjust wages and hours to meet the minimum 
wage requirement, as described here. Then, these workers' hours will be 
further adjusted in response to the requirement to pay the overtime 
premium, which is discussed in the following section. The transfers 
presented here only apply to the minimum wage provision. However, 
minimum wage transfers impact overtime transfers because the overtime 
premium is calculated based on the minimum wage, not the worker's 
original wage. Thus, the two are not entirely separable.
3. Transfers Due to the Overtime Pay Provision
Introduction
    The Final Rule will also transfer income to affected workers who 
work in excess of 40 hours per week. Requiring an overtime premium 
increases the marginal cost of labor, which employers will likely try 
to offset by adjusting wages or hours. Thus, the size of the transfers 
due to the overtime pay provision will depend largely on how employers 
respond to the updated salary levels. How employers respond and the 
ensuing changes in employment conditions will depend on the demand for 
labor, current wages, employer and employee bargaining power, and other 
factors. Employers may respond by: (1) Paying the required overtime 
premium to affected workers for the same number of overtime hours at 
the same implicit regular rate of pay; (2) reducing overtime hours and 
potentially transferring some of these hours to other workers; (3) 
increasing workers' salaries to the updated salary or compensation 
level; (4) reducing the regular rate of pay for workers working 
overtime; or (5) using some combination of these responses. How 
employers will respond depends on many factors, including the relative 
costs of each of these alternatives; in turn, the relative costs of 
each of these alternatives are a function of workers' earnings and 
hours worked.
    The simplest approach to estimating these transfer payments would 
be to multiply an employee's regular rate of pay (after compliance with 
the minimum wage) by 1.5 for all overtime hours; this is referred to as 
the ``full overtime premium'' model.\186\ However, due to expected wage 
and hour adjustments by employers, this would likely overestimate the 
size of the transfer. Therefore, the Department used a methodology that 
allows for employer adjustments, such as changes in the regular rate of 
pay or hours worked. The size of these adjustments is likely to vary 
depending on the affected worker's salary and work patterns. To model 
employer responses, the Department used a method that reflects the 
average response among all employers for all affected workers. However, 
individual employer responses will vary.
---------------------------------------------------------------------------

    \186\ The implicit regular rate of pay is calculated as usual 
weekly earnings divided by usual weekly hours worked. For example, 
the regular rate of pay for an employee previously ineligible for 
overtime whose usual weekly earnings was $600 and usual weekly hours 
was 50 would be $12 per hour. Under the full overtime premium model, 
this employee would receive $660 ((40 hours x $12) + (10 hours x $12 
x 1.5)).
---------------------------------------------------------------------------

Literature on Employer Adjustments
    Two conceptual models are useful for thinking about how employers 
may respond to reclassifying certain employees as overtime eligible: 
The ``full overtime premium'' model and the ``employment contract'' 
model.\187\ These models make different assumptions about the demand 
for overtime hours and the structure of the employment agreement which 
result in different implications for predicting employer responses.
---------------------------------------------------------------------------

    \187\ The employment contract model is also known as the fixed-
job model. See Trejo, S.J. (1991). The Effects of Overtime Pay 
Regulation on Worker Compensation. American Economic Review, 81(4), 
719-740, and Barkume, A. (2010). The Structure of Labor Costs with 
Overtime Work in U.S. Jobs. Industrial and Labor Relations Review, 
64(1), 128-142.
---------------------------------------------------------------------------

    The full overtime premium model is based on what we will refer to 
as the ``labor demand'' model of determining wage and hour conditions. 
In the labor demand model, employers and employees negotiate fixed 
hourly wages and then subsequently negotiate hours worked, rather than 
determining both hours and pay simultaneously. This model assumes 
employees are aware of the hourly wage rate they negotiated and may be 
more reluctant to accept downward adjustments. The labor demand model 
would apply if employees had a contract to be paid at an hourly rate, 
meaning that employers could not reduce the regular rate of pay in 
response to the requirement to pay a 50 percent premium on hours worked 
beyond 40 in a week. However, the increase in the marginal cost of 
labor would lead to a reduction in the hours of labor demanded as long 
as labor demand is not completely inelastic. The full overtime premium 
model is a special case of the labor demand model in which the demand 
for labor is completely inelastic, that is employers will demand the 
same number of hours worked regardless of the cost.
    In the employment contract model, employers and employees negotiate 
total pay and hours simultaneously, rather than negotiating a fixed 
hourly wage and then determining hours. Under this model, when 
employers are required to pay employees an overtime premium, they 
adjust the employees' implicit hourly rate of pay downward so that when 
the overtime premium is paid total employee earnings (and thus total 
employer cost) remain constant, along with the employees' hours. The 
employer does not experience a change in cost and the employee does not 
experience a change in earnings or hours. The employment contract model 
would hold if the workers who are reclassified as overtime protected 
had an employment agreement specifying set total earnings and hours of 
work.
    The employment contract model tends to be more applicable when 
overtime hours are predictable, while the labor demand model is 
generally more applicable to situations where the need for overtime is 
unanticipated (for example, where there are unforeseen, short-term 
increases in demand). However, the employment contract model may not 
fully hold even for workers who work predictable overtime due to market 
imperfections, employer incentives, or workers' bargaining power. Four 
examples are provided.

[[Page 32484]]

     Employers are constrained because they cannot reduce an 
employee's implicit hourly rate of pay below the minimum wage. If the 
employee's implicit hourly rate of pay before the change is at or below 
the minimum wage, then employers will not be able to reduce the rate of 
pay to offset the cost of paying the overtime premium.
     Employees generally have some, albeit limited, bargaining 
power which may prevent employers from reducing the employee's implicit 
hourly rate of pay to fully offset increased costs.
     Employers may be hesitant to reduce the employee's 
implicit hourly rate of pay by the entire amount predicted by the 
employment contract model because it may hurt employee morale and 
consequently productivity.\188\
---------------------------------------------------------------------------

    \188\ For example: Bewley, T. (1999). Why Wages Don't Fall 
During a Recession. Cambridge, MA: Harvard University Press. Brown, 
C. & Medoff, J. (1989). The Employer Size Wage Effect. Quarterly 
Journal of Economics, 97(5), 1027-1059. See also the literature on 
implicit contracts in labor markets.
---------------------------------------------------------------------------

     Employers are often limited in their ability to pay 
different regular rates of pay to different employees who perform the 
same work and have the same qualifications because of fairness 
concerns. In order to keep wages constant across employees and reduce 
wages for overtime workers, employers would need to reduce the implicit 
hourly rate of pay for employees who do not work overtime as well as 
those who do work overtime. This would reduce total earnings for these 
non-overtime employees (potentially causing retention problems, 
productivity losses, and morale concerns).\189\
---------------------------------------------------------------------------

    \189\ For example: Fehr & Schmidt. (2007). ``A Theory of 
Fairness Competition and Cooperation.'' Quarterly Journal of 
Economics. Vol 97 No. 2 pp. 867-868. Milgram, Paul. (1988). 
``Employment Contracts Influence Activities and Efficient 
Organization Design.'' Journal of Political Economy, Vol. 96 No. 1 
pp. 42-60.
---------------------------------------------------------------------------

    Therefore, the likely outcome will fall somewhere between the 
conditions predicted by the full overtime premium and employment 
contract models. For example, the implicit hourly rate of pay may fall, 
but not all the way to the wage predicted by the employment contract 
model, and overtime hours may fall but not be eliminated since the 
implicit hourly rate of pay has fallen. The Department conducted a 
literature review to evaluate how the market would adjust to a change 
in the requirement to pay overtime.
    Barkume (2010) and Trejo (1991) empirically tested for evidence of 
these two competing models by measuring labor market responses to the 
application of FLSA overtime pay regulations.\190\ Both concluded that 
wages partially adjust toward the level consistent with the employment 
contract model in response to the overtime pay provision.\191\ Barkume 
found that employee wage rates were adjusted downward by 40 to 80 
percent of the amount the employment contract model predicted, 
depending on modeling assumptions. Earlier research had demonstrated 
that in the absence of regulation some employers may voluntarily pay 
workers some overtime premium to entice them to work longer hours, to 
compensate workers for unexpected changes in their schedules, or as a 
result of collective bargaining.\192\ Thus Barkume assumed that workers 
would receive an average voluntary overtime pay premium of 28 percent 
in the absence of an overtime pay regulation. Including this voluntary 
overtime pay from employers, he estimated that in response to overtime 
pay regulation, the wage adjusted downward by 80 percent of the amount 
that would occur with the employment contract model. Conversely, when 
Barkume assumed workers would receive no voluntary overtime pay premium 
in the absence of an overtime pay regulation, wages adjusted downward 
40 percent of the amount the employment contract model 
predicted.193 194 However, while it seemed reasonable that 
some premium was paid for overtime in the absence of regulation, 
Barkume's assumption of a 28 percent initial overtime premium is likely 
too high for the salaried workers potentially affected by a change in 
the salary and compensation level requirements for the EAP 
exemptions.\195\
---------------------------------------------------------------------------

    \190\ Barkume, A. (2010). The Structure of Labor Costs with 
Overtime Work in U.S. Jobs. Industrial and Labor Relations Review, 
64(1), 128-142. Trejo, S.J. (1991). The Effects of Overtime Pay 
Regulation on Worker Compensation. American Economic Review, 81(4), 
719-740.
    \191\ Since both papers were based on cross-sectional data, 
findings were assumed to be at the final equilibrium wages. However, 
studies showing wage contracts are likely to be stickier in the 
short run than in the long run have limited applicability here since 
this analysis deals exclusively with salaried workers seeing an 
increase in their weekly wage while seeing a downward adjustment in 
their implicit hourly wage rate, and they may be less aware of their 
implicit hourly wage rate. The Department has modeled a sticky 
adjustment process by assuming the wage elasticity of demand for 
labor is smaller in Year 1 than in subsequent years.
    \192\ Barzel, Y. (1973). The Determination of Daily Hours and 
Wages. The Quarterly Journal of Economics, 87(2), 220-238 
demonstrated that modest fluctuations in labor demand could justify 
substantial overtime premiums in the employment contract model. 
Hart, R.A. and Yue, M. (2000). Why Do Firms Pay an Overtime Premium? 
IZA Discussion Paper No. 163, showed that establishing an overtime 
premium in an employment contract can reduce inefficiencies.
    \193\ Barkume's estimates are consistent with Trejo's 1991 
finding that the wage adjustment when there is no overtime premium 
was only about 40 percent of the full employment contract model 
adjustment. Trejo's estimates range from 25 percent to 49 percent 
and average 40 percent.
    \194\ Consider a worker earning $500 and working 50 hours per 
week. Assuming no overtime premium is paid the imputed hourly rate 
of pay is $10. Assuming a 28 percent overtime premium, the hourly 
rate of pay is $9.47 (($9.47 x 40 hours) + ($9.47 x 10 hours x 
1.28)) = $500. If the hourly rate of pay was fully adjusted to the 
employment contract model level when overtime pay is newly required, 
the hourly rate of pay would be $9.09 (($9.09 x 40 hours) + ($9.09 x 
10 hours x 1.5)) = $500. Forty percent of the adjustment from $10 to 
$9.09 results in an adjusted regular rate of pay of $9.64. Eighty 
percent of the adjustment from $9.47 to $9.09 results in an adjusted 
hourly rate of pay of $9.17. The Department took the average of 
these two adjusted wages to estimate that the resulting hourly rate 
of pay would be $9.40.
    \195\ Barkume (2010) based this assumption on the findings of 
Bell, D. and Hart, R. (2003). Wages, Hours, and Overtime Premia: 
Evidence from the British Labor Market. Industrial and Labor 
Relations Review, 56(3), 470-480. This study used 1998 data on male, 
non-managerial, full-time workers in Britain. British workers were 
likely paid a larger voluntary overtime premium than American 
workers because Britain did not have a required overtime pay 
regulation and so collective bargaining played a larger role in 
implementing overtime pay.
---------------------------------------------------------------------------

Comments Regarding Transfers
    The few commenters who tried to model employer responses generally 
used or cited the same literature the Department used (in particular, 
Barkume (2010) and Trejo (1991)). Susann Rohwedder and Jeffrey B. 
Wenger conducted an analysis for RAND on the impacts of the rulemaking 
and, like our analysis, found small effects on individual workers' 
earnings and hours.\196\
---------------------------------------------------------------------------

    \196\ Rohwedder, S. and Wenger, J.B. (2015). The Fair Labor 
Standards Act: Worker Misclassification and the Hours and Earnings 
Effects of Expanded Coverage. RAND Labor and Population.
---------------------------------------------------------------------------

    Some organizations conducted surveys to evaluate how employers may 
respond. Although these surveys may be helpful as background 
information, they generally cannot be used in a quantitative analysis 
due to issues such as insufficient sample sizes, missing sampling 
methodology, and missing magnitudes. As an example of the last concern, 
the American Association of Orthopaedic Executives (AAOE) conducted a 
survey of their members and found ``19% of respondents indicated that 
they would change the number of staff hours worked in order to avoid 
paying overtime.'' The Department agrees firms will generally change 
staffing hours and has included this in the quantitative analysis. The 
modeling question is to what degree employers will adjust hours.
    Despite the inability to incorporate these survey results into the 
analysis,

[[Page 32485]]

they may be informative and select results are presented here.
     The AAOE found ``18% [of members] indicated that they 
would not change their current practice operations. 16% stated that 
they would increase salaries to the new threshold. 11% would change the 
affected employees to hourly employees, and 4% stated that they would 
eliminate positions within their practice.'' This indicates employers 
will use a variety of mechanisms to reduce transfer payments, as 
discussed and modeled by the Department.
     The 2015 WorldatWork survey found ``73% of respondents 
stated they would have more nonexempt employees.''
     Kansas Bankers Association compiled member banks' analyses 
of the rule that found ``[o]verwhelmingly . . . the response was not to 
increase the newly non-exempt salaries to continue to keep the position 
as an exempt position. In fact, only 2 bank CEOs responded that they 
would choose to do so. Rather, the overwhelming majority of bank CEOs 
stated those employees would move to non-exempt status, and overtime 
would be restricted or prohibited.''
     The NAHB presented results from a member survey that found 
33 percent of companies indicated a change in company policies, with 
respect to construction supervisors, would occur. Among those firms, 
``56% of respondents indicated that they would take steps to minimize 
overtime, such as cut workers hours.''
     ANCOR found ``[l]ess than a third of providers would be 
able to increase the salary of full-time exempt workers to meet the 
projected threshold.''
     Society for Human Resource Management (SHRM) reported 
that, according to its survey ``the most significant result identified 
was the implementation of restrictive overtime policies leading to 
potential reduction in employees working overtime, with 70 percent of 
respondents indicating that would be a likely outcome.''
     AGC reported its survey found ``74% of AGC-surveyed 
construction contractors responded that they would likely reclassify 
some or all of the impacted exempt workers to a non-exempt hourly 
status at their current salaries. The survey results also show that: 
Over 60% of respondents expect the proposed rule to result in the 
institution of policies and practices to ensure that affected employees 
do not work over 40 hours a week.''
     International Public Management Association for Human 
Resources (IMPA-HR) and the International Municipal Lawyers Association 
reported from an IPMA-HR survey that ``[a]bout 60% said they would 
convert currently exempt employees to non-exempt and pay them overtime 
while the same amount would prohibit them from working more than 40 
hours per week without approval. Only 1/3 would raise salaries to at 
least $970 per week.''
     National Association of Professional Insurance Agents 
asked survey respondents with workers who would be converted to 
nonexempt status and who work overtime whether they would decrease 
overtime hours; 65 percent responded they would.
    Some commenters stated that many employers will respond by reducing 
hours and base wages more than the Department estimated. The National 
Association of Manufacturers wrote:

    While in the initial months following a reclassification, most 
employees tend to come out about the same in terms of total work and 
total compensation, the steady pressure of the overtime premium 
tends to result in a gradual reduction of the employee's schedule. 
The challenge for that employee is that the hourly rate does not 
normally increase to offset this loss in hours. Instead, the 
employer looks to give the work to other employees. The scaling back 
of the employee's weekly working hours can take a significant toll 
on the employee's earnings, especially given that the wages lost for 
each hour of overtime eliminated are at premium rates. The net 
economic effect of the Proposed Rule will be to take working hours 
and pay away from employees currently classified as exempt and 
redistribute those hours and pay to other employees.

    Some commenters, including Jackson Lewis, the National RV Dealers 
Association, and the Sheppard Mullin law firm, asserted that many 
employers may follow the full employment contract model rather than the 
partial employment contract model used by the Department in the 
analysis. The Iowa Association of Community Providers wrote that ``[i]n 
order to maintain current payroll budgets, the organizations will need 
to lower the hourly wages of non-exempt employees, such that their 
total annual compensation, including overtime payments, remains at the 
prior year's level.'' The Construction Industry Round Table asserted 
that ``empirical research generally supports the `fixed-job' model 
rather than the `fixed-wage' model.''
    Other commenters stated that overtime will be reduced significantly 
more than the Department estimated in the NPRM. However, little data 
was provided to support these claims, making them difficult to 
incorporate into the analysis. For example, Audubon Area Community 
Services believes that ``[b]ecause additional revenue is not an option, 
our agency would have to reclassify all but 10 of our positions to non-
exempt with no overtime allowed by any staff.''
    The Department's reading and analysis of the literature cited in 
the rulemaking is that a result between the fixed-job model and the 
fixed-wage model would occur and thus we modeled our results 
accordingly. Specifically, based upon Barkume's findings regarding 
employer responses and transfer payments, we believe the partial 
employment contract model is most appropriate and consistent with the 
literature. Therefore, we have not changed the analysis. Several 
commenters commented on the literature we used to support using the 
partial employment contract model. The Center for American Progress 
expressed support for our use of Barkume's analysis and stated that 
this would result in some transfer payments since employers cannot 
fully adjust base wages. The Washington Center for Equitable Growth 
noted the Department ``should make clear that under certain conditions 
the fixed-wage model underlying [the Department's] analysis implies 
that some workers will see an increase in hours. If these workers are 
under-employed, the shift in the composition of those hours from over-
worked to under-worked employees will be a welfare-improving 
consequence of the proposed rule.''
Identifying Types of Affected Workers
    The Department identified four types of workers whose work 
characteristics impact how employers were modeled to respond to the 
changes in both the standard and HCE salary levels:
     Type 1: Workers who do not work overtime.
     Type 2: Workers who do not regularly work overtime but 
occasionally work overtime.
     Type 3: Workers who regularly work overtime.
     Type 4: Workers who regularly work overtime. These workers 
differ from the Type 3 workers because it is less expensive for the 
employer to pay the updated salary level than pay overtime and incur 
managerial costs for these workers.\197\
---------------------------------------------------------------------------

    \197\ It is possible that employers will increase the salaries 
paid to some ``occasional'' overtime workers to maintain the 
exemption for the worker, but the Department has no way of 
identifying these workers.
---------------------------------------------------------------------------

    The Department began by identifying the number of workers in each 
type. After modeling employer adjustments, transfer payments were then 
estimated. Type 3 and 4 workers are identified as

[[Page 32486]]

those who regularly work overtime (CPS variable PEHRUSL1 greater than 
40). These workers are divided between Type 3 and Type 4 depending on 
whether their weekly earnings are raised to the updated EAP salary 
level or they become nonexempt. Distinguishing Type 3 workers from Type 
4 workers is a four step process. First we identify all workers who 
regularly work overtime. Then we estimate each worker's weekly earnings 
if they became nonexempt, to which we add weekly managerial costs for 
each affected worker of $3.53 ($42.31 per hour x (5 minutes/60 
minutes)). Lastly, we identify as Type 4 those workers whose expected 
nonexempt earnings plus weekly managerial costs exceeds the updated 
standard salary level; those whose expected nonexempt earnings plus 
weekly managerial costs are less than the new standard salary level are 
classified as Type 3 workers. The Department assumes that firms will 
include incremental managerial costs in their determination of whether 
to treat an affected employee as a Type 3 or Type 4 worker because 
those costs are only incurred if the employee is a Type 3 worker. Thus, 
it is appropriate to determine if the additional earnings plus the 
additional managerial costs for an affected worker exceed the revised 
salary level. In the NPRM managerial costs were not included in the 
determination of whether a worker is a Type 3 or Type 4 worker. 
Therefore, in this Final Rule there are somewhat more Type 4 workers 
than the NPRM methodology would yield.
    Identifying Type 2 workers involves two steps. First, using CPS 
MORG data, the Department identified those who do not usually work 
overtime but did work overtime in the survey week (the week referred to 
in the CPS questionnaire, variable PEHRACT1 greater than 40). These 
workers represent those who occasionally work overtime and happened to 
work overtime in that specific week. The survey (or reference) week is 
always the pay period that includes the 12th day of the month and 
contains responses for all twelve months. In a different week the 
identity of workers who work overtime might differ, but the number 
working overtime and the hours of overtime worked are similar because 
the survey week is representative of occasional overtime patterns.
    The second step for identifying Type 2 workers in the Final Rule 
differs from the methodology used in the NPRM. In the NPRM, we used 
only the first step described above to identify Type 2 workers. Those 
who did not regularly work overtime and did not work overtime in the 
survey week were classified as Type 1 workers. As previously discussed, 
commenters expressed concerns that the Department underestimated the 
number of workers who will experience changes in their wages or hours, 
and therefore that we underestimated costs, because managerial costs 
are a function of the number of workers who work overtime.
    Therefore, for this Final Rule, the Department supplemented the CPS 
data with data from the Survey of Income and Program Participation 
(SIPP) in order to look at likelihood of working some overtime during 
the year. Based on 2012 data, the most recent available, the Department 
found that 39.4 percent of nonhourly workers worked overtime at some 
point in a year. Workers already identified as Types 2, 3, and 4, using 
the methodology in the NPRM, compose 24 percent of affected workers. 
Therefore, as a second step, the Department classified a share of 
workers who reported they do not usually work overtime, and did not 
work overtime in the reference week (previously identified as Type 1 
workers), as Type 2 workers such that a total of 39.4 percent of 
affected workers were Type 2, 3, or 4. Therefore, the Department 
estimates fewer Type 1 workers and more Type 2 workers than in the 
NPRM.
Modeling Changes in Wages and Hours
    In practice, employers do not seem to adjust wages of regular 
overtime workers to the full extent indicated by the employment 
contract model, and thus employees appear to get a small but 
significant increase in weekly earnings due to overtime pay coverage. 
Barkume and Trejo found evidence partially supporting both the 
employment contract model and the full overtime premium model in 
response to a 50 percent overtime premium requirement: A decrease in 
the regular rate of pay for workers with overtime (but not the full 
decrease to the employment contract model level) and a decrease in the 
amount of overtime worked. Therefore, when modeling employer responses 
with respect to the adjustment to the regular rate of pay, the 
Department used a method that falls somewhere between the employment 
contract model and the full overtime premium model (i.e., the partial 
employment contract model).
    Barkume reported two methods to estimate this partial employment 
contract wage, depending on the amount of overtime pay assumed to be 
paid in the absence of regulation. As noted above, the Department 
believes both the model assuming a voluntary 28 percent overtime 
premium and the model assuming no voluntary overtime premium are 
unrealistic for the affected population. Therefore, lacking more 
information, the Department determined that an appropriate estimate of 
the impact on the implicit hourly rate of pay for regular overtime 
workers after the Final Rule should be determined using the average of 
Barkume's two estimates of partial employment contract model 
adjustments: A wage change that is 40 percent of the adjustment toward 
the amount predicted by the employment contract model, assuming an 
initial zero overtime pay premium, and a wage change that is 80 percent 
of the adjustment assuming an initial 28 percent overtime pay 
premium.\198\ This is approximately equivalent to assuming that 
salaried overtime workers implicitly receive the equivalent of a 14 
percent overtime premium in the absence of regulation (the mid-point 
between 0 and 28 percent).
---------------------------------------------------------------------------

    \198\ Both studies considered a population that included hourly 
workers. Evidence is not available on how the adjustment towards the 
employment contract model differs between salaried and hourly 
workers. The employment contract model may be more likely to hold 
for salaried workers than for hourly workers since salaried workers 
directly observe their weekly total earnings, not their implicit 
equivalent hourly wage. Thus, applying the partial adjustment to the 
employment contract model as estimated by these studies may 
overestimate the transfers from employers to salaried workers. We 
note that such an out-of-sample extrapolation has the potential to 
introduce uncertainty, just as there is uncertainty associated with 
other effects, such as the replacement of full-time jobs with part-
time jobs, where studies have suggested directionally non-beneficial 
effects that are not statistically significant. Due to the lack of 
modeling results for salaried employees in the employment contract 
model, we do not attempt to quantify the magnitude of this 
uncertainty or potential overestimate.
---------------------------------------------------------------------------

    Modeling changes in wages, hours, and earnings for Type 1 and Type 
4 workers is relatively straightforward. Type 1 affected EAP workers 
will become overtime eligible, but since they do not work overtime, 
they will see no change in their weekly earnings. Type 4 workers will 
remain exempt because their earnings will be raised to the updated EAP 
salary level (either the standard salary level or HCE compensation 
level depending on which test the worker passed). These workers' 
earnings will increase by the difference between their current earnings 
and the amount necessary to satisfy the new standard salary requirement 
or comply with the new total annual compensation level. It is possible 
employers will increase these workers' hours in response to paying them 
a higher salary, but the Department has not modeled this potential 
change.\199\
---------------------------------------------------------------------------

    \199\ Cherry, Monica, ``Are Salaried Workers Compensated for 
Overtime Hours?'' Journal of Labor Research 25(3): 485-494, 
September 2004, found that exempt full-time salaried employees earn 
more when they work more hours, but we have chosen not to use her 
results for the quantification of the effect on hours of an increase 
in earnings.

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[[Page 32487]]

    Modeling changes in wages, hours, and earnings for Type 2 and Type 
3 workers is more complex and uses findings from Barkume discussed 
above. The Department distinguishes those who regularly work overtime 
(Type 3 workers) from those who occasionally, or irregularly, work 
overtime (Type 2 workers) because employer adjustment to the Final Rule 
may differ accordingly. The Department believes that employers are more 
likely to adjust hours worked and wages for regular overtime workers 
because their hours are predictable. Conversely, it may be more 
difficult to adjust hours and wages for occasional overtime workers 
because employers may be responding to a transient, perhaps 
unpredicted, shift in market demand for the good or service they 
provide. In this case, it is likely advantageous for the employer to 
pay for this occasional overtime rather than to adjust permanent 
staffing. Additionally, the transient and possibly unpredicted nature 
of the change may make it difficult to adjust wages for these workers.
    The Department treats Type 2 affected workers in two ways due to 
the uncertainty of the nature of these occasional overtime hours 
worked. If these workers work extra hours on an unforeseen, short-term, 
as-needed basis (e.g., to adjust to unanticipated increases in demand), 
then there may be less opportunity for employers to adjust straight-
time wages downward.\200\ However, if these workers work extra hours on 
a foreseen, periodic basis (e.g., work a few extra hours one week each 
month, but workers do not consider it ``regular overtime'' because they 
do not work overtime during three weeks each month), then there may be 
some opportunity for employers to adjust straight-time wages downward 
(e.g., so pre- and post-revision monthly income is more similar). That 
this overtime is periodic and predictable is what makes it much more 
similar to that worked by Type 3 workers, and provides employers with 
more opportunity to adjust hours and wages. Since in reality there is 
likely a mix of these two occasional overtime scenarios, the Department 
combines models representing these two scenarios when estimating 
impacts.
---------------------------------------------------------------------------

    \200\ Employers may be reluctant to reset hourly wage rates to 
respond to unexpected changes to the need for overtime because the 
negative impact on worker morale may outweigh the gains from 
adjusting wages to unexpected shifts in demand. Of relevance is the 
well-established literature that shows employers do not quickly 
adjust wages downward in response to downturns in the economy; the 
same logic applies to our approach to unexpected changes in demand. 
See, for example: Bewley, T. (1999). Why Wages Don't Fall During a 
Recession. Cambridge, MA: Harvard University Press. See also Barzel, 
Y. (1973). The Determination of Daily Hours and Wages. The Quarterly 
Journal of Economics, 87(2), 220-238.
---------------------------------------------------------------------------

    Our estimate for how Type 2 workers are affected is based on the 
assumption that 50 percent of these workers who worked occasional 
overtime worked expected overtime hours and the other 50 percent worked 
unexpected overtime.\201\ Workers were randomly assigned to these two 
groups. Workers with expected occasional overtime hours were treated 
like Type 3 affected workers (partial employment contract model 
adjustments). Workers with unexpected occasional overtime hours were 
assumed to receive a 50 percent pay premium for the overtime hours 
worked and receive no change in base wage or hours (full overtime 
premium model). When modeling Type 2 workers' hour and wage 
adjustments, we treated those identified as Type 2 using the CPS data 
as representative of all Type 2 workers. We estimated employer 
adjustments and transfers assuming that the patterns observed in the 
CPS reference week are representative of an average week in the year. 
Thus, we assume total transfers for the year are equal to 52 times the 
transfers estimated for the single representative week for which we 
have CPS data. However, these transfers are spread over a larger group 
including those who occasionally work overtime but did not do so in the 
CPS reference week.\202 203\
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    \201\ Trejo's and Barkume's adjustments are averages; excluding 
some workers (i.e., half of Type 2 workers) from these adjustments 
could potentially bias the size of the adjustment for the workers 
who continue to receive the adjustment. This bias would exist if 
Barkume and Trejo estimated the average adjustment for a sample of 
workers including irregular overtime workers and the size of the 
adjustment for these workers differs from other workers. It is not 
clear whether Trejo's and Barkume's samples include both occasional 
and regular overtime workers; however, the Department's 
interpretation is that Trejo includes only workers who usually work 
overtime and Barkume includes both. If these assumptions are 
correct, the magnitude of this RIA's adjustment made for the workers 
whose wages and hours are adjusted would be appropriate if it were 
applying Trejo's results but may, due to applying Barkume's, result 
in an underestimate of the average fall in base wages. We believe 
the magnitude of any potential bias will be small because the half 
of Type 2 workers who are occasional, regular overtime workers in 
the CPS reference week (and thus treated differently) compose only 9 
percent of Type 2 and Type 3 workers.
    \202\ Because these workers do not work overtime every week, the 
size of the wage and hour adjustments will be smaller than modeled. 
However, we are only modeling wage and hour adjustments for a subset 
of workers. If the wage and hour adjustments are linear, then our 
modeling assumptions should yield the same aggregate results as 
making smaller adjustments for all workers.
    \203\ If a different week was chosen as the survey week, then 
likely some of these workers would not have worked overtime. 
However, because the data are representative of both the population 
and all twelve months in a year, the Department believes the share 
of Type 2 workers identified in the CPS data in the given week is 
representative of an average week in the year.
---------------------------------------------------------------------------

    Since Type 2 and Type 3 EAP workers work more than 40 hours per 
week, whether routinely or occasionally, they will receive an overtime 
premium based on their implicit hourly wage adjusted as described 
above. Because employers must now pay more for the same number of labor 
hours, they will seek to reduce those hours; in economics, this is 
described as a decrease in the quantity of labor hours demanded (a 
movement to the left along the labor demand curve). It is the net 
effect of these two changes that will determine the final weekly 
earnings for affected EAP workers. The reduction in hours is calculated 
using the elasticity of labor demand with respect to wages. The 
Department used a short-run demand elasticity of -0.20 to estimate the 
percentage decrease in hours worked resulting from the increase in 
average hourly wages in Year 1, calculated using the adjusted base wage 
and the overtime wage premium.\204\ The interpretation of the short run 
demand elasticity in this context is that a 10 percent increase in 
wages will result in a 2 percent decrease in hours demanded. Transfers 
projected for years 2 through 10 used a long-run elasticity; this is 
discussed in section VI.D.x.\205\
---------------------------------------------------------------------------

    \204\ This elasticity estimate is based on the Department's 
analysis of Lichter, A., Peichl, A. & Siegloch, A. (2014). The Own-
Wage Elasticity of Labor Demand: A Meta-Regression Analysis. IZA DP 
No. 7958. Some researchers have estimated larger impacts on the 
number of overtime hours worked (Hamermesh, D. and S. Trejo. (2000). 
The Demand for Hours of Labor: Direct Evidence from California. The 
Review of Economics and Statistics, 82(1), 38-47 concludes the price 
elasticity of demand for overtime hours is at least -0.5. The 
Department decided to use a general measure of elasticity applied to 
the average change in wages since the increase in the overtime wage 
is somewhat offset by a decrease in the non-overtime wage as 
indicated in the employment contract model. The Department invited 
comments on the appropriate elasticity to be used in this analysis, 
but no relevant comments were received.
    \205\ In the short run not all factors of production can be 
changed and so the change in hours demanded is smaller than in the 
long run, when all factors are flexible.
---------------------------------------------------------------------------

    For Type 3 affected workers, and the 50 percent of Type 2 affected 
workers who worked expected overtime, we estimated adjusted total hours 
worked after making wage adjustments using the partial employment 
contract model. To estimate adjusted hours worked, we set

[[Page 32488]]

the percent change in total hours worked equal to the percent change in 
average wages multiplied by the wage elasticity of labor demand.\206\ 
The percent change in average wages is equal to the adjusted implicit 
average hourly wage minus the original implicit average hourly wage 
divided by the original implicit average hourly wage. The original 
implicit average hourly wage is equal to original weekly earnings 
divided by original hours worked. The adjusted implicit average hourly 
wage is equal to adjusted weekly earnings divided by adjusted total 
hours worked. Adjusted weekly earnings equals the adjusted hourly wage 
(i.e., after the partial employment contract model adjustment) 
multiplied by 40 hours plus adjusted hours worked in excess of 40 
multiplied by 1.5 times the adjusted hourly wage.
---------------------------------------------------------------------------

    \206\ In this equation, the only unknown is adjusted total hours 
worked. Since adjusted total hours worked is in the denominator of 
the left side of the equation and is also in the numerator of the 
right side of the equation, solving for adjusted total hours worked 
requires solving a quadratic equation.
---------------------------------------------------------------------------

    Figure 4 is a flow chart summarizing the four types of affected EAP 
workers. Also shown are the impacts on exempt status, weekly earnings, 
and hours worked for each type of affected worker.

[[Page 32489]]

[GRAPHIC] [TIFF OMITTED] TR23MY16.006


[[Page 32490]]


[GRAPHIC] [TIFF OMITTED] TR23MY16.007

Estimated Number of and Impacts on Affected EAP Workers
    The Department projects 4.2 million workers will be affected by 
either (1) an increase in the standard salary level to the 40th 
percentile of weekly earnings of full-time salaried workers in the 
South because they earn salaries of at least $455 per week and less 
than $913 per week, or (2) an increase in the HCE compensation level to 
the 90th percentile of earnings of full-time salaried workers 
nationwide because they only pass the HCE duties test and earn at least 
$100,000 and less than $134,004 annually. These workers are categorized 
into the four ``types'' identified previously. There are 2.6 million 
Type 1 workers (60.4 percent of all affected EAP workers), those who 
work 40 hours per week or less and thus will not be paid an overtime 
premium despite their expected change in status to overtime protected 
(Table 19). The number of Type 1 workers decreased from the NPRM 
because some of these workers are now classified as Type 2 workers (as 
explained above). Type 2 workers, those who are expected to become 
overtime eligible and do not usually work overtime but do occasionally 
work overtime and will be paid the overtime premium, total 817,000 
(19.3 percent of all affected EAP workers). Type 3 workers, those who 
regularly work overtime and are expected to become overtime eligible 
and be paid the overtime premium, are composed of an estimated 759,000 
workers (17.9 percent of all affected EAP workers). The number of 
affected Type 4 workers was estimated to be 96,000 workers (2.3 percent 
of all affected workers); these are workers who the Department believes 
will remain exempt because firms will have a financial incentive to 
increase their weekly salaries to the updated salary and compensation 
levels, rather than pay a premium for overtime hours.\207\
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    \207\ As previously described, the Department calculated a wage 
and hour adjustment for all regular overtime workers. Consider, by 
way of example, a worker who initially earned $900 and worked 70 
hours per week. Suppose the partial employment contract adjustment 
results in a regular rate of pay of $11.94 and 69.5 hours worked per 
week. After the partial employment contract adjustments, this worker 
would receive approximately $1,006 per week ((40 x $11.94) + (29.5 x 
($11.94 x 1.5)). Since this is greater than the proposed standard 
salary level, the Department estimated that this worker would have 
his salary increased to $913 and remain exempt.

                             Table 19--Affected EAP Workers by Type (1,000s), FY2017
----------------------------------------------------------------------------------------------------------------
                                                                                         Regular overtime
                                                    No overtime     Occasional   -------------------------------
                                       Total           (T1)        overtime (T2)       Newly       Remain exempt
                                                                                  nonexempt (T3)       (T4)
----------------------------------------------------------------------------------------------------------------
Standard salary level...........           4,163           2,523             815             730              95
HCE compensation level..........            64.9            32.5             2.7            28.5             1.2
                                 -------------------------------------------------------------------------------
    Total.......................           4,228           2,555             817             759              96
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for FY2013-FY2015 projected to reflect FY2017.
*Type 1: Workers without regular OT and without occasional OT and become overtime eligible.
*Type 2: Workers without regular OT but with occasional OT. These workers become overtime eligible. Paid
  overtime premium pay, so average weekly earnings increase, but regular rate of pay and hours fall for 50
  percent of workers who regularly work occasional overtime.
*Type 3: Workers with regular OT who become overtime eligible. Paid overtime premium pay, so average weekly
  hours increase, but regular rate of pay and hours fall.
*Type 4: Workers with regular OT who remain exempt (i.e., earnings increase to the updated salary level).

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

[[Page 32491]]

application of the partial employment contract model, which predicts a 
decrease in their average regular rates of pay. The Department 
estimates that employers would decrease these workers' regular hourly 
rates of pay to the amount predicted by the partial employment contract 
model adjustment. Employers are assumed to be unable to adjust the 
hours or regular rate of pay for the occasional overtime workers whose 
overtime is irregularly scheduled and unpredictable (the remaining 50 
percent of Type 2 workers); therefore, their earnings will increase 
because they will receive the overtime premium for their unpredictable 
overtime hours. As a group, Type 2 workers currently exempt under the 
standard test would see a decrease in their average regular hourly wage 
(i.e., excluding the overtime premium) from $19.00 to $18.92, a 
decrease of 0.4 percent (Table 20). Type 2 workers paid between 
$100,000 and the updated HCE compensation level would see an average 
decrease in their regular hourly wage from $57.73 to $55.02, a decrease 
of 4.7 percent. However, because workers will now receive a 50 percent 
premium on their regular hourly wage for each hour worked in excess of 
40 hours per week, average weekly earnings for Type 2 workers would 
increase.\209\
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    \208\ It is possible that these workers may experience an 
increase in hours and weekly earnings because of transfers of hours 
from overtime workers. Due to the high level of uncertainty in 
employers' responses regarding the transfer of hours, the Department 
did not have credible evidence to support an estimation of the 
number of hours transferred to other workers.
    \209\ Type 2 workers do not see increases in regular earnings to 
the new salary level (as Type 4 workers do) even if their new 
earnings exceed that new level. This is because the estimated new 
earnings only reflect their earnings in that week when overtime is 
worked; their earnings in typical weeks that they do not work 
overtime do not exceed the salary level.
---------------------------------------------------------------------------

    Type 3 workers will also receive decreases in their regular hourly 
wage as predicted by the partial employment contract model. Type 3 
affected workers paid below the new standard salary level would have 
their regular hourly rate of pay decrease on average from $14.51 to 
$13.74 per hour, a decrease of 5.3 percent. Type 3 workers paid between 
$100,000 and the new HCE compensation level would have their regular 
rate of pay decrease on average from $41.43 to $38.80 per hour, a 
decrease of 6.3 percent. Again, although regular hourly rates decline, 
weekly earnings will increase on average because these workers are now 
eligible for the overtime premium.
    Type 4 workers' implicit hourly rates of pay would increase in 
order for their earnings to meet the updated standard salary level 
($913 per week) or the updated HCE annual compensation level ($134,004 
annually). The implicit hourly rate for Type 4 affected EAP workers who 
had earned at least $455 and below $913 per week would increase on 
average from $17.32 to $17.54 (a 1.3 percent increase). The implicit 
hourly rate of pay for Type 4 workers who had earned between $100,000 
and $134,004 annually would increase on average from $49.97 to $50.76 
(a 1.6 percent increase).

                  Table 20--Average Regular Rate of Pay by Type of Affected EAP Worker, FY2017
----------------------------------------------------------------------------------------------------------------
                                                                                         Regular overtime
                                                                                 -------------------------------
                                       Total       No  overtime     Occasional         Newly
                                                       (T1)       overtime  (T2)     nonexempt    Remain  exempt
                                                                                       (T3)             (T4)
----------------------------------------------------------------------------------------------------------------
                                              Standard Salary Level
----------------------------------------------------------------------------------------------------------------
Before Final Rule...............          $18.39          $19.36          $19.00          $14.51          $17.32
After Final Rule................          $18.25          $19.36          $18.92          $13.74          $17.54
Change ($)......................          -$0.15           $0.00          -$0.08          -$0.77           $0.23
Change (%)......................           -0.8%            0.0%           -0.4%           -5.3%            1.3%
----------------------------------------------------------------------------------------------------------------
                                             HCE Compensation Level
----------------------------------------------------------------------------------------------------------------
Before Final Rule...............          $49.62          $56.13          $57.73          $41.43          $49.97
After Final Rule................          $48.37          $56.13          $55.02          $38.80          $50.76
Change ($)......................          -$1.25           $0.00          -$2.72          -$2.63           $0.79
Change (%)......................           -2.5%            0.0%           -4.7%           -6.3%            1.6%
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for FY2013-FY2015 projected to reflect FY2017.
*Type 1: Workers without regular OT and without occasional OT and become overtime eligible.
*Type 2: Workers without regular OT but with occasional OT. These workers become overtime eligible. Paid
  overtime premium pay, so average weekly earnings increase, but regular rate of pay and hours fall for 50
  percent of workers who regularly work occasional overtime.
*Type 3: Workers with regular OT who become overtime eligible. Paid overtime premium pay, so average weekly
  earnings increase, but regular rate of pay and hours fall.
*Type 4: Workers with regular OT who remain exempt (i.e., earnings increase to the updated salary level).

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

[[Page 32492]]

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

    \210\ The Department estimates that half of Type 2 workers 
(those who work unpredictable overtime hours) will not see a 
reduction in their hours; however as a group, Type 2 workers are 
expected to experience a reduction in their hours of work. Because 
only half these workers experience a change in hours and because 
they work less overtime on average, the aggregate change is smaller 
than for Type 3 workers.

                     Table 21--Average Weekly Hours for Affected EAP Workers by Type, FY2017
----------------------------------------------------------------------------------------------------------------
                                                                                            Regular OT
                                                                                 -------------------------------
                                       Total        No overtime   Occasional  OT       Newly
                                                   worked  (T1)         (T2)         nonexempt     Remain exempt
                                                                                       (T3)            (T4)
----------------------------------------------------------------------------------------------------------------
                                            Standard Salary Level \a\
----------------------------------------------------------------------------------------------------------------
Before Final Rule...............            41.4            38.6            40.3            50.8            53.5
After Final Rule................            41.3            38.6            40.3            50.3            53.5
Change ($)......................            -0.1             0.0             0.0            -0.4             0.0
Change (%)......................           -0.2%            0.0%           -0.1%           -0.8%            0.0%
----------------------------------------------------------------------------------------------------------------
                                           HCE Compensation Level \a\
----------------------------------------------------------------------------------------------------------------
Before Final Rule...............            45.5            39.0            48.5            52.4            51.1
After Final Rule................            45.3            39.0            48.2            52.0            51.1
Change ($)......................            -0.2             0.0            -0.3            -0.4             0.0
Change (%)......................           -0.4%            0.0%           -0.5%           -0.7%            0.0%
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for FY2013-FY2015 projected to reflect FY2017.
\a\ Usual hours for Types 1, 3, and 4 but actual hours for Type 2 workers identified in the CPS MORG.
*Type 1: Workers without regular OT and without occasional OT and become overtime eligible.
*Type 2: Workers without regular OT but with occasional OT. These workers become overtime eligible. Paid
  overtime premium pay, so average weekly earnings increase, but regular rate of pay and hours fall for 50
  percent of workers who regularly work occasional overtime.
*Type 3: Workers with regular OT who become overtime eligible. Paid overtime premium pay, so average weekly
  earnings increase, but regular rate of pay and hours fall.
*Type 4: Workers with regular OT who remain exempt (i.e., earnings increase to the updated salary level).

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

                   Table 22--Average Weekly Earnings for Affected EAP Workers by Type, FY2017
----------------------------------------------------------------------------------------------------------------
                                                                                         Regular  overtime
                                                                                 -------------------------------
                                       Total       No  overtime     Occasional         Newly
                                                       (T1)       overtime  (T2)     nonexempt     Remain exempt
                                                                                       (T3)            (T4)
----------------------------------------------------------------------------------------------------------------
                                            Standard Salary Level \a\
----------------------------------------------------------------------------------------------------------------
Before Final Rule...............         $733.65         $724.45         $751.47         $723.86         $900.30
After Final Rule................         $739.13         $724.45         $760.11         $743.83         $913.00
Change ($)......................           $5.48           $0.00           $8.63          $19.97          $12.70
Change (%)......................            0.7%            0.0%            1.1%            2.8%            1.4%
----------------------------------------------------------------------------------------------------------------
                                           HCE Compensation Level \a\
----------------------------------------------------------------------------------------------------------------
Before Final Rule...............       $2,180.55       $2,155.94       $2,778.65       $2,136.91       $2,535.42
After Final Rule................       $2,209.75       $2,155.94       $2,836.63       $2,196.10       $2,577.00
Change ($)......................          $29.19           $0.00          $57.98          $59.19          $41.58
Change (%)......................            1.3%            0.0%            2.1%            2.8%            1.6%
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for FY2013-FY2015 projected to reflect FY2017.

[[Page 32493]]

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

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

  Table 23--Total Change in Weekly and Annual Earnings for Affected EAP
                      Workers by Provision, FY2017
------------------------------------------------------------------------
                                             Total change in earnings
                                                     (1,000s)
                Provision                -------------------------------
                                              Weekly          Annual
------------------------------------------------------------------------
Total \a\...............................         $24,715      $1,285,162
Standard salary level:..................
    Total...............................          22,820       1,186,646
    Minimum wage only...................             660          34,338
    Overtime pay only \b\...............          22,160       1,152,308
HCE compensation level:.................
    Total...............................           1,895          98,515
    Minimum wage only...................
    Overtime pay only \b\...............           1,895          98,515
------------------------------------------------------------------------
\a\ Due to both the minimum wage and overtime pay provisions and changes
  in both the standard salary level and the HCE compensation level.
\b\ Estimated by subtracting the minimum wage transfer from the total
  transfer.

4. Potential Transfers Not Quantified
    There may be additional transfers attributable to this Final Rule; 
however, the magnitude of these other transfers could not be 
quantified.
Reduced Earnings for Some Workers
    Holding regular rate of pay and work hours constant, payment of an 
overtime premium will increase weekly earnings for workers who work 
overtime. However, as discussed previously, employers may try to 
mitigate cost increases by reducing the number of overtime hours 
worked, either by transferring these hours to other workers or 
monitoring hours more closely. Depending on how hours are adjusted, a 
specific worker may earn less pay after this Final Rule. For example, 
assume an exempt worker is paid for overtime hours at his regular rate 
of pay (not paid the overtime premium but still acquires a benefit from 
each additional hour worked over 40 in a week). If the employer does 
not raise the worker's salary to the new level, requiring the overtime 
premium may cause the employer to reduce the worker's hours to 40 per 
week. If the worker's regular rate of pay does not increase, the worker 
will earn less due to the lost hours of work.
Additional Work for Some Workers
    Affected workers who remain exempt will see an increase in pay but 
may also see an increase in workload as Emerge Center and other 
commenters noted. The Department estimated the net changes in hours, 
but as noted in section VI.D.iv.3, subpart Modeling Changes in Wages 
and Hours, did not estimate changes in hours for affected workers whose 
earnings increase (perhaps most notably those whose salary is increased 
to the new threshold so they remain overtime exempt).
Reduction in Bonuses and Benefits
    Some commenters stated that employers may offset increased labor 
costs by reducing bonuses or benefits.\211\ See, e.g., Greater 
Philadelphia Chamber of Commerce; Kentucky Society of CPAs; Michigan 
Association of Certified Public Accountants; Rockingham County, North 
Carolina. AGC stated that 40 percent of the members it surveyed 
expected affected employees to lose some fringe benefits. Other 
commenters, such as AIA-PCI, stated that employers would reduce bonus 
and incentive pay to newly overtime-eligible workers, offsetting some 
of the earnings gains achieved through overtime pay. NAHB presented 
results from a survey conducted of members concerning overtime of 
construction supervisors, and stated that of the 33 percent of 
companies indicating that a change in company policies, with respect to 
construction supervisors, would occur, 55 percent reported they would 
``reduce or eliminate bonuses'' and 33 percent indicated they would 
``reduce or eliminate other benefits.'' This results in approximately 
18 percent of respondents predicting reduced bonuses

[[Page 32494]]

and 11 percent predicting reduced benefits.
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    \211\ Other commenters asserted that some newly overtime-
eligible employees will lose benefits that their employers tie to 
exempt status. See, e.g., CUPA-HR; National Association of 
Electrical Distributors; WorldatWork. As the Department explained in 
section IV.A.iv., we see no compelling reason why employers cannot 
change their compensation plans to provide such fringe benefits and 
bonus payments based upon, for example, the employees' job titles 
rather than based upon their exemption status.
---------------------------------------------------------------------------

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

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

    Table 24--Summary of the Assumptions Used To Calculate the Lower
      Estimate, Preferred Estimate, and Upper Estimate of Transfers
------------------------------------------------------------------------
                                                        Upper transfer
     Lower transfer estimate      Preferred estimate       estimate
------------------------------------------------------------------------
                  Occasional Overtime Workers (Type 2)
------------------------------------------------------------------------
50% full EC model adj...........  50% partial EC      100% full overtime
                                   model adj.          premium.
50% full overtime premium.......  50% full overtime
                                   premium.
------------------------------------------------------------------------
                    Regular Overtime Workers (Type 3)
------------------------------------------------------------------------
100% full EC model adj..........  100% partial EC     50% partial EC
                                   model adj.          model adj.
                                                      50% full overtime
                                                       premium.
------------------------------------------------------------------------
* Full overtime premium: Regular rate of pay equals the implicit hourly
  wage prior to the regulation (with no adjustments); workers are paid
  1.5 times this base wage for the same number of overtime hours worked
  prior to the regulation.
* Full employment contract (EC) model: Base wages are set at the higher
  of: (1) A rate such that total earnings and hours remain the same
  before and after the regulation; thus the base wage falls, and workers
  are paid 1.5 times the new base wage for overtime hours (the
  employment contract model) or (2) the minimum wage.
* Partial employment contract model: Regular rates of pay are partially
  adjusted to the wage implied by the employment contract model. The
  resulting regular rate of pay is the midpoint of: (1) A base wage that
  adjusts 40 percent of the way to the employment contract model wage
  level, assuming no overtime premium was initially paid and (2) a base
  wage that adjusts 80 percent of the way to the employment contract
  model wage level, assuming the workers initially received a 28 percent
  premium for overtime hours worked.

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

[[Page 32495]]

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

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

                     Table 25--Bounds on Year 1 Cost and Transfer Payment Estimates, FY 2017
                                                   [Millions]
----------------------------------------------------------------------------------------------------------------
                                                                  Lower transfer     Preferred    Upper transfer
                          Cost/transfer                              estimate        estimate        estimate
----------------------------------------------------------------------------------------------------------------
Direct employer costs:
    Reg. familiarization........................................          $272.5          $272.5          $272.5
    Adjustment costs............................................           191.4           191.4           191.4
    Managerial costs............................................             0.0           214.0            62.4
Total direct employer costs.....................................           463.9           677.9           526.2
Transfers.......................................................           487.5         1,285.2         2,525.3
----------------------------------------------------------------------------------------------------------------
Note 1: Pooled data for FY2013-FY2015 projected to reflect FY2017.
Note 2: Estimates due to both the minimum wage and overtime pay provisions and changes in both the standard
  salary level and the HCE compensation level.

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

                     Table 26--Potentially Affected and Affected Workers, by Region, FY2017
----------------------------------------------------------------------------------------------------------------
                                                                               Affected workers
                                                 Potentially ---------------------------------------------------
                                      Workers      affected                              Percent of
              Region                 subject to    workers       Number     Percent of  potentially   Percent of
                                        FLSA      (millions)   (millions)     total       affected   all workers
                                     (millions)      \a\          \b\        affected    workers in   in region
                                                                                           region
----------------------------------------------------------------------------------------------------------------
All...............................        132.8         22.5          4.2          100         18.8          3.2
Northeast.........................         24.8          4.8          0.8         18.6         16.4          3.2
Midwest...........................         29.5          4.7          0.9         20.8         18.6          3.0
South.............................         48.2          7.8          1.7         41.1         22.2          3.6
West..............................         30.2          5.1          0.8         19.5         16.0          2.7
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for FY2013-FY2015 projected to reflect FY2017.
\a \ Potentially affected workers are EAP exempt workers who are white collar, salaried, not eligible for
  another (non-EAP) overtime exemption, and not in a named occupation.
\b\ Estimated number of workers exempt under the EAP exemptions who would be entitled to overtime protection
  under the updated salary levels (if their weekly earnings do not increase to the new salary levels).


[[Page 32496]]

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

                                      Table 27--Transfers by Region, FY2017
----------------------------------------------------------------------------------------------------------------
                                                                   Total change
                             Region                                 in earnings     Percent of     Per affected
                                                                  (millions) \a\       total          worker
----------------------------------------------------------------------------------------------------------------
Total...........................................................        $1,285.2             100         $304.00
Northeast.......................................................           189.9            14.8          241.86
Midwest.........................................................           314.7            24.5          357.13
South...........................................................           469.3            36.5          269.96
West............................................................           311.3            24.2          378.28
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for FY2013-FY2015 projected to reflect FY2017.
\a\ Due to both the minimum wage and overtime pay provisions and changes in both the standard salary level and
  the HCE compensation level.

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

                                Table 28--Direct Employer Costs by Region, FY2017
----------------------------------------------------------------------------------------------------------------
    Direct employer costs \a\       All regions      Northeast        Midwest          South           West
----------------------------------------------------------------------------------------------------------------
                                                Costs (Millions)
----------------------------------------------------------------------------------------------------------------
Regulatory familiarization......          $272.5           $52.6           $59.9           $95.7           $64.3
Adjustment......................           191.4            35.6            39.9            78.7            37.3
Managerial......................           214.0            34.9            54.1            85.1            39.9
    Total direct costs..........           677.9           123.0           153.9           259.6           141.5
----------------------------------------------------------------------------------------------------------------
                                        Percent of Total Costs by Region
----------------------------------------------------------------------------------------------------------------
Regulatory familiarization......             100            19.3            22.0            35.1            23.6
Adjustment......................             100            18.6            20.8            41.1            19.5
Managerial......................             100            16.3            25.3            39.8            18.7
    Total direct costs..........             100            18.1            22.7            38.3            20.9
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for FY2013-FY2015 projected to reflect FY2017.
\a\ All costs include both standard salary level costs and HCE compensation level costs.

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

[[Page 32497]]

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

                              Table 29--Annual Transfers and Costs as Percents of Payroll and of Revenue by Region, FY2017
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                               Direct employer costs                 Transfers
                                                              Payroll         Revenue    ---------------------------------------------------------------
                         Region                             (billions)      (billions)     As percent of   As percent of   As percent of   As percent of
                                                                                              payroll         revenue         payroll         revenue
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total...................................................          $6,524         $37,261          0.010%          0.002%          0.020%          0.003%
Northeast...............................................           1,440           7,492           0.009           0.002           0.013           0.003
Midwest.................................................           1,393           8,503           0.011           0.002           0.023           0.004
South...................................................           2,171          13,362           0.012           0.002           0.022           0.004
West....................................................           1,520           7,905           0.009           0.002           0.020           0.004
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes: Pooled data for FY2013-FY2015 projected to reflect FY2017. Payroll, revenue, costs, and transfers all exclude the federal government.
Sources: Private sector payroll and revenue data from 2012 Economic Census. State and local payroll data from 2014 Annual Survey of Public Employment
  and Payroll. State and local revenue data from 2012 Census of Governments.

    In order to gauge the impact of the final rule on industries, the 
Department compared estimates of combined direct costs and transfers as 
a percent of payroll, profits, and revenue, for the 13 major industry 
groups (Table 30).\214\ This provides a common method of assessing the 
relative impacts of the rule on different industries, and the magnitude 
of adjustments the rule may require on the part of enterprises in each 
industry. The relative costs and transfers expressed as a percentage of 
payroll are particularly useful measures of the relative size of 
adjustment faced by organizations in an industry because they benchmark 
against the cost category directly associated with the labor force. 
Measured in these terms, costs and transfers as a percent of payroll 
are highest in agriculture, other services, and leisure and 
hospitality. However, the overall magnitude of the relative shares are 
small, representing less than 0.1 percent of overall payroll costs 
across industries. The differences between industries are also small, 
with the range of values of total costs and transfers as a percent of 
payroll ranging from a low of .01 percent (public administration) to a 
high of 0.09 percent (agriculture).
---------------------------------------------------------------------------

    \214\ Note that the totals in this table for transfers and 
direct costs do not match the totals in other sections due to the 
exclusion of transfers to federal workers and costs to federal 
entities. Federal costs and transfers are excluded to be consistent 
with payroll and revenue which exclude the federal government.
---------------------------------------------------------------------------

    The Department also estimates transfers and costs as a percent of 
profits.215 216 Benchmarking against profits is potentially 
helpful in the sense that it provides a measure of the Final Rule's 
effect against returns to investment. However, this metric must be 
interpreted carefully as it does not account for differences across 
industries in risk-adjusted rates of return which are not readily 
available for this analysis. The ratio of costs and transfers to 
profits also does not reflect differences in the firm-level adjustment 
to profits impacts reflecting cross-industry variation in market 
structure.\217\ Nonetheless, the overall magnitude of costs and 
transfers as a percentage of profits are small, representing in all 
industries except one (transportation and utilities) less than 1.0 
percent of overall profits. The differences between industries are also 
small, with the range of values of total costs and transfers as a 
percent of profits ranging from a low of .04 percent (financial 
activities) to a high of 1.46 percent (transportation and utilities).
---------------------------------------------------------------------------

    \215\ Internal Revenue Service. (2012). Corporation Income Tax 
Returns. Available at: https://www.irs.gov/pub/irs-soi/12coccr.pdf.
    \216\ Table 1 of the IRS report provides information on total 
receipts, net income, and deficits. The Department calculated the 
ratio of net income (column (7)) less any deficit (column (8)) to 
total receipts (column (3)) for all firms by major industry 
categories. Costs and transfers as a percent of revenues were 
divided by the profit to receipts ratios to calculate the costs and 
transfers as a percent of profit.
    \217\ In particular, a basic model of competitive product 
markets would predict that highly competitive industries with lower 
rates of return would adjust to increases in the marginal cost of 
labor arising from the rule through an overall, industry-level 
increase in prices and a reduction in quantity demanded based on the 
relative elasticities of supply and demand. Alternatively, more 
concentrated markets with higher rates of return would be more 
likely to adjust through some combination of price increases and 
profit reductions based on elasticities as well as interfirm pricing 
responses.
---------------------------------------------------------------------------

    Finally, the Department's estimates of transfers and costs as a 
percent of revenue by industry also indicate very small impacts (Table 
30). The industries with the largest costs and transfers as a percent 
of revenue are leisure and hospitality and other services. However, the 
difference between the leisure and hospitality industry, the industry 
with the highest costs and transfers as a percent of revenue, and the 
industry with the lowest costs and transfers as a percent of revenue 
(public administration) is 0.02 percentage points. Table 30 illustrates 
that the actual differences in costs relative to revenues are quite 
small across industry groupings.

[[Page 32498]]



 Table 30--Annual Transfers, Total Costs, and Transfers and Costs as Percent of Payroll, Revenue, and Profit by
                                                Industry, FY2017
----------------------------------------------------------------------------------------------------------------
                                                                                Costs and transfers
                                     Transfers     Direct costs  -----------------------------------------------
            Industry                (millions)      (millions)     As percent of   As percent of   As percent of
                                                                      payroll         revenue       profit \a\
----------------------------------------------------------------------------------------------------------------
All.............................       $1,282.70         $676.70           0.03%           0.01%           0.09%
Agriculture, forestry, fishing,             4.10            1.40            0.09            0.02            0.34
 & hunting......................
Mining..........................           11.90            3.50            0.02            0.00            0.08
Construction....................           50.20           36.60            0.03            0.01            0.21
Manufacturing...................          125.60           46.00            0.03            0.00            0.05
Wholesale & retail trade........          248.50          117.60            0.05            0.00            0.09
Transportation & utilities......           44.50           21.80            0.03            0.01            1.46
Information.....................           48.90           21.80            0.03            0.01            0.08
Financial activities............          134.90           79.60            0.03            0.01            0.04
Professional & business services          181.50          113.30            0.02            0.01            0.14
Education & health services.....          183.70          114.80            0.03            0.01            0.21
Leisure & hospitality...........          142.60           57.40            0.07            0.02            0.40
Other services..................           71.60           45.20            0.08            0.02            0.46
Public administration...........           34.80           17.70            0.01            0.00             \b\
----------------------------------------------------------------------------------------------------------------
Sources: Private sector payroll and revenue data from 2012 Economic Census. State and local payroll data from
  2014 Annual Survey of Public Employment and Payroll. State and local revenue data from 2012 Census of
  Governments. Profit to revenue ratios calculated from 2012 Internal Revenue Service Corporation Income Tax
  Returns.
\a\ Profit data based on corporations only.
\b\ Profit is not applicable for public administration.

    Although labor market conditions vary by Census Region and 
industry, the impacts from updating the standard salary level and the 
HCE compensation level do not unduly affect any of the regions or 
industries. The proportion of total costs and transfers in each region 
is fairly consistent with the proportion of total workers in each 
region. Additionally, the estimated costs and transfers from this Final 
Rule are very small relative to current payroll or current revenue--
less than a tenth of a percent of payroll and less than three-
hundredths of a percent of revenue in each region and in each industry.
vi. Deadweight Loss
    Deadweight loss (DWL) occurs when a market operates at less than 
optimal equilibrium output. This typically results from an intervention 
that sets, in the case of a labor market, wages above their equilibrium 
level. While the higher wage results in transfers from employers to 
workers, it also often causes a decrease in the total number of labor 
hours that are being purchased on the market. DWL is a function of the 
difference between the wage employers were willing to pay for the hours 
lost and the wage workers were willing to take for those hours. In 
other words, DWL represents the total loss in economic surplus 
resulting from a ``wedge'' between the employer's willingness to pay 
and the worker's willingness to accept. DWL may vary in magnitude 
depending on market parameters, but is typically small when wage 
changes are small or when labor supply and labor demand are relatively 
price (wage) inelastic. The estimate of DWL assumes the market meets 
the theoretical conditions for an efficient market in the absence of 
this intervention (e.g., all conditions of a perfectly competitive 
market hold: full information, no barriers to entry, etc.). Since labor 
markets are generally not perfectly competitive, the Department's 
estimate of DWL is likely an overestimate.
    The DWL resulting from this Final Rule was estimated based on the 
average decrease in hours worked and increase in hourly wages 
calculated in section VI.D.iv. As the cost of labor rises due to the 
requirement to pay the overtime premium, the demand for overtime hours 
decreases, which results in fewer hours of overtime worked. To 
calculate the DWL, the following values must be estimated:

     The increase in average hourly wages for affected EAP 
workers (holding hours constant),
     the decrease in average hours per worker, and
     the number of affected EAP workers.

Only 50 percent of Type 2 workers with overtime hours worked in the 
survey week (those who work regular or predictable occasional overtime) 
and Type 3 workers are included in the DWL calculation because the 
other workers either do not work overtime (Type 1), continue to work 
the same number of overtime hours (Type 4), or their employers are 
unable to adjust their hourly wage because their overtime hours worked 
are unpredictable (the other 50 percent of Type 2 workers). As 
described above, after taking into account a variety of potential 
responses by employers, the Department estimated the average wage 
change for affected EAP workers whose hours change. Workers impacted by 
the change in the standard salary level are considered separately from 
workers impacted by the change in the HCE compensation level.

    For workers affected by the revised standard salary level, and who 
experience a change in hours, average wages (including overtime) will 
increase by $0.69 per hour prior to employer hour adjustments (Table 
31). This represents the size of the wedge between labor supply and 
labor demand. Average hours will fall by 0.40 per week. These changes 
result in an average DWL of $0.14 per week per Type 2 (the 50 percent 
of CPS occasional overtime workers who work foreseeable overtime) and 
Type 3 worker. An estimated 803,500 workers will be eligible for the 
overtime premium on some of their hours worked each week after employer 
adjustments are taken into account. Multiplying the $0.14 per worker 
per week estimate by the number of affected workers results in a total 
DWL of $5.8 million in the first year of this Final Rule attributable 
to the revised standard salary level (803,500 workers in DWL analysis x 
$0.14 per worker per week x 52 weeks).
    For workers affected by the revised HCE compensation level and who 
experience a change in hours, the average hourly wage will increase by 
$2.01 and average hours worked will fall by 0.37 per week. This results 
in an

[[Page 32499]]

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

    \218\ Very few commenters addressed the Department's DWL 
calculation in the NPRM. The FL DEO derived their own estimate for 
deadweight loss in Florida, which if applied nationally would be 
significantly larger than the Department's DWL estimate. However, FL 
DEO did not explain how they arrived at their estimate, nor did they 
note any specific problems with our calculation. Therefore, the 
Department has not adjusted our DWL calculations. Additionally, FL 
DEO's concern that the Department's DWL estimate is too low because 
it is ``only $1.58 per worker, per year'' divides the DWL costs 
across all affected workers. If instead these costs are spread 
across only those workers whose hours or wages change, the cost per 
worker is larger.

     Table 31--Summary of Deadweight Loss Component Values in Year 1
------------------------------------------------------------------------
                                                                HCE
                Component                    Standard      Compensation
                                           salary level        level
------------------------------------------------------------------------
Average hourly wages (holding hours
 constant)
    Pre.................................          $14.86          $42.84
    Post................................          $15.55          $44.85
    Change..............................           $0.69           $2.01
Average overtime hours
    Pre.................................           10.60           12.03
    Post................................           10.20           11.65
    Change..............................           -0.40           -0.37
Affected EAP workers....................         803,476          31,225
DWL
    DWL per worker per week.............           $0.14           $0.38
        Total annual DWL (millions).....           $5.78           $0.61
------------------------------------------------------------------------
Note: DWL analysis is limited to workers who experience hour adjustments
  in the reference week (50 percent of Type 2 workers identified in the
  CPS and Type 3).

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

[[Page 32500]]

higher end. Such workers are also more likely to be functioning in 
those parts of the labor market more impacted by trade, technological 
change, and other factors that may lead to a greater number of job 
seekers than job vacancies. Given these well documented market 
imperfections, tailored government intervention can result in social 
benefits. In a frictionless labor market, we would expect workers to 
find jobs where, at the margin, their compensation is equivalent to the 
value of their leisure time. However, labor market frictions of the 
sort discussed above diminish mobility and therefore lead to suboptimal 
outcomes for overtime exempt workers with few outside options, 
specifically, in them having excessive hours of work. In the presence 
of labor market friction, tailored government intervention can make 
these workers better off from a social welfare perspective.
---------------------------------------------------------------------------

    \219\ Stiglitz, Joseph E. (2000) ``The Contributions of the 
Economics of Information to Twentieth Century Economics'', Quarterly 
Journal of Economics 115 (4): 1441-1478.
    \220\ Wozniak, Abigail (2010) ``Are College Graduates More 
Responsive to Distant Labor Market Opportunities?'' Journal of Human 
Resources 45(3): 994-970. Bound, John and Harry Holzer (200) 
``Demand Shifts, Population Adjustments, and Labor Market Outcomes 
during the 1980s'' Journal of Labor Economics 18(1): 20-54. 
Greenwoods, Michael, J (1997) ``Internal Migration in Developed 
Countries'' in Handbook of Population and Family Economics, ed Mark 
Rosenzweig and Oded Stark. New York: Elsevier Science.
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1. Strengthening Overtime Protection for Other Workers
    In addition to the 4.2 million affected EAP workers who will be 
newly eligible for overtime protection (absent employer response to 
increase the salary level to retain the exemption), overtime protection 
will be strengthened for an additional 8.9 million salaried workers who 
earn between the current salary level of $455 per week and the updated 
salary level of $913 per week. These workers, who were previously 
vulnerable to misclassification through misapplication of the duties 
test, will now be automatically overtime protected because their 
salaries fall below the new salary level and therefore they will not be 
subject to the duties test. These 8.9 million workers include:
     5.7 million salaried white collar workers who are at 
particular risk of being misclassified because they currently pass the 
salary level test but do not satisfy the duties test; and
     3.2 million salaried workers in blue collar occupations 
whose overtime protection will be strengthened because their salary 
will fall below the new salary threshold.\221\ (Identification of blue 
collar workers is explained in section VI.B.iv).
---------------------------------------------------------------------------

    \221\ Some workers in this group may be overtime exempt due to 
another non-EAP exemption.
---------------------------------------------------------------------------

    Although these workers are currently entitled to minimum wage and 
overtime protection, their protection is better assured with the 
updated salary level. The salary level test is considered a bright-line 
test because it is immediately clear to employers and employees alike 
whether or not a worker passes the salary threshold. The duties test 
(which is the reason employers cannot currently claim the EAP exemption 
for the above workers) is more subjective and therefore harder to 
apply. An outdated salary level reduces the effectiveness of this 
bright-line test. At the new salary level, the number of overtime-
eligible white collar salaried workers earning at or above the salary 
level will decrease by 5.7 million, and if we use our estimate of 
misclassification of 12.8 percent, then an estimated 732,000 of these 
workers are currently entitled to overtime protection but their 
employers do not recognize them as such. Therefore, increasing the 
salary level is expected to result in less worker misclassification. 
These reductions will have the greatest impact on workers concentrated 
in certain occupations and industries as shown in Table 10. Employers 
will be able to more readily determine their legal obligations and 
comply with the law. The resulting effects, although unquantified, 
would be categorized into costs (e.g., increased managerial effort), 
transfers (e.g., increased payments from employers to workers) and 
benefits in the same manner as effects are categorized in the analysis 
of EAP workers who will be newly eligible for overtime protection.
2. Reduction in Litigation
    Reducing the number of white collar employees for whom a duties 
analysis must be performed in order to determine entitlement to 
overtime will also reduce some types of litigation related to the EAP 
exemption. As previously discussed, employer uncertainty about which 
workers should be classified as EAP exempt has contributed to a sharp 
increase in FLSA lawsuits over the past decade. Much of this litigation 
has involved whether employees who satisfy the salary level test also 
meet the duties test for exemption. See, e.g, Soehnle v. Hess Corp., 
399 F. App'x 749 (3d Cir. 2010) (gas station manager earning 
approximately $654 per week satisfied duties test for executive 
employee); Morgan v. Family Dollar Stores, Inc., 551 F.3d 1233 (11th 
Cir. 2008) (store managers earning an average weekly salary of up to 
$706 did not satisfy duties test for executive exemption).
    Setting an appropriate salary level for the standard duties test, 
and maintaining the salary level with automatic updates, will restore 
the test's effectiveness as a bright-line method for separating 
overtime-protected workers from those who may be bona fide EAP workers, 
and in turn decrease the litigation risk created when employers must 
apply the duties test to employees who generally are not performing 
bona fide EAP work. This will vastly reduce legal challenges regarding 
the duties test for employees earning between the current salary level 
($455) and the updated level ($913). See, e.g., Little v. Belle Tire 
Distribs., Inc., 588 F. App'x 424 (6th Cir. 2014) (applicability of 
administrative or executive exemption to tire store assistant manager 
earning $1,100 semi-monthly); Taylor v. Autozone, Inc., 572 F. App'x 
515 (9th Cir. 2014) (applicability of executive exemption to store 
managers earning as little as $800 per week); Diaz v. Team Oney, Inc., 
291 F. App'x. 947 (11th Cir. 2008) (applicability of executive duties 
test to pizza restaurant assistant manager earning $525 per week). 
Setting the salary level test at the 40th percentile of weekly earnings 
of full-time salaried workers in the lowest-wage Census Region ($913) 
will alleviate the need for employers to apply the duties test in these 
types of cases, which is expected to result in decreased litigation as 
employers will be able to determine employee exemption status through 
application of the salary level test without the need to perform a 
duties analysis. See Weiss Report at 8 (explaining that the salary 
tests ``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 International Association of Fire Fighters (IAFF) concurred, 
stating that ``reducing the number of employees for whom the duties 
test must be applied will significantly reduce litigation related to 
the EAP exemption.'' Other commenters agreed that the proposed rule 
would make the exemption easier to apply, resulting in savings as a 
result of reduced litigation. See Comment from 57 labor law professors; 
American Federation of State, County and Municipal Employees; NELP. 
Another attorney, commenting on his own, similarly stated that the rule 
would reduce the potential for the misclassification of employees that 
often leads to litigation.\222\
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    \222\ Some commenters, including the National Association of 
Manufacturers and Jackson Lewis, expressed concern that the 
rulemaking will increase rather than decrease litigation costs 
because there will be a ``spike in employees who were unhappy about 
being reclassified'' and disputes about issues such as what is 
compensable time, the accuracy of time records, and compliance with 
rest/meal period requirements. See also Wage and Hour Defense 
Institute. As a number of employee advocates commented, and as the 
Department explained in section IV.A.iv., we disagree with these 
employer commenters, and believe an increased salary level that will 
once again serve as a clear and efficient line of demarcation will 
reduce litigation.

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[[Page 32501]]

    The size of the potential social benefits from reducing litigation 
can be illuminated with the following estimation method. The Department 
estimated the share of FLSA cases that could potentially be avoided due 
to the revised salary levels. The Department used data from the U.S. 
Court's Public Access to Court Electronic Records (PACER) system and 
the CPS to estimate the percent of FLSA cases that concern EAP 
exemptions and are likely to be affected by the final rule and data 
from a published study of the cost of civil litigation to determine the 
potential benefits of reduced litigation arising from the final rule.
    In order to determine the potential number of cases that would be 
affected by the Final Rule, the Department obtained a list of all FLSA 
cases closed in 2014 from PACER (8,256 cases). From this list the 
Department selected a random sample of 500 cases. For each case in this 
sample, relevant information was reviewed and the Department identified 
the cases that were associated with the EAP exemption. The Department 
found that 12.0 percent of FLSA cases (60 of 500) were related to the 
EAP exemptions.\223\ Next the Department determined what share of these 
cases could potentially be avoided by an increase in the standard 
salary level to $913 and an increase in the annual HCE compensation 
level to $134,004.
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    \223\ It was not always clear whether the case involved the EAP 
exemption; when uncertain the Department classified the case as not 
being related to the EAP exemption to produce a conservative 
estimate. For example, in cases with multiple allegations (including 
both EAP and non-EAP issues) the Department classified the case as 
not being related to the EAP exemption.
---------------------------------------------------------------------------

    The Department estimated the share of EAP cases that may be avoided 
due to the Final Rule by using data on the salaried earnings 
distribution from the CPS to determine the share of potentially 
avoidable EAP cases where workers earn at least $455 but less than $913 
per week or at least $100,000 but less than $134,004 annually. From 
CPS, the Department selected white collar, nonhourly workers as the 
appropriate reference group for defining the earnings distribution 
instead of exempt workers because of the simple fact that if a worker 
is litigating his or her exempt status, then we do not know if that 
worker is exempt or not. Based on this analysis, the Department 
determined that 35.8 percent of white collar nonhourly workers had 
earnings within these ranges. Applying these findings to the 12 percent 
of cases associated with the EAP exemption yields an estimated 4.3 
percent of FLSA cases may be avoidable.\224\ The assumption underlying 
this method is that workers who claim they are misclassified as EAP 
exempt have a similar earnings distribution as all white collar 
nonhourly workers.\225\
---------------------------------------------------------------------------

    \224\ If we use the pool of all exempt workers as the reference 
group, then 32.8 percent of salaried workers earn within these 
income ranges and an estimated 3.9 percent of FLSA cases may be 
avoidable (32.8 percent x 12 percent).
    \225\ There are several reasons why this assumption may not 
hold. First, workers with lower earnings are less likely to pass the 
duties test, and thus may be more likely to be misclassified. This 
may result in an underestimate of the share of cases associated with 
workers earning between $455 and $913. Conversely, workers with 
higher earnings may be more likely to bring a lawsuit because 
lawyers may be more likely to take the case. This may result in an 
overestimate of the share of cases associated with workers earning 
between $455 and $913.
---------------------------------------------------------------------------

    After estimating the share of cases that might be avoidable, the 
Department quantified the associated benefit regarding the cost of 
litigation. The Department drew on a recent study conducted by the 
Court Statistics Project.\226\ The study provides estimates of the 
costs of litigation related to employment cases, based on time for the 
various steps of the litigation process (e.g., case initiation, 
discovery, settlement, trial, etc.) and the costs of staff in providing 
these activities (e.g., paralegals, junior and senior attorneys, etc.). 
It then provides quartile estimates (25th percentile, median, and 75th 
percentile) based on the survey data. The study finds that the median 
cost for employment litigation is $88,000. Applying this figure, the 
Department estimated avoided litigation costs resulting from the rule 
may total approximately $31.2 million per year.\227\
---------------------------------------------------------------------------

    \226\ Hannaford-Agor, P. and Waters, N. L. (2013). Estimating 
the Cost of Civil Litigation. Court Statistics Project, 20(1), 1-8. 
Additional data on the distribution of litigation costs can be found 
at www.ncsc.org/clcm.
    \227\ The cost of litigation is estimated to be $53,680 if the 
case does not go to trial; according to Court Statistics Project, 39 
percent of litigation costs are associated with trials ($88,000x(1-
0.39)). Conversely, litigation costs might be significantly higher 
than estimated here since 25 percent of trial cases exceed costs of 
$210,800.
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3. Uncertainty About Future Overtime Hours and Pay
    This Final Rule may have an impact on newly overtime-protected 
employees who are not currently working much or any overtime, but who 
will now be entitled to minimum wage and overtime pay protections. 
These workers may face a lower risk of being asked to work overtime in 
the future, because they are now entitled to an overtime premium, which 
could reduce their uncertainty and improve their welfare if they do not 
desire to work overtime. Additionally, if they are asked to work 
overtime, they will be compensated for the inconvenience with an 
overtime premium.\228\
---------------------------------------------------------------------------

    \228\ Although this statement holds as a comparison between work 
hours below and above 40 per week, it is not universally valid as a 
comparison between the state of the world with the rule and the 
state of the world without the rule.
---------------------------------------------------------------------------

    Economic theory suggests that workers tend to assign monetary 
values to risk or undesirable job characteristics, as evidenced by the 
presence of compensating wage differentials for undesirable jobs, 
relative to other jobs the worker can perform in the marketplace.\229\ 
To the extent a compensating wage differential exists, compensation may 
decrease with the reduction in uncertainty.\230\ For this reason, 
overall compensation would be expected to decrease for workers whose 
uncertainty decreases. Employees who prefer the reduced uncertainty to 
the wage premium would experience a net benefit of the rule, and 
employees who prefer the wage premium to the reduced uncertainty would 
experience a net detriment as a result of the rule. The Department 
believes that attempting to model the net monetary value of changes in 
uncertainty is not feasible due to its heavy reliance on data that are 
not readily available, and the potentially questionable nature of the 
resulting estimates.
---------------------------------------------------------------------------

    \229\ For a discussion of compensating wage differentials, see 
Gronberg, T. J., & Reed, W. R. (1994). Estimating Workers' Marginal 
Willingness to Pay for Job Attributes using Duration Data. Journal 
of Human Resources, 29(3), 911-931.
    \230\ In this case, the size of the compensating wage 
differential is a function of the likelihood of working overtime and 
the amount of overtime worked. If the probability of working 
overtime is small then the wage differential may not exist.
---------------------------------------------------------------------------

    4. Work-Life Balance
    Due to the increase in marginal cost for overtime hours for newly 
overtime-eligible workers, employers will demand fewer hours from some 
of the workers affected by this rule.\231\ The estimated transfer 
payment does not take into account the benefit to some workers of 
working fewer hours in exchange for more (or equal) pay. Therefore, an 
additional potential benefit of this Final Rule is the increase in time 
off for some affected EAP workers. On average, affected EAP workers 
were estimated to work 4.7 minutes less per week after the Final

[[Page 32502]]

Rule. The effect is much more pronounced when limited to just those 
workers whose hours are adjusted in a given week (the 50 percent of 
Type 2 workers who work occasional overtime and are identified in the 
CPS data and all Type 3 workers); they would on average work 24.0 
minutes less per week after the Final Rule. The additional time off may 
potentially make these workers better off.
---------------------------------------------------------------------------

    \231\ The Department recognizes that not all workers would 
prefer to work fewer hours and thus some of these workers might 
experience an adverse impact. The Department has no basis for 
estimating this potential negative impact.
---------------------------------------------------------------------------

    However, employers may respond to the rule by increasing hours of 
work for some other employees--especially those who pass the duties 
test and whose salaries are either already over the proposed threshold 
or will be adjusted to be so. For these employees, work-life balance 
may be harmed by the rule, in some cases without increased pay. For EAP 
employees whose work hours and pay are both reduced, they may seek 
second jobs in order to restore pay to its original level, thus 
similarly impacting work-life balance. The impact of this possible 
effect is unquantified.
    Several commenters stated that by reducing excessive overtime the 
rule will improve work-life balance for employees. The Coalition on 
Human Needs asserted that one outcome of the proposed rule would be 
that ``[e]mployers . . . will have to acknowledge the value of the 40-
hour workweek by . . . limiting workers['] [hours], thus giving them 
more time with their families.'' See also Center for American Progress; 
EPI. According to the Center for Effective Government ``[the] proposed 
rule would provide more time protections to the parents of over an 
estimated 9 million children.'' \232\
---------------------------------------------------------------------------

    \232\ Conversely, some commenters believe the rule will hurt 
work-life balance because workers who become nonexempt may lose 
flexibility in setting their schedules (see section IV.A.iv.)
---------------------------------------------------------------------------

    Empirical evidence shows that workers in the United States 
typically work more than workers in other comparatively wealthy 
countries.\233\ Although estimates of the actual level of overwork vary 
considerably, executive, administrative, and professional occupations 
have the highest percentage of workers who would prefer to work fewer 
hours compared to other occupational categories.\234\ Therefore, the 
Department believes that the Final Rule may result in increased time 
off for a group of workers who may prefer such an outcome. However, the 
empirical evidence does not allow us to estimate how many workers would 
prefer fewer hours or how much workers value this additional time off, 
so it is difficult to monetize the benefit they may receive.
---------------------------------------------------------------------------

    \233\ For more information, see OECD series, average annual 
hours actually worked per worker, available at: http://stats.oecd.org/index.aspx?DataSetCode=ANHRS.
    \234\ Hamermesh, D.S., Kawaguchi, D., Lee, J. (2014). Does Labor 
Legislation Benefit Workers?
    Well-Being after an Hours Reduction. IZA DP No. 8077.
    Golden, L., & Gebreselassie, T. (2007). Overemployment 
Mismatches: The Preference for Fewer Work Hours. Monthly Labor 
Review, 130(4), 18-37.
    Hamermesh, D.S. (2014). Not Enough Time? American Economist, 
59(2).
---------------------------------------------------------------------------

    Furthermore, not all workers would prefer to work fewer hours and 
thus some of these workers might experience an adverse impact. In 
addition, the estimated work loss represents an average over all 
affected workers, and some workers may experience a larger reduction in 
hours.\235\
---------------------------------------------------------------------------

    \235\ It is possible that some employers may choose to eliminate 
all overtime for affected workers and hire additional workers or 
spread the work to existing employees to replace the lost hours. The 
potential for this adjustment is uncertain, and the Department has 
found no studies that estimate the potential magnitude of this 
effect. In addition, an employer may be limited in his or her 
ability to make such adjustments; many affected employees work only 
a few hours of overtime each week; affected employees' tasks may not 
be easily divisible; and hiring new workers and/or managing 
different work flows will impose additional costs on the employer 
that will offset the savings from avoiding paying the overtime 
premium.
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5. Health
    Working long hours is correlated with an increased risk of injury 
or health problems.\236\ Therefore, by reducing overtime hours, some 
affected EAP workers' health may improve. This would benefit the 
workers' welfare, their families' welfare, and society since fewer 
resources would need to be spent on health. Health has also been shown 
to be highly correlated with productivity.\237\ Some affected employees 
who work large amounts of overtime may see a significant health impact; 
for example, workers at the 75th and 90th percentiles of hours worked 
report working 15 and 20 hours of overtime hours per week, 
respectively. On average, 25 percent of currently exempt employees who 
work overtime work at least 10 hours of overtime per week. EPI, NELP, 
and other commenters noted the poor health effects of working long 
hours. The beneficial health effects of reduced hours for some newly 
overtime-eligible employees may be partially offset to the extent that 
hours worked by other employees, especially those who are overtime 
exempt, increase. These effects have not been quantified.
---------------------------------------------------------------------------

    \236\ Keller, S. M. (2009). Effects of Extended Work Shifts and 
Shift Work on Patient Safety, Productivity, and Employee Health. 
AAOHN Journal, 57(12), 497-502. Kivim[auml]ki, M. (2015). Long 
Working Hours and Risk of Coronary Heart Disease and Stroke: A 
Systematic Review and Meta-Analysis of Published and Unpublished 
Data for 603,838 Individuals. The Lancet, 386(10005), 1739-1746.
    \237\ Loeppke, R., Taitel, M., Richling, D., Parry, T., Kessler, 
R., Hymel, P., et al. (2007). Health and Productivity as a Business 
Strategy. Journal of Occupational and Environmental Medicine, 49(7), 
712-721.
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6. Increased Productivity
    This Final Rule is expected to increase the marginal cost of some 
workers' labor, predominately due to the overtime pay requirement since 
almost all affected EAP workers already earn the federal minimum wage. 
In light of the increased marginal cost of labor for newly overtime-
eligible workers, employers may organize workers' time more 
efficiently, thus increasing productivity. Other channels that may 
increase marginal productivity include: Worker health (which was 
addressed above), reduced turnover, and other effects described by 
efficiency wage theory. Any such net gains would benefit both employers 
and workers.
    Efficiency wages: By increasing earnings this Final Rule may 
increase a worker's productivity by incentivizing the worker to work 
harder. Thus the additional cost to firms may be partially offset by 
higher productivity. In particular, the estimated managerial costs 
associated with greater monitoring effort may be offset due to this 
effect. A strand of economic research, commonly referred to as 
``efficiency wages,'' considers how an increase in wages may be met 
with greater productivity.\238\ However, this literature tends to focus 
on firms voluntarily paying higher wages, and thus distinguishing 
themselves from other firms. Because employer response to this 
rulemaking will result in wage increases, extrapolating from efficiency 
wage theory may not be appropriate to estimate the likely effects of 
the rule.
---------------------------------------------------------------------------

    \238\ Akerlof, G. A. (1982). Labor Contracts as Partial Gift 
Exchange. The Quarterly Journal of Economics, 97(4), 543-569.
---------------------------------------------------------------------------

    Some commenters discussed increased productivity as a benefit of 
the rulemaking, including the AFL-CIO, the American Federation of 
Teachers, and the IAFF. Individual comments submitted by the National 
Women's Law Center asserted that paying workers well ``will lead to 
increased productivity, employee loyalty and less worker turn-over'' 
and stated that ``the better you treat employees the better the quality 
of the work they produced.''
    Conversely, there are channels through which increasing overtime 
pay may reduce productivity. For example, some overtime hours may be 
spread to other workers. If the work requires significant project-
specific knowledge or

[[Page 32503]]

skills, then the new worker receiving these transferred hours may be 
less productive than the first worker, especially if there is a steep 
learning curve. However, having another worker versed in the project 
may be beneficial to the firm if the first worker leaves the firm or is 
temporarily absent (e.g., sick) or by providing benefits of teamwork 
(e.g., facilitating information exchange).\239\ The relative magnitudes 
of rule-induced increases and decreases in productivity have not been 
quantified.
---------------------------------------------------------------------------

    \239\ Some commenters believe productivity would decline. See 
section VI.D.iii.
---------------------------------------------------------------------------

    Reduction in turnover: Research demonstrates a correlation between 
earnings and employee turnover--as earnings increase, employee turnover 
decreases.240 241 Reducing turnover may increase 
productivity, at least partially because new employees have less firm-
specific capital (i.e., skills and knowledge that have productive value 
in only one particular company) and thus are less productive and 
require additional supervision and training.\242\ In short, replacing 
experienced workers with new workers decreases productivity, and 
avoiding that will increase productivity. Reduced turnover should also 
reduce firms' hiring and training costs. As a result, even though 
marginal labor costs rise, they may rise by less than the amount of the 
wage change because the higher wages may be offset by lower turnover 
rates, increased productivity, and reduced hiring costs for firms.
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    \240\ Howes, Candace. (2005). Living Wages and Retention of 
Homecare Workers in San Francisco. Industrial Relations, 44(1), 139-
163. Dube, A., Lester,T.W., & Reich, M.. (2014). Minimum Wage 
Shocks, Employment Flows and Labor Market Frictions. IRLE Working 
Paper #149-13.
    \241\ Note that this literature tends to focus on changes in 
earnings for a specific sector or subset of the labor force. The 
impact on turnover when earnings increase across sectors (as would 
be the case with this regulation) may be smaller.
    \242\ Argote, L., Insko, C. A., Yovetich, N., & Romero, A. A. 
(1995). Group Learning Curves: The Effects of Turnover and Task 
Complexity on Group Performance. Journal of Applied Social 
Psychology, 25(6), 512-529. Shaw, J. D. (2011). Turnover Rates and 
Organizational Performance: Review, Critique, and Research Agenda. 
Organizational Psychology Review, 1(3), 187-213.
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    It is difficult to estimate the impact of reduced turnover on 
worker productivity and firm hiring costs. The potential reduction in 
turnover is a function of several variables: the current wage, hours 
worked, turnover rate, industry, and occupation. Additionally, 
estimates of the cost of replacing a worker who quits vary 
significantly. Therefore, the Department does not quantify the 
potential benefit associated with a decrease in turnover attributed to 
this Final Rule.
7. Reduction in Social Assistance Expenditures
    The transfer of income resulting from this Final Rule may result in 
reduced need for social assistance (and by extension reduced social 
assistance expenditures by the government). A worker earning the 
current salary level of $455 per week earns $23,660 annually. If this 
worker resides in a family of four and is the sole earner, then the 
family will be considered impoverished. This makes the family eligible 
for many social assistance programs. Thus, transferring income to these 
workers may reduce eligibility for government social assistance 
programs and government expenditures. Several commenters, including 
Court Appointed Special Advocates and some individual commenters, 
agreed that the rulemaking would reduce unemployment insurance and 
social welfare costs.
    Benefits for which currently exempt EAP workers may qualify include 
Medicaid, the Supplemental Nutrition Assistance Program (SNAP), the 
Temporary Assistance for Needy Families (TANF) program, the Special 
Supplemental Nutrition Program for Women, Infants, and Children (WIC), 
and school breakfasts and lunches.\243\ Quantifying the impact of this 
Final Rule on government expenditures is complex and thus not estimated 
here. In order to conduct such an analysis, the Department would need 
estimates of the transfer per worker, (as noted earlier in this 
analysis, these estimates average $13.91 per week across affected 
workers who work overtime and $5.48 across all affected workers), his 
or her current income level, other sources of family income, number of 
family members, state of residence, and receipt of aid.
---------------------------------------------------------------------------

    \243\ Earned Income Tax Credit (EITC) expenditures could either 
increase or decrease depending on whether workers are on the 
``phase-in'' or the ``phase-out'' portion of the EITC-eligibility 
profile.
---------------------------------------------------------------------------

8. Employment Spreading
    Because employers will have an incentive to reallocate excessive 
overtime hours in some cases (for instance, amongst employees who work 
so many hours that any increase would lead to minimum wage violations), 
the Final Rule may result in expanded employment opportunities. Several 
commenters predicted such an expansion. The Society of St. Vincent de 
Paul stated that that there will be positive spillover effects that 
will result in ``opportunities for new employment for others to fill 
the hours previously treated as non-compensable but mandatory 
managerial duties.'' The Washington Center for Equitable Growth 
commented that the Department understated the benefits of the 
rulemaking ``by failing to account for employers' tendency to hire 
additional workers and to schedule non-overtime work in response to the 
rule change.''
    Two estimates of job creation were referenced by commenters. The 
Washington Center for Equitable Growth referenced an analysis by 
Goldman Sachs estimating the impact of the proposed change in the 
standard salary level on employment.\244\ Goldman Sachs concluded that 
an increase in the salary threshold from $455 to $970 would result in a 
total of 120,000 new hires.\245\ Legal Aid Society-Employment Law 
Center referenced a publication by the NRF which, relying on data from 
Oxford Economics, estimated that a salary threshold of $970 per week 
would create 117,100 part-time jobs in the retail industry alone.\246\ 
While the Department has some concerns with Oxford Economics' analysis, 
as discussed in section VI.D.iii., we agree that in some instances 
employers may hire additional employees to work hours previously worked 
by newly nonexempt employees. However, as noted earlier, to the extent 
the individuals hired for the new jobs are already employed elsewhere, 
the number of individuals who are employed may not increase by as much 
as the number of jobs increases. Further, to the extent that employers 
shift overtime hours of newly overtime-eligible employees to part-time 
or overtime exempt employees who are already on staff, hiring will not 
increase.
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    \244\ Goldman Sachs. (2015). US Daily: The New Federal Overtime 
Rules: A Greater Effect on Payrolls than Pay.
    \245\ Goldman Sachs based its analysis on a difference-in-
difference-in-difference (DDD) estimate of the impact of the 2004 
regulation. This method assumes the 2004 salary level change is 
comparable to the proposed salary level change, the short duties 
test is similar to the standard duties test, and all reduced hours 
will be transferred to new hires. Accordingly, the Department did 
not conduct a similar analysis in this Final Rule.
    \246\ National Retail Federation. (2015). The Hidden Cost Of 
Overtime Expansion.
---------------------------------------------------------------------------

9. Macroeconomic Benefits
    Several commenters asserted that the regulations will benefit the 
economy as a whole. United Steel Workers stated that ``[w]hen the 
workers have more money to spend, businesses have more customers and 
more incentive to hire and invest.'' Democracy for America commented 
the proposed rule ``would go a long way in addressing [wage] disparity, 
strengthening our economy by providing more income to households that 
they can turn around and spend at businesses, creating new jobs and 
growing our GDP.'' There are potential

[[Page 32504]]

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

Table 32--Updated Standard Salary and HCE Compensation Levels and Alternatives, Affected EAP Workers, Costs, and
                                                Transfers, FY2017
----------------------------------------------------------------------------------------------------------------
                                                                            Year 1 impacts  (millions)
                                                   Affected EAP  -----------------------------------------------
           Alternative             Salary level       workers         Adj. &
                                                     (1,000s)       managerial       Transfers        DWL \b\
                                                                     costs \a\
----------------------------------------------------------------------------------------------------------------
                                         Standard Salary Level (Weekly)
----------------------------------------------------------------------------------------------------------------
Alt. #1: Inflate 2004 level.....            $570             538           $47.9          $111.4            $0.4
Alt. #2: 2004 method............             596             683            61.3           145.4             0.5
Alt. #3: Kantor long test level.             684           1,444           133.7           318.1             1.6
Final...........................             913           4,163           397.0         1,186.6             5.8
Alt. #4: Proposed...............             972           4,837           470.1         1,476.8             7.3
Alt. #5: Kantor short test......           1,019           5,636           541.2         1,779.3             8.4
Alt. #6: Inflate 1975 short test           1,100           6,684           665.4         2,418.8            11.7
 level..........................
----------------------------------------------------------------------------------------------------------------
                                        HCE Compensation Level (Annually)
----------------------------------------------------------------------------------------------------------------
Alt. #1: No change..............        $100,000               0  ..............  ..............  ..............
Alt. #2: Inflate 2004 level.....         125,320              56             6.7            72.2             0.4
Final...........................         134,004              65             8.4            98.5             0.6
Alt. #3: 2004 percentile........         149,894              72             9.4           123.0             0.8
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for FY2013-FY2015 projected to reflect FY2017.
\a\ Regulatory familiarization costs are excluded because they do not vary based on the selected values of the
  salary levels.

[[Page 32505]]

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

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

[[Page 32506]]

[GRAPHIC] [TIFF OMITTED] TR23MY16.008

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

    \247\ This question is only asked of ``heads'' and ``wives'' in 
the PSID (i.e., heads of households and their spouses). However, in 
the 2013 PSID, ``heads'' and ``wives'' composed 88 percent of 
workers.
---------------------------------------------------------------------------

Workers May Remain Salaried Even if Nonexempt
    The Department disagrees with commenters that suggested that 
employers will likely (or automatically) convert large numbers of newly 
nonexempt employees to hourly pay status. In some instances such 
conversation may occur, for example, if an employee regularly works 
overtime and the employer is able to adjust his or her regular rate. 
However, for the majority of affected employees, there will be no 
incentive for employers to convert them to hourly pay because they do 
not work overtime. Also, employers may have other incentives to 
maintain workers' salary status; for example, they

[[Page 32507]]

may offer salaried positions to attract talent. Commenters highlighted 
that employees value job characteristics associated with salaried pay--
such as earnings predictability--and so employers may pay nonexempt 
employees on a salary basis to preserve employee morale. Using the CPS 
MORG data pooled for FY2013-FY2015 and projected to FY2017, the 
Department estimated that 18.6 percent of white collar workers earning 
below $455 per week are nonhourly; based on findings from the PSID, the 
Department believes most of these nonhourly workers are salaried.
Previous Salary Level Updates Did Not Indicate Workers Being Converted 
to Hourly
    The Department analyzed employer responses to the 2004 Final Rule 
and to a series of revisions to California's salary level test for 
exemption under state law in order to better estimate whether workers 
who are reclassified as nonexempt are more likely to be paid on an 
hourly basis. These analyses allow the identification of any potential 
regulatory impact while controlling for time trends and a broad range 
of other relevant factors (education, occupation, industry, geographic 
location, etc.). The Department found no evidence that changes in the 
salary level for exemption resulted in a statistically significant 
increase in the percent of full-time white collar workers paid on an 
hourly basis following either the 2004 Final Rule or the California 
salary level updates. See section VI.D.iii.5 for discussion of the 
applicability of these results to this Final Rule.
    2004 Final Rule. In 2004, the salary level required to be eligible 
for exemption increased from $250 per week (short salary level) to $455 
(the standard salary level).\248\ To estimate the effect of this salary 
level update on the share of full-time, white collar workers paid 
hourly, the Department conducted a difference-in-differences (DD) 
analysis of the 2004 part 541 salary level revisions. The Department 
modeled two types of differences to include in the analysis:
---------------------------------------------------------------------------

    \248\ The 2004 Final Rule increased the salary level from the 
previous long test level of $155 per week (executive and 
administrative exemptions) or $170 per week (professional exemption) 
to $455 per week. For purposes of this analysis, the Department 
compared the increase from the short test salary level ($250 per 
week) since the long test was no longer operative due to increases 
in the minimum wage.
---------------------------------------------------------------------------

    Difference #1 (pre- versus post-rulemaking): January-March 2004 
versus January-March 2005,\249\
---------------------------------------------------------------------------

    \249\ The 2004 Final Rule was published April 23, 2004 and went 
into effect August 23, 2004.
---------------------------------------------------------------------------

    Difference #2 (workers exempt before, but not after rule compared 
to workers exempt both before and after the rule): Workers earning 
between $250 and $455 per week versus those earning at least $455 but 
less than $600.\250\
---------------------------------------------------------------------------

    \250\ In order to isolate the potential effect on earnings due 
to the 2004 salary changes, we excluded workers in states where the 
state EAP salary level was higher than the FLSA short salary level 
(i.e., Alaska, California, Connecticut, Maine and New York).
---------------------------------------------------------------------------

    Using this DD analysis, the Department found no evidence that 
changes in the salary level for exemption resulted in a statistically 
significant increase in the percent of full-time white collar workers 
paid on an hourly basis following the 2004 Final Rule.\251\ This can 
also be demonstrated by looking directly at the share of workers paid 
hourly; the Department found that following the 2004 Final Rule, the 
percent of full-time white collar workers who were paid hourly 
decreased from 74.6 percent to 73.6 percent in the affected earnings 
range ($250-$455), while it increased from 60.9 percent to 63.6 percent 
in the earnings range where there were no changes to EAP exemption 
eligibility. In other words, between the first quarter of 2004 and the 
first quarter of 2005, the share of full-time white-collar workers who 
are paid hourly decreased marginally in the group of potentially 
affected workers (those earning $250 to $455), whereas in the group 
earning above the salary level (those earning more than $455 but less 
than $600) it increased by 2.6 percentage points.
---------------------------------------------------------------------------

    \251\ The shares provided in the text do not control for other 
covariates. However, using a DD regression approach that includes a 
full complement of controls (age, education, gender, race, 
ethnicity, occupation, industry, state of residence, working 
overtime, multiple job holding), the relevant marginal effect is -
0.033 (i.e., the amount the likelihood of being paid hourly changes 
post rulemaking for workers earning between $250 and $455 per week 
relative to the change for workers earning $455 or above) and the p-
value is 0.118, which is not statistically significant at 
conventional thresholds for significance. The difference-in-
differences model used can be written as where Hi is equal to 1 if 
worker i is paid by the hour and 0 otherwise, Ti is equal to 1 if 
worker i earns at least $250 but less than $455 and 0 if she earns 
between $455 and $600, Pi is equal to 1 for the post-change period 
(Jan.-Mar. 2005) and 0 for the pre-change period (Jan.-Mar. 2004), 
and Ci is the set of worker-specific controls. The model was 
estimated using a probit regression.
---------------------------------------------------------------------------

    California. The exempt salary level in California is set by statute 
as equal to twice the state minimum wage for 40 hours worked per week. 
The salary level has been updated four times in recent years when 
California raised the state minimum wage: In 2007 (from $540 to $600), 
2008 (from $600 to $640), 2014 (from $640 to $720), and 2016 (from $720 
to $800). To estimate the effect of the salary level update on the 
share of white collar workers paid hourly, the Department conducted 
difference-in-differences-in-differences (DDD) analyses of the 
revisions to the California exempt salary level for which CPS data were 
available (2007-2008, and 2014).\252\
---------------------------------------------------------------------------

    \252\ California raised the state minimum wage in January of 
both 2007 and 2008. These changes were announced jointly in 
September 2006. Because employers knew that a second increase in the 
exempt salary level would occur one year after the 2007 increase, 
the Department expected that they planned their adjustments 
accordingly rather than treat the two increases as isolated 
independent events. Therefore the Department considered the combined 
effects of the 2007 and 2008 changes.
---------------------------------------------------------------------------

    The Department modeled three types of differences to include in the 
analyses:
    Difference #1 (pre- versus post-rulemaking):
    2007-2008: January-March 2006 versus January-March 2008, and 2014: 
January-March 2014 versus January-March 2015.\253\
---------------------------------------------------------------------------

    \253\ The minimum wage update took place in July 2014.
---------------------------------------------------------------------------

    Difference #2 (workers exempt before, but not after rule compared 
to workers exempt both before and after the rule):
    2007-2008: Workers earning between $540 and $640 versus those 
earning at least $640 but less than $740, and
    2014: Workers earning between $640 and $720 versus workers earning 
at least $720 but less than $800.
    Difference #3: California workers versus workers in other states 
where the salary level was not increased.\254\
---------------------------------------------------------------------------

    \254\ We excluded Alaska, Connecticut and New York because the 
state EAP salary levels either: (1) Were above the FLSA standard 
salary level; (2) differed in the time periods considered; or (3) 
both (1) and (2).
---------------------------------------------------------------------------

    Using this DDD analysis, the Department found no evidence that 
changes in the salary level for exemption resulted in a statistically 
significant increase in the percent of full-time white collar workers 
paid on an hourly basis.\255\ This can also be

[[Page 32508]]

demonstrated by looking directly at the share of workers paid hourly 
(using differences one and three). After the 2007-2008 California 
update, among Californians earning between the old and new salary 
levels, the share of full-time white collar workers being paid hourly 
decreased slightly from 73.4 percent to 73.1 percent. Among full-time 
white collar workers earning comparable amounts in states where the 
salary level did not change, the share of workers being paid hourly 
increased from 66.2 percent to 67.5 percent. After the 2014 California 
update, the values increased from 72.0 percent to 74.0 percent in 
California, and increased from 68.2 percent to 69.4 percent in other 
states.\256\ Neither of these results suggests that the salary updates 
resulted in a significantly greater percent of affected workers being 
converted to hourly pay in California as compared to the rest of the 
United States.
---------------------------------------------------------------------------

    \255\ The shares provided in the text do not control for other 
covariates. However, using a DDD regression approach that includes a 
full complement of controls (age, education, gender, race, 
ethnicity, occupation, industry, state of residence, working 
overtime, multiple job holding), the relevant marginal effect for 
2007-2008 is 0.018 and the p-value is 0.612. The marginal effect of 
the triple difference for 2014 is -0.057 and the p-value is 0.103. 
Neither of these are statistically significant at conventional 
thresholds for significance. The difference-in-difference-in-
differences model used can be written as
    where Hi is equal to 1 if worker i is paid by the hour and 0 
otherwise, Ti is equal to 1 if worker i earns between the old 
threshold and the new threshold and 0 if she earns just above the 
new threshold, Pi is equal to 1 for the post-change period and 0 for 
the pre-change period, Si is equal to 1 if worker i is in California 
and 0 if she is in other states where the salary level was not 
increased, and Ci is the set of worker-specific controls. The model 
was estimated using a probit regression. The Department also 
performed alternative analyses to check whether these results hold, 
including (1) a comparison of California and other states looking 
only at workers with earnings below the revised salary level (i.e., 
eliminating Difference #2 from the DDD model), and (2) running 
simplified models without individual controls. None of these checks 
found a significant increase in the percentage of workers paid on an 
hourly basis.
    \256\ The increase in the proportion of workers paid on an 
hourly basis in the relevant salary range in California is not 
statistically different from the increase in the proportion for 
workers in other states.
---------------------------------------------------------------------------

The Department's Modeling of Possible ``Ratcheting'' Indicates Any 
Effect Would Be Negligible
    In a study submitted by the PPWO, Edgeworth Economics estimated the 
impact that automatic updating using the fixed percentile approach 
would have on the salary level. They found that ``[i]f just one quarter 
of the full-time non-hourly workers earning less than $49,400 per year 
($950 per week) were reclassified as hourly workers, the pay 
distribution among the remaining non-hourly workers would shift so that 
the 40th percentile of the 2016 pay distribution would be $54,184 
($1,042 per week), about 9.6 percent higher than it was in 2015.'' 
Their estimate was based on the key assumption that one quarter of all 
full-time nonhourly employees would be converted to hourly pay each 
year. Accordingly, based on the Department's reading of the Edgeworth 
Economics' analysis, it appears they converted one quarter of all full-
time nonhourly employees earning below the salary level to hourly 
status. This modeling is inappropriate because it fails to account for 
whether the employees perform white collar work and are subject to the 
EAP exemption, and ignores that, at most, employers will only have an 
incentive to convert affected workers (a small share of all full-time 
nonhourly employees).
    Oxford Economics also considered how converting salaried workers to 
hourly status could influence automatically updated salary levels. In 
one analysis, they assumed that employers will convert the lowest 40 
percent of full-time salaried workers to hourly status in 2016, and 
that by Year 2 the 40th percentile of the new distribution of salaried 
workers would be equivalent to the 64th percentile of the original 
distribution. The Department believes this model is clearly 
unrealistic. Like Edgeworth Economics, Oxford Economics erroneously 
assumes that workers who are not affected by the new salary would 
nonetheless be converted to hourly status.
    In another analysis, Oxford Economics estimated employer response 
to updating the threshold to $970 in 2016. According to their analysis, 
approximately 695,000, or nearly one third, of the 2,189,000 affected 
workers will be converted from ``salaried exempt'' to ``hourly 
nonexempt.'' Oxford Economics concluded that about two-thirds of these 
converted employees will have their hourly rates decreased to leave 
their earnings unchanged, and one third will have their hours reduced 
to 38 per week. However, neither analysis appears to account for the 
possibility that employers may continue to pay some newly nonexempt 
employees on a salary basis, and thus both predictions likely 
overestimate the number of workers converted to hourly status.
    The Department conducted a similar analysis, using what the 
Department believes are more realistic assumptions, and found a 
significantly smaller potential impact. The Department considered which 
affected workers are most likely to be converted from salaried to 
hourly pay as a result of this rulemaking. Type 4 workers, those whose 
salaries are increased to the new standard salary level, remain exempt 
and their method of pay will not change. Type 3 workers, who regularly 
work overtime and become nonexempt, and Type 2 workers, those who 
occasionally work overtime and become nonexempt, are the most likely to 
have their pay status changed. Type 1 workers (who make up more than 60 
percent of the affected workers) are assumed to not work overtime, and 
employers thus have little incentive to convert them to hourly pay. For 
this analysis, the Department assumed all Type 2 and Type 3 workers are 
converted to hourly status to generate a realistic upper bound of the 
magnitude of any possible ratcheting effect. The Department estimated 
that the salary level in 2026, after three updates, the salary level as 
set in the Final Rule (based on weekly earnings of full-time salaried 
workers in the South) could be approximately 2.5 percent higher than 
expected due to this effect. This figure is significantly smaller than 
the estimates provided by the commenters. Furthermore, we believe our 
estimate is an overestimate because it assumes employers convert all 
Type 2 and Type 3 workers to hourly status, which, for the reasons 
discussed above and in section IV.E.iii. of the preamble, the 
Department believes is a highly unlikely outcome.
x. Projections
1. Methodology
    The Department projected affected workers, costs, and transfers 
forward for ten years. This involved several steps. First, past growth 
in the earnings distribution was used to estimate future salary levels. 
Second, workers' earnings, absent a change in the salary levels, were 
predicted. Third, predicted salary levels and earnings were used to 
estimate affected workers. Fourth, employment adjustments were 
estimated and adjusted earnings were calculated. Lastly, costs and 
transfers were calculated.
    First, in years when the salary level is updated, the predicted 
salary levels are estimated using the historic geometric growth rate 
between FY2005 and FY2015 in (1) the 40th earnings percentile of full-
time salaried workers in the South for the standard salary level and 
(2) the 90th earnings percentile of full-time salaried workers 
nationally for the HCE compensation level, projected to the second 
quarter of the respective years before the updated levels go into 
effect. Second, the Department calculated workers' projected earnings 
in future years by applying the annual projected wage growth rate in 
the workers' industry-occupation to current earnings, as described in 
section VI.B.ii. Third, we compared workers' counter-factual earnings 
(i.e., absent the rulemaking) to the predicted salary levels. If the 
counter-factual earnings are below the relevant salary level (i.e., 
standard or HCE) then the worker is considered affected. In other 
words, in each year affected EAP workers were identified as those who 
would be exempt in FY2017 absent the rule change but have projected 
earnings in the future year that are less than the relevant salary

[[Page 32509]]

level. Sampling weights were also adjusted to reflect employment growth 
as explained in section VI.B.ii.
    Adjusted hours for workers affected in Year 1 were re-estimated in 
Year 2 using a long-run elasticity of labor demand of -0.4.\257\ For 
workers newly affected in Year 2 through Year 10, employers' wage and 
hour adjustments due to the rulemaking are estimated in that year, as 
described in section VI.D.iv., except the long-run elasticity of labor 
demand of -0.4 is used. Employer adjustments are made in the first year 
the worker is affected and then applied to all future years in which 
the worker continues to be affected (unless the worker switches to a 
Type 4 worker). Workers' earnings in predicted years are earnings post 
employer adjustments, with overtime pay, and with ongoing wage growth 
based on historical growth rates (as described above).
---------------------------------------------------------------------------

    \257\ This elasticity estimate is based on the Department's 
analysis of the following paper: Lichter, A., Peichl, A. & Siegloch, 
A. (2014). The Own-Wage Elasticity of Labor Demand: A Meta-
Regression Analysis. IZA DP No. 7958.
---------------------------------------------------------------------------

    Very few commenters discussed the Department's projections for Year 
2 through Year 10 in the NPRM's analysis. Dan Goldbeck \258\ stated, in 
an article cited by the Association of Energy Service Companies, that 
in the NPRM, the Department reported only Year 2 and Year 10 projected 
estimates, making it ``difficult to know the accuracy of this 
calculation.'' See also International Bancshares Corporation. In the 
Final Rule, the Department has included projected costs in each of the 
nine projected years.
---------------------------------------------------------------------------

    \258\ Goldbeck, D. (2015). ``White Collar'' Overtime Expansion. 
Regulation Review.
---------------------------------------------------------------------------

2. Estimated Projections
    The Department estimated that in Year 1, 4.2 million EAP workers 
will be affected, with about 65,000 of these attributable to the 
revised HCE compensation level. In Year 10, the number of affected EAP 
workers was estimated to equal 5.3 million with 217,000 attributed to 
the HCE exemption. The projected number of affected EAP workers 
accounts for anticipated employment growth by increasing the number of 
workers represented by the affected EAP workers (i.e., increasing 
sampling weights).
    The projected number of affected workers includes workers who were 
not EAP exempt in the base year but would have become exempt in the 
absence of this Final Rule in Years 2 through 10. For example, a worker 
may earn less than $455 in FY2017 but between $455 and $913 in 
subsequent years; such a worker would be counted as an affected worker. 
In the absence of this Final Rule he or she would likely have become 
exempt at some point during the 9 projected years; however, as a result 
of the Final Rule, this worker remains nonexempt, and is thus affected 
by the Final Rule. In the NPRM the Department considered these workers 
separately from affected workers and did not estimate costs and 
transfers associated with these workers.\259\
---------------------------------------------------------------------------

    \259\ These workers were not considered in the NPRM because 
their work patterns are known when they are nonexempt (because they 
earn less than $455), but those patterns might change if they become 
exempt (e.g., they may work more hours). However, because a 
significant number of additional workers are projected to remain 
nonexempt through this process, the Department chose to include them 
in the analysis for this Final Rule. To do so, we assume their 
exempt work patterns will be similar to their nonexempt work 
patterns.
---------------------------------------------------------------------------

    The Department quantified three types of direct employer costs in 
the ten-year projections: (1) Regulatory familiarization costs; (2) 
adjustment costs; and (3) managerial costs. Regulatory familiarization 
costs only occur in Year 1 and years when the salary levels are 
automatically updated. Thus, in addition to Year 1, some regulatory 
familiarization costs are expected to occur in Year 4 (FY2020), Year 7 
(FY2023), and Year 10 (FY2026).\260\ Specifically, the Department added 
5 minutes per establishment for regulatory familiarization time to 
access and read the published notice in the Federal Register with the 
updated standard salary level and HCE compensation level in years when 
the salary level is updated. In each of these three years (FY2020, 
FY2023, and FY2026) regulatory familiarization costs are approximately 
$23 million (see section VI.D.iii. for details on the methodology for 
estimating costs).
---------------------------------------------------------------------------

    \260\ The first update will go into effect January 1, 2020. 
However, for this economic analysis, the Department modeled the 
first automatic update to occur at the beginning of FY2020. This is 
because the analysis is conducted by fiscal year and modeling the 
update as going into effect a quarter before allows simplification 
of the analysis with only a negligible impact on estimates.
---------------------------------------------------------------------------

    Although start-up firms must still become familiar with the FLSA 
following Year 1, the difference between the time necessary for 
familiarization with the current part 541 exemptions and those 
exemptions as modified by the Final Rule is essentially zero. 
Therefore, projected regulatory familiarization costs for new entrants 
over the next nine years are zero (although these new entrants will 
incur regulatory familiarization costs in years when the salary and 
compensation levels are updated).
    Adjustment costs and managerial costs are a function of the number 
of affected EAP workers and thus will be higher with automatic 
updating. Adjustment costs will occur in any year in which workers are 
newly affected. After Year 1, these costs are estimated to be 
relatively small since the majority of workers affected by this 
rulemaking are affected in Year 1, and the costs occur almost 
exclusively in years when the salary is automatically updated. 
Management costs recur each year for all affected EAP workers whose 
hours are adjusted. Therefore, managerial costs increase modestly over 
time as the number of affected EAP workers increases. The Department 
estimated that Year 1 managerial costs would be $214.0 million (section 
VI.D.iii.); by Year 10 these costs would grow slightly to $255.1 
million. In years without automatic updates managerial costs fall 
slightly since earnings growth will cause some workers to no longer be 
affected in those years. In all years between 94 and 98 percent of 
costs are attributable to the revised standard salary level (Table 33).
    The Department projected two types of transfers from employers to 
employees associated with workers affected by the regulation: (1) 
Transfers due to the minimum wage provision and (2) transfers due to 
the overtime pay provision. Transfers to workers from employers due to 
the minimum wage provision, estimated to be $34.3 million in Year 1, 
are projected to decline to $17.8 million in Year 10 as increased 
earnings over time move workers' regular rate of pay above the minimum 
wage.\261\ Transfers due to overtime pay should grow slightly over time 
because the number of affected workers will increase, although 
transfers fall in years between automatic updates. Transfers to workers 
from employers due to the overtime pay provision increase from $1,250.8 
million in Year 1 to $1,589.4 million in Year 10. Workers affected by 
the revised standard salary level account for between 80 and 92 percent 
of overtime transfers in all years.
---------------------------------------------------------------------------

    \261\ State minimum wages above the federal level as of January 
1, 2016 were incorporated and used for projected years. Increases in 
minimum wages were not projected. If state or federal minimum wages 
increase between January 1, 2016 and FY2026, then estimated 
projected minimum wage transfers may be underestimated.

[[Page 32510]]



                                         Table 33--Projected Costs and Transfers, Standard and HCE Salary Levels
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                       Affected                          Costs                                      Transfers
                                         EAP     -------------------------------------------------------------------------------------------
        Fiscal year (year #)           workers                  Adjustment                                                                     DWL \b\
                                      (millions)   Reg. Fam.       \a\       Managerial     Total      Due to MW    Due to OT      Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                     ...........                                            (Millions FY2017$)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Year:
    2017 (1).......................          4.2        272.5        191.4        214.0        677.9         34.3      1,250.8      1,285.2          6.4
    2018 (2).......................          4.0          0.0          1.5        206.6        208.0         28.5        907.9        936.5          8.7
    2019 (3).......................          3.9          0.0          1.9        200.6        202.6         27.7        883.9        911.6          8.5
    2020 (4).......................          4.6         22.8         10.4        232.5        265.7         25.8      1,221.2      1,247.0          9.8
    2021 (5).......................          4.4          0.0          2.8        223.7        226.5         24.6      1,134.7      1,159.2          9.6
    2022 (6).......................          4.3          0.0          2.8        217.6        220.5         20.5      1,017.3      1,037.8          9.4
    2023 (7).......................          5.0         23.0          7.3        243.4        273.7         18.0      1,404.6      1,422.6         10.2
    2024 (8).......................          4.8          0.0          2.5        236.1        238.6         15.2      1,290.0      1,305.3         10.0
    2025 (9).......................          4.6          0.0          2.2        230.9        233.1         14.4      1,193.2      1,207.6         10.1
    2026 (10)......................          5.3         23.1          5.9        255.1        284.2         17.8      1,589.4      1,607.2         11.1
Average Annualized:
    3% real rate...................  ...........         37.6         25.4        225.0        288.0         23.2      1,178.5      1,201.6          9.3
    7% real rate...................  ...........         42.4         29.0        223.6        295.1         23.8      1,165.3      1,189.1          9.2
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ Adjustment costs occur in all years when there are newly affected workers, including years when the salary level is not updated. Adjustment costs
  may occur in years without updated salary levels because some workers' projected earnings are estimated using negative earnings growth.
\b\ DWL was estimated based on the aggregate impact of both the minimum wage and overtime pay provisions. Since the transfer associated with the minimum
  wage is negligible compared to the transfer associated with overtime pay, the vast majority of this cost is attributed to the overtime pay provision.

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

                         Table 34--Summary of Projected Deadweight Loss Component Values
----------------------------------------------------------------------------------------------------------------
                                                                                           Future years
                            Component                                 Year 1     -------------------------------
                                                                                      Year 2          Year 10
----------------------------------------------------------------------------------------------------------------
                                                                                  Standard salary
                                                                 -----------------------------------------------
Average hourly wages (holding hours constant)
    Pre.........................................................          $14.86          $14.94          $17.59
    Post \a\....................................................          $15.55          $15.45          $18.20
    Change......................................................           $0.69           $0.51           $0.61
Change in average overtime hours................................           -0.40           -0.76           -0.79
Affected EAP workers (1,000s)...................................             803             778             903
DWL
    Per worker per week.........................................           $0.14           $0.20           $0.24
    Nominal annual (millions)...................................            $5.8            $7.9           $11.3
    Real annual (millions of FY2017$)...........................            $5.8            $7.9            $9.2
                                                                 -----------------------------------------------
                                                                                        HCE
                                                                 -----------------------------------------------
Average hourly wages (holding hours constant)
    Pre.........................................................          $42.84          $42.51          $45.03
    Post \a\....................................................          $44.85          $43.96          $46.56
    Change......................................................           $2.01           $1.45           $1.53

[[Page 32511]]

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

3. Comparison to Projections With Alternative Methods
    This section presents estimated projected impacts without automatic 
updating and using the CPI-U to automatically update salary levels. 
Projections without automatic updating are shown so impacts of the 
initial increase and subsequent increases can be disaggregated. 
Projections using the CPI-U are included because this alternative was 
proposed as a potential method in the NPRM.
    For the CPI-U method, the Department used the predicted change in 
annual CPI-U values for FY2017 through FY2026 from the Congressional 
Budget Office.\262\ For example, inflation based on the CPI-U for 
FY2017, FY2018, and FY2019 is predicted to be 2.2, 2.4, and 2.4 
percent, respectively; therefore, the projected salary level for Year 4 
(the year of the first salary level update) is $978 ($913 x 1.022 x 
1.024 x 1.024). In other years, predicted inflation based on the CPI-U 
was projected to be 2.4 percent.
---------------------------------------------------------------------------

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

    Table 35 shows projected numbers of affected workers, costs, and 
transfers with these alternative methods. With triennial automatic 
updating as adopted in this Final Rule, the number of affected EAP 
workers would increase from 4.2 million to 5.3 million over 10 years. 
With triennial automatic updating using the CPI-U, the number of 
affected EAP workers would increase from 4.2 million to 5.4 million 
over 10 years. Conversely, in the absence of automatic updating, the 
number of affected EAP workers is projected to decline from 4.2 to 3.0 
million.
    The three costs to employers previously considered are (1) 
regulatory familiarization costs, (2) adjustment costs, and (3) 
managerial costs. Regulatory familiarization costs do not vary 
depending on whether the fixed percentile method or the CPI-U method is 
used for automatic updating, and are only slightly lower without 
automatic updating. Adjustment costs and managerial costs are a 
function of the number of affected EAP workers and so will be higher 
with automatic updating. Average annualized direct costs were projected 
to be very similar with the fixed percentile method and the CPI-U 
method: $295.1 million and $294.7 million, respectively. Average 
annualized direct costs are lower without automatic updating because 
fewer workers will be affected ($249.8 million).
    Average annualized transfers and DWL follow a similar pattern: 
estimates are very similar for the fixed percentile method and the CPI-
U method, but are lower without automatic updating. Average annualized 
transfers are $1,189.1 million with the fixed earnings percentile, 
$1,172.6 million with the CPI-U method, and $873.5 million without 
automatic updating. Average annualized DWL is $9.2 million with the 
fixed earnings percentile, $9.2 million with the CPI-U method, and $7.7 
million without automatic updating.

[[Page 32512]]

[GRAPHIC] [TIFF OMITTED] TR23MY16.009

Appendix A: Methodology for Estimating Exemption Status

    The number of workers exempt under the FLSA's part 541 regulations 
is unknown. It is neither reported by employers to any central agency 
nor asked in either an employee or establishment survey.\263\ The

[[Page 32513]]

Department estimated the number of exempt workers using the following 
methodology. This methodology is based largely on the approach used 
during the 2004 revisions.\264\ This appendix expands on the 
methodology description in the Final Rule.
---------------------------------------------------------------------------

    \263\ RAND recently released results from a survey conducted to 
estimate EAP exempt workers. Rohwedder, S. and Wenger, J.B. (2015). 
The Fair Labor Standards Act: Worker Misclassification and the Hours 
and Earnings Effects of Expanded Coverage. RAND Labor and 
Population.
    \264\ 69 FR 22196-22209 (Apr. 23, 2004).
---------------------------------------------------------------------------

A.1 The Duties Tests Probability Codes
    The CPS MORG data do not include information about job duties. To 
determine whether a worker meets the duties test the Department employs 
the methodology it used in the 2004 Final Rule. Each occupation is 
assigned a probability representing the odds that a worker in that 
occupation would pass the duties test. For the EAP duties test, the 
five probability intervals are:
     Category 0: Occupations not likely to include any workers 
eligible for the EAP exemptions.
     Category 1: Occupations with probabilities between 90 and 
100 percent.
     Category 2: Occupations with probabilities between 50 and 
90 percent.
     Category 3: Occupations with probabilities between 10 and 
50 percent.
     Category 4: Occupations with probabilities between 0 and 
10 percent.\265\
---------------------------------------------------------------------------

    \265\ Table A2 lists the probability codes by occupation used to 
estimate exemption status.
---------------------------------------------------------------------------

    The occupations identified in this classification system represent 
an earlier occupational classification scheme (the 1990 Census Codes). 
Therefore, an occupational crosswalk was used to map the previous 
occupational codes to the 2002 Census occupational codes which are used 
in the CPS MORG 2002 through 2010 data.266 267 When the new 
occupational category was comprised of more than one previous 
occupation, the Department assigned a probability category using the 
weighted average of the previous occupations' probabilities, rounded to 
the closest category code.
---------------------------------------------------------------------------

    \266\ To match 1990 Census Codes to the corresponding 2000 
Census Codes see: http://www.census.gov/people/io/methodology/. To 
translate the 2000 Census Codes into the 2002 Census Codes each code 
is multiplied by 10.
    \267\ Beginning January 2011, the MORG data use the 2010 Census 
Codes. The Department translates these codes into the equivalent 
2002 Census Codes to create continuity. The crosswalk is available 
at: http://www.census.gov/people/io/methodology/.
---------------------------------------------------------------------------

    Next, the Department must determine which workers to classify as 
exempt. For example, the probability codes indicate that out of every 
ten public relation managers between five and nine are exempt; however, 
the Department does not know which five to nine workers are exempt. 
Exemption status could be randomly assigned but this would bias the 
earnings of exempt workers downward, since higher paid workers are more 
likely to perform the required duties. Therefore, the probability of 
being classified as exempt should increase with earnings. First, the 
Department assigned the upper bound of the probability range in each 
exemption category to workers with top-coded weekly earnings. For all 
other white collar salaried workers earning at least $455 per week in 
each exemption category,\268\ the Department estimated the probability 
of exemption for each worker in the data based on both occupation and 
earnings using a gamma distribution.\269\ For the gamma distribution, 
the shape parameter alpha was set to the squared quotient of the sample 
mean divided by the sample standard deviation, and the scale parameter 
beta was set to the sample variance divided by the sample mean. These 
parameter calculations are based on the method described in the 2004 
rulemaking, except for the use of the standard deviation instead of the 
standard error.\270\ Table A1 shows that the expected number of exempt 
workers is similar when using a gamma distribution method and assigning 
the midpoint of each probability code range to all workers in that 
probability code. After determining the probabilities of exemption for 
each worker in the data (dependent on both occupation and earnings), 
the Department randomly assigns exemption status to each worker, 
conditional on the worker's probability of exemption.
---------------------------------------------------------------------------

    \268\ Also included are all workers who are in occupational 
categories associated with named occupations.
    \269\ A gamma distribution is a general type of statistical 
distribution that is based on two parameters, in this case alpha and 
beta. The gamma distribution was chosen because during the 2004 
revision it fit the data the best of the non-linear distributions 
considered, which included normal, lognormal, and gamma. 69 FR 
22204-08.
    \270\ Since the sample standard deviation is much larger than 
the standard error, using the sample standard deviation to calculate 
the shape and location parameters resulted in probabilities that 
vary more with earnings.

         Table A1--Comparison of EAP-Exempt Worker Estimates \a\
------------------------------------------------------------------------
                                                             Gamma
     Probability code category           Midpoint         distribution
                                       probability           model
------------------------------------------------------------------------
High probability of exemption (1).         23,134,055         23,165,165
Probably exempt (2)...............          4,808,003          4,792,536
Probably not exempt (3)...........          1,675,615          1,644,144
Low or no probability of exemption            277,473            287,310
 (4)..............................
                                   -------------------------------------
    Total.........................         29,895,146         29,889,154
------------------------------------------------------------------------
\a\ Numbers shown are the expected value of the number of workers exempt
  in each of the four probability code categories.

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

[[Page 32514]]

the analysis. The Department now is, in addition, estimating those 
workers who fall under one of the other exemptions in section 13(a) of 
the FLSA, because such workers are exempt from both minimum wage and 
overtime pay under the relevant section and would remain exempt 
regardless of any changes to the EAP exemption. In fact, many of the 
workers estimated below as falling within one of the section 13(a) 
exemptions will already have been excluded from the analysis because 
they are paid on an hourly basis or are in a blue collar occupation. 
The methodology for identifying the workers who fall under the section 
13(a) exemptions is explained here and is based generally on the 
methodology the Department used in 1998 when it issued its last report 
under section 4(d) of the FLSA.
A.2.1 Section 13(a)(1) Outside Sales Workers
    Outside sales workers are a subset of the section 13(a)(1) 
exemptions, but since they are not affected by the salary regulations 
they are not discussed in detail in the preamble. Outside sales workers 
are included in occupational category ``door-to-door sales workers, 
news and street vendors, and related workers'' (Census code 4950). This 
category is composed of workers who both would and would not qualify 
for the outside sales worker exemption; for example, street vendors 
would not qualify. Therefore, the percentage of these workers that 
qualify for the exemption was estimated. The Department believes that, 
under the 1990 Census Codes system, outside sales workers were more or 
less uniquely identified with occupational category ``street & door-to-
door sales workers'' (277). Therefore, the Department exempts the share 
of workers in category 4950 who would have been classified as code 277 
(43 percent) under the old classification system.
A.2.2 Agricultural Workers
    Similar to the 2004 analysis, the Department excluded agricultural 
workers from the universe of affected employees. In the 2004 Final Rule 
all workers in agricultural industries were excluded; however, here 
only workers also in select occupations were excluded since not all 
workers in agricultural industries qualify for the agricultural 
overtime pay exemptions. This method better approximates the true 
number of exempt agricultural workers and provides a more conservative 
estimate of the number of affected workers. Industry categories 
include: ``crop production'' (0170), ``animal production'' (0180), and 
``support activities for agriculture and forestry'' (0290). 
Occupational categories include all blue collar occupations (identified 
with the probability codes), ``farm, ranch, and other agricultural 
managers'' (0200), ``general and operations managers'' (0020), and 
``first-line supervisors/managers of farming, fishing, and forestry 
workers'' (6000).
A.2.3 Other Section 13(a) Exemptions
    The following methodology relies mainly on CPS MORG data but also 
incorporates alternative data sources when necessary.

Section 13(a)(3): Seasonal amusement and recreational establishment

    Any employee of an amusement or recreational establishment may be 
exempt from minimum wage and overtime pay if the establishment meets 
either of the following tests: (a) It operates for seven months or less 
during any calendar year, or (b) its revenue for the six lowest months 
of the year is less than one-third of the other six months of such 
year. Amusement and recreational establishments are defined as 
``establishments frequented by the public for its amusement or 
recreation,'' and ``typical examples of such are the concessionaires at 
amusement parks and beaches.'' \271\ In the CPS MORG data the 
Department identifies general amusement and recreation in the following 
industry categories:
---------------------------------------------------------------------------

    \271\ Sec.  779.385.
---------------------------------------------------------------------------

     ``independent artists, performing arts, spectator sports, 
and related industries'' (8560),
     ``museums, art galleries, historical sites, and similar 
institutions'' (8570),
     ``bowling centers'' (8580),
     ``other amusement, gambling, and recreation industries'' 
(8590), and
     ``recreational vehicle parks and camps, and rooming and 
boarding houses'' (8670).\272\
---------------------------------------------------------------------------

    \272\ The Department does not believe that all employees in this 
industry category would qualify for this exemption. However, we had 
no way to segregate in the data employees who would and would not 
qualify for exemption.
---------------------------------------------------------------------------

    The CPS MORG data does not provide information on employers' 
operating information or revenue. Using Business Employment Dynamics 
(BED) data, the Department estimated the share of leisure and 
hospitality employees working for establishments that are closed for at 
least one quarter a year.\273\ Although not technically the same as the 
FLSA definition of ``seasonal,'' this is the best available 
approximation of ``seasonal'' employees. The Department estimated that 
2.8 percent of amusement and recreational workers will be exempt.
---------------------------------------------------------------------------

    \273\ Seasonal employment was calculated by taking the 
difference in employment between establishment openings (all 
establishments that are either opening for the first time or 
reopening) and establishment births (establishments that are opening 
for the first time)--resulting in employment in only establishments 
reopening. Similarly, seasonal employment was estimated by taking 
the difference in employment between establishment closings and 
establishment deaths. These two estimates were then averaged. The 
analysis is limited to the leisure and hospitality industry. Since 
the exemption is limited to workers in ``establishments frequented 
by the public for its amusement or recreation'' the Department must 
assume the rate of employment in seasonal establishments, relative 
to all establishments, is equivalent across these amusement or 
recreation establishments and all leisure and hospitality 
establishments.
---------------------------------------------------------------------------

    The 1998 section 4(d) report estimated the number of exempt workers 
by applying an estimate determined in 1987 by a detailed report from 
the Employment Standards Administration. The Department chose not to 
use this estimate because it is outdated.
    Section 13(a)(3) also exempts employees of seasonal religious or 
non-profit educational centers, but many of these workers have already 
been excluded from the analysis either as religious workers (not 
covered by the FLSA) or as teachers (professional exemption) and so are 
not estimated.

Section 13(a)(5): Fishermen

    Any employee, such as a fisherman, employed in the catching, 
harvesting, or farming of fish or other aquatic life forms, is exempt 
from minimum wage and overtime pay. Fishermen are identified in 
occupational categories ``fishers and related fishing workers'' (6100) 
and ``ship and boat captains and operators'' (9310) and the industry 
category ``fishing, hunting, and trapping'' (0280). Workers identified 
in both these occupational and industry categories are considered 
exempt.

Section 13(a)(8): Small, local newspapers

    This exemption from minimum wage and overtime pay applies to any 
employee employed by a newspaper with circulation of less than 4,000 
and circulated mainly within the county where published. Newspaper 
employees are identified in the following occupational categories:
     ``news analysts, reporters and correspondents'' (2810),
     ``editors'' (2830),
     ``technical writers'' (2840),
     ``writers and authors'' (2850), and
     ``miscellaneous media and communication workers'' (2860).

[[Page 32515]]

    The exemption is limited to the industry category ``newspaper 
publishers'' (6470). To limit the exemption to small, local papers, the 
Department limits the exemption to employees in rural areas. Although 
employment in a rural area is not synonymous with employment at a small 
newspaper, this is the best approach currently available. 
Alternatively, the Department could use data from Dun and Bradstreet 
(D&B) as was done in the 1998 section 4(d) report. This data would 
provide information on which establishments are in rural areas; from 
this the Department could estimate the share of employment in rural 
areas. This approach would be much more time intensive but would not 
necessarily provide a better result.

Section 13(a)(10): Switchboard operators

    An independently owned public telephone company that has not more 
than 750 stations may claim the minimum wage and overtime pay exemption 
for its switchboard operators. ``Switchboard operators, including 
answering service'', are exempt under occupation code 5010 and industry 
classifications ``wired telecommunications carriers'' (6680) and 
``other telecommunications carriers'' (6690). Using the 2012 Economic 
Census, the Department estimated that 1.6 percent of employees in the 
telecommunication industry (NAICS 517) are employed by firms with fewer 
than ten employees (the estimated level of employment necessary to 
service seven hundred and fifty stations). According to the 1998 
section 4(d) report, fewer than 10,000 workers were exempt in 1987 and 
so at that time the Department did not develop a methodology for 
estimating the number exempt.

Section 13(a)(12): Seamen on foreign vessels

    Any employee employed as a seaman on a vessel other than an 
American vessel is exempt from minimum wage and overtime pay. Seamen 
are identified by occupational categories:
     ``sailors and marine oilers'' (9300),
     ``ship and boat captains and operators'' (9310), and
     ``ship engineers'' (9570).
    The CPS MORG data do not identify whether the vessel is foreign or 
domestic. The best approach the Department has devised is to assume 
that the number of workers in the occupation ``deep sea foreign 
transportation of freight'' (SIC 441) in 2000 is roughly equivalent to 
the number of workers on foreign vessels.\274\ The 2001 Occupational 
Employment Statistics estimates there were 13,290 workers in this 
occupation and thus that number of seamen are assigned exempt status on 
a random basis.
---------------------------------------------------------------------------

    \274\ The SIC classification system has been replaced with 
NAICS; thus, more recent data are not available.

---------------------------------------------------------------------------
Section 13(a)(15): Companions

    Domestic service workers employed to provide ``companionship 
services'' for an elderly person or a person with an illness, injury, 
or disability are not required to be paid the minimum wage or overtime 
pay. Companions are classified under occupational categories:
     ``nursing, psychiatric, and home health aides'' (3600) and
     ``personal and home care aides'' (4610).

And industry categories:

     ``home health care services'' (8170),
     ``individual and family services'' (8370), and
     ``private households'' (9290).

All the workers who fall within these occupational and industry 
categories were previously excluded from the analysis because they are 
in occupations where workers have no likelihood of qualifying for the 
section 13(a)(1) exemption.

Section 13(a)(16): Criminal investigators

    The criminal investigator must be employed by the federal 
government and paid ``availability pay.'' \275\ Criminal investigators 
are identified in occupational categories:
---------------------------------------------------------------------------

    \275\ Availability pay is compensation for hours when the agent 
must be available to perform work over and above the standard 40 
hours per week. See http://www.opm.gov/oca/pay/HTML/AP.HTM.
---------------------------------------------------------------------------

     ``detectives and criminal investigators'' (3820),
     ``fish and game wardens'' (3830), and
     ``private detectives and investigators'' (3910).
    This exemption was not mentioned in the 1998 section 4(d) report. 
The Department exempts all workers in the occupations identified above 
and employed by the federal government (PEIO1COW value equal to one).

Section 13(a)(17): Computer workers

    Computer workers who meet the duties test are exempt under two 
sections of the FLSA. Salaried computer workers who earn a weekly 
salary of not less than $455 are exempt under section 13(a)(1) and 
computer workers who are paid hourly are exempt under section 13(a)(17) 
if they earn at least $27.63 an hour. Occupations that may be 
considered exempt include: ``Computer and information systems 
managers'' (110), ``computer scientists and systems analysts'' (1000), 
``computer programmers'' (1010), ``computer software engineers'' 
(1020), ``computer support specialists'' (1040), ``database 
administrators'' (1060), ``network and computer systems 
administrators'' (1100), ``network systems and data communications 
analysts'' (1110), ``computer operators'' (5800), and ``computer 
control programmers and operators'' (7900).
    To identify computer workers exempt under section 13(a)(17), the 
Department restricts the population to workers who are paid on an 
hourly basis and who earn at least $27.63 per hour. To determine which 
of these workers pass the computer duties test, we use the 
probabilities of exemption assigned to these occupations by the 
Department and assume a linear relationship between earnings and 
exemption status. Note that none of these workers are impacted by the 
rulemaking because they are paid on an hourly basis.
A.2.4 Section 13(b) Exemptions
Section 13(b)(1): Motor carrier employees

    This exemption eliminated overtime pay for ``any employee with 
respect to whom the Secretary of Transportation has power to establish 
qualifications and maximum hours of service pursuant to the provisions 
of Section 31502 of Title 49.'' \276\ In essence, these are motor 
carrier workers, identified by industry category ``truck 
transportation'' (6170).
---------------------------------------------------------------------------

    \276\ 49 U.S.C. 31502. The text of the law is available at: 
http://www.gpo.gov/fdsys/pkg/USCODE-2011-title49/html/USCODE-2011-title49-subtitleVI-partB-chap315-sec31502.htm.
---------------------------------------------------------------------------

    To be exempt, these workers must engage in ``safety affecting 
activities.'' Examples of exempt occupations include: ``driver, 
driver's helper, loader, or mechanic.'' \277\ The relevant occupational 
categories are:
---------------------------------------------------------------------------

    \277\ Fact Sheet #19: The Motor Carrier Exemption under the Fair 
Labor Standards Act (FLSA).
---------------------------------------------------------------------------

     ``electronic equipment installers and repairers, motor 
vehicles'' (7110),
     ``automotive service technicians and mechanics'' (7200),
     ``bus and truck mechanics and diesel engine specialists'' 
(7210),
     ``heavy vehicle and mobile equipment service technicians 
and mechanics'' (7220), and
     ``driver/sales workers and truck drivers'' (9130).\278\
---------------------------------------------------------------------------

    \278\ The 2004 methodology used 1990 Census codes 505, 507, and 
804 which crosswalk to these occupations. However, occupations 605, 
613, and 914 (included in the 1990 Census code 804) were excluded 
because under the new classification system they were deemed 
irrelevant.

---------------------------------------------------------------------------
Section 13(b)(2): Rail carrier employees


[[Page 32516]]


    Section 13(b)(2) exempts ``any employee of an employer engaged in 
the operation of a rail carrier subject to part A of subtitle IV of 
Title 49.'' \279\ This includes industrial category ``rail 
transportation'' (6080). The 1998 methodology did not include 
occupational requirements but the 2004 methodology did, so this 
restriction was included. Occupations are limited to:
---------------------------------------------------------------------------

    \279\ 49 U.S.C. 10101-11908. Text of the law is available at: 
http://www.gpo.gov/fdsys/pkg/USCODE-2013-title49/pdf/USCODE-2013-title49-subtitleIV-partA.pdf.
---------------------------------------------------------------------------

     ``locomotive engineers and operators'' (9200),
     ``railroad brake, signal, and switch operators'' (9230),
     ``railroad conductors and yardmasters'' (9240), and
     ``subway, streetcar, and other rail transportation 
workers'' (9260).

Section 13(b)(3): Air carrier employees

    This section exempts employees subject to the ``provisions of title 
II of the Railway Labor Act.'' \280\ In essence, this exempts air 
carrier employees, identified by industry category ``air 
transportation'' (6070). The 1998 methodology did not include 
occupational requirements but the 2004 methodology did, so this 
restriction was included. Occupations are limited to ``aircraft pilots 
and flight engineers'' (9030) and ``aircraft mechanics and service 
technicians'' (7140).
---------------------------------------------------------------------------

    \280\ 45 U.S.C. 181 et seq. Available at: http://www.gpo.gov/fdsys/pkg/USCODE-2013-title45/html/USCODE-2013-title45-chap8-subchapII.htm.

---------------------------------------------------------------------------
Section 13(b)(6): Seamen

    Occupational categories include ``sailors and marine oilers'' 
(9300), ``ship and boat captains and operators'' (9310), and ``ship 
engineers'' (9570).\281\ The exemption is limited to the ``water 
transportation'' industry (6090).
---------------------------------------------------------------------------

    \281\ The 2004 methodology used 1990 Census codes 828, 829, and 
833 which crosswalk to these occupations. However, occupation 952 
(dredge, excavating, and loading machine operators) was excluded 
because under the new classification system it was deemed 
irrelevant.

---------------------------------------------------------------------------
Section 13(b)(10): Salesmen, partsmen, or mechanics

    The Department limited this exemption to workers employed in a 
``nonmanufacturing establishment primarily engaged in the business of 
selling such vehicles or implements to ultimate purchasers.'' Industry 
classifications include: ``automobile dealers'' (4670) and ``other 
motor vehicle dealers'' (4680). In the 2004 Final Rule, the industry 
was limited to 1990 Census code 612 which became Census code 
``automobile dealers'' (4670). Category 4680 (``other motor vehicle 
dealers'') is also included here in keeping with the 1998 section 4(d) 
report methodology.
    The 1998 methodology did not include an occupational restriction; 
however, the 2004 methodology limited the exemption to automobiles, 
trucks, or farm implement sales workers and mechanics.

Automobiles, trucks, or farm implement sales workers include:

     ``parts salespersons'' (4750), and
     ``retail salespersons'' (4760).\282\
---------------------------------------------------------------------------

    \282\ The 2004 methodology used codes 263 and 269 which 
crosswalk to these codes plus a few others which have been deemed 
irrelevant and excluded (4700, 4740, and 4850).

---------------------------------------------------------------------------
Mechanics include:

     ``electronic equipment installers and repairers, motor 
vehicles'' (7110),
     ``automotive body and related repairers'' (7150),
     ``automotive glass installers and repairers'' (7160),
     ``automotive service technicians and mechanics'' (7200),
     ``bus and truck mechanics and diesel engine specialists'' 
(7210),
     ``heavy vehicle and mobile equipment service technicians 
and mechanics'' (7220),
     ``small engine mechanics'' (7240), and
     ``miscellaneous vehicle and mobile equipment mechanics, 
installers, and repairers'' (7260).\283\
---------------------------------------------------------------------------

    \283\ The 2004 methodology used codes 505, 506, 507, and 514 
which generally crosswalk to these codes. A few additional codes 
were added which were deemed relevant (7240 and 7260).

                Table A2--Probability Codes by Occupation
------------------------------------------------------------------------
                                                             Probability
         2002 Census code                 Occupation             code
------------------------------------------------------------------------
10...............................  Chief executives........            1
20...............................  General and operations              1
                                    managers.
40...............................  Advertising and                     1
                                    promotions managers.
50...............................  Marketing and sales                 1
                                    managers.
60...............................  Public relations                    2
                                    managers.
100..............................  Administrative services             1
                                    managers.
110..............................  Computer and information            1
                                    systems managers.
120..............................  Financial managers......            1
130..............................  Human resources managers            1
140..............................  Industrial production               1
                                    managers.
150..............................  Purchasing managers.....            1
160..............................  Transportation, storage,            1
                                    and distribution
                                    managers.
200..............................  Farm, ranch, and other              3
                                    agricultural managers.
210..............................  Farmers and ranchers....            0
220..............................  Construction managers...            1
230..............................  Education administrators            1
300..............................  Engineering managers....            1
310..............................  Food service managers...            3
320..............................  Funeral directors.......            2
330..............................  Gaming managers.........            2
340..............................  Lodging managers........            3
350..............................  Medical and health                  1
                                    services managers.
360..............................  Natural sciences                    1
                                    managers.
400..............................  Postmasters and mail                0
                                    superintendents.
410..............................  Property, real estate,              3
                                    and community
                                    association managers.
420..............................  Social and community                1
                                    service managers.
430..............................  Managers, all other.....            1
500..............................  Agents and business                 2
                                    managers of artists,
                                    performers, and
                                    athletes.

[[Page 32517]]

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

[[Page 32518]]

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

[[Page 32519]]

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

[[Page 32520]]

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

[[Page 32521]]

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

[[Page 32522]]

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

[[Page 32523]]

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


[[Page 32524]]

Appendix B. Additional Tables

  Table B1--Estimated Number of Potentially Affected EAP Workers With the Current and Updated Salary Levels, by
                                     Detailed Industry, Projected for FY2017
----------------------------------------------------------------------------------------------------------------
                                                                                                    Affected as
                                                    Potentially                                      share of
                    Industry                       affected EAP    Not-affected      Affected       potentially
                                                      workers     (millions) \b\  (millions) \c\     affected
                                                  (millions) \a\                                     (percent)
----------------------------------------------------------------------------------------------------------------
Total \d\.......................................            22.5            18.3             4.2              19
Agriculture.....................................             0.0             0.0             0.0              19
Forestry, logging, fishing, hunting, and                     0.0             0.0             0.0               6
 trapping.......................................
Mining..........................................             0.2             0.2             0.0              10
Construction....................................             0.8             0.7             0.1              16
Nonmetallic mineral product manufacturing.......             0.1             0.1             0.0              11
Primary metals and fabricated metal products....             0.2             0.2             0.0              13
Machinery manufacturing.........................             0.3             0.3             0.0              10
Computer and electronic product manufacturing...             0.6             0.5             0.0               8
Electrical equipment, appliance manufacturing...             0.1             0.1             0.0               9
Transportation equipment manufacturing..........             0.6             0.5             0.0               8
Wood products...................................             0.0             0.0             0.0              18
Furniture and fixtures manufacturing............             0.0             0.0             0.0              19
Miscellaneous and not specified manufacturing...             0.3             0.3             0.0              14
Food manufacturing..............................             0.2             0.1             0.0              17
Beverage and tobacco products...................             0.1             0.1             0.0               9
Textile, apparel, and leather manufacturing.....             0.1             0.1             0.0              19
Paper and printing..............................             0.1             0.1             0.0              20
Petroleum and coal products manufacturing.......             0.1             0.1             0.0               9
Chemical manufacturing..........................             0.4             0.4             0.0               9
Plastics and rubber products....................             0.1             0.1             0.0              15
Wholesale trade.................................             0.8             0.7             0.1              17
Retail trade....................................             1.6             1.2             0.4              26
Transportation and warehousing..................             0.5             0.4             0.1              20
Utilities.......................................             0.3             0.2             0.0              11
Publishing industries (except internet).........             0.2             0.2             0.0              15
Motion picture and sound recording..............             0.0             0.0             0.0              54
Broadcasting (except internet)..................             0.2             0.1             0.0              21
Internet publishing and broadcasting............             0.1             0.0             0.0              10
Telecommunications..............................             0.4             0.3             0.0              13
Internet service providers and data processing               0.0             0.0             0.0              20
 services.......................................
Other information services......................             0.1             0.0             0.0              31
Finance.........................................             2.0             1.7             0.3              14
Insurance.......................................             1.1             0.9             0.2              19
Real estate.....................................             0.3             0.3             0.1              24
Rental and leasing services.....................             0.1             0.0             0.0              26
Professional and technical services.............             4.0             3.5             0.5              13
Management of companies and enterprises.........             0.1             0.1             0.0              24
Administrative and support services.............             0.5             0.4             0.1              26
Waste management and remediation services.......             0.1             0.0             0.0              23
Educational services............................             0.9             0.7             0.2              26
Hospitals.......................................             1.1             0.9             0.2              22
Health care services, except hospitals..........             1.3             1.0             0.3              25
Social assistance...............................             0.4             0.2             0.2              38
Arts, entertainment, and recreation.............             0.4             0.3             0.1              33
Accommodation...................................             0.1             0.1             0.0              21
Food services and drinking places...............             0.3             0.2             0.1              30
Repair and maintenance..........................             0.1             0.1             0.0              35
Personal and laundry services...................             0.1             0.0             0.0              37
Membership associations and organizations.......             0.4             0.3             0.1              29
Private households..............................             0.0             0.0             0.0              21
Public administration...........................             0.8             0.6             0.2              24
----------------------------------------------------------------------------------------------------------------
Note: Pooled data for FY2013 through FY2015.
\a\ Workers who are white collar, salaried, not eligible for another (non-EAP) overtime exemption, and not in a
  named occupation.
\b\ Workers who continue to be exempt after the increases in the salary levels (assuming affected workers'
  weekly earnings do not increase to the new salary level).
\c\ Estimated number of workers exempt under the EAP exemptions who would be entitled to overtime protection
  under the updated salary levels (if their weekly earnings do not increase to the new salary levels).
\d\ Columns may not sum to total due to rounding.


[[Page 32525]]

VII. Final Regulatory Flexibility Analysis (FRFA)

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

    Table 36--Overview of Costs to Small Businesses, All Employees at
                   Establishment Affected Methodology
------------------------------------------------------------------------
          Small business costs                         Cost
------------------------------------------------------------------------
                        Direct and Payroll Costs
------------------------------------------------------------------------
Average total cost per affected entity   $3,265.
 \a\.
Range of total costs per affected        $847-$75,059.
 entity \a\.
Average percent of revenue per affected  0.17%.
 entity \a\.
Average percent of payroll per affected  0.87%.
 entity \a\.
Average percent of small business        0.14%.
 profit.
------------------------------------------------------------------------
                              Direct Costs
------------------------------------------------------------------------
Regulatory familiarization:
    Time (first year)..................  1 hour per establishment.
    Time (update years)................  5 minutes per establishment.
    Hourly wage........................  $36.22.
Adjustment:
    Time (first year affected).........  75 minutes per newly affected
                                          worker.
    Hourly wage........................  $36.22.
Managerial:
    Time (weekly)......................  5 minutes per affected worker.
    Hourly wage........................  $42.31.
------------------------------------------------------------------------
                            Payroll Increases
------------------------------------------------------------------------
Average payroll increase per affected    $2,516.
 entity \a\.
Range of payroll increases per affected  $647-$54,430.
 entity \a\.
------------------------------------------------------------------------
\a\ Using the methodology where all employees at an affected small firm
  are affected. This assumption generates upper-end estimates. Lower-end
  cost estimates are significantly smaller.

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

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

[[Page 32526]]

nonexempt workers whom Congress intended to be protected by the FLSA's 
minimum wage and overtime provisions. Throughout the regulatory history 
of the FLSA, the Department has considered the salary level test the 
``best single test'' of exempt status. Stein Report at 19. This bright-
line test is easily observed, objective, and clear. Id.
    The Department has periodically updated the regulations governing 
these tests since the FLSA's enactment in 1938, most recently in 2004 
when, among other revisions, the Department created the standard duties 
test and paired it with a salary level test of $455 per week. As a 
result of inflation, the real value of the salary threshold has fallen 
significantly since its last update, making it inconsistent with 
Congress' intent to exempt only ``bona fide'' EAP workers.
    The standard salary level and the total compensation level required 
for highly compensated employees (HCE) have not been updated since 
2004. As a result, the standard salary level has declined considerably 
in real terms relative to both its 2004 and 1975 values (see section 
VI.A.ii.). This is problematic because the exemption now covers workers 
who were never intended to be within the exemption, removing them from 
minimum wage and overtime protection. Similarly, the HCE annual 
compensation requirement is out of date; by the Final Rule's effective 
date the share of workers earning above $100,000 annually will have 
more than tripled since it was adopted in 2004. Therefore, the 
Department believes this rulemaking is necessary in order to restore 
the effectiveness of these levels.
    The Department's primary objective in this rulemaking is to ensure 
that the revised salary levels will continue to provide a useful and 
effective test for exemption. The salary levels were designed to 
operate as a ready guide to assist employers in deciding which 
employees were more likely to meet the duties tests for the exemptions. 
If left unchanged, however, the effectiveness of the salary level test 
as a means of determining exempt status diminishes as employees' wages 
increase over time.
    In order to restore the ability of the standard salary level and 
the HCE compensation requirements to serve as appropriate bright-line 
tests between overtime protected employees and those who may be bona 
fide EAP employees, this rulemaking increases the minimum salary level 
to come within the exemption from the FLSA minimum wage and overtime 
requirements as an EAP employee from $455 to the 40th percentile of 
weekly earnings of full-time salaried workers in the lowest-wage Census 
Region (currently the South, $913 a week) for the standard test, and 
from $100,000 to the annualized value of the 90th percentile of weekly 
earnings of full-time salaried workers nationally ($134,004 per year) 
for the HCE test. The Department reached the final standard salary and 
HCE total compensation levels after considering available data on 
actual salary levels currently being paid in the economy, publishing a 
proposed rule, reviewing more than 270,000 timely comments, and 
considering a range of alternatives. In order to ensure that these 
levels continue to function appropriately in the future, the rule also 
includes a provision to automatically update these salary levels every 
three years.

B. The Agency's Response to the Public Comments

    Many of the issues raised by small businesses in the public 
comments received on the proposed rule are described in the preamble 
and RIA above, which we incorporate herein. Nevertheless, the 
significant issues raised by representatives of small businesses and 
the U.S. Small Business Administration's Office of Advocacy (Advocacy) 
are repeated here.
    Most of the comments received concerning small businesses centered 
on the burden that the proposed salary level would impose on small 
entities. Some commenters expressed concern that the expected cost 
increase from the rule would disproportionately affect small entities. 
For example, the Wisconsin Agri-Business Association stated that the 
proposed rule's increased labor costs ``will be felt most by small 
businesses'' because they do not have the ability to adjust to 
increased costs ``without detriment to their business or the people 
they employ.'' Similarly, the Small Business Legislative Council (SBLC) 
explained that small businesses (and especially new business) tend to 
operate on very narrow margins, and so such businesses would be 
disproportionately affected by this rule. Other comments stated more 
generally that the proposed salary level would impose significant 
burdens on small businesses. See, e.g., Nebraska Chamber of Commerce 
and Industry, Northeastern Retail Lumber Association.
    Accordingly, many commenters suggested the Department adopt some 
forms of differential treatment for small entities. The Greater 
Philadelphia Chamber of Commerce urged that ``a lower compensation 
threshold be extended to small businesses and nonprofits, which can be 
expected to bear the greatest burden of complying with the proposed 
rule as presently written.'' The American Society of Association 
Executives and the International Association of Lighting Designers 
stated that the Department ``should either set a lower salary level 
applicable to all employers or set the minimum salary level at a lower 
percentile of the national average for nonprofit and/or small 
employers.'' See also American Osteopathic Association; Kentucky 
Pharmacists Association. The Greene Law Firm recommended excluding from 
the proposed salary level increase employers that qualify as ``small 
businesses'' for their industries according to the North American 
Industry Classification System (NAICS) codes. The Maine Department of 
Labor ``agree[d] that consideration should not focus on the size of the 
employer,'' but, citing the FLSA's coverage principles, stated that 
``[b]usinesses with low annual dollar volumes should not be held to the 
same [salary] level as large corporations.'' Finally, the Association 
for Enterprise Opportunity, the California Association for Micro 
Enterprise Opportunity, and Women Impacting Public Policy each 
requested an exemption for small businesses that fall below the 
$500,000 per year threshold for enterprise coverage under the FLSA.
    Consistent with the history of the part 541 regulations, the 
Department declines to create a lower salary level requirement for 
employees employed at small entities, or to exclude such employees from 
the salary level test entirely. As we noted in 2004, while ``the FLSA 
itself does provide special treatment for small entities under some of 
its exemptions . . . the FLSA's statutory exemption for white-collar 
employees in section 13(a)(1) contains no special provision based on 
size of business,'' 69 FR 22238. In the 78-year history of the part 541 
regulations defining the EAP exemption, the salary level requirements 
have never varied according to the size or revenue of the employer. Cf. 
Stein Report at 5-6 (rejecting proposals to set varying regional salary 
levels); see also 69 FR 22238 (stating that implementing differing 
salary levels based on business size industry-by-industry ``would 
present the same insurmountable challenges'' as adopting regional or 
population-based salary levels).
    Congress established the threshold for enterprise coverage under 
the FLSA (not less than $500,000 in annual gross volume of sales made 
or business done).\284\ All employees of an FLSA-

[[Page 32527]]

covered enterprise are entitled to the FLSA's protection, unless the 
employee meets the criteria for exemption from the FLSA's minimum wage 
and/or overtime pay provisions. Employees of firms which are not 
covered enterprises under the FLSA may still be subject to the FLSA's 
protections if they are individually engaged in interstate commerce or 
in the production of goods for interstate commerce, or in any closely-
related process or occupation directly essential to such production. 
Such employees include those who: work in communications or 
transportation; regularly use the mails, telephones or interstate 
communication, or keep records of interstate transactions; handle, 
ship, or receive goods moving in interstate commerce; regularly cross 
state lines in the course of employment; or work for independent 
employers who contract to do clerical, custodial, maintenance, or other 
work for firms engaged in interstate commerce or in the product of 
goods for interstate commerce. The Department does not have the 
authority to create an exemption from the FLSA's individual coverage 
provision.
---------------------------------------------------------------------------

    \284\ The FLSA also applies to certain ``named'' activities, 
regardless of the annual dollar volume of those enterprises. Named 
enterprises include the operation of a hospital, an institution 
primarily engaged in the care of the sick, the aged, or the mentally 
ill who reside on the premises; a school for mentally or physically 
disabled or gifted children; a preschool, an elementary or secondary 
school, or an institution of higher education (whether operated for 
profit or not for profit); or an activity of a public agency. 29 
U.S.C. 203(s)(1)(B)-(C).
---------------------------------------------------------------------------

    Several small business commenters raised concerns about the impact 
that the proposed salary level would have on small entities in low-wage 
regions and industries. See, e.g., Association for Enterprise 
Opportunity; Credit Union National Association; National Federation of 
Independent Businesses (NFIB); Society of Independent Gasoline 
Marketers of America. Kinecta Federal Credit Union stated that ``the 
Department of Labor has clearly failed to adequately consider the 
potential impact of this rule on small businesses.''
    The Department recognizes that many small employers operate in low-
paying regions or industries, and we have historically accounted for 
small employers when setting the salary level. See Weiss Report at 14-
15 (setting the long test salary level for executive employees 
``slightly lower than might be indicated by the data'' in part to avoid 
excluding ``large numbers of the executives of small establishments 
from the exemption''). This Final Rule is no exception, as the 
Department is setting the salary level at the 40th percentile of weekly 
earnings of full-time salaried employees in the lowest-wage Census 
Region (as opposed to nationally) in part to account for low-wage 
employers, including small entities. This change from the methodology 
contained in the NPRM results in a lower standard salary level than 
proposed. The final standard salary level represents the 20th 
percentile of likely exempt employees working in small 
establishments.\285\
---------------------------------------------------------------------------

    \285\ The Department does not know which employees work for 
small businesses and therefore randomly assigns workers to small 
businesses.
---------------------------------------------------------------------------

    The National Small Business Association and several other small 
business commenters asserted that ``[m]any small businesses have no, or 
very few, non-exempt employees with most workers being salaried 
professionals or administrative employees. They do not have timekeeping 
and payroll systems in place that can accommodate the addition of many 
more non-exempt employees. Thus, the burden of these changes will fall 
much more heavily on small businesses than on their larger 
competitors.'' Similarly, NFIB stated that ``small companies typically 
lack specialized compliance personnel'' to adjust to new regulations, 
forcing business owners to oversee compliance efforts themselves or pay 
for outside consultation. The Louisiana Small Business Advisory Council 
similarly stated: ``The cost of compliance for small businesses will be 
much greater than estimated by the DOL. Lots of small businesses have a 
minimal number of non-exempt employees, with most workers being 
salaried professionals or administrative employees.'' Identical or 
nearly identical ``campaign'' comments from small businesses also 
stated that ``[s]mall businesses are often not equipped to monitor the 
activities of their employees in order to regulate their time. 
Companies with fewer than 20 employees rarely have a dedicated HR 
department, so the creation of new hourly reporting and tracking 
requirements are likely to be a much greater burden on these companies 
that do not currently face them. The result will be confusion and 
excess cost for individual business owners.''
    The Department believes that most, if not all, small businesses, 
like larger businesses, employ a mix of exempt and overtime-protected 
workers. As such, employers already have policies and systems in place 
for scheduling workers and monitoring overtime hours worked and the 
corresponding overtime premium pay. The Department recognizes that the 
Final Rule will result in the reclassification of some workers of small 
businesses from exempt to nonexempt, and expects that employers will 
modify their existing policies and systems to accommodate this change.
    NFIB asserted that ``the IRFA underestimates compliance costs 
because it does not take into account business size when estimating the 
time it takes to read, comprehend and implement the proposed changes.'' 
The Louisiana Small Business Advisory Council similarly commented that 
the Department underestimated adjustment costs, stating that small 
businesses ``do not have timekeeping and payroll systems in place that 
can accommodate the addition of new, non-exempt employees.''
    In the Final Rule, the Department has clarified the explanation of 
our method for estimating the number of affected workers employed by 
small firms, and the number of small firms affected. The Department 
also reconsidered its estimate of the number of affected workers who 
work some overtime and increased in this Final Rule its estimate of 
affected workers who work overtime to 40 percent, up from 24 percent in 
the IRFA. Additionally, in response to comments, the Department has 
increased estimated regulatory familiarization and adjustment costs in 
the Final Rule.
    Because there was insufficient data to estimate the number of 
affected workers employed by a typical small entity, the Department 
presented in the IRFA a range of results based on the assumption that 
only one employee per small firm was affected (the lower bound), and, 
alternatively, based on the assumption that all employees in a small 
firm were affected (the upper bound estimate of impacts per small 
establishment). Assuming the upper bound scenario, that all employees 
in a firm were affected, the IRFA showed that on average, costs and 
payroll increases for small affected firms were less than 0.9 percent 
of payroll and less than 0.2 percent of revenues. The largest impacts 
were found in the food services and drinking places industry, where 
costs and payroll increases composed 0.84 percent of revenues. Due to 
the mix of exempt and overtime-protected workers employed by small 
businesses, the actual impact in this industry would almost certainly 
be smaller than shown in this upper bound scenario analysis.
    The Department's adjustment cost estimate in the IRFA of one hour 
per newly affected worker was meant to be an average across all 
establishments. The Department acknowledges that some small businesses 
may face higher costs because of this rulemaking; however, since there 
is no data indicating the magnitude of this cost

[[Page 32528]]

(compared to other businesses), the Department has not distinguished 
between establishment sizes in the cost estimates. However, in response 
to comments, the Department has increased the average adjustment time 
from one hour to 75 minutes per affected worker and we have added 
additional time for regulatory familiarization.
    The Department received many comments in response to our proposal 
in the NPRM to automatically update the standard salary and HCE total 
annual compensation requirements. As discussed in section IV.E.i., some 
commenters asserted that the automatic updating mechanism introduced in 
this rulemaking may violate the RFA. For example, Seyfarth Shaw urged 
the Department to not proceed with automatic updating in part because 
this mechanism would ``effectively bypass'' this authority. The 
Partnership to Protect Workplace Opportunity (PPWO) raised similar RFA 
concerns and characterized the Department's rulemaking as a ```super-
proposal,' deciding once and for all what (in the Department's belief) 
is best without consideration of its impact